AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE __, 1998
REGISTRATION NO. 333=__________
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
__________
FIRSTPLUS INVESTMENT CORPORATION
(Exact name of Registrant as specified in its charter)
NEVADA 75-2596063
(State or other (I.R.S. Employer
jurisdiction of Identification
incorporation or No.)
organization)
__________
3773 HOWARD HUGHES PARKWAY JOHN MARK BUNNEL
SUITE 300N C/O FIRSTPLUS DIRECT
LAS VEGAS, NEVADA 89109 28601 LOS ALISOS BOULEVARD
(702) 892-3772 MISSION VIEJO, CALIFORNIA 92692
(Address, including zip code, (714) 770-0300
and telephone number, including (Name, address, including zip code,
area code, of Registrant's and telephone number, including
principal executive offices) area code, of agent for service
with respect to the Registrant)
__________
COPIES TO:
RONALD M. BENDALIN, ESQ. JOHN ARNHOLZ, ESQ.
1600 VICEROY BROWN & WOOD LLP
DALLAS, TEXAS 75235 815 CONNECTICUT AVENUE, N.W., SUITE 701
(214) 599-6500 WASHINGTON, D.C. 20006
(202) 973-0600
__________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement as determined by
market conditions and pursuant to Rule 415.
If any securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
__________
<TABLE>
CALCULATION OF REGISTRATION FEE
<CAPTION>
================================ ============================ ====================== ======================= =======================
Proposed Maximum Proposed Maximum
Proposed Title of Securities to Offering Price Per Aggregate Offering Amount of Registration
be Registered Amount Being Registered Unit(1) Price(1) Fee(2)
- -------------------------------- ---------------------------- ---------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C>
Asset-Backed Securities $8,000,000,000 100% $8,000,000,000 $2,360,000
================================ ============================ ====================== ======================= =======================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee on the
basis of the proposed maximum offering price per unit.
(2) Pursuant to Rule 429 of the General Rules and Regulations under the
Securities Act of 1933, as amended, $618,755,000 of Asset-Backed Securities
are being carried forward from the Registrant's Registration Statement No.
333-26527. A filing fee associated with such securities was previously paid
upon the filing of said registration statement.
__________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
PURSUANT TO RULE 429 OF THE GENERAL RULES AND REGULATIONS OF THE SECURITIES
ACT OF 1933, AS AMENDED, THE PROSPECTUSES WHICH ARE A PART OF THIS REGISTRATION
STATEMENT ARE COMBINED PROSPECTUSES RELATING ALSO TO $618,755,000 OF SECURITIES
REGISTERED UNDER THE REGISTRATION STATEMENT NO. 333-26527 AND REMAINING UNISSUED
AS OF THE DATE HEREOF.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Estimated expenses in connection with the issuance and distribution of the
securities, other than underwriting discounts and commissions*, are as follows:
<TABLE>
<CAPTION>
<S> <C>
Registration Fee-- Securities and Exchange Commission......................................................... $2,360,000.00
Printing and Engraving Fees................................................................................... 800,000.00
Accounting Fees and Expenses.................................................................................. 480,000.00
Legal Fees and Expenses....................................................................................... 2,400,000.00
Trustee Fees and Expenses..................................................................................... 320,000.00
Blue Sky Fees and Expenses.................................................................................... 0.00
Rating Agency Fees............................................................................................ 7,040,000.00
Miscellaneous Expenses........................................................................................ 320,000.00
--------------
Total..................................................................................................... $13,720,000.00
==============
</TABLE>
* To be provided for each Series of Securities on the cover page of the
related Prospectus Supplement.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The forms of Underwriting Agreement filed as Exhibits 1.1, 1.2 and 1.3 to
this Registration Statement provide for indemnification by the Underwriters of
FIRSTPLUS Investment Corporation (the "Company"), each of its officers who signs
this Registration Statement, and each person who controls the Company within the
meaning of the Securities Act of 1933 (the "Securities Act") or the Securities
and Exchange Act of 1934 (the "Exchange Act") against any and all losses,
claims, damages or liabilities, joint or several, to which they or any of them
may become subject under the Securities Act, the Exchange Act, or other Federal
or state statutory law or regulation, at common law or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon (a) a written information furnished to the
Company by or on behalf of the Underwriters specifically for use in the
preparation of the Registration Statement related to the offered securities of
the applicable series as it became effective or in any amendment or supplement
thereof, or in such Registration Statement, in the related Preliminary
Prospectus or the related Final Prospectus or in any amendment thereof, or in
the Form 8-K referred to in such Final Prospectus or (b) any Computational
Materials or ABS Term Sheets (or amendments or supplements thereof) delivered to
prospective investors by any such Underwriter, including any Computational
Materials or ABS Term Sheets that are furnished to the Company by such
Underwriter pursuant to the Underwriting Agreement and incorporated by reference
in the Registration Statement, the related Preliminary Prospectus or the related
Final Prospectus or any amendment or supplement thereof (except for such
exceptions as are provided in the Underwriting Agreement).
The Articles of Incorporation and By-Laws of the Company (Exhibits 3.1 and
3.2, respectively) provide that the Company shall indemnify its officers and
directors and may, in the discretion of the Board of Directors, indemnify its
other employees and agents to the fullest extent permitted by Nevada statutory
and decisional law if any such person was or is a party, or is threatened to be
made a party, to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative, arbitrative or
investigative, by reason of the fact that such person is or was a director,
officer, employee or agent of the Company, or is or was serving at the request
of the Company as a director, officer, partner, venturer, proprietor, trustee,
employee or agent of another company, partnership, joint venture, trust, limited
liability company or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding.
ITEM 16. EXHIBITS.
Exhibit
Number
- -------
1.1 Form of Underwriting Agreement (Pass-Through Certificates)(1)
1.2 Form of Underwriting Agreement (Notes and Certificates)(2)
3.1 Amended and Restated Articles of Incorporation of FIRSTPLUS Investment
Corporation, as amended(3)
3.2 By-Laws(4)
4.1 Form of Pooling and Servicing Agreement(4)
4.2 Form of Indenture (Notes)(2)
4.3 Form of Trust Agreement(2)
5.1 Opinion of Brown & Wood LLP regarding the legality of the Securities(5)
8.1 Opinion of Brown & Wood LLP regarding tax matters (included as part of
Exhibit 5.1)
10.1 Representative Form of Mortgage Note(6)
10.2 Representative Form of Mortgage(6)
10.3 Representative Form of Retail Installment Contract, Note and Disclosure
Statement(6)
10.4 Specimen of Certificate Insurance Policy(4)
10.5 Form of Subservicing Agreement(4)
10.6 Form of Loan Sale Agreement(4)
10.7 Form of Sale and Servicing Agreement(2)
10.8 Form of Administration Agreement(2)
10.9 Form of Agreement with Clearing Agency(4)
23.1 Consent of Brown & Wood LLP (included as part of Exhibit 5.1)
24.1 Power of Attorney*
25.1 Statement of Eligibility of Trustee(7)
99.1 Form of Prospectus Supplement for Asset-Backed Certificates(8)
99.2 Form of Prospectus Supplement for Asset-Backed Securities(8)
- ----------------
* Filed herewith.
(1) Previously filed with the Commission as Exhibit 1.1 to the Registrant's
Current Report on Form 8-K dated as of June 9, 1996 and incorporated by
reference herein.
(2) Previously filed with the Commission as an exhibit to the Registrant's Form
S-3 Registration Statement (File No. 333-11855) on September 12, 1996 and
incorporated by reference herein.
(3) Previously filed with the Commission as an exhibit to the Registrant's
Amendment No. 2 to Form S-3 Registration Statement (File No. 33-65373) on
June 10, 1996 and incorporated by reference herein.
(4) Previously filed with the Commission as an exhibit to the Registrant's Form
S-3 Registration Statement (File No. 33-65373) on December 22, 1995 and
incorporated by reference herein.
(5) Previously filed with the Commission under cover of Form 8-K on September
11, 1997 and incorporated by reference herein.
(6) Previously filed with the Commission as an exhibit to the Registrant's
Amendment No. 1 to Form S-3 Registration Statement (File No. 33-65373) on
April 23, 1996 and incorporated by reference herein.
(7) Previously filed with the Commission under cover of Form 305B2 on September
10, 1996 and incorporated by reference herein.
(8) Previously filed with the Commission as an exhibit to the Registrant's Form
S-3 Registration Statement (File No. 333-10451) on August 19, 1996 and
incorporated by reference herein.
ITEM 17. UNDERTAKINGS.
(a) The Company hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement to include
any material information with respect to the plan of distribution not
previously disclosed in this Registration Statement or any material change
to such information in this Registration Statement.
(2) That for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The Company hereby undertakes that, for purposes of determining any
liability under the Securities Act, each filing of the Company's annual report
pursuant to section 13(a) or section 15(d) of the Exchange Act that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of competent
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(d) Undertakings for registration statement permitted by Rule 430A.
The Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Dallas, State of Texas, on the 29th day of June,
1998.
FIRSTPLUS INVESTMENT CORPORATION
By: /s/ John Mark Bunnel
----------------------------------------
John Mark Bunnel, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-3 has been signed below by the following
persons in the capacities and on the dates indicated. Each person whose
signature appears below constitutes and appoints John Mark Bunnel, Mark J.
Landry, Larry G. Studinski and Wade Walker, and each of them his true and lawful
attorney-in-fact and agent, acting together or alone, with full powers of
substitution and resubstitution, for them and in their name, place and stead, to
sign any or all amendments to this Registration Statement (including any
pre-effective or post-effective amendment), and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, acting together or alone, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as they might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, acting together or alone, or other substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/John Mark Bunnel Director and President June 29, 1998
--------------------------------------------------
John Mark Bunnel (Principal Executive Officer)
/s/Mark J. Landry Director, Treasurer and Chief June 29, 1998
--------------------------------------------------
Mark J. Landry Financial Officer (Principal
Financial and Accounting Officer)
/s/Larry G. Studinski Director June 29, 1998
--------------------------------------------------
Larry G. Studinski
/s/Wade Walker Director June 29, 1998
--------------------------------------------------
Wade Walker
</TABLE>
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
1.1 Form of Underwriting Agreement (Pass-Through Certificates)(1)
1.2 Form of Underwriting Agreement (Notes and Certificates)(2)
3.1 Amended and Restated Articles of Incorporation of FIRSTPLUS Investment
Corporation, as amended(3)
3.2 By-Laws(4)
4.1 Form of Pooling and Servicing Agreement(4)
4.2 Form of Indenture (Notes)(2)
4.3 Form of Trust Agreement(2)
5.1 Opinion of Brown & Wood LLP regarding the legality of the Securities(5)
8.1 Opinion of Brown & Wood LLP regarding tax matters (included as part of
Exhibit 5.1)
10.1 Representative Form of Mortgage Note(6)
10.2 Representative Form of Mortgage(6)
10.3 Representative Form of Retail Installment Contract, Note and Disclosure
Statement(6)
10.4 Specimen of Certificate Insurance Policy(4)
10.5 Form of Subservicing Agreement(4)
10.6 Form of Loan Sale Agreement(4)
10.7 Form of Sale and Servicing Agreement(2)
10.8 Form of Administration Agreement(2)
10.9 Form of Agreement with Clearing Agency(4)
23.1 Consent of Brown & Wood LLP (included as part of Exhibit 5.1)
24.1 Power of Attorney*
25.1 Statement of Eligibility of Trustee(7)
99.1 Form of Prospectus Supplement for Asset-Backed Certificates(8)
99.2 Form of Prospectus Supplement for Asset-Backed Securities(8)
- ----------------
* Filed herewith.
(1) Previously filed with the Commission as Exhibit 1.1 to the Registrant's
Current Report on Form 8-K dated as of June 9, 1996 and incorporated by
reference herein.
(2) Previously filed with the Commission as an exhibit to the Registrant's
Form S-3 Registration Statement (File No. 333-11855) on September 12,
1996 and incorporated by reference herein.
(3) Previously filed with the Commission as an exhibit to the Registrant's
Amendment No. 2 to Form S-3 Registration Statement (File No. 33-65373)
on June 10, 1996 and incorporated by reference herein.
(4) Previously filed with the Commission as an exhibit to the Registrant's
Form S-3 Registration Statement (File No. 33-65373) on December 22, 1995
and incorporated by reference herein.
(5) Previously filed with the Commission under cover of Form 8-K on
[[September 11]], 1997 and incorporated by reference herein.
(6) Previously filed with the Commission as an exhibit to the Registrant's
Amendment No. 1 to Form S-3 Registration Statement (File No. 33-65373)
on April 23, 1996 and incorporated by reference herein.
(7) Previously filed with the Commission under cover of Form 305B2 on
September 10, 1996 and incorporated by reference herein.
(8) Previously filed with the Commission as an exhibit to the Registrant's
Form S-3 Registration Statement (File No. 333-10451) on August 19, 1996
and incorporated by reference herein.
SUBJECT TO COMPLETION, DATED JUNE __, 1998
PROSPECTUS
ASSET BACKED NOTES
ASSET BACKED CERTIFICATES
(ISSUABLE IN SERIES)
FIRSTPLUS INVESTMENT CORPORATION,
AND CERTAIN TRUSTS TO BE FORMED BY
FIRSTPLUS INVESTMENT CORPORATION
The Asset Backed Notes (the "Notes") and the Asset Backed Certificates (the
"Certificates" and, together with the Notes, the "Securities") described herein
may be sold from time to time in one or more series (each, a "Series"), in
amounts, at prices and on terms to be determined at the time of sale and to be
set forth in a supplement to this Prospectus (a "Prospectus Supplement"). Each
Series of Securities, which may include one or more classes (each, a "Class") of
Notes and/or Certificates, will be issued by either FIRSTPLUS Investment
Corporation ("FIC") or a separate entity (each, a "Trust") formed by FIC solely
for the purpose of issuing the Notes of the related Series (either such entity,
as applicable, the "Issuer"). Each Trust will be formed pursuant to either (i) a
Trust Agreement (each, a "Trust Agreement") to be entered into among FIC, as
Seller (in its capacity as Seller, the "Seller") and the owner trustee specified
in the related Prospectus Supplement (the "Owner Trustee") or (ii) a Pooling and
Servicing Agreement (each, a "Pooling and Servicing Agreement") to be entered
into among the Seller, FIRSTPLUS FINANCIAL, INC., as Servicer (the "Servicer")
and the trustee specified in the related Prospectus Supplement (the "Trustee").
If a Series of Securities includes Notes, such Notes of a Series will be issued
and secured pursuant to an Indenture (each, an "Indenture") between the Issuer
and the Indenture Trustee specified in the related Prospectus Supplement (the
"Indenture Trustee") and will represent indebtedness of the related Issuer. If a
Series of Securities includes Certificates, such Certificates of a Series will
represent undivided ownership interest in the related Trust. The related
Prospectus Supplement will specify which Class or Classes of Notes, if any, and
which Class or Classes of Certificates, if any, of the related Series are being
offered thereby.
(continued on next page)
See "ERISA Considerations" herein and in the related Prospectus Supplement
for a discussion of restrictions on the acquisition of Securities by "plan
fiduciaries."
BEFORE PURCHASING ANY OFFERED SECURITIES, PROSPECTIVE INVESTORS SHOULD
REVIEW THE INFORMATION SET FORTH HEREIN UNDER THE CAPTION "RISK FACTORS" AND
SUCH INFORMATION AS MAY BE SET FORTH UNDER THE CAPTION "RISK FACTORS" IN THE
RELATED PROSPECTUS SUPPLEMENT.
NOTES OF A SERIES WILL CONSTITUTE NON-RECOURSE OBLIGATIONS OF THE RELATED
ISSUER. CERTIFICATES OF A SERIES WILL EVIDENCE INTERESTS ONLY IN THE RELATED
TRUST. EXCEPT AS OTHERWISE SET FORTH HEREIN AND IN THE RELATED PROSPECTUS
SUPPLEMENT, THE SECURITIES WILL NOT REPRESENT AN INTEREST IN OR OBLIGATION OF
THE SERVICER, ANY ORIGINATOR, ANY TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES.
NEITHER THE SECURITIES NOR THE UNDERLYING LOAN ASSETS WILL BE GUARANTEED OR
INSURED BY ANY GOVERNMENTAL AGENCY OR ANY OTHER PERSON OR ENTITY, EXCEPT AS SET
FORTH IN THE RELATED PROSPECTUS SUPPLEMENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of Securities offered hereby unless accompanied by a
Prospectus Supplement.
The date of this Prospectus is June __, 1998
(Continued from prior page)
********************************************************************************
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THESE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
********************************************************************************
THE PRIMARY ASSETS SECURING OR BACKING EACH SERIES, AS APPLICABLE (THE
"TRUST PROPERTY") WILL CONSIST PRIMARILY OF A SEGREGATED POOL (A "LOAN ASSET
POOL") OF ONE OR MORE OF THE FOLLOWING MORTGAGE RELATED ASSETS (THE "LOAN
ASSETS"): (I) POOLS (EACH, A "MORTGAGE POOL") OF SINGLE FAMILY (ONE- TO
FOUR-UNIT) RESIDENTIAL MORTGAGE LOANS, TIMESHARE MORTGAGE LOANS AND LOANS
EVIDENCED BY RETAIL INSTALLMENT SALES OR INSTALLMENT LOAN AGREEMENTS THAT ARE
SECURED BY FIRST OR JUNIOR LIENS ON REAL PROPERTY (THE "MORTGAGE LOANS"); AND
(II) POOLS (EACH, A "CONTRACT POOL") OF LOANS EVIDENCED BY RETAIL INSTALLMENT
SALES OR INSTALLMENT LOAN AGREEMENTS, INCLUDING LOANS SECURED BY NEW OR USED
MANUFACTURED HOMES (AS DEFINED HEREIN) THAT ARE NOT CONSIDERED TO BE INTERESTS
IN REAL PROPERTY BECAUSE SUCH MANUFACTURED HOMES ARE NOT PERMANENTLY AFFIXED TO
REAL ESTATE ("SECURED CONTRACTS") AND LOANS EVIDENCED BY RETAIL INSTALLMENT
SALES OR INSTALLMENT LOAN AGREEMENTS WHICH ARE NOT SECURED BY ANY INTEREST IN
REAL OR PERSONAL PROPERTY ("UNSECURED CONTRACTS" AND, TOGETHER WITH THE SECURED
CONTRACTS, THE "CONTRACTS"). TO THE EXTENT SPECIFIED IN THE RELATED PROSPECTUS
SUPPLEMENT, THE LOAN ASSETS MAY INCLUDE TITLE I MORTGAGE LOANS AND TITLE I
CONTRACTS. IF SPECIFIED IN THE RELATED PROSPECTUS SUPPLEMENT, THE TRUST PROPERTY
FOR A SERIES OF SECURITIES MAY INCLUDE THE RIGHTS OR OTHER ANCILLARY OR
INCIDENTAL ASSETS (TOGETHER WITH THE LOAN ASSETS, COLLECTIVELY, THE "ASSETS")
THAT ARE INTENDED (I) TO PROVIDE CREDIT ENHANCEMENT FOR THE ULTIMATE OR TIMELY
DISTRIBUTIONS OF PROCEEDS FROM THE LOAN ASSETS TO HOLDERS OF THE SECURITIES
("SECURITYHOLDERS") OR (II) TO ASSURE THE SERVICING OF THE LOAN ASSETS. THE LOAN
ASSETS WILL CONSIST OF LOANS FOR WHICH THE RELATED PROCEEDS WERE USED TO FINANCE
(I) PROPERTY IMPROVEMENTS, (II) DEBT CONSOLIDATION, (III) THE PURCHASE OR
REFINANCING OF SINGLE FAMILY RESIDENTIAL PROPERTY, (IV) A COMBINATION OF
PURCHASE OR REFINANCING OF SINGLE FAMILY RESIDENTIAL PROPERTY, PROPERTY
IMPROVEMENTS, DEBT CONSOLIDATION CASH-OUT, CREDIT INSURANCE PREMIUMS,
ORIGINATION COSTS, FINANCING OF CREDIT INSURANCE OR OTHER CONSUMER PURPOSES, OR
(V) THE ACQUISITION OF PERSONAL PROPERTY SUCH AS HOME APPLIANCES OR FURNISHINGS.
UNLESS OTHERWISE PROVIDED IN THE RELATED PROSPECTUS SUPPLEMENT, THE LOAN ASSETS
WILL BE SERVICED BY FIRSTPLUS FINANCIAL, INC., AS SERVICER (THE "SERVICER")
PURSUANT TO A SALE AND SERVICING AGREEMENT (EACH, AS AMENDED AND SUPPLEMENTED
FROM TIME TO TIME, A "SALE AND SERVICING AGREEMENT") BETWEEN (I) FIC, THE
TRANSFEROR, THE SERVICER AND THE RELATED INDENTURE TRUSTEE IF FIC IS THE ISSUER
OR (II) THE ISSUER, THE SELLER, THE SERVICER AND THE RELATED INDENTURE TRUSTEE,
IF A TRUST IS THE ISSUER.
EACH CLASS OF SECURITIES OF A SERIES WILL REPRESENT THE RIGHT TO RECEIVE
SPECIFIED PAYMENTS IN RESPECT OF COLLECTIONS OF PRINCIPAL AND INTEREST ON THE
RELATED ASSETS, AT THE RATES, ON THE DATES AND IN THE MANNER DESCRIBED HEREIN
AND IN THE RELATED PROSPECTUS SUPPLEMENT. IF A SERIES INCLUDES MULTIPLE CLASSES
OF SECURITIES, THE RIGHTS OF ONE OR MORE CLASSES OF SECURITIES TO RECEIVE
PAYMENTS MAY BE SENIOR OR SUBORDINATE TO THE RIGHTS OF ONE OR MORE OF THE OTHER
CLASSES OF SUCH SERIES. DISTRIBUTIONS ON CERTIFICATES OF A SERIES MAY BE
SUBORDINATE IN PRIORITY TO PAYMENTS DUE ON ANY RELATED NOTES OF SUCH SERIES TO
THE EXTENT DESCRIBED HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT. A SERIES
MAY INCLUDE ONE OR MORE CLASSES OF NOTES AND/OR CERTIFICATES WHICH DIFFER AS TO
THE TIMING AND PRIORITY OF PAYMENT, INTEREST RATE OR AMOUNT OF DISTRIBUTIONS IN
RESPECT OF PRINCIPAL OR INTEREST OR BOTH. A SERIES MAY INCLUDE ONE OR MORE
CLASSES OF NOTES OR CERTIFICATES ENTITLED TO DISTRIBUTIONS IN RESPECT OF
PRINCIPAL WITH DISPROPORTIONATE, NOMINAL OR NO INTEREST DISTRIBUTIONS, OR TO
INTEREST DISTRIBUTIONS, WITH DISPROPORTIONATE, NOMINAL OR NO DISTRIBUTIONS IN
RESPECT OF PRINCIPAL. THE RATE OF PAYMENT IN RESPECT OF PRINCIPAL OF ANY CLASS
OF NOTES AND DISTRIBUTIONS IN RESPECT OF PRINCIPAL OF THE CERTIFICATES OF ANY
CLASS WILL DEPEND ON THE PRIORITY OF PAYMENT OF SUCH CLASS AND CERTIFICATES AND
THE RATE AND TIMING OF PAYMENTS (INCLUDING PREPAYMENTS, DEFAULTS, LIQUIDATIONS
AND REPURCHASES OF ASSETS) ON THE RELATED ASSETS. A RATE OF PAYMENT LOWER OR
HIGHER THAN THAT ANTICIPATED MAY AFFECT THE WEIGHTED AVERAGE LIFE OF EACH CLASS
OF SECURITIES IN THE MANNER DESCRIBED HEREIN AND IN THE RELATED PROSPECTUS
SUPPLEMENT. SEE "RISK FACTORS -- EFFECT OF PREPAYMENTS ON AVERAGE LIFE".
OFFERS OF THE SECURITIES MAY BE MADE THROUGH ONE OR MORE DIFFERENT METHODS,
INCLUDING OFFERINGS THROUGH UNDERWRITERS, AS MORE FULLY DESCRIBED HEREIN AND IN
THE RELATED PROSPECTUS SUPPLEMENT. SEE "PLAN OF DISTRIBUTION" HEREIN. THERE WILL
HAVE BEEN NO PUBLIC MARKET FOR ANY SERIES OF SECURITIES PRIOR TO THE OFFERING
THEREOF. THERE CAN BE NO ASSURANCE THAT A SECONDARY MARKET WILL DEVELOP FOR THE
SECURITIES OF ANY SERIES OR, IF IT DOES DEVELOP, THAT SUCH MARKET WILL CONTINUE.
PROSPECTUS SUPPLEMENT
As further described herein, the Prospectus Supplement relating to each
Series of Securities offered thereby (the "Offered Securities") will, among
other things, set forth, as and to the extent appropriate: (i) a description of
each Class of such Offered Securities, including with respect to each such Class
the following (A) the applicable payment or distribution provisions, (B) the
aggregate principal amount, if any, (C) the rate at which interest accrues from
time to time, if at all, or the method of determining such rate, and (D) whether
interest will accrue from time to time on its aggregate principal amount, if
any, or on a specified notional amount, if at all; (ii) information with respect
to any other Classes of Securities of the same Series; (iii) the respective
dates on which payments or distributions are to be made; (iv) information as to
the Assets, including the Loan Assets and Credit Enhancement, constituting the
related Trust Property; (v) the circumstances, if any, under which the
Securities may be subject to redemption or early termination; (vi) additional
information with respect to the method of payment or distribution in respect of
such Offered Securities; (vii) the initial percentage ownership interest in the
related Trust to be evidenced by each Class of Certificates of such Series;
(viii) information concerning the Trustee (as defined herein) of the related
Trust; (ix) if the related Trust Property consists of Mortgage Loans or
Contracts, information concerning the Servicer and any Master Servicer (as
defined herein) of such Mortgage Loans or Contracts; (x) information as to the
nature and extent of subordination of any Class of Securities of such Series,
including a Class of Offered Securities; and (xi) whether such Offered
Securities will be initially issued in definitive or book-entry form.
The actual characteristics of the Loan Assets relating to a Series will not
deviate in any material respect from the parameters specified in the related
Prospectus Supplement; provided, however, that if the characteristics described
therein materially differ from the actual characteristics, a supplement to such
Prospectus Supplement will be distributed.
AVAILABLE INFORMATION
FIC has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (together with all amendments and
exhibits thereto, referred to herein as the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Securities to be offered from time to time pursuant to this Prospectus. For
further information, reference is made to the Registration Statement which may
be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549; and at the
Commission's regional offices at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and Seven World Trade Center, New York, New York
10048. Copies of the Registration Statement may also be obtained at prescribed
rates from the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. In addition, the Commission maintains a Web site
on the Internet that contains reports, proxy and information statements and
other information regarding the Seller. The address of such Web site is
http://www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by or on behalf of FIC or the Trust referred to in the
accompanying Prospectus Supplement pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
subsequent to the date of this Prospectus and prior to the termination of any
offering of the Securities issued by FIC or such Trust shall be deemed to be
incorporated by reference in this Prospectus. Any statement contained herein or
in a document incorporated or deemed to be incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein or in any subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
FIC will provide without charge to each person, including any beneficial
owner of Securities, to whom a copy of this Prospectus is delivered, on the
written or oral request of any such person, a copy of any or all of the
documents incorporated herein or in any related Prospectus Supplement by
reference, except the exhibits to such documents (unless such exhibits are
specifically incorporated by reference in such documents). Requests for such
copies should be directed to FIC at 3773 Howard Hughes Parkway, Suite 300N, Las
Vegas, Nevada 89109 (Telephone: (702) 866-2236), Attention: Lee F. Reddin.
TABLE OF CONTENTS
Page
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PROSPECTUS SUPPLEMENT........................................................iii
AVAILABLE INFORMATION.........................................................iv
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...............................iv
SUMMARY OF TERMS...............................................................1
RISK FACTORS..................................................................12
Limited Liquidity and Fluctuation in
Value from Market Conditions.............................................12
Limited Assets.............................................................13
Effect of Prepayments on Average Life......................................15
Limitations of Credit Enhancement..........................................17
Limited Nature of Ratings..................................................19
Adverse Tax Consequences...................................................20
Certain Factors Affecting Delinquencies,
Foreclosures and Losses on Loan Assets...................................20
Risks Associated with Certain Loan Assets..................................24
Recharacterization of Sale of Loan Assets
as Borrowing.............................................................26
Risks Relating to Indexed Securities.......................................27
DESCRIPTION OF THE NOTES......................................................27
General....................................................................27
Principal and Interest on the Notes........................................28
The Indenture..............................................................29
The Indenture Trustee......................................................33
Administration Agreement...................................................33
DESCRIPTION OF THE CERTIFICATES...............................................33
Distributions of Principal and Interest....................................34
POOL FACTORS AND TRADING INFORMATION..........................................35
CERTAIN INFORMATION REGARDING THE SECURITIES..................................36
General....................................................................36
Fixed Rate Securities and Floating Rate Securities.........................37
Indexed Securities.........................................................37
Book-Entry Registration....................................................38
Definitive Securities......................................................43
THE TRUSTS....................................................................44
THE TRUSTEE...................................................................45
DESCRIPTION OF THE TRUST PROPERTY.............................................46
General....................................................................46
Mortgage Loans.............................................................47
Contracts..................................................................49
Modifications of Mortgage Loans and Contracts..............................50
Additions, Substitution and Withdrawal of Assets...........................51
Pre-Funding Arrangements...................................................51
CREDIT ENHANCEMENT............................................................53
General....................................................................53
Subordination..............................................................54
Overcollateralization......................................................55
Cross-Support..............................................................55
Guaranty Insurance.........................................................55
Mortgage Pool Insurance....................................................55
Special Hazard Insurance...................................................56
Reserve Funds..............................................................57
SERVICING OF THE LOAN ASSETS..................................................57
Enforcement of Due-on-Sale Clauses.........................................58
Realization Upon Defaulted Loan Assets.....................................58
Waivers and Deferments of Certain Payments.................................59
Subservicers...............................................................60
Removal and Resignation of Servicer........................................60
Advances...................................................................61
Servicing Procedures.......................................................61
Administration and Servicing Compensation and Payment of Expenses..........63
THE SELLER AND THE ISSUER.....................................................63
THE SERVICER AND THE TRANSFEROR...............................................64
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS..........................67
Sale and Assignment of Loan Assets.........................................68
Conveyance of Subsequent Loan Assets.......................................70
Repurchase or Substitution of Loan Assets..................................70
Evidence as to Compliance..................................................71
List of Securityholders....................................................71
Administration of the Distribution Account.................................72
Reports to Securityholders.................................................73
Events of Default..........................................................74
Rights Upon Event of Default...............................................74
Amendment..................................................................75
CERTAIN LEGAL ASPECTS OF THE LOAN ASSETS......................................76
General Legal Considerations...............................................76
Foreclosure................................................................78
Truth in Lending Act.......................................................87
Applicability of Usury Laws................................................88
Soldiers' and Sailors' Civil Relief Act....................................88
The Title I Program........................................................89
CERTAIN FEDERAL INCOME TAX CONSEQUENCES......................................100
Opinion of Counsel........................................................100
Trusts Characterized As Grantor Trusts....................................100
Trusts Characterized As Partnerships......................................106
Tax Consequences to Holders of the Notes..................................110
Trusts Characterized As FASITs............................................112
NOTES ISSUED BY FIC..........................................................116
ERISA CONSIDERATIONS.........................................................117
LEGAL INVESTMENT MATTERS.....................................................118
PLAN OF DISTRIBUTION.........................................................118
USE OF PROCEEDS..............................................................119
LEGAL OPINIONS...............................................................119
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to the Securities of any Series contained in the
related Prospectus Supplement to be prepared and delivered in connection with
the offering of such Securities. Certain capitalized terms used herein are
defined elsewhere in this Prospectus on the pages indicated in the "Index of
Terms".
ISSUER............................... With respect to each Series of
Securities, FIRSTPLUS Investment
Corporation ("FIC") or a separate entity
(each, a "Trust") formed by FIC solely
for the purpose of issuing such Notes, as
applicable. Each Trust will be formed
pursuant to either a Trust Agreement (as
amended and supplemented from time to
time, a "Trust Agreement") between the
Seller and the applicable Owner Trustee
for such Trust (the "Trust") or a Pooling
and Servicing Agreement (as amended and
supplemented from time to time, the
"Pooling and Servicing Agreement") among
the Seller, the Servicer and the Trustee
for such Trust.
SELLER............................... With respect to each Series in which the
Issuer is a Trust, FIRSTPLUS Investment
Corporation (the "Seller").
SERVICER............................. FIRSTPLUS FINANCIAL, INC. ("FFI" or the
"Transferor" or the "Servicer").
PASS THROUGH TRUSTEE................. With respect to each Series of Securities
that is issued by a trust created
pursuant to a Pooling and Servicing
Agreement, the Pass-Through Trustee
specified in the related Prospectus
Supplement.
OWNER TRUSTEE........................ With respect to each Series of Securities
that is issued by a trust created
pursuant to a Trust Agreement, the Owner
Trustee specified in the related
Prospectus Supplement.
INDENTURE TRUSTEE ................... With respect to any applicable Series
of Securities that includes one or more
Classes of Notes, the Indenture Trustee
specified in the related Prospectus
Supplement.
TRUSTEE.............................. As used herein, the term "Trustee" shall
refer to the Indenture Trustee with
respect to a Series of Notes, the Owner
Trustee under the applicable Trust
Agreement with respect to a Series of
Certificates, or the Pass Through Trustee
under the applicable Pooling and
Servicing Agreement with respect to a
Series of Certificates. The Trustees with
respect to each Series will be specified
in the related Prospectus Supplement.
ADMINISTRATOR ....................... The entity or entities named as
Administrator, if any, in the related
Prospectus Supplement (the
"Administrator"), will act as
administrator with respect to one or more
aspects related to any Loan Assets
included as Trust Property. The
Administrator may be an affiliate of the
Issuer, the Seller and/or the Servicer.
MASTER SERVICER...................... If the related Trust Property consists of
Mortgage Loans or Contracts, the entity
or entities, if any, named as the master
servicer in the related Prospectus
Supplement (the "Master Servicer"), that
will act as master servicer with respect
to such Mortgage Loans or Contracts. The
Master Servicer may be an affiliate of
the Seller and/or Servicer.
THE NOTES ........................... A Series of Securities may include one
or more Classes of Notes issued pursuant
to an Indenture between the Issuer and
the Indenture Trustee (as amended and
supplemented from time to time, an
"Indenture"). The related Prospectus
Supplement will specify which Class or
Classes, if any, of Notes of the related
Series are being offered thereby.
To the extent specified in the related
Prospectus Supplement, Notes will be
available for purchase in denominations
of $1,000 and integral multiples thereof
and will be available in book-entry form
only. Noteholders will be able to receive
Definitive Notes only in the limited
circumstances described herein or in the
related Prospectus Supplement. See
"Certain Information Regarding the
Securities -- Definitive Securities".
To the extent specified in the related
Prospectus Supplement, each Class of
Notes will have a stated principal amount
and will bear interest at a specified
rate or rates (with respect to each Class
of Notes, the "Interest Rate"). Each
Class of Notes may have a different
Interest Rate, which may be a fixed rate,
an adjustable rate, or a combination of
the two. The related Prospectus
Supplement will specify the Interest Rate
for each Class of Notes, or the method
for determining the Interest Rate.
With respect to a Series that includes
two or more Classes of Notes, each Class
may differ as to the timing and priority
of payments, seniority, allocations of
losses, or Interest Rate or amount of
payments of principal or interest.
Furthermore, payments of principal or
interest in respect of any such Class or
Classes may or may not be made upon the
occurrence of specified events or on the
basis of collections from designated
portions of the Trust Property.
In addition, a Series may include one or
more Classes of Notes entitled to
principal payments with disproportionate,
nominal or no interest payments.
To the extent specified in the related
Prospectus Supplement, the Seller, the
Servicer or a successor thereto may have
an option to purchase the Trust Property
in the manner and on the respective terms
and conditions as set forth in the
related Prospectus Supplement.
THE CERTIFICATES .................... A Series may include one or more Classes
of Certificates and may or may not
include any Notes. The related Prospectus
Supplement will specify which Class or
Classes, if any, of the Certificates are
being offered thereby.
To the extent specified in the related
Prospectus Supplement, Certificates will
be available for purchase in a minimum
denomination of $1,000 and in integral
multiples thereof and will be available
in book-entry form only.
Certificateholders will be able to
receive Definitive Certificates only in
the limited circumstances described
herein or in the related Prospectus
Supplement. See "Certain Information
Regarding the Securities--Definitive
Securities".
To the extent specified in the related
Prospectus Supplement, each Class of
Certificates will have a stated
Certificate Balance specified in the
related Prospectus Supplement (the
"Certificate Balance") and will accrue
interest on such Certificate Balance at a
specified rate (with respect to each
Class of Certificates, the "Pass Through
Rate"). Each Class of Certificates may
have a different Pass Through Rate, which
may be a fixed rate or an adjustable
rate, or a combination of the two. The
related Prospectus Supplement will
specify the Pass Through Rate for each
Class of Certificates or the method for
determining the Pass Through Rate.
With respect to a Series that includes
two or more Classes of Certificates, each
Class may differ as to timing and
priority of distributions, seniority,
allocations of losses, Pass Through Rate
or amount of distributions in respect of
principal or interest. Furthermore,
distributions in respect of principal or
interest in respect of any such Class or
Classes may or may not be made upon the
occurrence of specified events or on the
basis of collections from designated
portions of the Trust Property.
In addition, a Series may include one or
more Classes of Certificates entitled to
(i) distributions in respect of principal
with disproportionate, nominal or no
interest distributions or (ii) interest
distributions with disproportionate,
nominal or no distributions in respect of
principal.
If a Series of Securities includes
Classes of Notes, distributions in
respect of the Certificates may be
subordinated in priority of payment to
payments on the Notes to the extent
specified in the related Prospectus
Supplement.
To the extent specified in the related
Prospectus Supplement, the Seller, the
Servicer or a successor thereto may have
an option to purchase the Trust Property
in the manner and on the respective terms
and conditions as set forth in the
related Prospectus Supplement.
THE TRUST PROPERTY................... As specified in the related Prospectus
Supplement, the property securing or
backing each Series (the "Trust
Property") will include Loan Assets
consisting of one or more of the
following:
(i) a pool (a "Mortgage Pool") of
single family (one- to four-unit)
residential mortgage loans, including
mortgage loans that are secured by first
or junior liens on the related mortgaged
properties, timeshare mortgage loans and
loans evidenced by retail installment
sales or installment loan agreements that
are secured by first or junior liens on
real property ("Mortgage Loans"); and
(ii) a pool (a "Contract Pool") of
loans evidenced by retail installment
sales or installment loan agreements,
including loans secured by new or used
Manufactured Homes (as defined herein)
that are not considered to be interests
in real property because such
Manufactured Homes are not permanently
affixed to real estate ("Secured
Contracts") and loans evidenced by retail
installment sales or installment loan
agreements which are not secured by any
interest in real or personal property
("Unsecured Contracts" and, together with
the Secured Contracts, the "Contracts").
The Trust Property may also include, or
the related Securities may also have the
benefits of, certain rights and other
ancillary or incidental assets (together
with the Loan Assets, collectively, the
"Assets"), that are intended (i) to
enhance the likelihood of ultimate or
timely payments or distributions of
proceeds from the Loan Assets to
Securityholders, including letters of
credit, insurance policies, guaranties,
reserve funds or other types of credit
enhancement or any combination thereof
(the "Credit Enhancement"), or (ii) to
assure the servicing of the Loan Assets,
including interest rate exchange
agreements, reinvestment income and cash
accounts.
The Securities of any Series will be
entitled to payment only from the Trust
Property and any other Assets pledged or
otherwise available for the benefit of
the holders of such Securities as
specified in the related Prospectus
Supplement.
The Trust Property of each Series may
also include amounts on deposit in
certain trust accounts, including the
related Collection Account, Distribution
Account and any Yield Maintenance
Account, Reserve Fund or other account
identified in the applicable Prospectus
Supplement.
A. Mortgage Loans.................. As specified in the related Prospectus
Supplement for a Series, "Mortgage Loans"
may include: (i) loans secured by first
liens on one-to-four family residential
properties; (ii) loans secured by
security interests in shares issued by
private, non-profit, cooperative housing
corporations ("Cooperatives") and in the
related proprietary leases or occupancy
agreements granting exclusive rights to
occupy specific dwelling units in such
Cooperatives' buildings; (iii) loans
secured by junior (i.e., second, third,
etc.) liens on the related mortgaged
properties (which may be evidenced by
retail installment sales contracts and
installment loan agreements); (iv) loans
secured by security instruments creating
first or junior liens on the related
borrower's leasehold interest in real
property; (v) loans secured by timeshare
estates representing an ownership
interest in common with other owners in
one or more vacation units entitling the
owner thereof to the exclusive use of
unit and access to the accompanying
recreational facilities for the week or
weeks owned; and (vi) loans evidenced by
retail installment sales and installment
loan agreements that are secured by first
or junior liens on real property. See
"Description of the Trust Property--
Mortgage Loans." Certain of the junior
lien Mortgage Loans may be conventional
(i.e., not insured or guaranteed by a
governmental agency) mortgage loans
("Conventional Mortgage Loans"), while
other junior lien Mortgage Loans that are
property improvement loans may be
partially insured by the Federal Housing
Administration under the Title I Program
("Title I Mortgage Loans"). The related
Prospectus Supplement for a Series will
describe any Mortgage Loans included in
the related Trust Property and will
specify certain information regarding the
payment terms of such Mortgage Loans. See
"Description of the Trust Property--
Mortgage Loans."
If so specified in the related Prospectus
Supplement, certain terms of the Mortgage
Loans in the related Mortgage Pool may be
modified if the related borrowers have
indicated their intention to prepay such
loans. See "Description of the Trust
Property--Modifications of Mortgage
Loans."
B. Contracts....................... As specified in the related Prospectus
Supplement for a Series, "Contracts" may
include: (i) loans evidenced by retail
installments sales or loan agreements,
including loans secured by new or used
Manufactured Homes (as defined herein)
that are not considered to be interests
in real property because such
Manufactured Homes are not permanently
affixed to real estate ("Secured
Contracts") and (ii) loans evidenced by
retail installment sales or installment
loan agreements which are not secured by
any interest in real or personal property
("Unsecured Contracts"). See "Description
of the Trust Property -- Contracts".
Certain Contracts may be conventional
(i.e., not insured or guaranteed by a
governmental agency) contracts
("Conventional Contracts"), while other
Contracts may be partially insured by the
FHA under the Title I Program ("Title I
Contracts"). The related Prospectus
Supplement for a Series will further
describe the type of Contracts, if any,
included in the related Trust Property.
See "Description of the Trust Property--
Contracts."
C. Pre-Funding Arrangements........ If so specified in the related Prospectus
Supplement, the related Sale and
Servicing Agreement or Pooling and
Servicing Agreement will contain
provisions pursuant to which the related
Transferor will agree to transfer
additional Loan Assets ("Subsequent Loan
Assets") into the related Loan Asset Pool
for a specified period of time following
the date on which the related Securities
are issued (such provisions being
referred to herein as a "Pre-Funding
Arrangement"). Any such Pre-Funding
Arrangement will require that any Loan
Assets so transferred conform to the
requirements specified in the related
Sale and Servicing Agreement or Pooling
and Servicing Agreement, as applicable.
See "Description of the Trust Property --
Pre-Funding Arrangements."
TRANSFER OF LOAN ASSETS.............. On or before the date of initial
issuance of a Series of Securities (the
related "Closing Date"), the Loan Assets
having an aggregate principal balance
specified in the related Prospectus
Supplement as of the dates specified
therein (the "Cut-off Date") will be
transferred pursuant to (i) the related
Sale and Servicing Agreement, or (ii) the
related Pooling and Servicing Agreement.
The Loan Assets will have been (i)
originated by the Transferor in
accordance with the Transferor's
underwriting criteria or (ii) originated
by the Transferor's correspondents in
accordance with the Transferor's
underwriting criteria and subsequently
purchased by the Transferor. The Loan
Assets to be included in the Trust
Property will be selected based on the
underwriting criteria specified in the
related Sale and Servicing Agreement or
Pooling and Servicing Agreement, as
applicable, and described herein and in
the related Prospectus Supplement.
CREDIT ENHANCEMENT .................. If and to the extent specified in the
related Prospectus Supplement, credit
enhancement with respect to a Series or
any Class or Classes of Securities may
include any one or more of the following:
subordination of one or more other
Classes of Securities, a Reserve Fund, a
Yield Maintenance Account,
overcollateralization, letters of credit,
credit or liquidity facilities, surety
bonds, guaranteed investment contracts,
swaps or other interest rate protection
agreements, repurchase obligations, cash
deposits or other agreements or
arrangements with respect to third party
payments or other support. Any form of
credit enhancement may have certain
limitations and exclusions from coverage
thereunder and, if so, such limitations
and exclusions from coverage will be
described in the related Prospectus
Supplement. See "Risk Factors --
Limitations of Credit Enhancement" and
"Credit Enhancement".
TRANSFER AND SERVICING
AGREEMENTS.......................... The Assets for a given Series of
Securities will be transferred to the
related Issuer pursuant to a Sale and
Servicing Agreement or a Pooling and
Servicing Agreement. The rights and
benefits of any Issuer under a Sale and
Servicing Agreement will be assigned to
the Indenture Trustee as collateral for
the Notes of the related Series. The
Servicer will agree with such Issuer to
be responsible for servicing, managing,
maintaining custody of and making
collections on the Assets. If and to the
extent set forth in the related
Prospectus Supplement, FFI will undertake
certain administrative duties under an
Administration Agreement with respect to
any Issuer that has issued Notes.
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES ....................... Except as otherwise provided in the
related Prospectus Supplement, upon the
issuance of a Series of Securities, Tax
Counsel to the Issuer will opine that for
federal income tax purposes (a) any Notes
of such Series will be characterized as
debt and (b) such Issuer, if a Trust,
will not be a business entity classified
as a corporation, a publicly traded
partnership treated as a corporation or a
taxable mortgage pool. In respect of any
such Series, each Noteholder, if any, by
the acceptance of a Note of such Series,
will agree to treat such Note as
indebtedness, and each Certificateholder,
by the acceptance of a Certificate of
such Series, will agree, to the extent
provided in the related Prospectus
Supplement, to treat a Certificate as
representing either an ownership interest
in a grantor trust, or as an interest in
a partnership in which such
Certificateholder is a partner for
federal income tax purposes. Alternative
characterizations of such Trusts and such
Certificates are possible, but would not
result in materially adverse tax
consequences to Certificateholders.
If specified in the Prospectus Supplement
for a Series of Securities, one or more
elections may be made to treat all or
specified portions of the related Trust
Fund as a "Financial Asset Securitization
Investment Trust" ("FASIT") or to treat
the arrangement by which such Series is
issued as a FASIT, for federal income tax
purposes. If applicable, the Prospectus
Supplement for a Series will specify
which Class or Classes of such Series of
Certificates will be considered to be
regular interests and ownership interests
in the related FASIT.
See "Certain Federal Income Tax
Consequences"for additional information
concerning the application of federal tax
laws to the Securities.
ERISA CONSIDERATIONS ................ A fiduciary of any employee benefit plan
subject to the Employee Retirement Income
Security Act of 1974, as amended
("ERISA"), or the Code should carefully
review with its own legal advisors
whether the purchase or holding of
Securities could give rise to a
transaction prohibited or otherwise
impermissible under ERISA or the Code.
See "ERISA Considerations." To the extent
described in the Prospectus Supplement
for a Series, certain Classes of
Securities of such Series may not be
transferred unless the applicable Trustee
and FIC are furnished with a letter of
representation or an opinion of counsel
to the effect that such transfer will not
result in a violation of the prohibited
transaction provisions of ERISA and the
Code and will not subject the applicable
Trustee, the Issuer, the Seller, the
Servicer, the Master Servicer, if any, or
the Administrator, if any, to additional
obligations. If specified in the related
Prospectus Supplement, the United States
Department of Labor may have issued to
the Underwriter an administrative
exemption for certain Classes of
Securities. See "Certain Information
Regarding the Securities-- General" and
"ERISA Considerations."
LEGAL INVESTMENT MATTERS............. The Securities of each Series will not
constitute "mortgage related securities"
under the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA")
because, to the extent specified in the
related Prospectus Supplement, a
substantial number of the Mortgage Loans
will be secured by liens on real estate
that are not first liens, as required by
SMMEA. Accordingly, many institutions
with legal authority to invest in
"mortgage related securities" may not be
legally authorized to invest in the
Securities of any Series. Investors
should consult their own legal advisors
in determining whether and to what extent
the Securities of any particular Series
constitute legal investments for such
investors.
USE OF PROCEEDS...................... Substantially all of the net proceeds
from the sale of a Series will be applied
to the simultaneous purchase of the Loan
Assets included in the related Trust
Property or to reimburse the amounts
previously used to effect such purchase,
the costs of carrying the Loan Assets
until sale of such Series and to pay
other expenses connected with pooling the
Loan Assets and issuing such Series. See
"Use of Proceeds."
RATING............................... It is a condition to the issuance of
each Class of a Series specified as being
offered by the related Prospectus
Supplement that the Securities of such
Class be rated in one of the four highest
rating categories established for such
Securities by a nationally recognized
statistical rating agency (a "Rating
Agency").
RISK FACTORS
In considering an investment in the Offered Securities of any Series,
investors should consider, among other things, the following risk factors and
any other factors set forth under the heading "Risk Factors" in the related
Prospectus Supplement.
LIMITED LIQUIDITY AND FLUCTUATION IN VALUE FROM MARKET CONDITIONS
GENERAL. The Offered Securities of any Series may have limited or no
liquidity. Accordingly, an investor may be forced to bear the risk of its
investment in any Offered Securities for an indefinite period of time.
Furthermore, except to the extent described herein and in the related Prospectus
Supplement, Securityholders will have no redemption rights, and the Offered
Securities of each Series are subject to early retirement only under certain
specified circumstances described in the related Prospectus Supplement.
LACK OF A SECONDARY MARKET. There can be no assurance that a secondary
market for the Offered Securities of any Series will develop or, if it does
develop, that it will provide holders with liquidity of investment or that it
will continue for as long as such Offered Securities remain outstanding. The
Prospectus Supplement for any Series of Offered Securities may indicate that an
underwriter specified therein intends to establish a secondary market in such
Offered Securities; however, no underwriter will be obligated to do so. Any such
secondary market may provide less liquidity to investors than any comparable
market for securities that evidence interests in single-family mortgage loans.
To the extent provided in the related Prospectus Supplement, the Securities may
be listed on any securities exchange.
BOOK ENTRY REGISTRATION. To the extent specified in the related Prospectus
Supplement, persons acquiring beneficial ownership interests in the Securities
of any Series or Class will hold their Securities through DTC, in the United
States, or Cedel or Euroclear in Europe. Transfers within DTC, Cedel or
Euroclear, as the case may be, will be in accordance with the usual rules and
operating procedures of the relevant system. So long as the Securities are
Book-Entry Securities, such Securities will be evidenced by one or more
certificates registered in the name of Cede & Co., as the nominee of DTC, or
Citibank N.A. or Morgan Guaranty Trust Company of New York, the relevant
depositaries of Cedel and Euroclear, respectively, and each a participating
member of DTC. No Securityholder will be entitled to receive a definitive
certificate representing such person's interest, except in the event that
Definitive Securities are issued under the limited circumstances described
herein. See "Certain Information Regarding the Securities -- Book-Entry
Registration". Unless and until Definitive Securities for such Series are
issued, holders of such Securities will not be recognized by the Trustee or any
applicable Indenture Trustee as "Certificateholders", "Noteholders" or
"Securityholders", as the case may be (as such terms are used herein or in the
related Pooling and Servicing Agreement or related Indenture and Trust
Agreement, as applicable). Hence, until Definitive Securities are issued,
holders of such Securities will only be able to exercise the rights of
Securityholders indirectly through DTC (if in the United States) and its
participating organizations, or Cedel and Euroclear (in Europe) and their
respective participating organizations. See "Certain Information Regarding the
Securities -- Book-Entry Registration".
Since transactions in the Securities can be effected only through DTC,
Cedel, Euroclear, participating organizations, indirect participants and certain
banks, the ability of the beneficial owner thereof to pledge such Securities to
persons or entities that do not participate in the DTC, Cedel or Euroclear
system, or otherwise to take actions in respect of such Securities, may be
limited due to lack of a physical certificate representing such Securities.
Beneficial owners of Securities may experience some delay in their receipt
of payments or distributions of interest of and principal since such
distributions will be forwarded by the Trustee or Indenture Trustee to DTC and
DTC will credit such payments or distributions to the accounts of its
Participants (as defined herein) which will thereafter credit them to the
accounts of the beneficial owners thereof either directly or indirectly through
indirect participants.
LIMITED NATURE OF ONGOING INFORMATION. The primary source of ongoing
information regarding the Offered Securities of any Series, including
information regarding the status of the related Loan Assets and any Credit
Enhancement for such Offered Securities, will be the periodic reports to
Securityholders to be delivered pursuant to the related Indenture or Pooling and
Servicing Agreement as described herein under the heading "Description of the
Transfer and Servicing Agreements -- Reports to Securityholders". There can be
no assurance that any additional ongoing information regarding the Offered
Securities of any Series will be available through any other source. The limited
nature of such information in respect of a Series of Offered Securities may
adversely affect the liquidity thereof, even if a secondary market for such
Offered Securities does develop.
SENSITIVITY TO FLUCTUATIONS IN PREVAILING INTEREST RATES. Insofar as a
secondary market does develop with respect to any Series of Offered Securities
or Class thereof, the market value of such Offered Securities will be affected
by several factors, including the perceived liquidity thereof, the anticipated
cash flow thereon (which may vary widely depending upon the prepayment and
default assumptions applied in respect of the underlying Loan Assets) and
prevailing interest rates. The price payable at any given time in respect of
certain Classes of Offered Securities (in particular, a Class with a relatively
long average life, or a Class of Interest Only Securities or Principal Only
Securities) may be extremely sensitive to small fluctuations in prevailing
interest rates; and the relative change in price for an Offered Security in
response to an upward or downward movement in prevailing interest rates may not
necessarily equal the relative change in price for such Offered Security in
response to an equal but opposite movement in such rates. Accordingly, the sale
of Offered Securities by a holder in any secondary market that may develop may
be at a discount from the price paid by such holder. FIC is not aware of any
source through which price information about the Offered Securities will be
generally available on an ongoing basis.
LIMITED ASSETS
The Offered Securities and Loan Assets for a Series will be guaranteed or
insured, if at all, to the extent specified in the related Prospectus
Supplement; otherwise neither the Offered Securities of any Series nor the Loan
Assets in the related Trust Property will be guaranteed or insured by, or be
recourse obligations of, the Issuer, the Seller, the Servicer or any of their
respective affiliates, by any governmental agency or instrumentality or by any
other person, and no Offered Security of any Series will represent a claim
against or security interest in the Trust Property for any other Series.
Accordingly, if the related Trust Property includes insufficient assets to make
payments on a Series of Offered Securities, no other assets will be available
for payment of the deficiency, and the holders of one or more Classes of such
Offered Securities will be required to bear the consequent loss. To the extent
provided in the related Prospectus Supplement for a Series that consists of one
or more Classes of Subordinate Securities, on any Distribution Date in respect
of which losses or shortfalls in collections on the Loan Assets have been
incurred, all or a portion of the amount of such losses or shortfalls will be
borne first by one or more Classes of the Subordinate Securities, and,
thereafter, by the remaining Classes of Securities in the priority and manner
and subject to the limitations specified in such Prospectus Supplement. Because
payments and distributions of principal on the Securities of a Series may, if
provided in the related Prospectus Supplement, be applied to outstanding Classes
of such Series in the priority specified in the related Prospectus Supplement, a
deficiency that arises after Securities of a Class of any such Series having
higher priority in payment or distribution have been fully or partially repaid
will have a disproportionately greater effect on the Securities of Classes of
such Series having lower priority in payment. The disproportionate effect of any
such deficiency is further increased in the case of Classes of Compound Interest
Securities of any Series because, prior to the retirement of all Classes of such
Series having higher priority in payment than such Compound Interest Securities,
interest is not payable, to the extent provided in the related Prospectus
Supplement, but is accrued and added to the principal of such Compound Interest
Securities.
ADDITIONS, SUBSTITUTIONS AND WITHDRAWALS OF ASSETS. To the extent provided
in the related Prospectus Supplement for a Series, the Seller or the Issuer may,
subsequent to the issuance of such a Series, deliver additional Assets or
withdraw Assets previously included in the Trust Property for such Series,
substituting assets therefore or depositing additional Assets or withdrawing
Assets previously deposited in a Reserve Fund for such Series. The effect of
delivery or substitution of other Assets may be to alter the characteristics and
composition of the Assets underlying such Series, either of which may alter the
timing and amount of payments or distributions on, or the date of the final
payment or distribution in respect of, the Securities of such Series. See
"Description of the Trust Property -- Additions, Substitution and Withdrawal of
Assets". Furthermore, certain amounts on deposit from time to time in certain
funds or accounts constituting part of the Trust Property for a Series,
including the Distribution Account and any accounts maintained as Credit
Enhancement, may be withdrawn under certain conditions, if and to the extent
described in the related Prospectus Supplement, for purposes other than the
payment of principal of or interest on the related Series of Securities.
MODIFICATIONS OF MORTGAGE LOANS AND CONTRACTS. With respect to a Series of
Securities, the related Master Servicer, Servicer or Subservicer, if any, may,
subsequent to the issuance of such Series of Securities, effect certain
modifications of the terms of the related Mortgage Loans and Contracts to the
extent that (i) the related borrower has indicated an intention to refinance
such Mortgage Loan or Contract, if so specified in the related Prospectus
Supplement, including modification of the applicable interest rate, principal
balance, monthly payment and/or term to maturity, or (ii) such Mortgage Loan or
Contract is in default (or default is, in the judgment of the Master Servicer,
Servicer or Subservicer, as applicable, reasonably foreseeable), including
deferral or forgiveness of delinquent payments and modification of the
applicable interest rate, principal balance, monthly payment and/or term to
maturity. See "Description of the Trust Property--Modifications of Mortgage
Loans and Contracts."
EFFECT OF PREPAYMENTS ON AVERAGE LIFE
As a result of prepayments on the Loan Assets, the amount and timing of
payments or distributions of principal and/or interest on the Offered Securities
of the related Series may be highly unpredictable. Prepayments on the Loan
Assets included in the Trust Property will result in a faster rate of principal
payments on one or more Classes of the related Series of Securities than if
payments on such Loan Assets were made as scheduled. Thus, the prepayment
experience on the Loan Assets included in the Trust Property may affect the
average life of one or more Classes of Securities of the related Series,
including a Class of Offered Securities. The rate of principal payments on pools
of mortgage loans and installment loan contracts varies among pools and from
time to time is influenced by a variety of economic, demographic, geographic,
social, tax and legal factors. For example, if prevailing interest rates fall
significantly below the interest rates borne by the Loan Assets included in the
Trust Property, then, subject to the particular terms of the Loan Assets (e.g.,
provisions that prohibit voluntary prepayments during specified periods or
impose penalties in connection therewith) and the ability of borrowers to obtain
new financing, principal prepayments on such Loan Assets are likely to be higher
than if prevailing interest rates remain at or above the rates borne by those
Loan Assets. Conversely, if prevailing interest rates rise significantly above
the interest rates borne by the Loan Assets included in the Trust Property, then
principal prepayments on such Loan Assets are likely to be lower than if
prevailing interest rates remain at or below the interest rates borne by those
Loan Assets. In addition to fluctuations in prevailing interest rates, the rate
of prepayments on the Loan Assets may be influenced by changes and developments
in the types and structures of loan products being offered to consumers within
the mortgage banking and consumer finance industry and by technological
developments and innovations to the loan underwriting and origination process.
To the extent that the Mortgage Loans or Contracts of a Series are subject
to modification in lieu of refinancing as described under "--Limited
Assets--Modifications of Mortgage Loans and Contracts" above, modifications of
the applicable interest rates and/or terms to maturity of Mortgage Loans and
Contracts would slow (or mitigate the acceleration of) the rate of prepayment of
Mortgage Loans and Contracts in the related Mortgage Pool.
Accordingly, there can be no assurance as to the actual rate of prepayment
on the Loan Assets included in any given Trust Property or that such rate of
prepayment will conform to any model described herein or in any Prospectus
Supplement. As a result, depending on the anticipated rate of prepayment for the
Loan Assets included in the Trust Property with respect to a Series, the
retirement of any Class of Securities of such Series could occur significantly
earlier or later, and the average life thereof could be significantly shorter or
longer, than expected.
In comparison to first lien single family mortgage loans, FIC is aware of
only limited publicly available statistical information regarding the rates of
prepayment of loans such as the Loan Assets that is based upon the historical
loan performance of this segment of the mortgage banking and consumer finance
industry. In fact, this segment of the mortgage banking and consumer finance
industry has undergone significant growth and expansion, including an increase
in new loan originations, as a result of certain social and economic factors,
including recent tax law changes that limit the deductibility of consumer
interest to indebtedness secured by an individual's principal residence and
changes and developments in the types and structures of loan products being
offered to consumers. Therefore, no assurance can be given as to the level of
prepayments that the Loan Assets will experience. In fact, a number of factors
suggest that the prepayment experience of the Loan Assets may be significantly
different from that of any first lien Mortgage Loans with equivalent interest
rates and maturities.
Additional prepayment, yield and weighted average life considerations with
respect to a Series of Securities will be set forth in the related Prospectus
Supplement.
The extent to which prepayments on the Loan Assets included in the Trust
Property of any Series ultimately affect the average life of any Class of
Securities of such Series will depend on the terms and provisions of such
Securities. A Class of Securities, including a Class of Offered Securities, may
provide that on any Distribution Date the holders of such Securities are
entitled to a pro rata share of the prepayments on the Loan Assets included in
the related Trust Property that are distributable on such date, to a
disproportionately large share (which, in some cases, may be all) of such
prepayments, or to a disproportionately small share (which, in some cases, may
be none) of such prepayments. A Class of Securities that entitles the holders
thereof to a disproportionately large share of the prepayments on the Loan
Assets included in the related Trust Property increases the likelihood of early
retirement of such Class ("Call Risk") if the rate of prepayment is relatively
fast; while a Class of Securities that entitles the holders thereof to a
disproportionately small share of the prepayments on the Loan Assets included in
the related Trust Property increases the likelihood of an extended average life
of such Class ("Extension Risk") if the rate of prepayment is relatively slow.
To the extent described in the related Prospectus Supplement, the respective
entitlement of the various Classes of Securityholders of such Series to receive
payments (and, in particular, prepayments) of principal of the Loan Assets
included in the related Trust Property may vary based on the occurrence of
certain events (e.g., the retirement of one or more Classes of Securities of
such Series) or whether certain contingencies do or do not occur (e.g.,
prepayment and default rates with respect to such Loan Assets).
A Series of Securities may include one or more Classes of scheduled
amortization Securities (each, a "Scheduled Amortization Security"), which will
entitle the holders thereof to receive principal payments or distributions
according to a specified principal payment schedule. Although prepayment risk
cannot be eliminated entirely from any Class of Securities, a Class of Scheduled
Amortization Securities will generally provide a relatively stable cash flow so
long as the actual rate of prepayment on the Loan Assets included in the related
Trust Property remains relatively constant at the rate, or within the range of
rates, of prepayment used to establish the specific principal payment schedule
for such Securities. Prepayment risk with respect to a given pool of Loan Assets
does not disappear, however, and the stability afforded to Scheduled
Amortization Securities comes at the expense of one or more Companion Classes of
the same Series (each, a "Companion Class"), any of which Companion Classes may
also be a Class of Offered Securities. In general, and as more specifically
described in the related Prospectus Supplement, a Companion Class may entitle
the holders thereof to a disproportionately large share of prepayments on the
Loan Assets included in the related Trust Property when the rate of prepayment
is relatively fast, and/or may entitle the holders thereof to a
disproportionately small share of prepayments on the Loan Assets included in the
related Trust Property when the rate of prepayment is relatively slow. As and to
the extent described in the related Prospectus Supplement, a Companion Class
absorbs some (but not all) of the Call Risk and/or Extension Risk that would
otherwise belong to the related Scheduled Amortization Securities if all
payments of principal of the Loan Assets included in the related Trust Property
were allocated on a pro rata basis.
EFFECT OF PREPAYMENTS ON YIELD
A Series of Securities may include one or more Classes of Offered
Securities offered at a premium or discount. Yields on such Classes of
Securities will be sensitive, and in some cases extremely sensitive, to
prepayments on the Loan Assets included in the related Trust Property and, where
the amount of interest payable with respect to a Class is disproportionately
large, as compared to the amount of principal, as with a Class of Interest Only
Securities, a holder might fail to recover its original investment under some
prepayment scenarios. The extent to which the yield to maturity of any Class of
Offered Securities may vary from the anticipated yield will depend upon the
degree to which such Offered Securities are purchased at a discount or premium
and the amount and timing of distributions thereon. An investor should consider,
in the case of any Offered Security purchased at a premium, the risk that a
faster than anticipated rate of principal payments could result in an actual
yield to such investor that is lower than the anticipated yield.
LIMITATIONS OF CREDIT ENHANCEMENT
LIMITATIONS REGARDING TYPES OF LOSSES COVERED. The related Prospectus
Supplement for a Series of Securities will describe any Credit Enhancement
provided with respect thereto. Use of Credit Enhancement will be subject to the
conditions and limitations described herein and in the related Prospectus
Supplement. Moreover, such Credit Enhancement may not cover all potential losses
or delays; for example, Credit Enhancement may or may not cover loss by reason
of fraud or negligence by a mortgage loan originator or other parties. Any such
losses or delays not covered by Credit Enhancement may, at least in part, be
allocated to, or affect payments or distributions to, one or more Classes of
Offered Securities.
Disproportionate Benefits to Certain Classes and Series. A Series of
Securities may include one or more Classes of Subordinate Securities (which may
include Offered Securities), if provided in the related Prospectus Supplement.
Although subordination is intended to reduce the likelihood of temporary
shortfalls and ultimate losses to holders of the related senior Securities, the
amount of subordination will be limited and may decline under certain
circumstances. In addition, if principal payments on one or more Classes of
Offered Securities of a Series are made in a specified order of priority, any
related Credit Enhancement may be exhausted before the principal of the later
paid Classes of Offered Securities of such Series has been repaid in full. As a
result, the impact of losses and shortfalls experienced with respect to the Loan
Assets may fall primarily upon those Classes of Offered Securities having a
later right of payment. Moreover, if a form of Credit Enhancement covers the
Offered Securities of more than one Series and losses on the related Loan Assets
exceed the amount of such Credit Enhancement, it is possible that the holders of
Offered Securities of one (or more) such Series will be disproportionately
benefited by such Credit Enhancement to the detriment of the holders of Offered
Securities of one (or more) other such Series.
LIMITATIONS REGARDING THE AMOUNT OF CREDIT ENHANCEMENT. The amount of any
applicable Credit Enhancement supporting one or more Classes of Offered
Securities, including the subordination of one or more other Classes of
Securities, will be determined on the basis of criteria established by each
Rating Agency rating such Classes of Securities based on an assumed level of
defaults, delinquencies and losses on the Loan Assets and certain other factors.
There can be no assurance that the default, delinquency and loss experience on
such Loan Assets will not exceed such assumed levels. See "Credit Enhancement".
If the defaults, delinquencies and losses on such Loan Assets do exceed such
assumed levels, the holders of one or more Classes of Offered Securities will be
required to bear such additional defaults, delinquencies and losses. Regardless
of the form of Credit Enhancement provided with respect to a Series, the amount
of coverage will be limited in amount and in most cases will be subject to
periodic reduction in accordance with a schedule or formula.
LIMITATIONS ON FHA INSURANCE FOR TITLE I LOANS. The related Prospectus
Supplement will specify the number and percentage of the Title I Mortgage Loans
and/or Title I Contracts, if any, included in the related Trust Property that
are partially insured by the FHA pursuant to Title I Program. Since the FHA
Insurance Amount for the Title I Mortgage Loans and Title I Contracts is limited
as described herein and in the related Prospectus Supplement, and since the
adequacy of such FHA Insurance Amount is dependent upon future events, including
reductions for the payment of FHA claims, no assurance can be given that the FHA
Insurance Amount is or will be adequate to cover 90% of all potential losses on
the Title I Mortgage Loans and Title I Contracts included in the related Trust
Property. If the FHA Insurance Amount for the Title I Mortgage Loans and Title I
Contracts is reduced to zero, such loans and contracts will be effectively
uninsured from and after the date of such reduction. Under the Title I Program,
until a claim for insurance reimbursement is submitted to the FHA, the FHA does
not review or approve for qualification for insurance the individual Title I
Mortgage Loan or Title I Contract insured thereunder (as is typically the case
with other federal loan insurance programs). Consequently, the FHA has not
acknowledged that any of the Title I Mortgage Loans and Title I Contracts are
eligible for FHA insurance, nor has the FHA reviewed or approved the
underwriting and qualification by the originating lenders of any individual
Title I Mortgage Loans and Title I Contracts. See "Certain Legal Aspects of the
Loan Assets -- The Title I Program".
The availability of FHA Insurance reimbursement following a default on a
Title I Mortgage Loan or Title I Contract is subject to a number of conditions,
including strict compliance by the originating lender of such loan, FIC, the FHA
Claims Administrator, the Servicer and any subservicer with the FHA Regulations
in originating and servicing such Title I Mortgage Loan or Title I Contract, and
limits on the aggregate insurance coverage available in FIC's FHA Reserve. For
example, the FHA Regulations provide that, prior to originating a Title I
Mortgage Loan or Title I Contract, a Title I lender must exercise prudence and
diligence in determining whether the borrower and any co-maker or co-signer is
solvent and an acceptable credit risk with a reasonable ability to make payments
on the loan. Although the related Transferor will represent and warrant that the
Title I Mortgage Loans and Title I Contracts have been originated and serviced
in compliance with all FHA Regulations, these regulations are susceptible to
substantial interpretation. Failure to comply with all FHA Regulations may
result in a denial of FHA Claims, and there can be no assurance that the FHA's
enforcement of the FHA Regulations will not become stricter in the future. See
"Certain Legal Aspects of the Loan Assets -- The Title I Program -- General".
The FHA will not recognize any Issuer or any Securityholders as the owners
of the Title I Mortgage Loans or Title I Contracts, or any portion thereof,
entitled to submit FHA Claims. Accordingly, neither the Issuer nor the
Securityholders will have a direct right to receive insurance payments from the
FHA. FIC will contract with the Servicer (or another person specified in the
Prospectus Supplement) to serve as the Administrator for FHA Claims (the "FHA
Claims Administrator") pursuant to an FHA claims administration agreement (the
"FHA Claims Administration Agreement"), which will provide for the FHA Claims
Administrator to handle all aspects of administering, processing and submitting
FHA Claims with respect to the Title I Mortgage Loans or Title I Contracts, in
the name and on behalf of FIC. The Securityholders will be dependent on the FHA
Claims Administrator to (i) make claims on the Title I Mortgage Loans or Title I
Contracts in accordance with FHA Regulations and (ii) remit all FHA Insurance
proceeds received from the FHA in accordance with the related Sale and Servicing
Agreement or Pooling and Servicing Agreement, as applicable. The
Securityholders' rights relating to the receipt of payment from and the
administration, processing and submission of FHA Claims by FIC or any FHA Claims
Administrator are limited and governed by the related Sale and Servicing
Agreement or Pooling and Servicing Agreement, as applicable, and the FHA Claims
Administration Agreement and these functions are obligations of FIC and the FHA
Claims Administrator, but not the FHA. See "Certain Legal Aspects of the Loan
Assets -- The Title I Program -- Claims Procedures under Title I".
LIMITED NATURE OF RATINGS
Any rating assigned by a Rating Agency to a Class of Offered Securities
will reflect only its assessment of the likelihood that holders of such Offered
Securities will receive payments or distributions to which such Securityholders
are entitled under the related Indenture, Trust Agreement or Pooling and
Servicing Agreement. Such rating will not constitute an assessment of the
likelihood that principal prepayments on the Loan Assets will be made, the
degree to which the rate of such prepayments might differ from that originally
anticipated or the likelihood of early optional redemption or termination of the
Securities. Furthermore, such rating will not address the possibility that
prepayment of the Loan Assets at a higher or lower rate than anticipated by an
investor may cause such investor to experience a lower than anticipated yield or
that an investor that purchases an Offered Security at a significant premium
might fail to recover its initial investment under certain prepayment scenarios.
Hence, a rating assigned by a Rating Agency does not guarantee or ensure the
realization of any anticipated yield on a Class of Offered Securities.
The amount, type and nature of Credit Enhancement, if any, provided with
respect to a Series of Securities will be determined on the basis of criteria
established by each Rating Agency rating a Class of Securities of such Series.
Those criteria are sometimes based upon an actuarial analysis of the behavior of
similar types of loans in a larger group. However, there can be no assurance
that the historical data supporting any such actuarial analysis will accurately
reflect future experience, or that the data derived from a large pool of similar
types of loans will accurately predict the delinquency, default or loss
experience of any particular pool of Loan Assets. In other cases, such criteria
may be based upon determination of the values of the Mortgaged Properties or
other properties, if any, that provide security for the Loan Assets. However, no
assurance can be given that those values will not decline in the future. As a
result, the Credit Enhancement required in respect of the Offered Securities of
any Series may be insufficient to fully protect the holders thereof from losses
on the related Loan Assets. See "-- Limitations of Credit Enhancement" and
"Credit Enhancement".
ADVERSE TAX CONSEQUENCES
ORIGINAL ISSUE DISCOUNT. Certain of the Offered Notes may be issued with
original issue discount for federal income tax purposes. A holder of a Note
issued with original issue discount will be required to include original issue
discount in gross income for federal income tax purposes as it accrues, even
though the cash payment to which the accrual relates may be made in a future
period. Accrued but unpaid interest on the Compound Interest Notes generally
will be treated as original issue discount for this purpose. See "Certain
Federal Income Tax Consequences".
CERTAIN FACTORS AFFECTING DELINQUENCIES, FORECLOSURES AND LOSSES ON LOAN ASSETS
GENERAL. The payment performance of the Offered Securities of any Series
will be directly related to the payment performance of the Loan Assets included
as part of the related Trust Property. Set forth below is a discussion of
certain factors that will affect the full and timely payment of the Loan Assets
included as part of any Trust Property.
GEOGRAPHIC CONCENTRATION. Certain geographic regions of the United States
from time to time will experience weaker regional economic conditions and
housing markets, and, consequently, will experience higher rates of loss and
delinquency on mortgage loans generally. Any concentration of Loan Assets in
such a region may present risk considerations in addition to those generally
present for similar mortgage-backed or asset-backed securities without such
concentration.
DECLINE IN VALUE OF A LOAN ASSET. An investment in Securities secured by or
evidencing an interest in a pool of Mortgage Loans may be adversely affected by,
among other things, a decline in one-to-four family residential property values.
No assurance can be given that values of the Mortgaged Properties have remained
or will remain at the levels existing on the dates of origination of the related
Mortgage Loans. If the residential real estate market should experience an
overall decline in property values such that the outstanding balances of the
Mortgage Loans in a particular Mortgage Pool, and any other financing on the
Mortgaged Properties, become equal to or greater than the value of the Mortgaged
Properties, the actual rates of delinquencies, defaults and losses could be
higher than those now generally experienced with respect to similar types of
loans within the mortgage lending industry. To the extent that such losses are
not covered by applicable insurance policies, if any, or by any Credit
Enhancement as described in the related Prospectus Supplement, holders of
Securities secured by or evidencing interests in such Mortgage Loans will bear
all risk of loss resulting from defaults by borrowers and will have to look
primarily to the value of the related Mortgaged Properties for recovery of the
outstanding principal and unpaid interest of the defaulted Mortgage Loans. See
"Description of the Trust Property -- Mortgage Loans".
An investment in Securities secured by or evidencing interests in Contracts
may be affected by, among other things, a downturn in regional or local economic
conditions. These regional or local economic conditions are often volatile, and
historically have affected the delinquency, loan loss and repossession
experience of Contracts. To the extent that losses on Contracts are not covered
by applicable insurance policies, if any, or by any Credit Enhancement, holders
of the Securities secured by or evidencing interests in such Contracts will bear
all risk of loss resulting from default by borrowers and will have to look
primarily to the value of the underlying asset, if any, for recovery of the
outstanding principal and unpaid interest of the defaulted Contracts. See
"Description of the Trust Property -- Contracts".
ADEQUACY OF THE MORTGAGED PROPERTIES AS SECURITY FOR THE MORTGAGE LOANS AND
CONTRACTS. To the extent specified in the related Prospectus Supplement, the
combined loan-to-value ratios for the Mortgage Loans or Contracts will generally
be in excess of 100%. The related Mortgaged Properties, therefore, will be
highly unlikely to provide adequate security for such Mortgage Loans. Even
assuming that a Mortgaged Property provides adequate security for the related
Mortgage Loan or Contract, substantial delays could be encountered in connection
with the liquidation of a loan that would result in current shortfalls in
payments to Securityholders to the extent such shortfalls are not covered by the
applicable credit enhancement. In addition, liquidation expenses (such as legal
fees, real estate taxes, and maintenance and preservation expenses) will reduce
the liquidation proceeds otherwise available for payment to Securityholders. In
the event that any Mortgaged Property fails to provide adequate security for the
related loan, any losses in connection with such loan will be borne by
Securityholders to the extent that the applicable credit enhancement is
insufficient to absorb all such losses.
UNDERWRITING GUIDELINES. To the extent specified in the related Prospectus
Supplement, the assessment of the credit history of a borrower and such
borrower's capacity to make payments on the related Mortgage Loan or Contract
will have been the primary considerations in underwriting the Mortgage Loans or
Contracts included in the related Loan Asset Pool. The evaluation of the
adequacy of the value of the related Mortgaged Property, together with the
amount of all liens senior to the lien of the loan (i.e., the related "combined
loan-to-value ratio"), if so specified in the related Prospectus Supplement,
will have been given less consideration, and in certain cases no consideration,
in underwriting the Mortgage Loans or Contracts.
To the extent described in the related Prospectus Supplement, the credit
quality of some of the borrowers under the Mortgage Loans and Contracts will be
lower than that of borrowers under mortgage loans conforming to the FNMA or
FHLMC underwriting guidelines for first-lien, single family mortgage loans. As a
result of such lower credit quality and, if so specified in the related
prospectus Supplement, the high loan-to-value ratios of the Mortgage Loans and
Contracts, the loans will be likely to experience higher rates of delinquencies,
defaults and losses (which rates could be substantially higher) than those that
would be experienced by loans underwritten in conformity with the FNMA or FHLMC
underwriting guidelines for first-lien, single family mortgage loans. In
addition, in the case of Mortgage Loans and Contracts originated for purposes
other than acquisition of the related Mortgaged property, the losses sustained
from defaulted loans are likely to be more severe (and will frequently be total
losses) because the costs incurred in the collection and liquidation of such
defaulted loans in relation to the smaller principal balances thereof are
proportionately higher than for first-lien, single family mortgage loans, and
because substantially all of such loans will, to the extent described in the
related prospectus Supplement, be secured by junior liens on Mortgaged
Properties in which the borrowers had little or no equity at the time of
origination of such loans.
The underwriting requirements for certain types of Mortgage Loans and
Contracts may change from time to time, which in certain instances may result in
less stringent underwriting requirements. Depending upon the dates on which
loans were originated or purchased, such loans may have been originated or
purchased pursuant to different underwriting requirements, and accordingly,
certain Mortgage Loans or Contracts included in the related Loan Asset Pool may
be of a different credit quality and have different loan characteristics than
other loans included therein. To the extent that certain Mortgage Loans or
Contracts were originated or purchased under less stringent underwriting
requirements, such loans may be more likely to experience higher rates of
delinquencies, defaults and losses than those loans originated or purchased
pursuant to more stringent underwriting requirements.
LIMITATIONS ON REALIZATIONS OF JUNIOR LIENS. The primary risk with respect
to defaulted Mortgage Loans secured by junior liens is the possibility that
adequate funds will not be received in connection with a foreclosure of the
related Mortgaged Property to satisfy fully both the related senior lien(s) and
the Mortgage Loan and that other insurance providing for reimbursement for
losses from such default (i.e., the FHA Insurance Amount for a Title I Mortgage
Loan) is not available. The claims of the related senior lienholder(s) will be
satisfied in full out of proceeds of the liquidation of the related Mortgaged
Property, if such proceeds are sufficient, before the related Issuer, as the
junior lienholder, receives any payments in respect of the defaulted Mortgage
Loan. If the Master Servicer, Servicer or a Subservicer, if any, were to
foreclose on any junior lien Mortgage Loan, it would do so subject to any
related senior lien(s). In order for a junior lien Mortgage Loan to be paid in
full at such sale, a bidder at the foreclosure sale of such Mortgage Loan would
have to bid an amount sufficient to pay off all sums due under the Mortgage Loan
and the senior lien(s) or purchase the Mortgaged Property subject to the senior
lien(s). If proceeds from a foreclosure and liquidation of the related Mortgaged
Property are insufficient to satisfy the costs of foreclosure and liquidation
and the amounts owed under the loans secured by the senior lien(s) and the
junior lien Mortgage Loan in the aggregate, the Issuer, as the junior
lienholder, will bear (i) the risk of delay in payments and distributions while
a deficiency judgment (which may not be available in certain jurisdictions)
against the borrower is obtained and realized and (ii) the risk of loss if the
deficiency judgment is not obtained or realized. Any such delays or losses will
be borne by the Securityholders of a Series to the extent that such delays or
losses are not otherwise covered by amounts available from any Credit
Enhancement provided for the related Securities, as specified in the related
Prospectus Supplement. See "Certain Legal Aspects of the Loan Assets --
Foreclosure -- Junior Liens".
CERTAIN LEGAL CONSIDERATIONS OF THE LOAN ASSETS. Applicable state laws
generally regulate interest rates and other charges that may be assessed on
borrowers, require certain disclosures to borrowers, and may require licensing
of FIC, the Trustee, the Indenture Trustee, the Servicer, the Administrator, if
any, the Master Servicer, if any, and any Subservicer. In addition, most states
have other laws, public policies and general principles of equity relating to
the protection of consumers and the prevention of unfair and deceptive practices
which may apply to the origination, servicing and collection of the Loan Assets.
The Loan Assets may also be subject to federal laws, including, if applicable,
the following: (i) the federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding the
terms of the Loan Assets; (ii) the Real Estate Settlement Procedures Act and
Regulation X promulgated thereunder, which require certain disclosures to the
borrowers regarding the settlement and servicing of the Mortgage Loans; (iii)
the Equal Credit Opportunity Act and Regulation B promulgated thereunder, which
prohibit discrimination on the basis of age, race, color, sex, religion, marital
status, national origin, receipt of public assistance or the exercise of any
right under the Consumer Credit Protection Act; (iv) the Fair Credit Reporting
Act, which regulates the use and reporting of information related to the
borrower's credit experience; (v) the Federal Trade Commission Preservation of
Consumers' Claims and Defenses Rule, 16 C.F.R. Part 433, regarding the
preservation of a consumer's rights; (vi) the Fair Housing Act, 42 U.S.C. 3601
et seq., relating to the creation and governance of the Title I Program; (vii)
the Home Ownership and Equity Protection Act; and (viii) the Soldiers' and
Sailors' Civil Relief Act of 1940, as amended (the "Relief Act"). In addition,
Federal and state environmental laws and regulations may also impact the
Servicer's or any Subservicer's ability to realize value with respect to the
Mortgaged Properties. See "Certain Legal Aspects of the Loan Assets".
Depending on the provisions of applicable law and the specific facts and
circumstances involved, violations of these laws, policies and principles may
limit the ability of the Servicer or any Subservicer to collect all or part of
the principal of or interest on the Loan Assets, may entitle the related
borrower to a refund of amounts previously paid, and, in addition, could subject
the Master Servicer, Servicer or any Subservicer to damages and administrative
sanctions. Further, violations of state law can affect the insurability of the
Title I Mortgage Loans and Title I Contracts under FHA Regulations. See "Certain
Legal Aspects of the Loan Assets -- The Title I Program." If the Master
Servicer, Servicer or any Subservicer is unable to collect all or part of the
principal or interest on any Loan Asset because of a violation of the
aforementioned laws, public policies or general principles of equity, payments
on or distributions in respect of the Securities may be delayed or the Trustee
may be unable to make all payments or distributions owed to the Securityholders
to the extent any related losses are not otherwise covered by amounts available
from any Credit Enhancement provided for the related Series of Securities.
Furthermore, depending upon whether damages and sanctions are assessed against
the Servicer, the Master Servicer, if any, or any Subservicer, such violations
may materially impact the financial ability of the Master Servicer, if any, the
Servicer or any Subservicer to continue to act in such capacity.
To the extent specified in the related Prospectus Supplement, the Seller or
the Transferor will be required to repurchase or replace any Loan Asset which,
at the time of origination, did not comply with applicable federal and state
laws or regulations.
BALLOON PAYMENTS. Mortgage loans that require "balloon payments" involve a
greater risk to the lender than fully amortizing loans because the ability of a
borrower to make a balloon payment typically will depend upon its ability either
to refinance the loan or to sell the related Mortgaged Property at a price
sufficient to permit the borrower to make the balloon payment. The ability of a
borrower to accomplish either of these goals will be affected by all of the
factors described above affecting property value as well as a number of other
factors at the time of attempted sale or refinancing, including the level of
available mortgage rates and prevailing economic conditions.
RISKS ASSOCIATED WITH CERTAIN LOAN ASSETS
NO HAZARD INSURANCE FOR TITLE I MORTGAGE LOANS. With respect to any Title I
Mortgage Loans, the FHA Regulations do not require that a borrower obtain title
or fire and casualty insurance as a condition to obtaining a property
improvement loan. With respect to both manufactured home contracts that are
Title I Contracts and property improvement loans that are Title I Mortgage
Loans, if the related Mortgage Property is located in a flood hazard area,
however, flood insurance in an amount at least equal to the loan amount is
required. In addition, the FHA Regulations do not require that the related
borrower obtain insurance against physical damage arising from earth movement
(including earthquakes, landslides and mudflows) as a condition to obtaining a
property improvement loan insured under the Title I Program. Accordingly, if a
Mortgaged Property that secures a Title I Mortgage Loan suffers any uninsured
hazard or casualty losses, holders of any Offered Securities secured in whole or
in part by Title I Mortgage Loans may bear the risk of loss resulting from a
default by the related borrower to the extent such losses are not recovered by
foreclosure on the defaulted loans or from any FHA Claims payments. Such loss
may be otherwise covered by amounts available from the Credit Enhancement
provided for the Offered Securities, as specified in the related Prospectus
Supplement.
CONTRACTS SECURED BY MANUFACTURED HOMES. The Secured Contracts will be
secured by security interests in Manufactured Homes that are not considered to
be real property because they are not permanently affixed to real estate.
Perfection of security interests in such Manufactured Homes and enforcement of
rights to realize upon the value of such Manufactured Homes as collateral for
the Secured Contracts are subject to a number of Federal and state laws,
including the Uniform Commercial Code as adopted in each state and each state's
certificate of title statutes. The steps necessary to perfect the security
interest in a Manufactured Home will vary from state to state. Because of the
expense and administrative inconvenience involved, the Servicer of a Secured
Contract will not amend any certificate of title to change the lienholder
specified therein from such Servicer to the Issuer or the applicable Trustee and
will not deliver any certificate of title to such Issuer or Trustee or note
thereon such Issuer's or Trustee's interest. Consequently, in some states, in
the absence of such an amendment, the assignment to such Issuer or Trustee of
the security interest in the Manufactured Home may not be effective or such
security interest may not be perfected and, in the absence of such notation or
delivery to such Issuer or Trustee, the assignment of the security interest in
the Manufactured Home may not be effective against creditors of the Servicer or
a trustee in bankruptcy of the Servicer. If any related Credit Enhancement is
exhausted and a Secured Contract is in default, then recovery of amounts due on
such Secured Contracts is dependent on repossession and resale of the
Manufactured Home securing such Secured Contract. Certain other factors may
limit the ability of the Servicer to realize upon the Manufactured Homes or may
limit the amount realized to less than the amount due.
UNSECURED CONTRACTS. The obligations of the borrower under any Unsecured
Contract included as part of the related Trust Property will not be secured by
an interest in the related real estate or otherwise, and the related Issuer, as
the owner of such Unsecured Contract and the related Indenture Trustee, as
assignee for the benefit of the Noteholders, of the Issuer's interest in such
Unsecured Contract, will be a general unsecured creditor as to such obligations.
As a consequence, in the event of a default under an Unsecured Contract, the
related Issuer or Indenture Trustee, as applicable, will have recourse only
against the related borrower's assets generally, along with all other general
unsecured creditors of the related borrower. In a bankruptcy or insolvency
proceeding relating to a borrower on an Unsecured Contract, the obligations of
the related borrower under such Unsecured Contract may be discharged in their
entirety, notwithstanding the fact that the portion of such borrower's assets
made available to the related Trustee as a general unsecured creditor to pay
amounts due and owing thereunder are insufficient to pay all such amounts. A
borrower on an Unsecured Contract may not demonstrate the same degree of concern
over performance of its obligations under such Unsecured Contract as if such
obligations were secured by a single family residence owned by such borrower.
CONSUMER PROTECTION LAWS RELATED TO CONTRACTS. Numerous federal and state
consumer protection laws impose requirements on lending under retail installment
sales contracts and installment loan agreements such as the Contracts, and the
failure by the lender or seller of goods to comply with such requirements could
give rise to liabilities of assignees for amounts due under such agreements and
claims by such assignees may be subject to set-off as a result of such lender's
or seller's noncompliance. These laws would apply to a Trustee as an assignee of
Contracts. FIC will warrant that each Contract complies with all requirements of
law and, with respect to any Secured Contract, will make certain warranties
relating to the validity, subsistence, perfection and priority of the security
interest in each Manufactured Home securing such Secured Contract. A breach of
any such warranty that materially adversely affects the interests of the
Securityholders in any Contract would create an obligation of the Seller to
repurchase or replace such Contract unless such breach is cured.
RELIANCE ON MANAGEMENT OF TIMESHARE UNITS. Unlike most conventional
single-family residential properties, the value of a timeshare unit is
substantially dependent on the management of the resort property in which it is
located. Management of timeshare resort properties includes operation of a
reservation system, maintenance of the physical structure, refurbishing of
individual units, maintenance and management of common areas and recreational
facilities, and facilitating the rental of individual units on behalf of
timeshare owners. In addition, timeshare units, which are purchased for
intervals of one or more specified weeks each year, are marketed as the owner's
purchase of future vacation opportunities rather than as a primary residence, a
second home or an investment. Accordingly, while borrowers are obligated to make
payments under their Mortgage Loans irrespective of any defect in, damage to or
change in conditions (such as poor management, faulty construction or physical,
social or environmental conditions) relating to the timeshare properties, any
such defect, damage or change in conditions could result in delays in payment or
in defaults by borrowers whose timeshare units are affected.
RECHARACTERIZATION OF SALE OF LOAN ASSETS AS BORROWING
In the event of the bankruptcy or insolvency of an affiliate of the Issuer
it is possible that a creditor, receiver, trustee in bankruptcy or other party
in interest may claim that the transactions through which the Issuer acquired
the Loan Assets were pledges of the Loan Assets rather than true sales, and
that, accordingly, the Loan Assets should be part of such affiliate's bankruptcy
estate. The transactions have been structured applying principles such that
following the bankruptcy of such affiliate, a court, in a proceeding considering
the transfers of the Loan Assets from such affiliate to the Issuer, should treat
the transfers of the Loan Assets as a true sale and, therefore, the Loan Assets
should not be part of such affiliate's bankruptcy estate. The Issuer and any
such affiliate will treat transfers of the Loan Assets as sales from the
affiliate to the Issuer for tax and accounting purposes, but such treatment will
not preclude a creditor, receiver, trustee in bankruptcy or other party in
interest of any such affiliate from pursuing such claim. If such transactions
are determined to be sales to the Issuer, the Loan Assets would not be part of
any such affiliate's bankruptcy estate and would not be available for
distribution to any such affiliate's creditors or equity security holders.
Additionally, in the event of the bankruptcy or insolvency of any of the
Issuer's affiliates, a creditor, receiver, trustee in bankruptcy or other party
in interest may seek a court order consolidating the assets and liabilities of
the Issuer with the estate of such affiliate ("substantive consolidation") with
the result that their combined estate will be made subject to their combined
liabilities. This transaction has been structured applying principles such that
following the bankruptcy of an affiliate of the Issuer, a court, upon motion of
a creditor, receiver, trustee in bankruptcy or other party in interest, should
not consolidate the assets and liabilities of the Issuer and such affiliate on
the basis of any legal theories regarding substantive consolidation previously
recognized by courts of competent jurisdiction in bankruptcy proceedings. The
foregoing statement is based on and subject to a number of assumptions
concerning facts and circumstances that have been noted, cited or acknowledged
by courts adjudicating similar claims in prior cases and certain other
assumptions regarding the separate corporate identities of the Issuer and its
affiliates, many of which relate to the manner in which the Issuer and its
affiliates have conducted and will conduct their respective businesses.
If either of the foregoing positions is argued before a court, such
argument could prevent, even if ultimately unsuccessful, timely payments of
amounts due on the Securities, and could result, if ultimately successful, in
payment of reduced amounts on the Securities.
RISKS RELATING TO INDEXED SECURITIES
An investment in Securities indexed, as to principal, premium and/or
interest, to one or more values of currencies (including exchange rates and swap
indices between currencies), commodities, interest rates or other indices
entails significant risks that are not associated with similar investments in a
conventional fixed-rate debt security. If the interest rate of such a Security
is so indexed, it may result in an interest rate that is less than that payable
on a conventional fixed-rate debt security issued at the same time, including
the possibility that no interest will be paid, and, if the principal amount of
such a Security is so indexed, the principal amount payable on the related final
Distribution Date may be less than the original purchase price of such Security
if allowed pursuant to the terms of such Security, including the possibility
that no principal will be paid. The secondary market for such Securities will be
affected by a number of factors, independent of the characteristics of the Loan
Assets, structure of the cash flows and the value of the applicable currency,
commodity, interest rate or other index, including the volatility of the
applicable currency, commodity, interest rate or other index, the time remaining
to the maturity of such Securities, the amount outstanding of such Securities
and market interest rates. The value of the applicable currency, commodity,
interest rate or other index depends on a number of interrelated factors,
including economic, financial and political events. Additionally, if the formula
used to determine the principal amount, premium, if any, or interest payable
with respect to such Securities contains a multiple or leverage factor, the
effect of any change in the applicable currency, commodity, interest rate or
other index may be increased. The historical experience of the relevant
currencies, commodities, interest rates or other indices should not be taken as
an indication of future performance of such currencies, commodities, interest
rates or other indices during the term of any Security. The credit ratings
assigned to any Series or Class of Securities, in no way, are reflective of the
potential impact of the factors discussed above, or any other factors, on the
market value of the Securities. Accordingly, prospective investors should
consult their own financial and legal advisors as to the risks entailed by an
investment in such Securities and the suitability of such Securities in light of
their particular circumstances.
DESCRIPTION OF THE NOTES
GENERAL
With respect to each Series, one or more Classes of Notes may be issued
pursuant to the terms of an Indenture, a form of which has been filed as an
exhibit to the Registration Statement of which this Prospectus forms a part. The
following summary does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of the Notes and
the Indenture.
Unless otherwise specified in the related Prospectus Supplement, each Class
of Notes will initially be represented by one or more Notes, in each case
registered in the name of the nominee of DTC (together with any successor
depository selected by the Issuer, the "Depository") except as set forth below.
Unless otherwise specified in the related Prospectus Supplement, the Notes will
be available for purchase in denominations of $1,000 and integral multiples
thereof in book-entry form only. FIC has been informed by DTC that DTC's nominee
will be Cede, unless another nominee is specified in the related Prospectus
Supplement. Accordingly, such nominee is expected to be the holder of record of
the Notes of each Class. Unless and until Definitive Notes are issued under the
limited circumstances described herein or in the related Prospectus Supplement,
no Noteholder will be entitled to receive a physical certificate representing a
Note. All references herein and in the related Prospectus Supplement to actions
by Noteholders refer to actions taken by DTC upon instructions from its
participating organizations (the "DTC Participants") and all references herein
and in the related Prospectus Supplement to distributions, notices, reports and
statements to Noteholders refer to payments, notices, reports and statements to
DTC or its nominee, as the registered holder of the Notes, for payment or
distribution to Noteholders in accordance with DTC's procedures with respect
thereto. See "Certain Information Regarding the Securities--Book-Entry
Registration" and "--Definitive Securities".
PRINCIPAL AND INTEREST ON THE NOTES
The timing and priority of payment, seniority, allocations of losses,
Interest Rate and amount of or method of determining payments of principal and
interest on each Class of Notes of a given Series will be described in the
related Prospectus Supplement. If so specified in the related Prospectus
Supplement, the Interest Rate applicable to one or more Classes of Notes may
increase or decrease upon the occurrence of certain events. The rights of
holders of any Class of Notes to receive payments of principal and interest may
be senior or subordinate to the rights of holders of any other Class or Classes
of Notes of such Series, as described in the related Prospectus Supplement. See
"Certain Information Regarding the Securities -- General". Unless otherwise
provided in the related Prospectus Supplement, payments of interest on the Notes
of such Series will be made prior to payments of principal thereon. Each Class
of Notes may have a different Interest Rate, which may be a fixed, variable or
adjustable Interest Rate (and which may be zero for Principal Only Securities),
or any combination of the foregoing. The related Prospectus Supplement will
specify the Interest Rate for each Class of Notes of a given Series or the
method for determining such Interest Rate. See "Certain Information Regarding
the Securities--Fixed Rate Securities and Floating Rate Securities". One or more
Classes of Notes of a Series may be redeemable in whole or in part under the
circumstances specified in the related Prospectus Supplement, including as a
result of the Servicer's exercising its option to purchase the related Loan
Assets Pool.
One or more Classes of Notes of a given Series may have fixed principal
payment schedules, as set forth in such Prospectus Supplement. Holders of such
Notes would be entitled to receive as payments of principal on any given
Distribution Date the applicable amounts set forth on such schedule with respect
to such Notes, in the manner and to the extent set forth in the related
Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, payments
to Noteholders of all Classes within a Series in respect of interest will have
the same priority. Under certain circumstances, the amount available for such
payments could be less than the amount of interest payable on the Notes on any
of the dates specified for payments in the related Prospectus Supplement (each,
a "Distribution Date"), in which case each Class of Noteholders will receive its
ratable share (based upon the aggregate amount of interest due to such Class of
Noteholders) of the aggregate amount available to be paid in respect of interest
on the Notes of such Series.
In the case of a Series of Notes which includes two or more Classes of
Notes, the sequential order and priority of payment in respect of principal and
interest, and any schedule or formula or other provisions applicable to the
determination thereof, of each such Class will be set forth in the related
Prospectus Supplement. Payments in respect of principal and interest of any
Class of Notes will be made on a pro rata basis among all the Noteholders of
such Class.
THE INDENTURE
MODIFICATION OF INDENTURE. The related Indenture Trustee and the Issuer
may, with the consent of Noteholders of not less than a majority of the
outstanding principal amount of the Notes of the related Series, enter into a
supplemental indenture for the purpose of adding any provisions to, or changing
in any manner or eliminating any of the provisions of, the related Indenture, or
modifying in any manner the rights of the related Noteholders (except as
provided below).
Unless otherwise specified in the related Prospectus Supplement with
respect to a Series of Notes, without the consent of the holder of each
outstanding Note affected thereby no supplemental indenture will: (i) change the
date of any installment of principal of or interest on any such Note or reduce
the principal amount thereof, the interest rate thereon or the redemption price
with respect thereto or change the provisions of the related Indenture relating
to the application of collections on, or the proceeds of the sale of, the Trust
Property to payment of principal or interest on the Notes or change any place of
payment where, or the coin or currency in which, any such Note or any interest
thereon is payable or impair the right to institute suit for the enforcement of
certain provisions of the related Indenture regarding payment; (ii) reduce the
percentage of the aggregate principal amount of the outstanding Notes of such
Series, the consent of the holders of which is required for any such
supplemental indenture or the consent of the holders of which is required for
any waiver of compliance with certain provisions of the related Indenture or
certain defaults thereunder and their consequences as provided for in such
Indenture; (iii) modify or alter the provisions of the related Indenture
regarding the definition of the term "outstanding"; (iv) reduce the percentage
of the aggregate principal amount of the outstanding Notes of such Series, the
consent of the holders of which is required to direct the related Indenture
Trustee to sell or liquidate the Loan Assets if the proceeds of such sale would
be insufficient to pay the principal amount and accrued but unpaid interest on
the outstanding Notes of such Series; (v) modify the sections of the related
Indenture which specify the applicable percentage of the aggregate principal
amount of the outstanding Notes of such Series necessary to amend such Indenture
or certain other related agreements; (vi) modify the provisions of the related
Indenture in such a manner as to affect the calculation of the amount of any
payment of interest or principal due on any Note on any Distribution Date or to
affect the rights of the Noteholders to the benefit of any provisions for the
mandatory redemption of the Notes; or (vii) permit the creation of any lien
ranking prior to or on a parity with the lien of the related Indenture with
respect to any part of the Trust Property or, except as otherwise permitted or
contemplated in such Indenture, terminate the lien of such Indenture on any such
property or deprive the holder of any such Note of the security provided by the
lien of such Indenture.
To the extent provided in the applicable Prospectus Supplement, the related
Indenture Trustee and the Issuer may also enter into supplemental indentures,
without the consent of the Noteholders of the related Series, for the purpose
of, among other things, adding any provisions to or changing in any manner or
eliminating any of the provisions of, the related Indenture or modifying in any
manner the rights of the Noteholders; provided that such action shall not
adversely affect in any material respect the interests of any Noteholder.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT. With respect to the Notes
of a given Series, unless otherwise specified in the related Prospectus
Supplement, "Events of Default" under the related Indenture will consist of: (i)
a default in the payment of any interest on any such Note when the same becomes
due and payable, and such default shall continue for a period of five days; (ii)
a default in the payment of the principal of or any installment of the principal
of any such Note when the same becomes due and payable; (iii) a default in the
observance or performance of any covenant or agreement of the applicable Issuer
made in the related Indenture or any representation or warranty of the Issuer
made in the related Indenture or in any certificate or other writing delivered
pursuant thereto or in connection therewith having been proven incorrect in any
material respect as of the time made, and such default shall have continued and
not been cured, or the circumstance or condition in respect of which such
representation or warranty was incorrect shall not have been eliminated or
otherwise cured for a period of 30 days after notice thereof is given to the
Issuer by the applicable Indenture Trustee or to such Issuer and such Indenture
Trustee by the holders of at least 25% of the aggregate principal amount of all
Notes then outstanding; or (iv) certain events of bankruptcy, insolvency,
receivership or liquidation of the applicable Issuer or any substantial portion
of the Trust Property. However, the amount of principal required to be paid to
Noteholders of such Series under the related Indenture will generally be limited
to amounts available to be deposited in the Collection Account. Therefore,
unless otherwise specified in the related Prospectus Supplement, the failure to
pay principal on a Class of Notes generally will not result in the occurrence of
an Event of Default until the final scheduled Distribution Date for such Class
of Notes.
If an Event of Default should occur and be continuing with respect to the
Notes of any Series, the related Indenture Trustee or holders of a majority in
principal amount of such Notes then outstanding may declare the principal of
such Notes to be immediately due and payable. Unless otherwise specified in the
related Prospectus Supplement, such declaration may, under certain
circumstances, be rescinded by the holders of a majority in principal amount of
such Notes then outstanding.
If an Event of Default shall have occurred and be continuing, the Indenture
Trustee may, and at the direction of a majority of the Noteholders shall, do one
or more of the following: (i) institute proceedings to collect amounts due, (ii)
foreclose on property included in the Trust Property; (iii) exercise remedies as
a secured party and the UCC; and (iv) sell the related Loan Assets. Unless
otherwise specified in the related Prospectus Supplement, however, such
Indenture Trustee is prohibited from selling the related Loan Assets following
an Event of Default, unless (i) the holders of all such outstanding Notes
consent to such sale, (ii) the proceeds of such sale are sufficient to discharge
in full all amounts then due and unpaid upon such Notes for principal and
interest, or (iii) such Indenture Trustee determines that the Trust Property
will not continue to provide sufficient funds for payment of principal of and
interest on the Notes as they would become due if the Notes were not declared
due and payable and the Indenture Trustee obtains the consent of holders of 66
2/3% of the aggregate principal amount of all Notes then outstanding. If the
Notes have been declared to be due and payable following an Event of Default,
the Indenture Trustee may, but need not, elect to maintain possession of the
Trust Property.
Subject to the provisions for indemnification and certain limitations
contained in the related Indenture, the holders of a majority of the aggregate
principal amount of the outstanding Notes of a given Series will have the right
to direct the time, method and place of conducting any proceeding for any remedy
available to the applicable Indenture Trustee, and the holders of a majority of
the aggregate principal amount of such Notes then outstanding may, in certain
cases, waive any past default and its consequences, except a default in the
payment of principal of or interest on any of the Notes or in respect of a
covenant or provision of such Indenture that cannot be modified or amended
without the consent of the holders of each such outstanding Note.
Unless otherwise specified in the related Prospectus Supplement, no holder
of a Note of any Series will have the right to institute any proceeding,
judicial or otherwise, with respect to the related Indenture, unless (i) such
holder has previously given written notice to the applicable Indenture Trustee
of a continuing Event of Default, (ii) the holders of not less than 25% of the
aggregate principal amount of the outstanding Notes of such Series have made
written request to such Indenture Trustee to institute such proceeding in
respect of such Event of Default in its own name as Indenture Trustee, (iii)
such holder or holders have offered to such Indenture Trustee reasonable
indemnity against the costs, expenses and liabilities to be incurred in
complying with such request, (iv) such Indenture Trustee for 60 days after its
receipt of such notice, request and offer of indemnity failed to institute such
proceeding and (v) no direction inconsistent with such written request has been
given to such Indenture Trustee during such 60-day period by the holders of a
majority of the aggregate principal amount of the outstanding Notes of such
Series.
In addition, each Indenture Trustee, by entering into the related
Indenture, and the related Noteholders, by accepting the related Notes, will
covenant that they will not at any time institute against the applicable Issuer
or the Servicer, or join in any institution against the applicable Issuer or the
Servicer of any bankruptcy, reorganization, arrangement, insolvency or
liquidation proceedings, or other proceeding under any United States federal or
state bankruptcy or similar law in connection with any obligations relating to
the Notes, the related Indenture or certain related documents.
The Notes shall be non-recourse obligations of the Issuer and shall be
limited in right of payment to amounts available from the Trust Property and any
amounts received by the Indenture Trustee under any Credit Enhancement in
respect of the Notes, as provided in the related Indenture. The Issuer shall not
otherwise be liable for payments on the Notes.
CERTAIN COVENANTS. Each Indenture will provide that the related Issuer will
not consolidate with or merge into any other entity, unless (i) the entity
formed by or surviving such consolidation or merger is organized under the laws
of the United States, any state or the District of Columbia, (ii) such entity
expressly assumes such Issuer's obligation to make due and punctual payments
upon the Notes of the related Series and the performance or observance of every
agreement and covenant of the Issuer under the Indenture, (iii) no Event of
Default shall have occurred and be continuing immediately after such merger or
consolidation, (iv) such Issuer has been advised that the rating of the Notes or
the Certificates of such Series then outstanding would not be reduced or
withdrawn by the Rating Agencies as a result of such merger or consolidation and
(v) such Issuer has received an opinion of counsel to the effect that such
consolidation or merger would have no material adverse tax consequence to the
Issuer or to any related Noteholder or Certificateholder.
Each Issuer will not, among other things, (i) except as expressly permitted
by the applicable Indenture or the applicable Sale and Servicing Agreements,
sell, transfer, exchange or otherwise dispose of any of the properties or assets
of the Issuer, including those included in the Trust Property unless directed to
do so by the Indenture Trustee, (ii) claim any credit on, or make any deduction
from the principal or interest payable in respect of, the Notes of the related
Series (other than amounts properly withheld under the Code or applicable state
law) or assert any claim against any present or former Noteholder by reason of
the payment of taxes levied or assessed upon any part of the Trust Property,
(iii) engage in any business or activity other than as permitted by the Issuer's
charter documents, (iv) permit the validity or effectiveness of the related
Indenture to be amended, hypothecated, subordinated, terminated or discharged or
permit any person to be released from any covenants or obligations with respect
to such Notes under such Indenture except as may be expressly permitted thereby
or (v) permit any lien, charge, excise, claim, security interest, mortgage or
other encumbrance (other than the lien of the related Indenture) to be created
on or extend to or otherwise arise upon or burden the Trust Property or any part
thereof, or any interest therein or the proceeds thereof.
ANNUAL COMPLIANCE STATEMENT. The Issuer will be required to deliver to the
Indenture Trustee, within 120 days after the end of each fiscal year of such
Issuer, an officer's certificate with respect to the fulfillment of the Issuer's
obligations under the Indenture during the immediately preceding fiscal year.
INDENTURE TRUSTEE'S ANNUAL REPORT. If required by Section 313(a) of the
Trust Indenture Act (the "TIA"), within 60 days after each February 1, the
Indenture Trustee shall mail to each Noteholder, as required by TIA Section
313(c), a brief report dated as of such date that complies with TIA Section
313(a). The Indenture Trustee also shall comply with TIA Section 313(b).
SATISFACTION AND DISCHARGE OF INDENTURE. An Indenture will cease to be of
further effect with respect to the Notes of any Series, upon the delivery to the
related Indenture Trustee for cancellation of all Notes of such Series or, with
certain limitations, upon deposit with such Indenture Trustee of funds
sufficient for the payment in full of all such Notes.
THE INDENTURE TRUSTEE
The Indenture Trustee for a Series of Notes will be specified in the
related Prospectus Supplement. The Indenture Trustee for any Series may resign
at any time, in which event the Issuer will be obligated to appoint a successor
thereto for such Series. The holders of a majority of the aggregate principal
amount of the related Notes outstanding may remove any such Indenture Trustee
and the Issuer shall remove the Indenture Trustee if (i) such Indenture Trustee
ceases to be eligible to continue as such under the related Indenture; (ii) such
Indenture Trustee becomes insolvent; (iii) a receiver or other public official
takes charge of such Indenture Trustee or its property; or (iv) such Indenture
Trustee otherwise becomes incapable of acting. In such circumstances, the Issuer
will be obligated to appoint a successor thereto for the applicable Series of
Notes. No resignation or removal of the Indenture Trustee and no appointment of
a successor thereto for any Series of Notes will become effective until the
acceptance of appointment by such successor.
ADMINISTRATION AGREEMENT
If and to the extent specified in the related Prospectus Supplement, FFI,
in its capacity as administrator (the "Administrator"), will enter into an
agreement (as amended and supplemented from time to time, an "Administration
Agreement") with each Issuer that issues Notes and the related Indenture Trustee
pursuant to which the Administrator will agree, to the extent provided in such
Administration Agreement, to provide the notices and to perform other
administrative obligations required by the related Indenture. To the extent
specified in the related Prospectus Supplement, as compensation for the
performance of the Administrator's obligations under the applicable
Administration Agreement and as reimbursement for its expenses related thereto,
the Administrator will be entitled to a monthly administration fee of such
amount as may be set forth in the related Prospectus Supplement (the
"Administration Fee"), which fee will be paid by the Servicer.
DESCRIPTION OF THE CERTIFICATES
GENERAL
With respect to each Series, one or more Classes of Certificates may be
issued pursuant to the terms of a Trust Agreement or a Pooling and Servicing
Agreement, a form of each of which has been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part. The following
summary does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Certificates and the
Trust Agreement or Pooling and Servicing Agreement, as applicable.
Unless otherwise specified in the related Prospectus Supplement and except
for the Certificates, if any, of a given Series purchased by the Seller, each
Class of Certificates will initially be represented by one or more Certificates
registered in the name of the nominee for DTC, except as set forth below. Unless
otherwise specified in the related Prospectus Supplement and except for the
Certificates, if any, of a given Series purchased by the Seller, the
Certificates will be available for purchase in minimum denominations of $1,000
and integral multiples thereof in book-entry form only. The Seller has been
informed by DTC that DTC's nominee will be Cede, unless another nominee is
specified in the related Prospectus Supplement. Accordingly, such nominee is
expected to be the holder of record of the Certificates of any Series that are
not purchased by the Seller. Unless and until Definitive Certificates are issued
under the limited circumstances described herein or in the related Prospectus
Supplement, no Certificateholder (other than the Issuer) will be entitled to
receive a physical certificate representing a Certificate. All references herein
and in the related Prospectus Supplement to actions by Certificateholders refer
to actions taken by DTC upon instructions from the Participants and all
references herein and in the related Prospectus Supplement to distributions,
notices, reports and statements to Certificateholders refer to distributions,
notices, reports and statements given, made or sent to DTC or its nominee, as
the case may be, as the registered holder of the Certificates, for distribution
to Certificateholders in accordance with DTC's procedures with respect thereto.
See "Certain Information Regarding the Securities--Book-Entry Registration" and
"--Definitive Securities". Any Certificates of a given Series owned by the
Seller or its affiliates will be entitled to equal and proportionate benefits
under the applicable Trust Agreement or Pooling and Servicing Agreement, except
that such Certificates will be deemed not to be outstanding for the purpose of
determining whether the requisite percentage of Certificateholders have given
any request, demand, authorization, direction, notice, consent or other action
under the Related Documents (other than the commencement by the related Trust of
a voluntary proceeding in bankruptcy as described under "Description of the
Transfer and Servicing Agreements--Insolvency Event").
DISTRIBUTIONS OF PRINCIPAL AND INTEREST
The timing and priority of distributions, seniority, allocations of losses,
Pass Through Rate and amount of or method of determining distributions with
respect to principal and interest of each Class of Certificates will be
described in the related Prospectus Supplement. If so specified in the related
Prospectus Supplement, the Pass Through Rate applicable to one or more Classes
of Certificates may increase or decrease upon the occurrence of certain events.
Distributions of interest on such Certificates will be made on the dates
specified in the related Prospectus Supplement (each, a "Distribution Date") and
will be made prior to distributions with respect to principal of such
Certificates.
Each Class of Certificates may have a different Pass Through Rate, which
may be a fixed, variable or adjustable Pass Through Rate (and which may be zero
for certain Classes of Certificates) or any combination of the foregoing. The
related Prospectus Supplement will specify the Pass Through Rate for each Class
of Certificates of a given Series or the method for determining such Pass
Through Rate. See also "Certain Information Regarding the Securities--Fixed Rate
Securities Floating Rate Securities". Unless otherwise provided in the related
Prospectus Supplement, distributions in respect of the Certificates of a given
Series that includes Notes may be subordinate to payments in respect of the
Notes of such Series as more fully described in the related Prospectus
Supplement. Distributions in respect of interest on and principal of any Class
of Certificates will be made on a pro rata basis among all the
Certificateholders of such Class.
In the case of a Series of Certificates which includes two or more Classes
of Certificates, the timing, sequential order, priority of payment or amount of
distributions in respect of interest and principal, and any schedule or formula
or other provisions applicable to the determination thereof, of each such Class
shall be as set forth in the related Prospectus Supplement.
If and as provided in the related Prospectus Supplement, certain amounts
remaining on deposit in the Collection Account after all required distributions
to the related Securityholders have been made may be released to the Seller, FFI
or one or more third party credit or liquidity enhancement providers.
POOL FACTORS AND TRADING INFORMATION
The "Note Pool Factor" for each Class of Notes will be a seven-digit
decimal which the Servicer will compute prior to each distribution with respect
to such Class of Notes indicating the remaining outstanding principal balance of
such Class of Notes, as of the applicable Distribution Date (after giving effect
to payments to be made on such Distribution Date), as a fraction of the initial
outstanding principal balance of such Class of Notes. The "Certificate Pool
Factor" for each Class of Certificates will be a seven-digit decimal which the
Servicer will compute prior to each distribution with respect to such Class of
Certificates indicating the remaining Certificate Balance of such Class of
Certificates, as of the applicable Distribution Date (after giving effect to
distributions to be made on such Distribution Date), as a fraction of the
initial Certificate Balance of such Class of Certificates. Each Note Pool Factor
and each Certificate Pool Factor will initially be 1.0000000 and thereafter will
decline to reflect reductions in the outstanding principal balance of the
applicable Class of Notes, or the reduction of the Certificate Balance of the
applicable Class of Certificates, as the case may be. A Noteholder's portion of
the aggregate outstanding principal balance of the related Class of Notes is the
product of (i) the original denomination of such Noteholder's Note and (ii) the
applicable Note Pool Factor. A Certificateholder's portion of the aggregate
outstanding Certificate Balance for the related Class of Certificates is the
product of (a) the original denomination of such Certificateholder's Certificate
and (b) the applicable Certificate Pool Factor.
Unless otherwise provided in the related Prospectus Supplement, the
Securityholders will receive reports on or about each Distribution Date
concerning (i) with respect to the Collection Period immediately preceding such
Distribution Date, payments received on the Loan Assets, the Pool Balance (as
such term is defined in the related Prospectus Supplement, the "Pool Balance"),
each Certificate Pool Factor or Note Pool Factor, as applicable, and various
other items of information, and (ii) with respect to the Collection Period
second preceding such Distribution Date, as applicable, amounts allocated or
distributed on the preceding Distribution Date and any reconciliation of such
amounts with information provided by the Servicer prior to such current
Distribution Date. In addition, Securityholders of record during any calendar
year will be furnished information for tax reporting purposes not later than the
latest date permitted by law. See "Description of the Transfer and Servicing
Agreements -- Reports to Securityholders".
CERTAIN INFORMATION REGARDING THE SECURITIES
GENERAL
To the extent provided in the related Prospectus Supplement, a Series may
include one or more Classes of Securities entitled only to (i) payments
allocable to interest ("Interest Only Securities"); (ii) payments allocable to
principal ("Principal Only Securities") and allocable as between scheduled
payments of principal and Principal Prepayments (as defined below); or (iii)
payments allocable to both principal (and allocable as between scheduled
payments of principal and Principal Prepayments) and interest. A Series of
Securities may include one or more Classes as to which payments or distributions
will be allocated (i) on the basis of collections from designated portions of
the Trust Property, (ii) in accordance with a schedule or formula, (iii) in
relation to the occurrence of events, or (iv) otherwise, in each case as
specified in the related Prospectus Supplement. The timing and amounts of such
payments or distributions may vary among Classes, over time or otherwise, in
each case as specified in the related Prospectus Supplement.
To the extent provided in the related Prospectus Supplement, one or more
Classes of Securities may provide for interest that accrues, but is not
currently payable ("Compound Interest Securities"). With respect to any Class of
Compound Interest Securities, if specified in the related Prospectus Supplement,
any interest that has accrued but is not paid on a given Distribution Date will
be added to the aggregate principal balance of such Class on that Distribution
Date.
To the extent provided in the related Prospectus Supplement, a Series of
Securities may include one or more Classes of Scheduled Amortization Securities
and Companion Securities. "Scheduled Amortization Securities" are Securities
with respect to which payments or distributions of principal are to be made in
specified amounts on specified Distribution Dates, to the extent of funds
available on such Distribution Date. "Companion Securities" are Securities which
receive payments or distributions of all or a portion of any funds available on
a given Distribution Date which are in excess of amounts required to be applied
to payments or distributions on Scheduled Amortization Securities on such
Distribution Date. Because of the manner of application of payments or
distributions of principal to Companion Securities, the weighted average lives
of Companion Securities of a Series may be expected to be more sensitive to the
actual rate of prepayments on the Loan Assets included in the related Trust
Property than will the Scheduled Amortization Securities of such Series.
To the extent provided in the related Prospectus Supplement, one or more
Series of Securities may constitute a Series of "Special Allocation Securities"
which may include Senior Securities, Subordinated Securities, Priority
Securities and Non-Priority Securities. As more fully described in the related
Prospectus Supplement for a Series of Special Allocation Securities, Special
Allocation Securities are Securities for which the timing and/or priority of
payments or distributions of principal and/or interest may favor one or more
Classes of such Securities over one or more other Classes of such Securities.
Such timing and/or priority may be modified or reordered upon the occurrence of
one or more specified events. To the extent specified in the related Prospectus
Supplement for a Series of Special Allocation Securities, losses on the Assets
included in the related Trust Property may be disproportionately borne by one or
more Classes of such Series, and the proceeds, payments and distributions from
such Assets may be applied to the payment in full of one or more Classes of such
Series before the balance, if any, of such proceeds is applied to one or more
other Classes within such Series. For example, Special Allocation Securities in
a Series may be comprised of one or more Classes of Senior Securities ("Senior
Securities") having a priority in right to payments or distributions of
principal and interest over one or more Classes of Subordinated Securities
("Subordinated Securities"), to the extent described in the related Prospectus
Supplement, as a form of Credit Enhancement. See "Credit Enhancement --
Subordination". Typically, Subordinated Securities of a Series will carry a
rating by the rating agencies rating the Securities of such Series lower than
that of the Senior Securities of such Series. In addition, one or more Classes
of Securities of a Series ("Priority Securities") may be entitled to a priority
of payments or distributions of principal or interest from Assets included in
the related Trust Property over another Class of Securities of such Series
("Non-Priority Securities"), but only after the exhaustion of other Credit
Enhancement applicable to such Series. Priority Securities and Non-Priority
Securities nonetheless may be within the same rating category.
FIXED RATE SECURITIES AND FLOATING RATE SECURITIES
Any Class of Securities (other than Principal Only Securities) may bear
interest at a fixed rate per annum ("Fixed Rate Securities") or at a variable or
adjustable rate per annum ("Floating Rate Securities"), as more fully described
in the applicable Prospectus Supplement. Each Class of Fixed Rate Securities
will bear interest at the applicable per annum Interest Rate or Pass Through
Rate, as the case may be, specified in the applicable Prospectus Supplement.
Unless otherwise set forth in the applicable Prospectus Supplement, interest on
each Class of Fixed Rate Securities will be computed on the basis of a 360-day
year of twelve 30-day months. See "Description of the Notes--Principal and
Interest on the Notes" and "Description of the Certificates--Distributions of
Principal and Interest".
INDEXED SECURITIES
To the extent so specified in any Prospectus Supplement, any Class of
Securities of a given Series may consist of Securities ("Indexed Securities") in
which the principal amount payable on the final Distribution Date for such Class
(the "Indexed Principal Amount") and/or the interest payable on any Distribution
Date is determined by reference to a measure (the "Index") which will be related
to the exchange rates of one or more currencies or composite currencies (the
"Index Currencies"); the price or prices of specified commodities; or specified
stocks, which may be based on U.S. or foreign stocks, on specified dates
specified in the applicable Prospectus Supplement, or such other price, interest
rate, exchange rate or other financial index or indices as are described in the
applicable Prospectus Supplement. Holders of Indexed Securities may receive a
principal amount on the related final Distribution Date that is greater than or
less than the face amount of the Indexed Securities depending upon the relative
value on the related final Distribution Date of the specified indexed item.
Information as to the method for determining the principal amount payable on the
related final Distribution Date, if any, and, where applicable, certain
historical information with respect to the specific indexed item or items and
special tax considerations associated with investment in Indexed Securities,
will be set forth in the applicable Prospectus Supplement. Notwithstanding
anything to the contrary herein, for purposes of determining the rights of a
holder of a Security indexed as to principal in respect of voting for or against
amendments to the related Trust Agreement, Indenture or Pooling and Servicing
Agreement, as the case may be, and modifications and the waiver of rights
thereunder, the principal amount of such Indexed Security shall be deemed to be
the face amount thereof upon issuance.
If the determination of the Indexed Principal Amount of an Indexed Security
is based on an Index calculated or announced by a third party and such third
party either suspends the calculation or announcement of such Index or changes
the basis upon which such Index is calculated (other than changes consistent
with policies in effect at the time such Indexed Security was issued and
permitted changes described in the applicable Prospectus Supplement), then such
Index shall be calculated for purposes of such Indexed Security by an
independent calculation agent named in the applicable Prospectus Supplement on
the same basis, and subject to the same conditions and controls, as applied to
the original third party. If for any reason such Index cannot be calculated on
the same basis and subject to the same conditions and controls as applied to the
original third party, then the Indexed Principal Amount of such Indexed Security
shall be calculated in the manner set forth in the applicable Prospectus
Supplement. Any determination of such independent calculation agent shall, in
the absence of manifest error, be binding on all parties.
The applicable Prospectus Supplement will describe whether the principal
amount of the related Indexed Security, if any, that would be payable upon
redemption or repayment prior to the applicable final scheduled Distribution
Date will be the Face Amount of such Indexed Security, the Indexed Principal
Amount of such Indexed Security at the time of redemption or repayment or
another amount described in such Prospectus Supplement. See "Risk Factors --
Risks Relating to Indexed Securities".
BOOK-ENTRY REGISTRATION
Unless otherwise specified in the related Prospectus Supplement, each Class
of Securities offered hereby will be represented by one or more certificates
registered in the name of Cede, as nominee of DTC. Unless otherwise specified in
the related Prospectus Supplement, Securityholders may hold beneficial interests
in Securities through DTC (in the United States) or Cedel or Euroclear (in
Europe) directly if they are participants of such systems, or indirectly through
organizations which are participants in such systems.
No Securityholder will be entitled to receive a certificate representing
such person's interest in the Securities, except as set forth below. Unless and
until Securities of a Class are issued in fully registered certificated form
("Definitive Securities") under the limited circumstances described below, all
references herein to actions by Noteholders, Certificateholders or
Securityholders shall refer to actions taken by DTC upon instructions from DTC
Participants, and all references herein to payments, distributions, notices,
reports and statements to Noteholders, Certificateholders or Securityholders
shall refer to distributions, notices, reports and statements to Cede, as the
registered holder of the Securities, for distribution to Securityholders in
accordance with DTC procedures. As such, it is anticipated that the only
Noteholder, Certificateholder or Securityholder will be Cede, as nominee of DTC.
Securityholders will not be recognized by the related Trustee as Noteholders,
Certificateholders or Securityholders as such terms will be used in the relevant
agreements, and Securityholders will only be permitted to exercise the rights of
holders of Securities of the related Class indirectly through DTC and DTC
Participants, as further described below.
Cedel and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in their respective names on
the books of their respective Depositaries which in turn will hold such
positions in customers' securities accounts in the Depositaries' names on the
books of DTC.
Transfers between DTC Participants will occur in accordance with DTC rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
accordance with their applicable rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel or
Euroclear participants, on the other, will be effected in DTC in accordance with
DTC rules on behalf of the relevant European international clearing system by
its Depositary. However, each such cross-market transaction will require
delivery of instructions to the relevant European international clearing system
by the counterparty in such system in accordance with its rules and procedures
and within its established deadlines. The relevant European international
clearing system will, if the transaction meets its settlement requirements,
deliver instructions to its Depositary to take action to effect final settlement
on its behalf by delivering or receiving securities in DTC, and making or
receiving payment in accordance with normal procedures for same-day funds
settlement applicable to DTC. Cedel Participants and Euroclear Participants may
not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities received in Cedel
or Euroclear as a result of a transaction with a DTC Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Cedel participant on such business day. Cash received in Cedel or
Euroclear as a result of sales of Securities by or through a Cedel Participant
or a Euroclear Participant to a DTC Participant will be received with value on
the DTC settlement date but will be available in the relevant Cedel or Euroclear
cash account only as of the business day following settlement in DTC.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York UCC and a "clearing agency" registered
pursuant to Section 17A of the Exchange Act. DTC was created to hold securities
for its participating members ("DTC Participants") and to facilitate the
clearance and settlement of securities transactions between DTC Participants
through electronic book-entries, thereby eliminating the need for physical
movement of certificates. DTC Participants include securities brokers and
dealers, banks, trust companies and clearing corporations which may include
underwriters, agents or dealers with respect to the Securities of any Class or
Series. Indirect access to the DTC system also is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a DTC Participant, either directly or indirectly
(the "Indirect DTC Participants"). The rules applicable to DTC and DTC
Participants are on file with the Commission.
Unless otherwise specified in the related Prospectus Supplement,
Securityholders that are not DTC Participants or Indirect DTC Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, Securities may do so only through DTC Participants and Indirect DTC
Participants. DTC Participants will receive a credit for the Securities on DTC's
records. The ownership interest of each Securityholder will in turn be recorded
on respective records of the DTC Participants and Indirect DTC Participants.
Securityholders will not receive written confirmation from DTC of their
purchase, but Securityholders are expected to receive written confirmations
providing details of the transaction, as well as periodic statements of their
holdings, from the DTC Participant or Indirect DTC Participant through which the
Securityholder entered into the transaction. Transfers of ownership interests in
the Securities of any Class will be accomplished by entries made on the books of
DTC Participants acting on behalf of Securityholders.
To facilitate subsequent transfers, all Securities deposited by DTC
Participants with DTC will be registered in the name of Cede, a nominee of DTC.
The deposit of Securities with DTC and their registration in the name of Cede
will effect no change in beneficial ownership. DTC will have no knowledge of the
actual Securityholders and its records will reflect only the identity of the DTC
Participants to whose accounts such Securities are credited, which may or may
not be the Securityholders. DTC Participants and Indirect DTC Participants will
remain responsible for keeping account of their holdings on behalf of their
customers. While the Securities of a Series are held in book-entry form,
Securityholders will not have access to the list of Securityholders of such
Series, which may impede the ability of Securityholders to communicate with each
other.
Conveyance of notices and other communications by DTC to DTC Participants,
by DTC Participants to Indirect DTC Participants and by DTC Participants and
Indirect DTC Participants to Securityholders will be governed by arrangements
among them, subject to any statutory or regulatory requirements as may be in
effect from time to time.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among DTC
Participants on whose behalf it acts with respect to the Securities and is
required to receive and transmit distributions of principal of and interest on
the Securities. DTC Participants and Indirect DTC Participants with which
Securityholders have accounts with respect to the Securities similarly are
required to make book-entry transfers and receive and transmit such payments on
behalf of their respective Securityholders.
DTC's practice is to credit DTC Participants' accounts on each Distribution
Date in accordance with their respective holdings shown on its records, unless
DTC has reason to believe that it will not receive payment on such Distribution
Date. Payments by DTC Participants and Indirect DTC Participants to
Securityholders will be governed by standing instructions and customary
practices, as is the case with securities held for the accounts of customers in
bearer form or registered in "street name", and will be the responsibility of
such DTC Participant and not of DTC, the related Indenture Trustee or Trustee
(or any paying agent appointed thereby), the Seller, the Issuer or the Servicer,
subject to any statutory or regulatory requirements as may be in effect from
time to time. Payment of principal of and interest on each Class of Securities
to DTC will be the responsibility of the related Indenture Trustee or Trustee
(or any paying agent), disbursement of such payments to DTC Participants will be
the responsibility of DTC and disbursement of such payments to the related
Securityholders will be the responsibility of DTC Participants and Indirect DTC
Participants. As a result, under the book-entry format, Securityholders may
experience some delay in their receipt of payments. DTC will forward such
payments to its DTC Participants which thereafter will forward them to Indirect
DTC Participants or Securityholders.
Because DTC can only act on behalf of DTC Participants, who in turn act on
behalf of Indirect DTC Participants and certain banks, the ability of a
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or otherwise take actions with respect to such
Securities, may be limited due to the lack of a physical certificate for such
Securities.
DTC has advised FIC that it will take any action permitted to be taken by a
Securityholder only at the direction of one or more DTC Participants to whose
account with DTC the Securities are credited. Additionally, DTC has advised FIC
that it will take such actions with respect to specified percentages of the
Securityholders' interest only at the direction of and on behalf of DTC
Participants whose holdings include undivided interests that satisfy such
specified percentages. DTC may take conflicting actions with respect to other
undivided interests to the extent that such actions are taken on behalf of DTC
Participants whose holdings include such undivided interests.
Neither DTC nor Cede will consent or vote with respect to the Securities.
Under its usual procedures, DTC will mail an "Omnibus Proxy" to the related
Indenture Trustee or Trustee as soon as possible after any applicable Record
Date for such a consent or vote. The Omnibus Proxy will assign Cede's consenting
or voting rights to those DTC Participants to whose accounts the related
Securities are credited on that record date (which record date will be
identified in a listing attached to the Omnibus Proxy).
Cedel Bank, societe anonyme ("Cedel") is incorporated under the laws of
Luxembourg as a professional depository. Cedel holds securities for its
participating organizations ("Cedel Participants") and facilitates the clearance
and settlement of securities transactions between Cedel Participants through
electronic book entry changes in accounts of Cedel Participants, thereby
eliminating the need for physical movement of certificates. Transactions may be
settled in Cedel in any of 28 currencies, including United States dollars. Cedel
provides to Cedel Participants, among other things, services for safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. Cedel interfaces with domestic markets in
several countries. As a professional depository, Cedel is subject to regulation
by the Luxembourg Monetary Institute. Cedel Participants are recognized
financial institutions around the world including underwriters, securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations and may include any underwriters, agents or dealers with
respect to any Class or Series of Securities offered hereby. Indirect access to
Cedel is also available to others, such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a Cedel
Participant, either directly or indirectly.
The Euroclear System was created in 1968 to hold securities for
participants of the Euroclear System ("Euroclear Participants") and to clear and
settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need for
physical movement of certificates and any risk from lack of simultaneous
transfers of securities and cash. Transactions may now be settled in any of 27
currencies, including United States dollars. The Euroclear System includes
various other services, including securities lending and borrowing, and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. The Euroclear
System is operated by Morgan Guaranty Trust Company of New York, Brussels,
Belgium office (the "Euroclear Operator" or "Euroclear"), under contract with
Euroclear Clearance System S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for the Euroclear System on behalf of Euroclear Participants. Euroclear
Participants include banks (including central banks), securities brokers and
dealers and other professional financial intermediaries and may include any
underwriters, agents or dealers with respect to any Class or Series of
Securities offered hereby. Indirect access to the Euroclear System is also
available to other firms that clear through or maintain a custodial relationship
with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawals of
securities and cash from the Euroclear System and receipts of payments with
respect to securities in the Euroclear System. All securities in the Euroclear
System are held on a fungible basis without attribution of specific certificates
to specific securities clearance accounts. The Euroclear Operator acts under the
Terms and Conditions only on behalf of Euroclear Participants, and has no record
of or relationship with persons holding through Euroclear Participants.
Payments and distributions with respect to Securities held through Cedel or
Euroclear will be credited to the cash accounts of Cedel Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by its Depositary. Such payments and
distributions will be subject to tax withholding in accordance with relevant
United States tax laws and regulations. See "Certain Federal Income Tax
Considerations". Cedel or the Euroclear Operator, as the case may be, will take
any other action permitted to be taken by a Securityholder on behalf of a Cedel
Participant or Euroclear Participant only in accordance with its relevant rules
and procedures and subject to its Depositary's ability to effect such actions on
its behalf through DTC.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Securities among participants of DTC, Cedel
and Euroclear, they are under no obligation to perform or continue to perform
such procedures and such procedures may be discontinued at any time.
DEFINITIVE SECURITIES
Unless otherwise specified in the related Prospectus Supplement, the Notes,
if any, and the Certificates, if any, of a given Series will be issued in fully
registered, certificated form ("Definitive Notes" and "Definitive Certificates",
respectively, and collectively referred to herein as "Definitive Securities") to
Noteholders or Certificateholders or their respective nominees, rather than to
DTC or its nominee, only if (i) DTC is no longer willing or able to discharge
properly its responsibilities as depository with respect to such Securities and
such Administrator or Trustee is unable to locate a qualified successor (and if
it is an Administrator that has made such determination, such Administrator so
notifies the applicable Trustee in writing), (ii) the Issuer, the Seller the
Administrator or the Trustee, as applicable, at its option, elects to terminate
the book-entry system through DTC or (iii) after the occurrence of an Event of
Default or a Servicer Default with respect to such Securities, holders
representing at least a majority of the outstanding principal amount of the
Notes or the Certificates, as the case may be, of such Series, acting together
as a single Class, advise the applicable Trustee through DTC in writing that the
continuation of a book-entry system through DTC (or a successor thereto) with
respect to such Notes or Certificates is no longer in the best interest of the
holders of such Securities.
Upon the occurrence of any event described in the immediately preceding
paragraph, the applicable Trustee or Indenture Trustee will be required to
notify all applicable Securityholders of a given Series through Participants of
the availability of Definitive Securities. Upon surrender by DTC of the
definitive certificates representing the corresponding Securities and receipt of
instructions for re-registration, the applicable Trustee or Indenture Trustee
will reissue such Securities as Definitive Securities to such Securityholders.
Payments and distributions of principal of, and interest on, such
Definitive Securities will thereafter be made by the applicable Trustee or
Indenture Trustee in accordance with the procedures set forth in the related
Indenture or the related Trust Agreement or Pooling and Servicing Agreement, as
applicable, directly to holders of Definitive Securities in whose names the
Definitive Securities were registered at the close of business on the applicable
Record Date specified for such Securities in the related Prospectus Supplement.
Such payments and distributions will be made by check mailed to the address of
such holder as it appears on the register maintained by the applicable Trustee
or Indenture Trustee. The final payment or distribution on any such Definitive
Security, however, will be made only upon presentation and surrender of such
Definitive Security at the office or agency specified in the notice of final
distribution to the applicable Securityholders. The applicable Trustee or the
Indenture Trustee will provide such notice to the applicable Securityholders not
less than 15 nor more than 30 days prior to the date on which such final payment
or distribution is expected to occur.
Definitive Securities will be transferable and exchangeable at the offices
of the applicable Trustee or of a registrar named in a notice delivered to
holders of Definitive Securities. No service charge will be imposed for any
registration of transfer or exchange, but the applicable Trustee or Indenture
Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge imposed in connection therewith.
THE TRUSTS
With respect to each Series of Securities with respect to which a Trust is
the Issuer, the Seller will establish a separate Trust pursuant to the
respective Trust Agreement or Pooling and Servicing Agreement, as applicable,
for the transactions described herein and in the related Prospectus Supplement.
On the applicable Closing Date, the Seller will sell the Loan Assets to the
Trust as specified in the related Prospectus Supplement. With respect to each
Series of Notes, the Issuer will pledge the Loan Assets to the Indenture
Trustee, for the benefit of the Noteholders, as specified in the related
Prospectus Supplement.
The Servicer will service the Loan Assets included in the Trust Property
and will receive fees for such services as specified in the related Prospectus
Supplement. To the extent specified in the related Prospectus Supplement, in
order to facilitate the servicing of the Loan Assets, the Seller, the Issuer and
each Trustee will authorize the Servicer to retain physical possession of the
applicable Loan Assets and other documents relating thereto as custodian with
respect to such Loan Assets and related documents.
THE TRUSTEE
As used herein, the term "Trustee" shall refer to the Indenture Trustee
with respect to a Series of Notes, the Owner Trustee under the applicable Trust
Agreement with respect to a Series of Certificates or the Pass-Through Trustee
under the applicable Pooling and Servicing Agreement with respect to a Series of
Certificates. The Trustees with respect to each Series will be specified in the
related Prospectus Supplement. The Trustee's liability in connection with the
issuance and sale of the related Securities is limited solely to the express
obligations of such Trustee set forth in the related Trust Agreement, Indenture
or Pooling and Servicing Agreement, as applicable.
Any commercial bank or trust company serving as Trustee may have normal
banking relationships with the Issuer, the Seller or the Servicer. In addition,
the Trustee will have the power and the responsibility for appointing
co-trustees or separate trustees of all or any part of the Trust Property
relating to a particular Series of Securities. At any time, for the purpose of
meeting any legal requirements of any jurisdiction in which any part of the
Trust Property may at the time be located, the Seller, or the Issuer, together
with the Trustee, acting jointly, shall have the power and shall execute and
deliver all instruments to appoint one or more Persons (any individual,
corporation, partnership, limited liability company, bank, trust or other entity
being referred to herein as a "Person") approved by the Trustee to act as
co-trustee or co-trustees, jointly with the Trustee, or separate trustee or
separate trustees, of all or any part of the Trust Property, and to vest in such
Person or Persons, in such capacity, such title to the Trust Property, or any
part thereof, and, subject to the provisions of the applicable Indenture, Trust
Agreement or Pooling and Servicing Agreement, such powers, duties, obligations,
rights and trusts as the Seller, or the Issuer, together with the Trustee, may
consider necessary or desirable. In the event of such appointment, all rights,
powers, duties and obligations conferred or imposed upon the Trustee by the
applicable Indenture, Trust Agreement or Pooling and Servicing Agreement will be
conferred or imposed upon the Trustee and such separate trustee or co-trustee
jointly, or in any jurisdiction in which the Trustee shall be incompetent or
unqualified to perform certain acts, singly upon such separate trustee or
co-trustee who shall exercise and perform such rights, powers, duties and
obligations solely at the direction of the Trustee.
The Trustee will make no representations as to the validity or sufficiency
of the applicable Indenture, Trust Agreement or Pooling and Servicing Agreement,
the related Securities, or of any Loan Asset or related document, and will not
be accountable for the use or application by the Seller or a Transferor of any
funds paid to the Seller or such Transferor in respect of the Securities or the
related Assets, or amounts deposited in the related Distribution Account or
deposited into any other account for purposes of making payments or
distributions to Securityholders. If no Event of Default has occurred, the
Trustee will be required to perform only those duties specifically required of
it under the applicable Indenture, Trust Agreement or Pooling and Servicing
Agreement. However, upon receipt of the various certificates, reports or other
instruments required to be furnished to it, the Trustee will be required to
examine them to determine whether they conform to the requirements of the
applicable Indenture, Trust Agreement or Pooling and Servicing Agreement.
The Trustee may resign at any time and the Seller, the Servicer or the
Administrator, as applicable, may remove the Trustee if the Trustee ceases to be
eligible to continue as such under the applicable Indenture, Trust Agreement or
Pooling and Servicing Agreement, if the Trustee becomes insolvent or in such
other instances, if any, as are set forth in the applicable Indenture, Trust
Agreement or Pooling and Servicing Agreement. Following any resignation or
removal of the Trustee, the Seller or Servicer, as applicable, will be obligated
to appoint a successor Trustee. Any resignation or removal of the Trustee and
appointment of a successor Trustee does not become effective until acceptance of
the appointment by the successor Trustee.
DESCRIPTION OF THE TRUST PROPERTY
GENERAL
The Trust Property for a Series of Securities may include (i) Loan Assets
and payments or distributions thereon (subject, if specified in the Prospectus
Supplement, to certain exclusions); (ii) if specified in the Prospectus
Supplement, reinvestment income on such payments or distributions; (iii) all
property acquired by foreclosure or deed in lieu of foreclosure with respect to
any Mortgage Loan or Secured Contract included in the Trust Property and certain
rights of the Administrator, if any, and the Servicer under any policies
required to be maintained in respect of the related Loan Assets; and (iv) if
specified in the Prospectus Supplement, one or more forms of Credit Enhancement.
The Trust Property will consist primarily of Loan Assets.
With respect to a Series, FIC will acquire the Loan Assets in the open
market or in privately negotiated transactions from one or more entities, and
each such entity from whom FIC so acquires a significant portion of the Loan
Assets (individually or collectively, the "Transferor") will be described in the
related Prospectus Supplement, including a description of any affiliation
between the Transferor and FIC. To the extent specified in the related
prospectus supplement, the Loan Assets will have been originated or acquired by
the Transferor in one of four ways: (i) the indirect origination and purchase of
retail installment sales contracts from a network of independent contractors or
dealers professionally installing property improvements ("indirect
originations"); (ii) the origination of loans directly to consumers, including
but not limited to solicitations through advertising and telemarketing ,
refinancing of existing mortgage loans and referrals from home improvement
contractors, mortgage brokers and credit unions ("direct originations"); (iii)
the purchase of loans, on a flow basis, originated by unaffiliated lenders, as
correspondents ("correspondent originations"), including delegated underwriting
corespondents; or (iv) the purchase, on a bulk basis, of loan portfolios
originated by other unaffiliated lenders ("portfolio acquisitions"). In
acquiring the Loan Assets from a Transferor, FIC will rely on the
representations and warranties made by the Transferor with respect to such Loan
Assets. For a summary description of the expected representations and warranties
with respect to such Loan Assets, See "Description of the Transfer and Servicing
Agreements -- Sale and Assignment of Loan Assets". As further described in the
related Prospectus Supplement for a Series, the Transferor will be obligated to
repurchase or replace any Loan Assets that, subject to the lapse of any
applicable cure period, are in breach of a representation or warranty made by
the Transferor and such breach has a material and adverse affect on the value of
such Loan Assets or the interest of Securityholders therein. To the extent that
FIC has any obligation to repurchase or replace any Loan Assets for a material
breach of any representations or warranties made by FIC, FIC is not expected to
have the financial capability to repurchase or replace such defective Loan
Assets, but rather FIC will be relying on the related Transferor of such
defective Loan Assets to repurchase or replace them. See "The Seller".
The following is a brief description of the Loan Assets expected to be
included in the Trust Property for each Series. If specific information
respecting the Loan Assets is not known at the time a Series is initially
offered, more general information of the nature described below will be provided
in the related Prospectus Supplement, and specific information will be set forth
in a report on Form 8-K to be filed with the Securities and Exchange Commission
within fifteen days after the initial issuance of such Series. A copy of the
related Sale and Servicing Agreement or Pooling and Servicing Agreement with
respect to each Series will be attached to the Form 8-K and will be available
for inspection at the corporate trust office of the related Trustee specified in
the related Prospectus Supplement. A schedule of the Loan Assets relating to
each Series, will be attached to the related Sale and Servicing Agreement or
Pooling and Servicing Agreement delivered to the applicable Trustee upon
delivery of such Series.
MORTGAGE LOANS
The Mortgage Loans will be evidenced by promissory notes, retail
installment sales contracts or other evidences of indebtedness (the "Mortgage
Notes") and will be secured by mortgages, deeds of trust, deeds to secure debt
or other similar security instruments (the "Mortgages") creating a lien or
security interest on single family (one-to-four unit) residences, units in
planned unit developments, units in condominium developments, town homes and
Manufactured Homes (as defined herein) (the "Mortgaged Properties") located in
various states. If specified in the Prospectus Supplement, the Mortgage Loans
may include cooperative apartment or manufactured housing loans ("Cooperative
Loans") secured by security interests in shares issued by private, non-profit,
cooperative housing corporations ("Cooperatives") and in the related proprietary
leases or occupancy agreements granting exclusive rights to occupy specific
units in such Cooperatives. To the extent specified in the related Prospectus
Supplement, all or a portion of the Mortgages will be junior liens on the
related Mortgaged Properties, and the related superior liens will not be
included in the related Loan Asset Pool. Certain of the Mortgage Loans may be
partially insured to the extent described in the related Prospectus Supplement
(and subject to the conditions described herein and in the related Prospectus
Supplement) by the FHA under the Title I Program (the "Title I Mortgage Loans").
To the extent specified in the related Prospectus Supplement, the Mortgage Loans
will have scheduled monthly payment dates throughout a month, and no Mortgage
Loan will provide for deferred interest or negative amortization, and no
commercial (other than mixed use) or multifamily loans will be included in any
Mortgage Loan Pool.
The payment terms of the Mortgage Loans to be included in the Trust
Property for a Series will be described in the related Prospectus Supplement and
may include any of the following features or combinations thereof or other
features described in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable from
time to time in relation to an index, a rate that is fixed for a period of time
or under certain circumstances and is followed by an adjustable rate, a rate
that otherwise varies from time to time, or a rate that is convertible from an
adjustable rate to a fixed rate. Changes to an adjustable rate may be subject to
periodic limitations, maximum rates, minimum rates or a combination of such
limitations. Accrued interest may be deferred and added to the principal of a
loan for such periods and under such circumstances as may be specified in the
related Prospectus Supplement. Mortgage Loans may provide for the payment of
interest at a rate lower than the specified mortgage rate for a period of time
or for the life of the Mortgage Loan with the amount of any difference
contributed from funds supplied by the seller of the Mortgaged Property or
another source.
(b) Principal may be payable on a level debt service basis to fully
amortize the Mortgage Loan over its term, may be calculated on the basis of an
amortization schedule that is significantly longer than the original term to
maturity or on an interest rate that is different from the interest rate on the
Mortgage Loan or may not be amortized during all or a portion of the original
term. Payment of all or a substantial portion of the principal may be due on
maturity. Principal may include interest that has been deferred and added to the
principal balance of the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed for the
life of the Mortgage Loan, may increase over a specified period of time or may
change from period to period. Mortgage Loans may include limits on periodic
increases or decreases in the amount of monthly payments and may include maximum
or minimum amounts of monthly payments.
(d) Prepayments of principal may be subject to a prepayment fee (which
may be waived), which may be fixed for the life of the related Mortgage Loan or
may decline over time, and may be prohibited for the life of the loan or for
certain periods ("lockout periods"). Certain Mortgage Loans may permit
prepayments after expiration of the applicable lockout period and may require
the payment of a prepayment fee in connection with any such subsequent
prepayment. Other Mortgage Loans may permit prepayments without payment of a fee
unless the prepayment occurs during specified time periods. The Mortgage Loans
may include "due-on-sale" clauses which permit the mortgagee to demand payment
of the entire Mortgage Loan in connection with the sale or certain transfers of
the related Mortgaged Property. Other Mortgage Loans may be assumable by persons
meeting the then applicable underwriting standards of the Transferor.
With respect to a Series for which the related Trust Property includes
Mortgage Loans the related Prospectus Supplement may specify, among other
things, information regarding the interest rates (the "Mortgage Rates"), the
average principal balance and the aggregate principal balance of such Mortgage
Loans, the years of origination, geographic dispersion and original principal
balances and the loan-to-value ratios of such Mortgage Loans.
CONTRACTS
As specified in the related Prospectus Supplement for a Series, "Contracts"
may include: (i) loans evidenced by retail installments sales or loan
agreements, including loans secured by new or used Manufactured Homes (as
defined herein) that are not considered to be interests in real property because
such Manufactured Homes are not permanently affixed to real estate ("Secured
Contracts") and (ii) loans evidenced by retail installments sales or loan
agreements which are not secured by any interest in real or personal property
("Unsecured Contracts"). To the extent described in the related Prospectus
Supplement, certain Contracts will be conventional (i.e., not insured or
guaranteed by a governmental agency) contracts (the "Conventional Contracts"),
while other Contracts will be partially insured by the FHA under the Title I
Program (the "Title I Contracts"). To the extent specified in the related
Prospectus Supplement, the Contracts included as part of the Trust Property for
a Series will be fully amortizing and will bear interest at a fixed annual
percentage rate ("APR"). The Secured Contracts differ from Mortgage Loans in
that the Secured Contracts are not secured by an interest in real property, but
rather by an interest in a Manufactured Home that is not permanently affixed to
real estate. In addition, the Contracts differ from Mortgage Loans in that they
are generally originated by a network of independent contractors or dealers that
professionally install property improvements, rather than by financial
institutions or other traditional mortgage lenders.
While the Unsecured Contracts are not secured by a security interest in any
related real or personal property, such contracts are still subject to the same
underwriting criteria as the Mortgage Loans and the Secured Contracts. For
example, in underwriting an Unsecured Contract, the Transferor will consider the
borrower's credit history and ability to repay the related debt as well as the
value of real or personal property owned by the borrower which could be the
subject of a junior lien in favor of the Transferor; however, because the
Unsecured Contracts generally have smaller principal amounts than the Mortgage
Loans or the Secured Contracts, a junior lien with respect to such real or
personal property will not be obtained because the costs associated with
obtaining and perfecting such a junior lien will not justify the benefits
provided by such a lien, including any realization from the enforcement of such
lien.
The Manufactured Homes securing the Secured Contracts consist of
manufactured homes within the meaning of 42 United States Code, Section 5402(6),
which defines a "Manufactured Home" as "a structure, transportable in one or
more sections, which in the traveling mode, is eight body feet or more in width
or forty body feet or more in length, or, when erected on site, is three hundred
twenty or more square feet, and which is built on a permanent chassis and
designed to be used as a dwelling with or without permanent foundation when
connected to the required utilities, and includes the plumbing, heating,
air-conditioning, and electrical systems contained therein; except that such
term shall include any structure which meets all the requirements of [this]
paragraph except the size requirements and with respect to which the
manufacturer voluntarily files a certification required by the Secretary of
Housing and Urban Development and complies with the standards established under
[this] chapter."
To the extent specified in the Prospectus Supplement with respect to a
Series for which the related Trust Property includes Secured Contracts, for
purposes of calculating the loan-to-value ratio of a Secured Contract relating
to a new Manufactured Home, the "Collateral Value" is no greater than the sum of
a fixed percentage of the list price of the unit actually billed by the
manufacturer to the dealer (exclusive of freight to the dealer site) including
"accessories" identified in the invoice (the "Manufacturer's Invoice Price"),
plus the actual cost of any accessories purchased from the dealer, a delivery
and set-up allowance, depending on the size of the unit and the cost of state
and local taxes, filing fees and up to three years prepaid hazard insurance
premiums. To the extent specified in the related Prospectus Supplement, the
Collateral Value of a used Manufactured Home is the least of the sales price,
the appraised value, and the National Automobile Dealer's Association book value
plus prepaid taxes and hazard insurance premiums. The appraised value of a
Manufactured Home is based upon the age and condition of the manufactured
housing unit and the quality and condition of the mobile home park in which it
is situated, if applicable.
The related Prospectus Supplement may specify for the Contracts contained
in the related Contract Pool, among other things, the date of origination of the
Contracts; the APRs on the Contracts; the Contract Loan-to-Value Ratios; the
minimum and maximum outstanding principal balance as of the cut-off date and the
average outstanding principal balance; the outstanding principal balances of the
Contracts included in the Contract Pool; and the original maturities of the
Contracts and the last maturity date of any Contract.
MODIFICATIONS OF MORTGAGE LOANS AND CONTRACTS
With respect to a Series of Securities, if so specified in the related
Prospectus Supplement, the related Master Servicer, Servicer or Special
Servicer, if any, may, subsequent to the issuance of a Series of Securities,
effect certain modifications of the terms of any related Mortgage Loan or
Contract to the extent that the related borrower has indicated an intention to
refinance such Mortgage Loan or Contract (an "Imminent Prepayment"). The Master
Servicer, Servicer or any Subservicer will also be authorized, to the extent
provided in the applicable Sale and Servicing Agreement, to modify the terms of
any Mortgage Loan or Contract that is in default, or as to which default is, in
the judgment of the Master Servicer, Servicer or Subservicer, as applicable,
reasonably foreseeable (a "Defaulted Loan").
In the case of an Imminent Prepayment, if so specified in the related
Prospectus Supplement, the Master Servicer, Servicer or any Special Servicer
will be authorized, provided that the related borrower satisfies certain minimum
credit criteria, to reduce the interest rate applicable to such Mortgage Loan or
Contract, to reduce (or increase) the applicable monthly payment, and/or to
extend (or to shorten) the applicable term to maturity of such Mortgage Loan or
Contract. Any fees payable by a borrower in connection with such a modification
may be retained by the Master Servicer, Servicer or Special Servicer, as
applicable, or other applicable party, or such fees may be an asset of the
related Trust. If so specified in the related Prospectus Supplement, the amount
of such fees may be added to the principal balance of the applicable Mortgage
Loan or Contract, which additional amount may be retained by the applicable
party or may be an asset of the Trust. In such event the modified Mortgage Loan
or Contract will remain an asset of the applicable Trust with the modified
terms. Such modifications will generally have the effect of reducing funds
available to Securityholders on subsequent Distribution Dates, and could affect
the yields to maturity and weighted average lives of the related Securities.
In the case of a Defaulted Loan, the Master Servicer, Servicer or any
Special Servicer may, in its judgment in accordance with accepted servicing
practices and the applicable Sale and Servicing Agreement, increase the
outstanding principal balance of such Mortgage Loan or Contract by the amount of
interest accrued on delinquent payments, extend the term to maturity of such
Mortgage Loan or Contract by the number of months of payment delinquency and
defer payment of delinquent monthly payments, modify the applicable interest
rate, principal balance, monthly payment and/or term to maturity, forgive all or
part of the amount of delinquent monthly payments or generally take such similar
actions or make such similar modifications as in its judgment can be expected to
maximize the amount realized by the related Trust on behalf of Securityholders.
Such actions or modifications could delay distributions to Securityholders,
could reduce amounts ultimately available for distribution to Securityholders
and could affect the yields to maturity and weighted average lives of the
related Securities.
ADDITIONS, SUBSTITUTION AND WITHDRAWAL OF ASSETS
With respect to a Series of Securities, as described in the related
Prospectus Supplement, the related Transferor, Seller or Issuer may, subsequent
to the issuance of a Series of Securities, (i) deliver additional Assets to be
included in the related Trust Property, (ii) withdraw Assets previously included
in the Trust Property for such Series and substitute comparable assets therefor,
or (iii) withdraw Assets previously included in a Reserve Fund for such Series.
Assets may be added to the Trust Property for a Series subsequent to the
issuance of such Series in the manner described under "Pre-Funding Arrangements"
below. In addition, Assets may be withdrawn from or substituted into the Trust
Property for a Series for the following reasons: (a) curing any breaches of
representations and warranties with respect to such Assets, (b) curing certain
immaterial irregularities with respect to such Assets that do not constitute a
breach of such representations and warranties, or (c) achieving certain targeted
or desired Loan Asset Pool characteristics with respect to the Loan Assets of a
particular Series, including, without limitation, those characteristics that
accommodate the requests of a Rating Agency, the Underwriters or a third party
provider of Credit Enhancement. Any such additions, withdrawals or substitutions
of Assets by the related Transferor or the Seller or the Issuer will be subject
to the applicable limitations, requirements and conditions provided in the
related Sale and Servicing Agreement or Pooling and Servicing Agreement (and
described in the related Prospectus Supplement) for such Series.
PRE-FUNDING ARRANGEMENTS
To the extent provided in the related Prospectus Supplement for a Series,
the related Sale and Servicing Agreement or Pooling and Servicing Agreement will
provide for a commitment by the related Trust or Issuer, as applicable, to
subsequently purchase additional Loan Assets ("Subsequent Loan Assets")
following the date on which the related Securities are issued (a "Pre-Funding
Arrangement"). With respect to a Series, the Pre-Funding Arrangement will
require that any Subsequent Loan Assets included in the Trust Property conform
to the requirements and conditions provided in the related Sale and Servicing
Agreement or Pooling and Servicing Agreement. If a Pre-Funding Arrangement is
utilized in connection with the issuance of the Series of Securities, on the
closing date for the issuance of such Series the related Trustee will be
required to deposit in a segregated account (a "Pre-Funding Account") all or a
portion of the proceeds received by such Trustee in connection with the sale of
one or more Classes of Securities of such Series; and, subsequently, the Issuer
will acquire Subsequent Loan Assets in exchange for the release of money from
the Pre-Funding Account for such Series. In addition, the Pre-Funding
Arrangement will be limited to a specified period, not to exceed three months,
during which time any transfers of Subsequent Loan Assets must occur and to a
maximum deposit to the related Pre-Funding Account of no more than thirty-five
percent (35%) of the aggregate proceeds received from the sale of all Classes of
Securities of such Series.
If all of the funds originally deposited in the such Pre-Funding Account
are not used by the end of such specified period, then any remaining amount of
such funds will be applied as a mandatory prepayment of a Class or Classes of
Securities as specified in the related Prospectus Supplement. Although it is
intended that the principal amount of Subsequent Loan Assets to be included as
Trust Property after the closing date for the issuance of any particular Series
will require application of substantially all of the Pre-Funding Account, and it
is not anticipated that there will be any material amount of principal
distributions from amounts remaining on deposit in the Pre-Funding Account in
reduction of the principal balances of any Securities, no assurance can be given
that such a distribution with respect to the Securities will not occur on the
Distribution Date following the Due Period in which the Pre-Funding Arrangement
ends. In any event, it is unlikely that the Transferor will be able to deliver
Subsequent Loan Assets with aggregate principal balances that exactly equal the
Pre-Funding Account, and the portion of the Pre-Funding Account remaining at the
end of the Pre-Funding Arrangement, if any, will be distributed in reduction of
the principal balance of the Securities of the related Series, as set forth in
related Prospectus Supplement.
As may be further specified in the related Prospectus Supplement, amounts
on deposit in the Pre-Funding Account will be invested in short-term debt
obligations of, or debt obligations guaranteed by, the United States, repurchase
agreements that satisfy the criteria specified in the applicable Sale and
Servicing Agreement or Pooling and Servicing Agreement, certificates of deposit,
time deposits and bankers acceptances of any United States depository
institution or trust company, FDIC insured deposits, including deposits with the
related Trustee, commercial paper, debt obligations, and money market funds;
provided such investments are acceptable to each Rating Agency rating the Series
of Offered Securities at the time at which the investments are made
(collectively "Permitted Investments"); and provided further that an investment
in such Permitted Investments will not require the Issuer for a Series to be
registered as an "investment company" under the Investment Company Act of 1940,
as amended. Permitted Investments will consist of short term investments that
convert into cash or mature within a short period of time, have minimal or no
exposure to fluctuations in value as a result of market changes in prevailing
interest rates and are acceptable to each Rating Agency rating the applicable
Series of Offered Securities.
The utilization of a Pre-Funding Arrangement is intended to improve the
efficiency of the issuance of a Series of Securities and the sale and assignment
of the Loan Assets to the related Issuer through the incremental delivery of the
Loan Assets on the closing date and during the three month period following the
closing date for such Series, which allows for a more even accumulation of the
Loan Assets by the Seller, the Issuer and the related Transferor and the
issuance of a larger principal amount of Securities for such Series than would
be the case without a Pre-Funding Arrangement.
CREDIT ENHANCEMENT
GENERAL
The amount and types of credit and cash flow enhancement arrangements
("Credit Enhancement") and the provider thereof, if applicable, with respect to
each Class of Securities of a given Series, if any, will be set forth in the
related Prospectus Supplement. If and to the extent provided in the related
Prospectus Supplement, Credit Enhancement may be in the form of the
subordination of one or more Classes of Securities of such Series, the
overcollateralization of the Trust Property with respect to a Series, the
establishment of one or more Reserve Funds, the use of a cross-support feature,
the use of a Mortgage Pool Insurance Policy, Guaranty Policy, Special Hazard
Insurance Policy, bankruptcy bond, surety bond, letter of credit, credit or
liquidity facility, guaranteed investment contract, swap or other interest rate
protection agreement, repurchase obligation, yield maintenance agreement, other
agreements with respect to third party payments or other support, cash deposits
or such other form of Credit Enhancement as may be described in the related
Prospectus Supplement, or any combination of two or more of the foregoing. If
specified in the related Prospectus Supplement, Credit Enhancement for a Class
of Securities may cover one or more other Classes of Securities of the same
Series, and Credit Enhancement for a Series of Securities may cover one or more
other Series of Securities.
The presence of Credit Enhancement for the benefit of any Class or Series
of Securities is intended to enhance the likelihood of receipt by the
Securityholders of such Class or Series of the full amount of principal and
interest due thereon and to decrease the likelihood that such Securityholders
will experience losses. To the extent specified in the related Prospectus
Supplement, any Credit Enhancement with respect to a Series will not provide
protection against all risks of loss and will not guarantee repayment of the
entire principal balance of the Securities of such Series and interest thereon.
If losses occur which exceed the amount covered by such Credit Enhancement or
which are not covered by the Credit Enhancement, holders will bear their
allocable share of deficiencies, as described in the related Prospectus
Supplement. In addition, if a form of Credit Enhancement covers more than one
Class or Series of Securities, Securityholders of any such Class or Series will
be subject to the risk that such credit enhancement will be exhausted by the
claims of Securityholders of other Classes or Series.
SUBORDINATION
If specified in the related Prospectus Supplement, payments and
distributions in respect of scheduled principal, interest or any combination
thereof that otherwise would have been payable or distributable to one or more
Classes of a Series (the "Subordinated Securities") will instead be payable to
one or more other Classes of such Series (the "Senior Securities") under the
circumstances and to the extent provided in such Prospectus Supplement. If
specified in the Prospectus Supplement, delays in receipt of scheduled payments
on the Loan Assets and losses on defaulted Loan Assets will be borne first by
the various Classes of Subordinated Securities and thereafter by the various
Classes of Senior Securities, in each case under the circumstances and subject
to the limitations specified in the Prospectus Supplement. The aggregate
payments and distributions in respect of delinquent payments or distributions on
the Loan Assets over the lives of the Securities of a Series or at any time, the
aggregate losses in respect of defaulted Loan Assets which must be borne by the
Subordinated Securities by virtue of subordination and the amount of the
payments and distributions otherwise due to the Subordinated Securities that
will be distributable to holders of Senior Securities on any Distribution Date
may be limited as specified in the related Prospectus Supplement. If aggregate
payments and distributions in respect of delinquent payments or distributions on
the Loan Assets or aggregate losses in respect of such Loan Assets were to
exceed the total amounts distributable and available for distribution to holders
of Subordinated Securities were to exceed the specified maximum amount, holders
of Senior Securities could experience losses on their Securities.
In addition to or in lieu of the foregoing, if specified in the related
Prospectus Supplement, all or any portion of payments or distributions otherwise
due to holders of Subordinated Securities on any Distribution Date may instead
be deposited into one or more Reserve Funds (as defined below) established by
the related Trustee. If specified in the related Prospectus Supplement, such
deposits may be made (i) on each Distribution Date, (ii) on each Distribution
Date for specified periods, or (iii) on each Distribution Date until the balance
in the Reserve Fund has reached a specified amount and, following payments from
the Reserve Fund to holders of Senior Securities or otherwise, thereafter to the
extent necessary to restore the balance in the Reserve Fund to required levels,
in each case as specified in such Prospectus Supplement. If specified in the
related Prospectus Supplement, amounts on deposit in the Reserve Fund may be
released to the Seller or Issuer or the holders of any Class of Securities at
the times and under the circumstances specified in such Prospectus Supplement.
If specified in the related Prospectus Supplement, various Classes of
Senior Securities and Subordinated Securities may themselves be subordinate in
their right to receive certain payments and distributions to other Classes of
Senior and Subordinated Securities, respectively, through a cross-support
mechanism or otherwise.
As between Classes of Senior Securities and as between Classes of
Subordinated Securities, payments and distributions may be allocated among such
Classes (i) in the order of their Stated Maturity or Assumed Final Distribution
Dates, (ii) in accordance with a schedule or formula, (iii) in relation to the
occurrence of events, or (iv) otherwise, in each case as specified in the
related Prospectus Supplement. As between Classes of Subordinated Securities,
payments and distributions to holders of Senior Securities on account of
delinquencies or losses and payments to any Reserve Fund will be allocated as
specified in the related Prospectus Supplement.
OVERCOLLATERALIZATION
If provided in the related Prospectus Supplement, the aggregate principal
balance of the Loan Assets included in the Trust Property may exceed the
aggregate original principal balance of the Securities of a Series thereby
creating an "Excess Spread" on each Distribution Date. If provided in the
related Prospectus Supplement, such Excess Spread may be distributed to holders
of Senior Securities to produce and maintain a specified level of
overcollateralization. With respect to a Series of Securities, the
overcollateralization level may be fixed or may increase or decrease over time,
subject to certain floors, caps and triggers, as set forth in the related
Prospectus Supplement and the related Indenture, Sale and Servicing Agreement or
Pooling and Servicing Agreement.
CROSS-SUPPORT
If specified in the related Prospectus Supplement, separate Classes of
related Series of Securities may represent the beneficial ownership of or be
separately secured by, separate groups of Assets included in the Trust Property
for a Series or otherwise available for the benefit of such Securities. In such
case, Credit Enhancement may be provided by a cross-support feature which may
require that payments and distributions be made with respect to Securities
evidencing beneficial ownership of or secured by one or more groups of Assets
prior to payments or distributions to Subordinated Securities evidencing a
beneficial ownership interest in or secured by other groups of Assets included
in the same Trust Property. The Prospectus Supplement for a Series which
includes a cross-support feature will describe the manner and conditions for
applying such cross-support feature.
GUARANTY INSURANCE
If specified in the Prospectus Supplement, one or more financial guaranty
insurance policies (each, a "Guaranty Policy") will be obtained. Each such
Guaranty Policy with respect to a Series will, subject to limitations described
in the related Prospectus Supplement, provide to the holders of the insured
Securities of a Series a guarantee of payment of any interest and/or principal
payments due to such holders on each Distribution Date. The related Prospectus
Supplement will describe the terms of any Guaranty Policy and will set forth
certain information with respect to the applicable insurer.
MORTGAGE POOL INSURANCE
With respect to a Series for which the related Trust Property includes
Mortgage Loans (and, if specified in the related Prospectus Supplement, a Series
for which the related Trust Property includes Contracts), in order to decrease
the likelihood that holders of the Securities of such Series will experience
losses in respect of such Mortgage Loans, if specified in the related Prospectus
Supplement, one or more mortgage pool insurance policies (each, a "Mortgage Pool
Insurance Policy") will be obtained. Each such Mortgage Pool Insurance Policy
will, subject to the limitations described below and in the Prospectus
Supplement, cover loss by reason of default in payments on such Mortgage Loans
up to the amounts specified in the Prospectus Supplement or reported on Form 8-K
and for the periods specified in the Prospectus Supplement. To the extent
specified in the related Prospectus Supplement, the Servicer under the related
Sale and Servicing Agreement or Pooling and Servicing Agreement will agree to
use its best reasonable efforts to cause to be maintained in effect any such
Mortgage Pool Insurance Policy and to file claims thereunder to the issuer of
such Mortgage Pool Insurance Policy (the "Pool Insurer"). A Mortgage Pool
Insurance Policy, however, is not a blanket policy against loss, since claims
thereunder may only be made respecting particular defaulted Mortgage Loans and
only upon satisfaction of certain conditions precedent set forth in such policy
as described in the related Prospectus Supplement. To the extent specified in
the related Prospectus Supplement, no Mortgage Pool Insurance Policy, if any,
will cover losses due to a failure to pay or denial of a claim under a primary
mortgage insurance policy, irrespective of the reason therefor. The related
Prospectus Supplement will describe the terms of any applicable Mortgage Pool
Insurance Policy and will set forth certain information with respect to the
related Pool Insurer.
SPECIAL HAZARD INSURANCE
With respect to a Series for which the related Trust Property includes
Mortgage Loans (and, if specified in the related Prospectus Supplement, each
Series for which the related Trust Property includes Contracts), in order to
decrease the likelihood that holders of the Securities of such Series will
experience losses in respect of such Mortgage Loans, if specified in the related
Prospectus Supplement, one or more Special Hazard Insurance Policies (each, a
"Special Hazard Insurance Policy") will be obtained. Each such Special Hazard
Insurance Policy with respect to a Series will, subject to limitations described
below and in the related Prospectus Supplement, protect holders of the
Securities of such Series from loss caused by reason of (i) damage to Mortgaged
Properties caused by certain hazards (including earthquakes and, to a limited
extent, tidal waves and related water damage) not covered by the standard form
of hazard insurance policy for the respective states in which the Mortgaged
Properties are located or under flood insurance policies, if any, covering the
Mortgaged Properties and (ii) the application of the coinsurance clause
contained in hazard insurance policies. Any Special Hazard Insurance Policy may
not cover losses occasioned by war, civil insurrection, certain governmental
actions, errors in design, faulty workmanship or materials (except under certain
circumstances), nuclear reaction, flood (if the Mortgaged Property is located in
a federally designated flood area), chemical contamination and certain other
risks. Aggregate claims under each Special Hazard Insurance Policy will be
limited as described in the related Prospectus Supplement. Any Special Hazard
Insurance Policy may also provide that no claim may be paid unless hazard and if
applicable, flood insurance on the Mortgaged Property has been kept in force and
other protection and preservation expenses have been paid.
The related Prospectus Supplement will describe the terms of any applicable
Special Hazard Insurance Policy and will set forth certain information with
respect to the related special hazard insurer.
RESERVE FUNDS
If specified in the Prospectus Supplement with respect to a Series, assets
such as cash, U.S. Treasury securities, instruments evidencing ownership of
principal or interest payments thereon, letters of credit, demand notes,
certificates of deposit or a combination thereof in the aggregate amount
specified in such Prospectus Supplement will be deposited by the Seller or
Issuer in one or more accounts (each, a "Reserve Fund") established and
maintained with the related Trustee. Such cash and the payments on such other
assets will be used to enhance the likelihood of timely payment and distribution
of principal of, and interest on, or, if specified in the related Prospectus
Supplement, to provide additional protection against losses in respect of the
Assets included in the related Trust Property, to pay the expenses of the
related Issuer or for such other purposes specified in such Prospectus
Supplement. Whether or not the Seller or Issuer has any obligation to make such
a deposit, certain amounts to which the holders of the Subordinated Securities
of such Series, if any, the Seller or Issuer would otherwise be entitled may
instead be deposited into the Reserve Fund from time to time and in the amounts
as specified in the related Prospectus Supplement. Any cash in any Reserve Fund
and the proceeds of any other instrument upon maturity will be invested in
Permitted Investments. If a letter of credit is deposited with the applicable
Trustee, such letter of credit will be irrevocable. To the extent specified in
the Prospectus Supplement with respect to a Series, any instrument deposited
therein will name the related Trustee, in its capacity as trustee for the
holders of the Securities of such Series, as beneficiary and will be issued by
an entity acceptable to each rating agency that rates such Securities.
Additional information with respect to such instruments deposited in the Reserve
Funds may be set forth in the Prospectus Supplement.
SERVICING OF THE LOAN ASSETS
Except as otherwise noted in the applicable Prospectus Supplement, the
description set forth below of the servicing of Loan Assets is applicable to
Loan Assets included in the Trust Property with respect to a Series of
Securities.
To the extent provided in the related Prospectus Supplement, the Loan
Assets included in the Trust Property for a Series of Securities will be
serviced by (i) the related Servicer as sole servicer, (ii) the related Master
Servicer as administrator or master servicer, (iii) one or more loan servicing
institutions as servicers or (iv) by another institution as master servicer. If
an institution other than the Servicer acts as the sole servicer or as the
master servicer for a Series, the Servicer may have no servicing obligations
with respect to such Series. Generally, the discussion in this section of the
Prospectus is applicable under circumstances when the Servicer is an affiliate
of the Seller or Issuer. If the Servicer is not an affiliate of the Seller or
Issuer, the discussion relating to the servicing of the Loan Assets as set forth
below may be modified or superseded by any discussion relating to the servicing
of the Loan Assets set forth in the Prospectus Supplement.
To the extent specified in the related Prospectus Supplement, the Loan
Assets will be serviced by one or more loan servicing institutions, which may
include the Servicer or a Subservicer, pursuant to a subservicing agreement
between each Subservicer and the Servicer (each, a "Subservicing Agreement"),
which may be entered into only with the prior written consent of the applicable
Trustee and the Administrator, if any.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
When a Mortgaged Property has been or is about to be conveyed by the
related borrower, the Servicer, on behalf of the Trustee, will generally, except
as specified below and to the extent it has knowledge of such conveyance or
prospective conveyance, enforce the rights of the Trustee as the mortgagee of
record to accelerate the maturity of the related Mortgage Loan under any
"due-on-sale" clause contained in the related Mortgage; provided, however, that
the Master Servicer, Servicer, or Subservicer, if any, shall not exercise any
such right if the "due-on-sale" clause, in the reasonable belief of the Master
Servicer, Servicer, or Subservicer, if any, is not enforceable under applicable
law. In such event or in the event the related Mortgage does not contain a
"due-on-sale" clause, the Master Servicer, Servicer, or Subservicer, if any,
shall enter into an assumption and modification Agreement with the person to
whom such property has been or is about to be conveyed, pursuant to which such
person becomes liable under such Mortgage and, unless prohibited by applicable
law or the mortgage documents, the related borrower remains liable thereon. The
Master Servicer, Servicer, or Subservicer, if any, is also authorized to enter
into a substitution of liability agreement with such purchaser, pursuant to
which the original borrower is released from liability and such purchaser is
substituted as borrower and becomes liable under the Mortgage.
In addition, in certain cases the Master Servicer, Servicer or Subservicer,
if any, may, in a manner consistent with its servicing practices, permit a
borrower who is selling his principal residence and purchasing a new one to
substitute the new Mortgaged Property as collateral for the related Mortgage
Loan, or may simply release its lien on the existing collateral, leaving the
related Mortgage Loan unsecured. In such event, the Master Servicer, Servicer or
Subservicer may require the borrower to make a partial prepayment in reduction
of the principal balance of the Mortgage Loan to the extent that the borrower
has received proceeds from the sale of the prior residence that will not be
applied to the purchase of the new residence.
REALIZATION UPON DEFAULTED LOAN ASSETS
With respect to any defaulted Loan Asset as to which no satisfactory
arrangements can be made for collection of delinquent payments or the cure of
any other event of default, the Master Servicer, Servicer, or Subservicer, if
any, will take such action as it shall deem to be in the best interest of the
Securityholders. Without limiting the generality of the preceding sentence, the
Master Servicer, Servicer, or Subservicer, if any, will, in accordance with the
servicing standard described above, (i) in the case of Title I Mortgage Loans
and Title I Contracts only, direct the Trustee (or any Administrator) to submit
an FHA Claim to the FHA, in accordance with FHA Regulations, or (ii) in the case
of Mortgage Loans and Contracts, take such other action as the Master Servicer,
Servicer, or Subservicer, if any, deems to be in the best interests of the
Securityholders, which, if no superior lien exists on the related Mortgaged
Property, could include a foreclosure upon such Mortgaged Property in the name
of the Trustee for the benefit of the Securityholders, provided such action is
economically justified. Typically, however, the Master Servicer, Servicer, or
Subservicer, if any, has chosen not to pursue foreclosures of defaulted loans
comparable to the Loan Assets due to the costs involved. In servicing mortgage
loans and contracts secured by junior liens in their portfolios, it will not be
the Master Servicer's, Servicer's or any Subservicer's practice to satisfy the
senior mortgage(s) at or prior to the foreclosure sale of the related Mortgaged
Property, or to advance funds to keep the senior mortgage(s) current. In
addition, if a defaulted Loan Asset (together with any senior lien indebtedness)
has a high loan-to-value ratio, then the Master Servicer, Servicer, or
Subservicer, if any, will be less likely to foreclose on the related Mortgaged
Property, even if the Master Servicer, Servicer, or Subservicer, has a
first-lien position for such defaulted Loan Asset. In the event an FHA Claim is
rejected by the FHA due to circumstances that constitute a breach of the
Transferor's representations and warranties in the applicable Sale and Servicing
Agreement or Pooling and Servicing Agreement, the Transferor will be required to
repurchase the related Title I Mortgage Loan or Title I Contract at the purchase
price and in the manner set forth in such Sale and Servicing Agreement or
Pooling and Servicing Agreement.
In connection with any collection activities or foreclosure, the Master
Servicer, Servicer, or Subservicer, if any, is required to exercise collection
and foreclosure procedures with the same degree of care and skill in its
exercise or use, as it would exercise or use under the circumstances in the
conduct of its own affairs.
WAIVERS AND DEFERMENTS OF CERTAIN PAYMENTS
Each Sale and Servicing Agreement and each Pooling and Servicing Agreement
will require the Master Servicer, Servicer, or Subservicer, if any, to make
reasonable efforts to collect all payments called for under the terms and
provisions of the Loan Assets. Consistent with the foregoing, the Servicer may
at its own discretion waive any late payment charge, assumption fee or any
penalty interest in connection with the payment of a Loan Asset or any other fee
or charge which the Servicer would be entitled to retain as servicing
compensation and may waive, vary or modify any term of any Loan Asset or consent
to the postponement of strict compliance with any such term or in any matter
grant indulgence to any borrower, subject to the limitations set forth in the
applicable Sale and Servicing Agreement or Pooling and Servicing Agreement and
the FHA Regulations, if applicable.
The Master Servicer, Servicer or Subservicer, as applicable, may permit a
borrower who is delinquent in payment but has established an ability to repay
the related Mortgage Loan to repay such delinquent amount in increments over
time. In such event, such borrower will be permitted to remain delinquent in
payment for an extended period of time.
As described under "Certain legal Aspects of the Loan
Assets-Foreclosure-Anti-Deficiency Legislation and Other Limitations on
Lenders," a court with federal bankruptcy jurisdiction may permit a debtor
through his or her Chapter 11 or Chapter 13 rehabilitative plan to cure a
default in respect of a Loan Asset by paying the delinquent amount over a period
of time. Such borrowers will be reported by the Master Servicer, Servicer or
Subservicer, as applicable, as being current in payment to the extent that they
are meeting the requirements of the applicable repayment plan.
The Master Servicer, Servicer or Subservicer may waive or vary the terms of
a Loan Asset, including reducing the interest rate or extending the term to
maturity, in order to obtain a reaffirmation of debt from a bankrupt borrower.
See "Description of the Trust Property--Modifications of Mortgage Loans and
Contracts."
SUBSERVICERS
The Servicer is permitted under the applicable Sale and Servicing Agreement
or Pooling and Servicing Agreement to enter into servicing arrangements from
time to time with subservicers (each, a "Subservicer") meeting the requirements
of such Sale and Servicing Agreement or Pooling and Servicing Agreement,
provided that the applicable Trustee gives written consent thereto.
Notwithstanding any subservicing arrangements, the Servicer shall not be
relieved of its obligations under the applicable Sale and Servicing Agreement or
Pooling and Servicing Agreement to the applicable Trustee and the
Securityholders, and the Servicer shall be obligated to the same extent and
under the same terms and conditions as if it alone were servicing and
administering the related Loan Assets.
REMOVAL AND RESIGNATION OF SERVICER
To the extent specified in the Prospectus Supplement, the applicable
Trustee may remove the Servicer upon the occurrence and continuation beyond the
applicable cure period of certain events described in the applicable Sale and
Servicing Agreement or Pooling and Servicing Agreement. To the extent specified
in the Prospectus Supplement, the Servicer will not be permitted to resign from
its obligations and duties except by mutual consent of the Servicer, the Seller,
the Issuer the applicable Trustee and any other persons so specified in the
applicable Sale and Servicing Agreement or Pooling and Servicing Agreement, or
upon the determination that the Servicer's duties are no longer permissible
under applicable law and such incapacity cannot be cured by the Servicer. No
such resignation shall become effective until a qualified successor has assumed
the Servicer's responsibilities and obligations. Upon removal or resignation of
the Servicer, a successor servicer will be appointed pursuant to the terms and
conditions set forth in the applicable Sale and Servicing Agreement or Pooling
and Servicing Agreement.
ADVANCES
To the extent specified in the Prospectus Supplement, neither the Servicer,
nor any Subservicer on behalf of the Servicer, shall have any obligation to
advance its own funds for any delinquent scheduled payments of principal or
interest on any Loan Asset or to satisfy or keep current the indebtedness
secured by any superior liens on the related Mortgaged Property. To the extent
specified in the Prospectus Supplement, no costs incurred by the Master
Servicer, Servicer or any Subservicer in respect of servicing advances shall,
for the purposes of payments or distributions to Securityholders, be added to
the amount owing under the related Loan Asset.
SERVICING PROCEDURES
To the extent specified in the related Prospectus Supplement, the Master
Servicer, Servicer and each Subservicer will service the Loan Assets pursuant to
written guidelines promulgated by the Seller, the Issuer or the Servicer. The
Servicer will exercise its best reasonable efforts to insure that any
Subservicers service the Loan Assets in compliance with such guidelines and in a
manner consistent with industry standards.
MORTGAGE LOANS. To the extent specified in the related Prospectus
Supplement, the Master Servicer, Servicer and Subservicer will be required to
service and administer the Mortgage Loans and will have full power and
authority, acting alone, to do any and all things in connection with such
servicing and administration which the Servicer may deem necessary or desirable
and consistent with the terms of the applicable Sale and Servicing Agreement or
Pooling and Servicing Agreement. The Master Servicer, Servicer or Subservicer,
if any, in servicing and administering the Mortgage Loans, will be required to
employ or cause to be employed procedures (including collection, foreclosure,
liquidation and REO Property management and liquidation procedures) and exercise
the same care that it customarily employs and exercises in servicing and
administering loans of the same type as the Mortgage Loans for its own account,
all in accordance with accepted servicing practices of prudent lending
institutions and servicers of loans of the same type as the Mortgage Loans and
giving due consideration to the Securityholders' reliance on the Servicer. With
respect to any Title I Mortgage Loan, the foregoing servicing standard also
shall include the requirement that the Servicer will and will cause any
Subservicer to, comply with FHA Regulations in servicing the Title I Mortgage
Loans so that the FHA Insurance remains in full force and effect with respect to
the Title I Mortgage Loans, except for good faith disputes relating to FHA
Regulations or such FHA Insurance, unless such disputes would result in the
termination or suspension of such FHA Insurance. The Master Servicer, Servicer
or Subservicer, if any, will be required to maintain the facilities, procedures
and experienced personnel necessary to comply with such servicing standard and
the duties of the Servicer set forth in the applicable Sale and Servicing
Agreement or Pooling and Servicing Agreement.
The Master Servicer, Servicer, or Subservicer, if any, will expend its own
funds to restore property securing a Mortgage Loan which has sustained uninsured
damage only if it determines that such restoration will increase the proceeds of
liquidation of the Mortgage Loan after the reimbursement to the Servicer of its
expenses and after the satisfaction of any senior liens.
With respect to Cooperative Loans, any prospective purchaser will generally
have to obtain the approval of the board of directors of the relevant
Cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. See "Certain Legal Aspects of the Loan
Assets -- General Legal Considerations -- Cooperative Loans". This approval is
usually based on the purchaser's income and net worth and numerous other
factors. Although the Cooperative's approval is unlikely to be unreasonably
withheld or delayed, the necessity of acquiring such approval could limit the
number of potential purchasers for those shares and otherwise limit the ability
to sell and realize the value of those shares.
In general, a "tenant-stockholder" (as defined in Code Section 216(b)(2))
of a corporation that qualifies as a "cooperative housing corporation" within
the meaning of Code Section 216(b)(1) is allowed a deduction for amounts paid or
accrued within his taxable year to the corporation representing his
proportionate share of certain interest expenses and certain real estate taxes
allowable as a deduction under Code Section 216(a) to the corporation under Code
Sections 163 and 164. In order for a corporation to qualify under Code Section
216(b)(1) for its taxable year in which such items are allowable as a deduction
to the corporation, such Code Section requires, among other things, that at
least 80% of the gross income of the corporation be derived from its
tenant-stockholders (as defined in Code Section 216(b)(2). By virtue of this
requirement, the status of a corporation for purposes of Code Section 216(b)(1)
must be determined on a year-to-year basis. Consequently, there can be no
assurance that Cooperatives relating to the Cooperative Loans will qualify under
such Code Section for any particular year. In the event that such a Cooperative
fails to qualify for one or more years, the value of the collateral securing any
related Cooperative Loans could be significantly impaired because no deduction
would be allowable to tenant-stockholders under Code Section 216(a) with respect
to those years. In view of the significance of the tax benefits accorded
tenant-stockholders of a corporation that qualifies under Code Section
216(b)(1), the likelihood that such a failure would be permitted to continue
over a period of years appears remote.
So long as it acts as servicer of the Mortgage Loans, the Servicer will be
required to maintain certain insurance covering errors and omissions in the
performance of its obligations as servicer and certain fidelity bond coverage
ensuring against losses through wrongdoing of its officers, employees and
agents.
CONTRACTS. With respect to Trust Property that includes Contracts, pursuant
to the applicable Sale and Servicing Agreement or Pooling and Servicing
Agreement, the Servicer will service and administer the Contracts assigned to
the Trustee as more fully set forth below. The Servicer, either directly or
through Subservicers subject to general supervision by the Servicer, will
perform diligently all services and duties specified in each Sale and Servicing
Agreement or Pooling and Servicing Agreement in the same manner as prudent
lending institutions of property improvement and/or manufactured housing
installment sales contracts of the same type as the Contracts in those
jurisdictions where the related borrowers are located. The Servicer will monitor
the performance of each Subservicer, if any, and, unless the related Prospectus
Supplement states otherwise, will remain liable for the servicing of the
Contracts in accordance with the terms of the applicable Sale and Servicing
Agreement or Pooling and Servicing Agreement. The duties to be performed by the
Servicer or the Subservicer, if any, will include collection and remittance of
principal and interest payments, collection of insurance claims and, if
necessary, repossession.
ADMINISTRATION AND SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Master Servicer or Servicer, and each Subservicer, if any, will be
entitled to a monthly fee as specified in the related Prospectus Supplement. In
addition to the primary compensation, the Master Servicer, each Servicer or
Subservicer, if any, may retain all assumption underwriting fees and late
payment charges, to the extent collected from borrowers, and may be entitled to
retain investment income on amounts in certain accounts.
The Servicer and any Subservicer will be entitled to reimbursement for
certain expenses incurred by it in connection with the liquidation of defaulted
Loan Assets. No loss will be suffered on the Securities by reason of such
expenses to the extent claims for such expenses are paid directly under any
applicable Mortgage Pool Insurance Policy, any primary mortgage insurance
policy, or from any other forms of Credit Enhancement. In the event, however,
that the defaulted Mortgage Loans are not covered by a Mortgage Pool Insurance
Policy, any primary mortgage insurance policy, or another form of Credit
Enhancement, or claims are either not made or not paid under such policies or
Credit Enhancement, or if coverage thereunder has ceased, a loss will occur on
the Securities of the affected Series to the extent that the proceeds from the
liquidation of a defaulted Loan Asset, after reimbursement of the Servicer's and
the Subservicer's expenses, are less than the then outstanding principal balance
of such defaulted Loan Asset.
To the extent specified in the related Prospectus Supplement, the Master
Servicer or Servicer will be responsible for payment of certain fees and
expenses of the related Trust.
THE SELLER AND THE ISSUER
FIRSTPLUS Investment Corporation ("FIC"), or a Trust formed by FIC for such
purpose, will act as Issuer with respect to each Series of Securities, and with
respect to each Series of Securities in which a Trust is the Issuer, FIC will
act as Seller.
FIC, a Nevada corporation, was incorporated in 1995 as a limited purpose
finance corporation. All of the outstanding capital stock of FIC is owned by
FIRSTPLUS Financial Group, Inc., the common stock of which is traded on the New
York Stock Exchange. The Seller maintains its principal office at 3773 Howard
Hughes Parkway, Suite 300N, Las Vegas, Nevada 89109, and its telephone number is
(702) 892-3772.
As a limited purpose finance corporation under the Rating Agency
guidelines, the business operations of FIC will be limited to functions relating
to the issuance of one or more Series of Securities or similar series of
asset-backed or mortgage-backed securities, the acquisition and resale of Loan
Assets and other incidental activities related thereto. FIC does not have, and
is not expected in the future to have, any significant assets. If FIC were
required to repurchase a Loan Asset included in the Trust Property for a Series,
its only sources of funds to make such repurchase would be funds obtained from
the enforcement of a corresponding obligation, if any, on the part of the
Transferor of such Loan Asset or the related Servicer, as the case may be, or
from a Reserve Fund, if any, established to provide funds for such repurchases.
Neither FIC nor any of its affiliates will insure or guarantee the
Securities of any Series or the Loan Assets backing any such Series. See "Risk
Factors -- Limited Assets."
THE SERVICER AND THE TRANSFEROR
To the extent specified in the related Prospectus Supplement, the Servicer
with respect to any Series of Securities may be FIRSTPLUS FINANCIAL, INC.
("FFI"), an affiliate of FIC. In addition, to the extent specified in the
related Prospectus Supplement for a Series, the related Transferor of the Loan
Assets to the Seller or the Issuer, as applicable, for such Series may also be
FFI. See "Description of the Trust Property -- General".
The delinquency and loss experience of FFI for the periods indicated is set
forth below. In the event that FFI is not the Servicer with respect to a Series,
or if an entity other than FFI acts as Servicer with respect to a Series, the
delinquency experience of such Servicer will be set forth in the related
Prospectus Supplement.
<TABLE>
DELINQUENCY EXPERIENCE
<CAPTION>
As of
-------------------------------------------------------
Dec. 31 Mar. 31 June 30 Sept. 30
1994 1995 1995 1995
------- ------- ------- --------
<S> <C> <C> <C> <C>
DELINQUENCY DATA:
Delinquencies in Serviced Loan Portfolio
(at period end) (1):
31-60 days................................................. 3.7% 2.3% 1.7% 1.8%
61-90 days................................................. 1.4 1.0 0.7 0.7
91 days and over........................................... 3.2 3.3 1.9 2.2
------- ------- ------- --------
Total 8.3% 6.6% 4.3% 4.7%
======= ======= ======= ========
Serviced Loan Portfolio
(at period end) (dollars in thousands)..................... $60,850 $70,410 $177,901 $238,583
.........As of
Dec. 31 Mar. 31 June 30 Sept. 30
1995 1996 1996 1996
------- ------- ------- --------
DELINQUENCY DATA:
Delinquencies in Serviced Loan Portfolio (at period end) (1):
31-60 days................................................. 1.5% 1.4% 1.1% 0.8%
61-90 days................................................. 0.5 0.6 0.5 0.4
91 days and over........................................... 2.1 1.9 1.9 1.6
------- ------- ------- --------
Total 4.1% 3.9% 3.5% 2.8%
======= ======= ======= ========
Serviced Loan Portfolio
(at period end) (dollars in thousands)..................... $387,343 $504,623 $750,529 $1,267,147
</TABLE>
<TABLE>
<CAPTION>
As of
------------------------------------------
Dec. 31 Mar. 31 June. 30
1996 1997 1997
------- ------- --------
<S> <C> <C> <C>
DELINQUENCY DATA:
Delinquencies in Serviced Loan Portfolio
(at period end) (1):
31-60 days.......................................................... 1.0% 0.9% 0.78%
61-90 days.......................................................... 0.4 0.4 0.37
91 days and over.................................................... 1.3 1.1 1.06
------- ------- --------
Total 2.7% 2.4% 2.21%
======= ======= ========
Serviced Loan Portfolio
(at period end) (dollars in thousands).............................. $1,882,187 $2,713,108 $3,612,241
As of
------------------------------------------
Sept. 30 Dec. 31 Mar. 31
1997 1997 1998
------- ------- --------
DELINQUENCY DATA:
Delinquencies in Serviced Loan Portfolio (at period end) (1):
31-60 days........................................................... 0.90% 0.97% 0.84%
61-90 days........................................................... 0.43 0.45 0.35
91 days and over..................................................... 1.18 1.19 1.09
------- ------- --------
Total 2.51% 2.61% 2.29%
======= ======= ========
Serviced Loan Portfolio
(at period end) (dollars in thousands)............................... $4,657,669 $5,605,433 $6,402,383
Year Ended
-------------------------------------------
Dec. 31 Dec. 31 Sept. 30
1994 1995 1996
------- ------- --------
DEFAULT DATA:
Defaults as a percentage of the average
Serviced Loan Portfolio(2)............................................ 2.64% 0.69% 1.29%
Three Months Ended
-------------------------------------------
Dec. 31 Mar. 31 June 30
1996 1997 1997
------- ------- --------
DEFAULT DATA:
Defaults as a percentage of the average
Serviced Loan Portfolio(2)............................................ 0.35% 0.31% 0.35%
Three Months Ended
---------------------------------------------
Sept. 30 Dec. 31 Mar. 31
1997 1997 1998
------- ------- --------
DEFAULT DATA:
Defaults as a percentage of the average
Serviced Loan Portfolio(2)............................................ 0.39% 0.45% 0.51%
</TABLE>
- -----------------------------------
(1) Delinquencies (as a percentage of the total serviced loan portfolio
balance) typically increase in November and December of each calendar
year.
(2) The average serviced loan portfolio is calculated by adding the
beginning and ending balances for the period presented and dividing the
sum by two.
BECAUSE THE SUBSTANTIAL MAJORITY OF FFI'S SERVICED LOAN PORTFOLIO CONSISTS
OF LOANS THAT HAD COMBINED LOAN-TO-VALUE RATIOS AT ORIGINATION NEAR OR IN EXCESS
OF 100%, LOSSES SUSTAINED FROM DEFAULTED LOANS ARE LIKELY TO MORE SEVERE THAN IN
THE CASE OF OTHER LOANS, AND WILL FREQUENTLY BE TOTAL LOSSES. PROSPECTIVE
INVESTORS SHOULD GENERALLY ASSUME THAT THE RATE OF NET LOSSES ON FFI'S SERVICED
LOAN PORTFOLIO WILL BE SUBSTANTIALLY THE SAME AS THE RATE OF DEFAULTS.
The preceding tables generally indicate that FFI experienced declining
delinquency rates on its serviced loan portfolio as a whole before delinquency
rates began increasing in the second half of 1997. There can be no assurance
that such rates will not continue to increase. THE RELATIVELY LOW DELINQUENCY
RATES ON THE SERVICED LOAN PORTFOLIO IN RECENT PERIODS ARE PRINCIPALLY
ATTRIBUTABLE TO THE INCREASED VOLUME OF LOANS ORIGINATED BY FFI. FFI CALCULATES
ITS DELINQUENCY AND DEFAULT RATES BY DIVIDING THE AMOUNT OF DELINQUENT OR
DEFAULTED LOANS IN ITS SERVICED LOAN PORTFOLIO BY THE TOTAL DOLLAR AMOUNT OF THE
SERVICED LOAN PORTFOLIO ON SUCH DATE. BECAUSE FFI AND ITS AFFILIATES ARE
ORIGINATING HIGHER VOLUMES OF NEW LOANS THAT, DUE TO THEIR LACK OF SEASONING,
TEND TO HAVE LOWER DELINQUENCY AND DEFAULT RATES, FFI'S OVERALL DELINQUENCY AND
DEFAULT RATES HAVE BEEN LOWER IN RECENT PERIODS THAN IN EARLIER PERIODS.
Because delinquencies and losses typically occur months or years after a
loan is originated, data relating to delinquencies and losses as a percentage of
the current portfolio can understate the risk of future delinquencies, losses or
foreclosures. There is no assurance that the delinquency and foreclosure
experience with respect to any of the Loan Assets or with respect to any pool of
Loan Assets will be comparable to the experience reflected above for assets
originated and serviced by FFI or its affiliates. Because certain Loan Assets
may have been underwritten pursuant to standards that rely primarily on the
creditworthiness of the related mortgagor rather than the value of the related
Mortgaged Property, the actual rates of delinquencies, foreclosures and losses
on such Loan Assets, particularly in periods during which the value of the
related Mortgage Properties has declined, could be higher than those
historically experienced by the mortgage lending industry in general. In
addition, the rate of delinquencies, foreclosures and losses with respect to the
Loan Assets will also be affected by, among other things, interest rate
fluctuations and general and regional economic conditions. See "Risk Factors --
Certain Factors Affecting Delinquencies, Foreclosures and Losses on Loan
Assets".
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following summary describes certain terms of each Sale and Servicing
Agreement or Pooling and Servicing Agreement pursuant to which an Issuer will
purchase Loan Assets from the Seller or Transferor, as applicable, and the
Servicer will agree to service such Loan Assets, each Trust Agreement (in the
case of a grantor trust, the Pooling and Servicing Agreement) pursuant to which
a Trust will be created and Securities will be issued and each Administration
Agreement pursuant to which FFI will undertake certain administrative duties
with respect to a Trust that issues Notes (collectively, the "Transfer and
Servicing Agreements"). Forms of the Transfer and Servicing Agreements have been
filed as exhibits to the Registration Statement of which this Prospectus forms a
part. This summary does not purport to be complete and is subject to, and
qualified in its entirety by reference to, all the provisions of the Transfer
and Servicing Agreements.
SALE AND ASSIGNMENT OF LOAN ASSETS
On or prior to the Closing Date specified with respect to any given Series
of Securities in the related Prospectus Supplement (the "Closing Date"), the
Transferor will sell and assign to the Seller or Issuer without recourse, its
entire interest in the Loan Assets comprising the related Loan Asset Pool,
together with all principal and interest on such Loan Assets (subject to
exclusions or adjustments, specified in the related Prospectus Supplement, on or
with respect to such Loan Assets on or after the Cut-off Date), other than
principal and interest due and payable in respect of such Loan Assets on or
before the date specified in the related Prospectus Supplement. On the Closing
Date, the Seller or Issuer will transfer and assign to the applicable Trustee,
without recourse, pursuant to a Sale and Servicing Agreement, a Pooling and
Servicing Agreement or an Indenture, as applicable, its entire interest in the
Loan Assets comprising the related Loan Asset Pool, together with all principal
and interest on such Loan Assets (subject to exclusions or adjustments specified
in the related Prospectus Supplement, on or with respect to such Loan Assets on
or after the Cut-off Date), other than principal and interest due and payable in
respect of such Loan Assets on or before the date specified in the related
Prospectus Supplement. Each such Loan Asset will be identified in a schedule
appearing as an exhibit to such Sale and Servicing Agreement or such Pooling and
Servicing Agreement (a "Schedule of Loan Assets"). The applicable Trustee will,
concurrently with such transfer and assignment, execute and deliver the related
Securities. Unless otherwise provided in the related Prospectus Supplement, the
net proceeds received from the sale of the Securities of a given Series will be
applied to the purchase of the related Loan Assets from the Seller or Transferor
and, to the extent specified in the related Prospectus Supplement, to provide
for the funding of the applicable Credit Enhancement.
In addition, as to each Loan Asset that is a Mortgage Loan, the Seller or
Issuer, as applicable, will deliver to the applicable Trustee or its custodian,
as specified in the related Prospectus Supplement, the related Mortgage Note and
Mortgage, any assumption and modification agreement, an assignment of the
Mortgage in recordable form, evidence of title insurance and, if applicable, the
certificate of private mortgage insurance. In instances where recorded documents
cannot be delivered due to delays in connection with recording, the Seller or
Issuer, as applicable, may deliver copies thereof and deliver the original
recorded documents promptly upon receipt.
The Transferor will not be required to record assignments of the Mortgages
to the applicable Trustee in the real property records of certain states. The
Transferor, in its capacity as the Servicer, will retain record title to such
Mortgages on behalf of the applicable Trustee and the holders of Securities of
the related Series. If the Transferor or the Seller were to sell, assign,
satisfy or discharge any Mortgage Loan prior to recording the related assignment
in favor of the applicable Trustee, the other parties to such sale, assignment,
satisfaction or discharge may have rights superior to those of the applicable
Trustee. In some states, in the absence of such recordation of the assignments
of the Mortgages, the transfer to the applicable Trustee of the Mortgage Loans
may not be effective against certain creditors or purchasers from the Transferor
or a trustee in bankruptcy of the Transferor.
With respect to each Loan Asset that is a Cooperative Loan, the Seller or
Issuer will cause to be delivered to the applicable Trustee or its custodian, as
specified in the related Prospectus Supplement, the related original Cooperative
note endorsed to the order of such Trustee, the original security agreement, the
proprietary lease or occupancy agreement, the recognition agreement, an executed
financing agreement and the relevant stock certificate and related blank stock
powers. The Seller or Issuer will file in the appropriate office an assignment
and a financing statement evidencing such Trustee's security interest in each
Cooperative Loan.
With respect to each Loan Asset that is a Contract for a Manufactured Home,
the Seller or Issuer will deliver or cause to be delivered to the applicable
Trustee, the original Contract and copies of documents and instruments related
to each Contract and the security interest in the Manufactured Home securing
each Contract. To give notice of the right, title and interest of the
Securityholders to the Contracts, the Seller or Issuer will cause a UCC-1
financing statement to be filed identifying such Trustee as the secured party
and identifying all Contracts as collateral. To the extent specified in the
related Prospectus Supplement, the Contracts will not be stamped or otherwise
marked to reflect their assignment from the Seller or Issuer to such Trustee.
Therefore, if a subsequent purchaser were able to take physical possession of
the Contracts without notice of such assignment, the interest of the holders of
the Securities of the applicable Series in the Contracts could be defeated. See
"Certain Legal Aspects of the Loan Assets."
To the extent specified in the related Prospectus Supplement, in the
applicable Sale and Servicing Agreement, Pooling and Servicing Agreement or
Indenture, as applicable, the Seller or Issuer generally will represent and
warrant to the applicable Trustee, among other things, that (i) the information
with respect to each Loan Asset set forth in the Schedule of Loan Assets
attached thereto is true and correct in all material respects; (ii) at the date
of initial issuance of the Securities, the Seller or Issuer, as applicable, has
good and marketable title to the Loan Assets included in the Trust Property and
such other items comprising the corpus of the Trust Property are free and clear
of any lien, mortgage, pledge, charge, security interest or other encumbrance;
(iii) at the date of initial issuance of the Securities, no payment in respect
of a Loan Asset is 30 or more days delinquent and there are no delinquent tax or
assessment liens against the related Mortgaged Property, if any; and (iv) at
origination, each Mortgage Loan complied in all material respects with
applicable state and federal laws, including, without limitation, consumer,
usury, truth-in-lending, consumer credit protection, equal credit opportunity
and disclosure laws and with respect to any Title I Mortgage Loans, the FHA
Regulations.
In the event that the Seller or Issuer has acquired the Loan Assets for a
Series, if specified in the related Prospectus Supplement, the Seller or Issuer,
as applicable, may, in lieu of making the representations set forth in the
preceding paragraph, cause the entity from which such Loan Assets were acquired
to make such representations (other than those regarding such Seller's or
Issuer's title to the Loan Assets, which will in all events be made by such
Seller or Issuer, as applicable), in the agreement pursuant to which such Loan
Assets are acquired, or if such entity is acting as Servicer, in the applicable
Sale and Servicing Agreement or Pooling and Servicing Agreement, or if such
entity is acting as a Subservicer, in its Subservicing Agreement. In such event,
such representations, and the Seller's rights against such entity in the event
of a breach thereof, will be assigned to the Trustee for the benefit of the
Securityholders of such Series.
CONVEYANCE OF SUBSEQUENT LOAN ASSETS
With respect to a Series of Securities for which a Pre-Funding Arrangement
is provided, in connection with any conveyance of Subsequent Loan Assets to the
Issuer, as applicable, after the issuance of such Series, the related Sale and
Servicing Agreement or Pooling and Servicing Agreement will require the
Transferor and Seller to satisfy the following conditions, among others: (i)
each Subsequent Loan Asset purchased after the Closing Date must satisfy the
representations and warranties contained in the subsequent transfer agreement to
be entered into by the Transferor, the applicable Trustee and the Seller or
Issuer (the "Subsequent Transfer Agreement") and in the related Sale and
Servicing Agreement or Pooling and Servicing Agreement; (ii) the Transferor will
not select such Subsequent Loan Assets in a manner that it believes is adverse
to the interests of the Securityholders; (iii) as of the related Cut-off date,
all of the Loan Assets in the Loan Asset Pool at that time, including the
Subsequent Loan Assets purchased after the closing date will satisfy the
criteria set forth in the related Sale and Servicing Agreement or Pooling and
Servicing Agreement; (iv) the Subsequent Loan Assets will have been approved by
any third party provider of Credit Enhancement, if applicable; and (v) prior to
the purchase of each Subsequent Loan Asset the applicable Trustee will perform
an initial review of certain related loan file documentation for such Loan Asset
and issue an initial certification for which the required documentation in such
loan file has been received with respect to each such Subsequent Loan Asset. The
Subsequent Loan Assets, on an aggregate basis, will have characteristics similar
to the characteristics of the pool of Initial Loan Assets as described in the
related Prospectus Supplement. Each acquisition of any Subsequent Loan Assets
will be subject to review by any third party provider of Credit Enhancement, if
applicable, and the Rating Agencies.
REPURCHASE OR SUBSTITUTION OF LOAN ASSETS
The Trustee (or its custodian as specified in the related Prospectus
Supplement) will review the documents delivered to it with respect to the Loan
Assets included in the related Trust Property. To the extent specified in the
related Prospectus Supplement, if any document is not delivered or is found to
be defective in any material respect and the Transferor, Seller or Issuer cannot
deliver such document or cure such defect within 60 days after notice thereof
(which the applicable Trustee will undertake to give within 45 days of the
delivery of such documents), and if any other party obligated to deliver such
document or cure such defect has not done so and has not substituted or
repurchased the affected Loan Asset, then the Transferor, Seller or Issuer, as
applicable, will, not later than the Determination Date next succeeding the end
of such 60-day period (a) if provided in the Prospectus Supplement remove the
affected Loan Asset from the Trust Property and substitute one or more other
Loan Assets therefor or (b) repurchase, or cause the Transferor to repurchase
the Loan Asset for a price equal to 100% of its principal balance plus interest
thereon as of the date specified in the related Prospectus Supplement, plus the
amount of unreimbursed servicing advances made by the Servicer or any
Subservicer with respect to such Loan Asset. The Transferor, Seller or Issuer,
as applicable, will be similarly obligated to repurchase any Loan Asset as to
which a breach of a representation or warranty of such party materially and
adversely affects the interests of Securityholders in such Loan Asset. To the
extent specified in the related Prospectus Supplement, such purchase price will
be deposited in the Collection Account on such Determination Date and such
repurchase and, if applicable, substitution obligation will constitute the sole
remedy available to holders of the Securities of the applicable Series or the
related Trustee against the Seller or the Issuer for a material defect in a
document relating to a Loan Asset.
If the Prospectus Supplement for a Series of Securities so provides, then
in lieu of agreeing to repurchase or substitute Loan Assets as described above,
the Seller or the Issuer may obtain such an agreement from the entity which sold
such Loan Assets to the Seller or Issuer, as applicable, which agreement will be
assigned to the applicable Trustee for the benefit of the holders of the
Securities of such Series.
EVIDENCE AS TO COMPLIANCE
The related Sale and Servicing Agreement or Pooling and Servicing Agreement
will provide that on or before a specified date after the end of each of the
Servicer's fiscal years elapsing during the term of its appointment, beginning
with the first fiscal year ending after the Closing Date, the Servicer, at its
expense, will furnish to the applicable Trustee and certain other Persons (i) an
opinion by a firm of independent certified public accountants on the financial
position of the Servicer at the end of the relevant fiscal year and the results
of operations and changes in financial position of the Servicer for such year
then ended on the basis of an examination conducted in accordance with generally
accepted auditing standards, and (ii) if the Servicer is then servicing any
Mortgage Loans, a statement from such independent certified public accountants
to the effect that based on an examination of certain specified documents and
records relating to the servicing of the Servicer's mortgage loan portfolio
conducted substantially in compliance with the audit program for mortgages
serviced for the United States Department of Housing and Urban Development
Mortgage Audit Standards, or the Uniform Single Audit Program for Mortgage
Bankers (the "Applicable Accounting Standards"), such firm is of the opinion
that such servicing has been conducted in compliance with the Applicable
Accounting Standards except for (a) such exceptions as such firm shall believe
to be immaterial and (b) such other exceptions as shall be set forth in such
statement. LIST OF SECURITYHOLDERS
Upon written request of the applicable Trustee, the Registrar for a Series
of Securities will provide to the Trustee, within fifteen days after receipt of
such request, a list of the names and addresses of all holders of record of the
Securities of such Series as of the most recent Record Date for payment or
distributions to holders of Securities of that Series. Upon written request of
three or more holders of record of a Series of Securities for purposes of
communicating with other holders with respect to their rights under the
applicable Indenture, Trust Agreement or Pooling and Servicing Agreement for
such Series, the applicable Trustee will afford such holders access during
business hours to the most recent list of holders of such Series held by such
Trustee. With respect to Book Entry Securities, the only named holder on the
Certificate Register will be the Clearing Agency.
No Indenture, Trust Agreement or Pooling and Servicing Agreement will
provide for the holding of any annual or other meetings of holders of
Securities.
ADMINISTRATION OF THE DISTRIBUTION ACCOUNT
The applicable Sale and Servicing Agreement or Pooling and Servicing
Agreement with respect to a Series will require the Servicer to maintain a
Distribution Account that is either: (i) an account maintained with a depository
institution the debt obligations of which (or, in the case of a depository
institution which is a part of a holding company structure, the debt obligations
of the holding company of which) have a long-term or short-term rating
acceptable to each rating agency that rated the Securities; (ii) an account or
accounts the deposits in which are fully insured by either the Bank Insurance
Fund (the "BIF"), the Federal Deposit Insurance Corporation (the "FDIC") or the
Savings Association Insurance Fund (as successor to the Federal Savings and Loan
Insurance Corporation) ("SAIF") of the FDIC; (iii) a trust account (which shall
be a "segregated trust account") maintained with the corporate trust department
of a federal or state chartered depository institution or trust company with
trust powers and acting in its fiduciary capacity for the benefit of the
applicable Trustee which depository institution or trust company will be
required to have capital and surplus of not less than the amount specified in
the related Indenture, Trust Agreement, Sale and Servicing Agreement or Pooling
and Servicing Agreement; or (iv) an account that will not cause any rating
agency rating the Securities of such Series to downgrade or withdraw its
then-current rating assigned to the Securities, as evidenced in writing by such
rating agency. The instruments in which amounts in the Distribution Account may
be invested are limited to Permitted Investments. To the extent specified in the
related Prospectus Supplement, a Distribution Account may be maintained as an
interest bearing account, or the funds held therein may be invested pending each
succeeding Distribution Date in Permitted Investments. To the extent specified
in the related Prospectus Supplement, the Seller, the Issuer or the Trustee will
be entitled to receive any such interest or other income earned on funds in the
Distribution Account as additional compensation. To the extent specified in the
related Prospectus Supplement, the following payments and collections received
subsequent to the cut-off date will be deposited in the Distribution Account:
(i) all payments on account of scheduled principal;
(ii) all payments on account of interest accruing and collected on and
after the date specified in the related Prospectus Supplement, subject to
exclusions or adjustments described in such Prospectus Supplement;
(iii) all Liquidation Proceeds net of certain amounts reimbursed to the
Subservicers or the Servicer, as described in the related Sale and Servicing
Agreement or Pooling and Servicing Agreement;
(iv) all Insurance Proceeds;
(v) all proceeds of any Loan Asset or property acquired in respect
thereof repurchased by the Servicer, the Seller or the Transferor or otherwise
as described herein;
(vi) all amounts, if any, required to be transferred to the
Distribution Account from any Credit Enhancement for the related Series; and
(vii) all other amounts required to be deposited in the Distribution
Account pursuant to the related Indenture, Trust Agreement, Sale and Servicing
Agreement or Pooling and Servicing Agreement.
REPORTS TO SECURITYHOLDERS
Concurrently with each payment or distribution on the Securities of a
Series, to the extent specified in the related Prospectus Supplement, the
applicable Trustee will furnish to the related Securityholders a statement
generally setting forth, to the extent applicable to such Series, among other
things:
(i) the aggregate amount of such distribution allocable to principal,
separately identifying the amount allocable to each Class;
(ii) the amount of such distribution allocable to interest, separately
identifying the amount allocable to each Class;
(iii) the aggregate principal balance of each Class of the Securities
after giving effect to payments and distributions on such Distribution Date;
(iv) if applicable, the aggregate principal balance of any Class of
Securities which are Compound Interest Securities after giving effect to any
increase in such principal balance that results from the accrual of interest
that is not yet distributable thereon;
(v) if applicable, the amount otherwise distributable to holders of
any Class of Securities that were distributed to holders of other Classes of
Securities;
(vi) if any Class of Securities has priority in the right to receive
Principal Prepayments, the amount of Principal Prepayments received by the
related Trustee in respect of the related Loan Assets;
(vii) certain performance information regarding the Loan Assets,
including delinquency and foreclosure information, specified in the related Sale
and Servicing Agreement or Pooling and Servicing Agreement;
(viii) the amount of coverage then remaining under any Credit
Enhancement; and
(ix) all other information required to be provided pursuant to the
related Indenture, Trust Agreement, Sale and Servicing Agreement or Pooling and
Servicing Agreement.
The Servicer or the applicable Trustee will also furnish annually customary
information deemed necessary for holders of such Securities to prepare their tax
returns.
EVENTS OF DEFAULT
"Events of Default" under the applicable Sale and Servicing Agreement or
Pooling and Servicing Agreement with respect to a Series will consist of (i) any
failure by the Servicer to duly observe or perform in any material respect any
of its covenants or agreements in such Sale and Servicing Agreement or such
Pooling and Servicing Agreement materially affecting the rights of holders of
the Securities of such Series which continues unremedied for 60 days after the
giving of written notice of such failure to the Servicer by the applicable
Trustee or to the Servicer or the applicable Trustee by the holders of such
Securities evidencing interests aggregating not less than 25% of the then
outstanding principal balance of the affected Class of Securities; and (ii)
certain events of insolvency, readjustment of debt, marshaling of assets and
liabilities or similar proceedings and certain actions by the Servicer
indicating its insolvency, reorganization or inability to pay its obligations.
RIGHTS UPON EVENT OF DEFAULT
As long as an Event of Default under a Sale and Servicing Agreement or
Pooling and Servicing Agreement remains unremedied by the Servicer, the
applicable Trustee, or holders of Securities of each Class affected thereby
evidencing, as to each such Class, interests aggregating not less than 51% of
the then outstanding principal balance of such Class, may terminate all of the
rights and obligations of the Servicer under the applicable Sale and Servicing
Agreement or Pooling and Servicing Agreement, whereupon the applicable Trustee,
or a new Servicer appointed pursuant to such Sale and Servicing Agreement or
such Pooling and Servicing Agreement, will succeed to all the responsibilities,
duties and liabilities of the Servicer under such Sale and Servicing Agreement
or such Pooling and Servicing Agreement and will be entitled to similar
compensation arrangements. Notwithstanding its termination as Servicer, the
Servicer will be entitled to receive amounts earned by it under the applicable
Sale and Servicing Agreement or Pooling and Servicing Agreement prior to such
termination. If at the time of any such termination the Servicer is also
servicing as the Administrator, the Servicer's status as Administrator will be
simultaneously terminated by the Trustee and the Servicer's responsibilities as
such shall be transferred to the successor servicer, if such person is then
qualified to so act), or to another successor Administrator retained by the
applicable Trustee, or to the applicable Trustee itself if a successor
Administrator cannot be retained in a timely manner. To the extent provided in
the related Prospectus Supplement, unless and until a successor servicer is
appointed, the applicable Trustee will be required to fulfill the duties of the
Servicer.
No Securityholder will have any right under the applicable Sale and
Servicing Agreement or Pooling and Servicing Agreement to institute any
proceeding with respect to such Sale and Servicing Agreement or such Pooling and
Servicing Agreement, unless such holder previously has given to the applicable
Trustee written notice of default and unless the holders of Securities as
specified in the applicable Sale and Servicing Agreement or Pooling and
Servicing Agreement have made written request to the applicable Trustee to
institute such proceeding in its own name as trustee thereunder and have offered
to the applicable Trustee reasonable indemnity and the Trustee for 60 days has
neglected or refused to institute any such proceedings. However, no Trustee will
be under any obligation to exercise any of the trusts or powers vested in it by
the applicable Indenture, Trust Agreement or Pooling and Servicing Agreement or
to make any investigation of matters arising thereunder or to institute, conduct
or defend any litigation thereunder or in relation thereto at the request, order
or direction of any of the Securityholders, unless such Securityholders have
offered to such Trustee reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred therein or thereby.
AMENDMENT
Each of the Sale and Servicing Agreement with respect to a Series and the
Pooling and Servicing Agreement with respect to a Series may be amended by the
Issuer, or the Seller, as applicable, the Servicer and the applicable Trustee
without the consent of the Securityholders of such Series, to cure any error or
ambiguity, to correct or supplement any provision therein which may be defective
or inconsistent with any other provision therein or to add any other provisions
with respect to matters or questions arising under such Sale and Servicing
Agreement or such Pooling and Servicing Agreement provided that such action will
not adversely affect in any material respect the interests of any
Securityholders of such Series. An amendment described above shall not be deemed
to adversely affect in any material respect the interests of the Securityholders
of a Series if either (a) an opinion of counsel satisfactory to the applicable
Trustee is obtained to such effect, or (b) the person requesting the amendment
obtains a letter from each of the rating agencies then rating the Securities of
that Series to the effect that the amendment, if made, would not result in a
downgrading or withdrawal of the rating then assigned by it to such Securities.
To the extent specified in the Prospectus Supplement, each of the Sale and
Servicing Agreement with respect to a Series and the Pooling and Servicing
Agreement with respect to a Series may also be amended by the Issuer, or the
Seller, as applicable, the Servicer, and the applicable Trustee with the consent
of the Securityholders evidencing interests aggregating in excess of 50% of the
then outstanding principal balance of the Securities of the applicable Series
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of such Sale and Servicing Agreement or such
Pooling and Servicing Agreement or of modifying in any manner the rights of
Securityholders of that Series; provided, however, that no such amendment may
(i) reduce in any manner the amount of, or delay the timing of, collections of
payments received on the related Loan Assets or distributions which are required
to be made on any Security without the consent of the holder of such Security,
(ii) adversely affect in any material respect the interests of the holders of
any Class of Securities in any manner other than as described in clause (i),
without the consent of the holders of Securities evidencing 100% of the then
outstanding principal balance of such Class or (iii) reduce the aforesaid
percentage of Securities of any Class required to consent to any such amendment,
without the consent of the holders of Securities evidencing 100% of the then
outstanding principal balance of such Class.
CERTAIN LEGAL ASPECTS OF THE LOAN ASSETS
The following discussion contains summaries of certain legal aspects of the
Loan Assets which are general in nature. Because such legal aspects are governed
primarily by applicable state law (which laws may differ substantially), the
summaries do not purport to be complete nor to reflect the laws of any
particular state, nor to encompass the laws of all states in which the security
for the Loan Assets is situated. The summaries are qualified in their entirety
by reference to the applicable federal and state laws governing the Loan Assets.
In addition, the following discussion also contains a summary of the Title
I Program, which may be applicable to certain of the Loan Assets. With respect
to each Series for which the related Trust Property includes Contracts, the
related Prospectus Supplement will contain a discussion of certain legal aspects
of manufactured housing contracts.
GENERAL LEGAL CONSIDERATIONS
Applicable state laws generally regulate interest rates and other charges
that may be assessed on borrowers, require certain disclosures to borrowers, and
may require licensing of the Transferor, the Seller, the Issuer, the Trustee,
the Administrator, the Servicer and any Subservicer. In addition, most states
have other laws, public policies and general principles of equity relating to
the protection of consumers and the prevention of unfair and deceptive practices
which may apply to the origination, servicing and collection of the Loan Assets.
The Loan Assets may also be subject to federal laws, including: (i) the
federal Truth-in-Lending Act and Regulation Z promulgated thereunder, which
require certain disclosures to the borrowers regarding the terms of the Loan
Assets; (ii) the Real Estate Settlement Procedures Act and Regulation X
promulgated thereunder, which require certain disclosures to the borrowers
regarding the settlement and servicing of the Mortgage Loans; (iii) the Equal
Credit Opportunity Act and Regulation B promulgated thereunder, which prohibit
discrimination on the basis of age, race, color, sex, religion, marital status,
national origin, receipt of public assistance or the exercise of any right under
the Consumer Credit Protection Act; (iv) the Fair Credit Reporting Act, which
regulates the use and reporting of information related to the borrower's credit
experience; (v) the Federal Trade Commission Preservation of Consumers' Claims
and Defenses Rule, 16 C.F.R. Part 433, regarding the preservation of a
consumer's rights; (vi) the Fair Housing Act, 42 U.S.C. 3601 et seq., relating
to the creation and governance of the Title I Program; (vii) the Home Ownership
and Equity Protection Act; and (viii) if applied, the Soldiers' and Sailors'
Civil Relief Act of 1940, as amended (the "Relief Act").
MORTGAGES. The Mortgage Loans will be secured by either deeds of trust,
mortgages, deeds to secure debt or chattel mortgages, depending upon the
prevailing practice in the state in which the Mortgaged Property subject to a
Mortgage Loan is located. In some states, a mortgage creates a lien upon the
real property encumbered by the mortgage. In other states, a mortgage conveys
legal title to the related real property to the related mortgagee subject to a
condition subsequent, i.e., the payment of the indebtedness secured thereby.
There are two parties to a mortgage, the borrower, who is the owner of the real
property and usually the borrower, and the mortgagee, who is the lender. Under
the mortgage instrument, the borrower delivers to the mortgagee a note or bond
and the mortgage. Although a deed of trust is similar to a mortgage, a deed of
trust has three parties, the owner of the real property and usually the
borrower, called the trustor (similar to a borrower), a lender called the
beneficiary (similar to a mortgagee), and a third-party grantee called the
trustee. Under a deed of trust, the borrower grants the property, irrevocably
until the debt is paid, in trust, generally with a power of sale, to the trustee
to secure payment of the obligation. The trustee's authority under a deed of
trust and the mortgagee's authority under a mortgage are governed by applicable
state law, the express provisions of the deed of trust or mortgage, and, in some
cases, with respect to deeds of trust, the directions of the beneficiary. Some
states use a security deed or deed to secure debt which is similar to a deed of
trust except that it has only two parties: a grantor (similar to a borrower) and
a grantee (similar to a mortgagee). Mortgages, deeds of trust and deeds to
secure debt generally are not prior to liens for real estate taxes and
assessments and other charges imposed under governmental police powers. Priority
with respect to mortgages, deeds of trust and deeds to secure debt and other
encumbrances depends on their terms, the knowledge of the parties to such
instrument and generally on the order of recordation of the mortgage, deed of
trust or the deed to secure debt in the appropriate recording office and other
relevant state law.
COOPERATIVE LOANS. Certain of the Mortgage Loans may be Cooperative Loans.
The private, non-profit, cooperative apartment corporation owns all the real
property that comprises the project, including the land, separate dwelling units
and all common areas. The cooperative is directly responsible for project
management and, in most cases, payment of real estate taxes and hazard and
liability insurance. If there is a blanket mortgage on the cooperative apartment
building and/or underlying land, as is generally the case, the cooperative, as
project borrower, is also responsible for meeting these mortgage obligations. A
blanket mortgage is ordinarily incurred by the cooperative in connection with
the construction or purchase of the cooperative's apartment building. The
interest of the occupant under proprietary leases or occupancy agreements to
which that cooperative is a party are generally subordinate to the interest of
the holder of the blanket mortgage in that building. If the cooperative is
unable to meet the payment obligations arising under its blanket mortgage, the
mortgagee holding the blanket mortgage could foreclose on that mortgage and
terminate all subordinate proprietary leases and occupancy agreements. In
addition, the blanket mortgage on a cooperative may provide financing in the
form of a mortgage that does not fully amortize with a significant portion of
principal being due in one lump sum at final maturity. The inability of the
cooperative to refinance this mortgage and its consequent inability to make such
final payment could lead to foreclosure by the mortgagee providing the
financing. A foreclosure in either event by the holder of the blanket mortgage
could eliminate or significantly diminish the value of any collateral held by
the lender who financed the purchase by an individual tenant-stockholder of
cooperative shares or, in the case of a pool of Mortgage Loans including
Cooperative Loans, the collateral securing the Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through ownership of
stock shares or membership certificates in the corporation allocated to specific
units, receive proprietary leases or occupancy agreements which confer exclusive
rights to occupy the related units. Generally, a tenant-stockholder of a
cooperative must make a monthly payment to the cooperative representing such
tenant-stockholder's pro rata share of the cooperative's payments for its
blanket mortgage, real property taxes, maintenance expenses and other capital or
ordinary expenses. An ownership interest in a cooperative and accompanying
occupancy rights is financed through a cooperative share loan evidenced by a
promissory note and secured by a security interest in the occupancy agreement or
proprietary lease and in the related cooperative shares. The lender takes
possession of the share certificate and a counterpart of the proprietary lease
or occupancy agreement and a financing statement covering the proprietary lease
or occupancy agreement and the cooperative shares is filed in the appropriate
state and local offices to perfect the lender's interest in its collateral.
Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in the
security agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of cooperative shares.
FORECLOSURE
MORTGAGES. Foreclosure of a mortgage is generally accomplished by judicial
action. Generally, the action is initiated by the service of legal pleadings
upon all parties having an interest of record in the real property. Delays in
completion of the foreclosure may occasionally result from difficulties in
locating necessary parties defendant. Judicial foreclosure proceedings are often
not contested by any of the defendant parties. However, when a mortgagee's right
to foreclose is contested, the legal proceedings necessary to resolve the issue
can be time consuming. After the completion of a judicial foreclosure, the court
generally issues a judgment of foreclosure and appoints a referee or other court
officer to conduct the sale of the property.
An action to foreclose a mortgage is an action to recover the mortgage debt
by enforcing the mortgagee's rights under the mortgage. Foreclosure is regulated
by statutes and rules and is subject to the court's equitable powers. Generally,
a borrower is bound by the terms of the mortgage note and the mortgage as made
and cannot be relieved from his default if the mortgagee has exercised his
rights in a commercially reasonable manner. However, since a foreclosure action
historically was equitable in nature the court may exercise equitable powers to
relieve a borrower of a default and deny the mortgagee foreclosure on proof that
either the borrower's default was neither willful nor in bad faith or the
mortgagee's action established a waiver, fraud, bad faith or oppressive or
unconscionable conduct such as to warrant a court of equity to refuse
affirmative relief to the mortgagee. Under certain circumstances a court of
equity may relieve a borrower from an entirely technical default where such
default was not willful.
A foreclosure action is subject to most of the delays and expenses of other
lawsuits if defenses or counterclaims are interposed, sometimes requiring up to
several years to complete. Moreover, a non-collusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of the
parties' intent, if a court determines that the sale was for less than
reasonably equivalent value and such sale occurred while the borrower was
insolvent and within one year (or within the state statute of limitations if the
trustee in bankruptcy elects to proceed under state fraudulent conveyance law)
of the filing of bankruptcy. Similarly, a suit against the debtor on the
mortgage note may take several years and, generally, is a remedy alternative to
foreclosure, the mortgagee being precluded from pursuing both at the same time.
In some states, mortgages may also be foreclosed by advertisement pursuant
to a power of sale provided in the mortgage. Foreclosure of a mortgage by
advertisement is essentially similar to foreclosure of a deed of trust by
nonjudicial power of sale.
Foreclosure of a deed of trust or a deed to secure debt is generally
accomplished by a non-judicial trustee's sale under a specific provision in the
deed of trust or deed to secure debt which authorizes the trustee to sell the
property upon default by the borrower under the terms of the note, deed of trust
or deed to secure debt. In some states, prior to such sale, the trustee must
record a notice of default and send a copy to the borrower-trustor and to any
person who has recorded a request for a copy of a notice of default and notice
of sale. In addition, in some states, prior to such sale, the trustee must
provide notice to any other individual having an interest of record in the real
property, including any junior lienholders. In some states, the borrower, or any
other person having a junior encumbrance on the real estate, may, during a
reinstatement period, cure the default by paying the entire amount in arrears
plus the costs and expenses incurred in enforcing the obligations, including
attorney's and trustee's fees to the extent allowed by applicable law. Certain
states may require notices of sale to be published periodically for a prescribed
period in a specified manner prior to the date of the trustee's sale. In
addition, some state laws require that a copy of the notice of sale be posted on
the property and sent to all parties having an interest in the real property. In
certain states, foreclosure under a deed of trust may also be accomplished by
judicial action in the manner provided for foreclosure of mortgages.
In case of foreclosure under either a mortgage or a deed of trust, the sale
by the referee or other designated officer or by the trustee is generally a
public sale. Because of the difficulty a potential buyer at the sale might have
in determining the exact status of title and because the physical condition of
the property may have deteriorated during the foreclosure proceedings, a third
party may be unwilling to purchase the property at a foreclosure sale. For these
and other reasons, it is common for the lender to purchase the property from the
trustee, referee or other court officer for an amount equal to the principal
amount of the indebtedness secured by the mortgage or deed of trust, plus
accrued and unpaid interest and the expenses of foreclosure. Generally, state
law controls the amount of foreclosure costs and expenses, including attorneys'
and trustee's fees, which may be recovered by a lender. In some states there is
a statutory minimum purchase price which the lender may offer for the property.
Thereafter, subject to the right of the borrower in some states to remain in
possession during the redemption period, the lender will assume ownership of the
mortgaged property and, therefore, the burdens of ownership, including the
obligation to pay taxes, obtain casualty insurance and to make such repairs at
its own expense as are necessary to render the property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Any loss may be mitigated by the
receipt of any mortgage insurance proceeds.
A second mortgagee may not foreclose on the property securing a second
mortgage unless it forecloses subject to the first mortgage and any other prior
liens, in which case it must either pay the entire amount due on the first
mortgage and such other liens, prior to or at the time of the foreclosure sale
or undertake the obligation to make payments on the first mortgage and such
liens, in either event adding the amounts expended to the balance due on the
second loan, and may be subrogated to the rights of the first mortgagee. In
addition, in the event that the foreclosure of a second mortgage triggers the
enforcement of a "due-on-sale" clause, the second mortgagee may be required to
pay the full amount of the first mortgage to the first mortgagee. Accordingly,
with respect to those Mortgage Loans which are second mortgage loans, if the
lender purchases the property, the lender's title will be subject to all senior
liens and claims and certain governmental liens.
The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage or deed of trust under which the sale was
conducted. Any remaining proceeds are generally payable to the holders of junior
mortgages or deeds of trust and other liens and claims in order of their
priority, whether or not the borrower is in default. Any additional proceeds are
generally payable to the borrower or trustor. The payment of the proceeds to the
holders of junior mortgages may occur in the foreclosure action of the senior
mortgagee; however, a junior lienholder whose rights in the property are
terminated pursuant to foreclosure by a senior lienholder will not share in the
proceeds from the subsequent disposition of the property. Junior lienholders may
also institute legal proceedings separate from the foreclosure proceedings of
the senior lienholders.
Some states impose prohibitions or limitations on remedies available to the
mortgagee, including the right to recover the debt from the borrower. See
"--Anti-Deficiency Legislation and Other Limitations on Lenders" below.
COOPERATIVE LOANS. The cooperative shares owned by the tenant-stockholder
and pledged to the lender are, in almost all cases, subject to restrictions on
transfer as set forth in the cooperative's Certificate of Incorporation and
Bylaws, as well as the proprietary lease or occupancy agreement, and may be
canceled by the cooperative for failure by the tenant-stockholder to pay rent or
other obligations or charges owned by such tenant-stockholder, including
mechanics' liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the cooperative to terminate such lease or agreement in the event a
borrower fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder on its obligations
under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from a sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the cooperative loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on a
cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the Uniform Commercial
Code (the "UCC") and the security agreement relating to those shares. Article 9
of the UCC requires that a sale be conducted in a "commercially reasonable"
manner. Whether a foreclosure sale has been conducted in a "commercially
reasonable" manner will depend on the facts in each case. In determining
commercial reasonableness, a court will look to the notice given the debtor and
the method, manner, time, place and terms of the foreclosure. Generally, a sale
conducted according to the usual practice of banks selling similar collateral
will be considered reasonably conducted. Article 9 of the UCC provides that the
proceeds of the sale will be applied first to pay the costs and expenses of the
sale and then to satisfy the indebtedness secured by the lender's security
interest. The recognition agreement, however, generally provides that the
lender's right to reimbursement is subject to the right of the cooperative
corporation to receive sums due under the proprietary lease or occupancy
agreement. If there are proceeds remaining, the lender must account to the
tenant-stockholder for the surplus. Conversely, if a portion of the indebtedness
remains unpaid, the tenant-stockholder is generally responsible for the
deficiency. See "--Anti-Deficiency Legislation and Other Limitations on Lenders"
below.
JUNIOR LIENS. Certain of the Mortgage Loans, including the Title I Mortgage
Loans, may be secured by junior lien mortgages or deeds of trust (i.e., second
mortgages). Second mortgages or deeds of trust are generally junior to first
mortgages or deeds of trust held by other lenders, and third mortgages or deeds
of trust are generally junior to first and second mortgages or deeds of trust
held by other lenders, and so forth. The rights of the Securityholders as the
holders of a junior deed of trust or a junior mortgage, are subordinate in lien
and in payment to those of the holder of the senior mortgage or deed of trust,
including the prior rights of the senior mortgagee or beneficiary to receive and
apply hazard insurance and condemnation proceeds and, upon default of the
related borrower, to cause a foreclosure on the related property. Upon
completion of the foreclosure proceedings by the holder of the senior mortgage,
the junior mortgagee's or junior beneficiary's lien will be extinguished unless
the junior mortgagee satisfies the defaulted senior loan or asserts its
subordinate interest in a property in foreclosure proceedings. A junior
mortgagee or beneficiary in some states may satisfy a defaulted senior lien in
full and in some states may cure such default and bring the senior loan current,
in either event, adding the amounts expended to the balance due on the junior
loan. In most states, absent a provision in the mortgage or deed of trust to the
contrary, no notice of default is required to be given to a junior mortgagee or
beneficiary.
Furthermore, the terms of a junior mortgage or deed of trust are
subordinate to the terms of the senior mortgage or deed of trust. In the event
of a conflict between the terms of the senior mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the senior mortgage or deed of
trust will generally govern. Upon a failure of the borrower or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the right to perform
the obligation itself. Generally, all sums so expended by the senior mortgagee
or beneficiary become part of the indebtedness secured by the senior mortgage or
deed of trust. To the extent a senior mortgagee expends such sums, such sums
will generally have priority over all sums due under the junior mortgage.
RIGHT OF REDEMPTION. The purposes of a foreclosure action are to enable the
mortgagee to realize upon its security and to bar the borrower, and all persons
who have an interest in the property which is subordinate to the foreclosing
mortgagee, from their "equity of redemption." The doctrine of equity of
redemption provides that, until the property covered by a mortgage has been sold
in accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest which is subordinate to that of the foreclosing mortgagee
have an equity of redemption and may redeem the property by paying the entire
debt with interest. In addition, in some states, when a foreclosure action has
been commenced, the redeeming party must pay certain costs of such action. Those
having an equity of redemption must generally be made parties and duly summoned
to the foreclosure action in order for their equity of redemption to be barred.
The equity of redemption which is a non-statutory right that must be
exercised prior to foreclosure sale should be distinguished from statutory
rights of redemption. In some states, after sale pursuant to a deed of trust or
foreclosure of a mortgage, the borrower and foreclosed junior lienors are given
a statutory period in which to redeem the property from the foreclosure sale. In
some states, statutory redemption may occur only upon payment of the foreclosure
sale price. In other states, redemption may be authorized if the former borrower
pays only a portion of the sums due. The effect of a statutory right of
redemption is to diminish the ability of the lender to sell the foreclosed
property. The exercise of a right of redemption would defeat the title of any
purchaser subsequent to foreclosure or sale under a deed of trust. Consequently,
the practical effect of the redemption right is to force the lender to maintain
the property and pay the expenses of ownership until the redemption period has
expired.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS. Certain
states have imposed statutory prohibitions that limit the remedies of a
beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the net amount realized
upon the public sale of the real property and the amount due to the lender.
Other statutes require the beneficiary or mortgagee to exhaust the security
afforded under a deed of trust or mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the borrower. In
certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. Consequently, the
practical effect of the election requirement, in those states permitting such
election, is that lenders will usually proceed against the security first rather
than bringing a personal action against the borrower. Finally, other statutory
provisions limit any deficiency judgment against the former borrower following a
judicial sale to the excess of the outstanding debt over the fair market value
of the property at the time of the public sale. The purpose of these statutes is
generally to prevent a beneficiary or a mortgagee from obtaining a large
deficiency judgment against the former borrower as a result of low or no bids at
the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws, the Relief
Act and state laws affording relief to debtors, may interfere with or affect the
ability of the secured mortgage lender to realize upon collateral and/or enforce
a deficiency judgment. For example, with respect to federal bankruptcy law, a
court with federal bankruptcy jurisdiction may permit a debtor through his or
her Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary default in
respect of a mortgage loan on a debtor's residence by paying arrearages within a
reasonable time period and reinstating the original mortgage loan payment
schedule even though the lender accelerated the mortgage loan and final judgment
of foreclosure had been entered in state court (provided no sale of the
residence had yet occurred) prior to the filing of the debtor's petition. Some
courts with federal bankruptcy jurisdiction have approved plans, based on the
particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have suggested that such modifications may include reducing the
amount of each monthly payment, changing the rate of interest, altering the
repayment schedule or forgiving all or a portion of the debt. Additionally, a
federal bankruptcy court in a Chapter 11 bankruptcy case may be able to reduce
the lender's security interest to the value of the residence, thus leaving the
lender a general unsecured creditor for the difference between the value of the
residence and the outstanding balance of the loan; however, the United States
Supreme Court has recently eliminated such a risk in Chapter 7 and Chapter 13
bankruptcy cases.
The Internal Revenue Code of 1986, as amended provides priority to certain
tax liens over the lien of a mortgage or deed of trust. In addition, substantive
requirements are imposed upon lenders in connection with the origination and the
servicing of mortgage loans by numerous federal and some state consumer
protection laws. These laws include the federal Truth-in-Lending Act, Real
Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair Credit
Billing Act, Fair Credit Reporting Act, and related statutes and regulations.
These federal laws impose specific statutory liabilities upon lenders who
originate mortgage loans and who fail to comply with the provisions of the
applicable laws. In some cases, this liability may affect assignees of the
Mortgage Loans.
ENFORCEABILITY OF CERTAIN PROVISIONS. Certain of the Mortgage Loans will
contain a debt-acceleration clause, which permits the lender to accelerate the
debt upon a monetary default of the borrower, after the applicable cure period.
Courts will generally enforce clauses providing for acceleration in the event of
a material payment default. However, courts, exercising equity jurisdiction, may
refuse to allow a lender to foreclose a mortgage or deed of trust when an
acceleration of the indebtedness would be inequitable or unjust and the
circumstances would render the acceleration unconscionable.
Some courts have imposed general equitable principles to limit the remedies
available in connection with foreclosure. These equitable principles are
generally designed to relieve the borrower from the legal effect of his defaults
under the loan documents. For example, some courts have required that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lenders' judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right of
lenders to foreclose if the default under the mortgage instrument or deed of
trust is not monetary, such as the borrower's failure to adequately maintain the
property or the borrower's execution of a second mortgage or deed of trust
affecting the property. The exercise by the court of its equity powers will
depend on the individual circumstances of each case. Finally, some courts have
been faced with the issue of whether federal or state constitutional provisions
reflecting due process concerns for adequate notice require that borrowers under
deeds of trust receive notices in addition to those prescribed statutorily. For
the most part, these cases have upheld the statutory notice provisions as being
reasonable or have found that the sale by a trustee under a deed of trust or
under a mortgage having a power of sale does not involve sufficient state action
to afford constitutional protection to the borrower.
Some of the Mortgage Loans may not restrict secondary financing, thereby
permitting the borrower to use the Mortgaged Property as security for one or
more additional loans. Where the borrower encumbers the Mortgaged Property with
one or more junior liens, the senior lender is subjected to additional risk.
First, the borrower may have difficulty servicing and repaying multiple loans.
Second, acts of the senior lender which prejudice the junior lender or impair
the junior lender's security may create a superior equity in favor of the junior
lender. For example, if the borrower and the senior lender agree to an increase
in the principal amount of or the interest rate payable on the senior loan, the
senior lender may lose its priority to the extent any existing junior lender is
harmed or the borrower is additionally burdened. Third, if the borrower defaults
on the senior loan and/or any junior loan or loans, the existence of junior
loans and actions taken by junior lenders can impair the security available to
the senior lender and can interfere with or delay the taking of action by the
senior lender. The bankruptcy of a junior lender may operate to stay foreclosure
or similar proceedings by the senior lender.
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made. In certain states, there are or may be specific limitations upon
the late charges which a lender may collect from a borrower for delinquent
payments. Late charges are typically retained by servicers as additional
servicing compensation.
A portion of the Mortgage Loans contain "due-on-sale" clauses. These
clauses permit the lender to accelerate the maturity of the loan if the borrower
sells, transfers or coveys the property. The enforceability of these clauses has
been the subject of legislation or litigation in many states, and in some cases
the enforceability of these clauses was limited or denied. However, the Garn-St.
Germain Depository Institutions Act of 1982 (the "Garn-St. Germain Act")
preempts state constitutional, statutory and case law that prohibits the
enforcement of due-on-sale clauses and permits lenders to enforce these clauses
in accordance with their terms, subject to certain limited exceptions. The
Garn-St. Germain Act does "encourage" lenders to permit assumption of loans at
the original rate of interest or at some other rate less than the average of the
original rate and the market rate.
Exempted from the general rule of enforceability of due-on-sale clauses
were mortgage loans (originated other than by federal savings and loan
associations and federal savings banks) that were made or assumed during the
period beginning on the date a state, by statute or final appellate court
decision having statewide effect, prohibited the exercise of due-on-sale clauses
and ending on October 15, 1982 ("Window Period Loans"). However, this exception
applied only to transfers of property underlying Window Period Loans occurring
between October 15, 1982 and October 15, 1985 and does not restrict enforcement
of a due-on-sale clause in connection with current transfers of property
underlying Window Period Loans. Due-on-sale clauses contained in mortgage loans
originated by federal savings and loan associations or federal savings banks are
fully enforceable pursuant to regulations of the Office of Thrift Supervision
(the "OTS"), as successor to the Federal Home Loan Bank Board which preempt
state law restrictions on the enforcement of due-on-sale clauses.
The Garn-St. Germain Act also sets forth nine instances in which a mortgage
lender covered by the Garn-St. Germain Act may not exercise a due-on-sale
clause, notwithstanding the fact that transfer of the property may have
occurred. These include intra-family transfers, certain transfers by operation
of law, leases of fewer than three years and the creation of a junior
encumbrance. The Garn-St. Germain Act also grants the Director of the Office of
Thrift Supervision (successor to the Federal Home Loan Bank Board) authority to
prescribe by regulation further instances in which a due-on-sale clause may not
be exercised upon the transfer of the property. To date no such regulations have
been issued. Regulations promulgated under the Garn-St. Germain Act also
prohibit the imposition of a prepayment penalty upon the acceleration of a loan
pursuant to a "due-on-sale" clause.
If interest rates were to rise above the interest rates on the Mortgage
Loans, then any inability of the Servicer or the subservicer to enforce
due-on-sale clauses may result in the Trust Property including a greater number
of Mortgage Loans bearing below-market interest rates than would otherwise be
the case, since a transferee of the property underlying a Mortgage Loan would
have a greater incentive in such circumstances to assume the seller's Mortgage
Loan. Any inability to enforce due-on-sale clauses may affect the average life
of the Mortgage Loans and the number of Mortgage Loans that may be outstanding
until maturity.
Upon foreclosure, courts have imposed general equitable principles. These
equitable principles are generally designed to relieve the borrower from the
legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include requirements that the lender undertake
affirmative and expensive actions to determine the causes for the borrower's
default and the likelihood that the borrower will be able to reinstate the loan.
In some cases, courts have substituted their judgment for the lender's judgment
and have required that lenders reinstate loans or recast payment schedules in
order to accommodate borrowers who are suffering from temporary financial
disability. In other cases, courts have limited the right of the lender to
foreclose if the default under the mortgage instrument is not monetary, such as
the borrower failing to adequately maintain the property or the borrower
executing a second mortgage or deed of trust affecting the property. Finally,
some courts have been faced with the issue of whether or not federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that borrowers under deeds of trust or mortgages receive notices in
addition to the statutorily-prescribed minimum. For the most part, these cases
have upheld the notice provisions as being reasonable or have found that the
sale by a trustee under a deed of trust, or under a mortgage having a power of
sale, does not involve sufficient state action to afford constitutional
protections to the borrower.
ADJUSTABLE RATE LOANS. The laws of certain states may provide that mortgage
notes relating to adjustable rate loans are not negotiable instruments under the
Uniform Commercial Code. In such event, the Trustee will not be deemed to be a
"holder in due course" within the meaning of the Uniform Commercial Code and may
take such a mortgage note subject to certain restrictions on its ability to
foreclose and to certain contractual defenses available to a borrower.
ENVIRONMENTAL LEGISLATION. Certain states impose a statutory lien for
associated costs on property that is the subject of a cleanup action by the
state on account of hazardous wastes or hazardous substances released or
disposed of on the property. Such a lien will generally have priority over all
subsequent liens on the property and, in certain of these states, will have
priority over prior recorded liens including the lien of a mortgage. In
addition, under federal environmental legislation and under state law in a
number of states, a secured party which takes a deed in lieu of foreclosure or
acquires a mortgaged property at a foreclosure sale or assumes active control
over the operation or management of a property so as to be deemed an "owner" or
"operator" of the property may be liable for the costs of cleaning up a
contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a secured lender (such as a Trustee or a Trust)
to homeowners. In the event that title to a property securing a Mortgage Loan in
a pool of Mortgage Loans was acquired by a Trustee or a Trust and cleanup costs
were incurred in respect of the property, the holders of the related Securities
might realize a loss if such costs were required to be paid. In addition, the
presence of certain environmental contamination, including, but not limited to,
lead-based paint, asbestos and leaking underground storage tanks could result in
the holders of the related Securities realizing a loss if associated costs were
required to be paid. The Seller, the Issuer, the Administrator, the
Underwriters, the Transferors, the Servicers, and any of their respective
affiliates (i) have not caused any environmental site assessments or evaluations
to be conducted with respect to any properties securing the Mortgage Loans, (ii)
are not required to make any such assessments or evaluations and (iii) make no
representations or warranties and assume no liability with respect to the
absence or effect of hazardous wastes or hazardous substances on any property or
any casualty resulting from the presence or effect of hazardous wastes or
hazardous substances.
TRUTH IN LENDING ACT
In September 1994, the Reigle Community Development and Regulatory
Improvement Act of 1994 (the "Reigle Act") was enacted which incorporates the
Home Ownership and Equity Protection Act of 1994, and which adds certain
additional provisions to Regulation Z, the implementing regulation of the
Truth-in-Lending Act ("TILA"). These provisions impose additional disclosure and
other requirements on creditors with respect to non-purchase money mortgage
loans with high interest rates or high up-front fees and charges ("covered
loans"). In general, mortgage loans within the purview of the Reigle Act have
annual percentage rates over 10% greater than the yield on Treasury Securities
of comparable maturity and/or fees and points which exceed the greater of 8% of
the total loan amount or $400. The provisions of the Reigle Act apply on a
mandatory basis to all mortgage loans originated on or after October 1, 1995.
These provisions can impose specific statutory liabilities upon creditors who
fail to comply with their provisions and may affect the enforceability of the
related loans. In addition, any assignee of a creditor would generally be
subject to all claims and defenses that the consumer could assert against the
creditor, including, without limitation, the right to rescind the mortgage loan.
A substantial majority of the loans originated or purchased by the Transferor
are covered by the Reigle Act.
The Reigle Act provisions impose additional disclosure requirements on
lenders originating covered loans and prohibit lenders from originating covered
loans that are underwritten solely on the basis of the borrower's home equity
without regard to the borrower's ability to repay the loan. The Transferor
believes that only a small portion of its loans originated in fiscal 1994 and
fiscal 1995 are of the type that, unless modified, would be prohibited by the
Reigle Act. As a result of the Reigle Act provisions, with respect to all
covered loans, the Transferor applies loan underwriting criteria that take into
consideration the borrower's ability to repay.
The Reigle Act provisions also prohibit lenders from including prepayment
fee clauses in covered loans to borrowers with debt-to-income ratios in excess
of 50% or covered loans used to refinance existing loans originated by the same
lender. The Transferor reported immaterial amounts of prepayment fee revenues in
fiscal 1993, 1994 and 1995, respectively. The Transferor will continue to
collect prepayment fees on loans originated prior to effectiveness of the Reigle
Act provisions and on non-covered loans, as well as on covered loans in
permitted circumstances following the effectiveness of the Reigle Act
provisions. The Reigle Act provisions impose other restrictions on covered
loans, including restrictions on balloon payments and negative amortization
features, which the Transferor does not believe will have a material effect on
its operations.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of home improvement first mortgage
loans originated by certain lenders after March 31, 1980. A similar federal
statute was in effect with respect to mortgage loans made during the first three
months of 1980. The Office of Thrift Supervision is authorized to issue rules
and regulations and to publish interpretations governing implementation of Title
V. The statute authorized any state to reimpose interest rate limits by
adopting, before April 1, 1983, a law or constitutional provision which
expressly rejects application of the federal law. In addition, even where Title
V is not so rejected, any state is authorized by the law to adopt a provision
limiting discount points or other charges on mortgage loans covered by Title V.
Certain states have taken action to reimpose interest rate limits and/or to
limit discount points or other charges.
A similar federal statute, adopted in 1976, provides federal usury
preemption with respect to Title I Mortgage Loans, such as the Title I Mortgage
Loans. This statute also permits states to reimpose interest rate limits by
passing legislation at any time after June 30, 1976. To date, no state has
enacted any reported statute to reimpose interest rate limits with respect to
any loans, mortgage or advance that is insured under Title I.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of such borrower's Mortgage Loan (including a borrower who
is a member of the National Guard or is in reserve status at the time of the
origination of the Mortgage Loan and is later called to active duty) may not be
charged interest above an annual rate of 6% during the period of such borrower's
active duty status, unless a court orders otherwise upon application of the
lender. It is possible that such interest rate limitation or similar limitations
under state law could have an effect, for an indeterminate period of time, on
the ability of the Servicer or the subservicer to collect full amounts of
interest on certain of the Mortgage Loans. Any shortfall in interest collections
resulting from the application of the Relief Act or similar legislation, which
would not be recoverable from the related Mortgage Loans, would result in a
reduction of the amounts available for distribution to the holders of the
Offered Securities, but the Offered Securities would receive the full amount
otherwise distributable to such holders to the extent that amounts are available
from the credit enhancement provided for the Offered Securities. See "Risk
Factors -- Limitations of Credit Enhancement". In addition, the Relief Act
imposes limitations which would impair the ability of the Servicer or
subservicer to foreclose on an affected Mortgage Loan during the borrower's
period of active duty status. Thus, in the event that such a Mortgage Loan goes
into default there may be delays and losses occasioned by the inability to
realize upon the related Mortgaged Property in a timely fashion.
THE TITLE I PROGRAM
GENERAL. Sections 1 and 2(a) of the National Housing Act of 1934, as
amended (the "Act"), authorize the creation of the Federal Housing
Administration (which is an agency within the United States Department of
Housing and Urban Development; such agency and department are referred to
together herein as the "FHA") and the Title I Program. Certain of the Mortgage
Loans or Contracts included in the Trust Property may be loans insured under the
Title I Program. FHA Regulations contain the requirements under which approved
Title I Lenders may obtain insurance against a portion of losses incurred with
respect to eligible loans that have been originated and serviced in accordance
with FHA Regulations, up to the amount of such Title I Lender's FHA Reserve, as
described below, and subject to the terms and conditions established under the
Act and FHA Regulations. While FHA Regulations permit the Secretary of HUD,
subject to statutory limitations, to waive a Title I Lender's noncompliance with
FHA Regulations if enforcement would impose an injustice on the lender (provided
the Title I Lender has acted in good faith, is in substantial compliance with
FHA Regulations and has credited the borrower for any excess charges), in
general, an insurance claim against the FHA will be denied if the Title I loan
to which it relates does not strictly satisfy the requirements of the Act and
FHA Regulations.
Unlike certain other government loan insurance programs, loans under the
Title I Program (other than loans in excess of $25,000) are not subject to prior
review by the FHA. Under the Title I Program, the FHA disburses insurance
proceeds with respect to defaulted loans for which insurance claims have been
filed by a Title I Lender prior to any review of such loans. A Title I Lender is
required to repurchase a Title I loan from the FHA that is determined to be
ineligible for insurance after insurance claim payments for such loan have been
paid to such lender. Under the FHA Regulations, if the Title I Lender's
obligation to repurchase the Title I loan is unsatisfied, the FHA is permitted
to offset the unsatisfied obligation against future insurance claim payments
owed by the FHA to such lender. FHA Regulations permit the FHA to disallow an
insurance claim with respect to any loan that does not qualify for insurance for
a period of up to two years after the claim is made and to require the Title I
Lender that has submitted the insurance claim to repurchase the loan. Pursuant
to a letter ruling issued by the FHA in October 1994, the FHA has stated that,
as a policy, the FHA will strive to review all insurance claim submissions in a
timely manner and limit the period of time within which it will request the
repurchase of a loan to a period of one year after claim submission. The letter
further states, however, that the FHA may find it necessary with respect to some
claim submissions to apply the foregoing two-year incontestability provision
strictly.
The proceeds of loans under the Title I Program may be used only for
permitted purposes, including, but not limited to, the alteration, repair or
improvement of residential property, the purchase of a manufactured home or lot
(or cooperative interest therein) on which to place such home or the purchase of
both a manufactured home loan and the lot (or cooperative interest therein) on
which such home is placed. Title I Program loans may be made directly to the
owners of the property to be improved or purchased ("direct loans") or with the
assistance of a dealer or home improvement contractor that will have an interest
in the proceeds of the loan ("dealer loans").
Subject to certain limitations described below, eligible Title I loans are
insured by the FHA for 90% of an amount equal to the sum of (i) the net unpaid
principal amount and the uncollected interest earned to the date of default,
(ii) interest on the unpaid loan obligation from the date of default to the date
of the initial submission of the insurance claim, plus 15 calendar days (the
total period not to exceed nine months) at a rate of 7% per annum, (iii)
uncollected court costs, (iv) title examination costs, (v) fees for required
inspections by the lenders or its agents, up to $75, and (vi) origination fees
up to a maximum of 5% of the loan amount. However, the insurance coverage
provided by the FHA is limited to the extent of the balance in the Title I
Lender's FHA Reserve maintained by the FHA. Accordingly if sufficient insurance
coverage is available in such FHA Reserve, then the Title I Lender bears the
risk of losses on a Title I loan for which a claim for reimbursement is paid by
the FHA of at least 10% of the unpaid principal, uncollected interest earned to
the date of default, interest from the date of default to the date of the
initial claim submission and certain expenses.
Under the Title I Program, the FHA maintains an FHA insurance coverage
reserve account (a "FHA Reserve") for each Title I Lender. The amount in each
Title I Lender's FHA Reserve is a maximum of 10% of the amounts disbursed,
advanced or expended by a Title I Lender in originating or purchasing eligible
loans registered with the FHA for Title I Insurance, with certain adjustments
permitted or required by FHA Regulations. The balance of such FHA Reserve is the
maximum amount of insurance claims the FHA is required to pay to the related
Title I Lender. Mortgage loans to be insured under the Title I Program will be
registered for insurance by the FHA, and the increase in Title I insurance
coverage to which the Title I Lender is entitled by reason of the reporting of
such loans under the Title I Lender's contract of insurance will be included in
the FHA Reserve for the originating Title I Lender following the receipt and
acknowledgment by the FHA of a transfer of note report on the prescribed form
(the "Transfer Report") pursuant to FHA Regulations.
Under the Title I Program the FHA will reduce the insurance coverage
available in a Title I Lender's FHA Reserve with the respect to loans insured
under such Title I Lender's contract of insurance by (i) the amount of FHA
Insurance claims approved for payment related to such loans, (ii) prior to
October 1, 1995, after a Title I Lender has held its Title I contract of
insurance for five years, the amount of the annual reduction (the "Annual
Reduction") equal to 10% of the amount of insurance coverage contained in the
related FHA Reserve as of that date, and (iii) the amount of reduction of the
Title I Lender's FHA Reserve by reason of the sale, assignment or transfer of
loans registered under the Title I Lender's contract of insurance. Such
insurance coverage also may be reduced for any FHA insurance claims previously
disbursed to the Title I Lender that are subsequently rejected by the FHA. On
June 5, 1995, the FHA announced the elimination of Annual Reductions, effective
as of October 1, 1995.
Upon the receipt and acknowledgment by the FHA of a Transfer Report,
originations of new loans will increase a Title I Lender's insurance coverage
reserve account balance by 10% of the amount disbursed, advanced or expended in
originating such loans registered with the FHA for insurance under the Title I
Program. A Title I Lender is permitted to sell or otherwise transfer loans
reported for insurance under the Title I Program only to another Title I Lender.
Upon any such transfer, except a transfer with recourse or under a guaranty or
repurchase Agreement, the seller is required to file a Transfer Report with the
FHA reporting the transfer of such loans. Upon notification and approval of such
transfer, the FHA Reserve of the selling Title I Lender is reduced, and the FHA
Reserve of the purchasing Title I Lender is increased, by an amount equal to the
lesser of 10% of the actual purchase price of the loans or the net unpaid
principal balance of the loans, up to the total amount of the selling Title I
Lender's FHA Reserve. Thus, in the event the selling Title I Lender's FHA
Reserve was less than 10% of the unpaid principal balance of its portfolio of
loans reported for insurance under the Title I Program prior to the sale, the
seller's FHA Reserve may be exhausted as the result of a sale of only a portion
of its total portfolio, with the result that its remaining Title I Program
portfolio may be ineligible for Title I Program benefits until the lender
originates or otherwise acquires additional loans reported for insurance under
the Title I Program. Accordingly, the insurance coverage reserves transferred to
the purchasing Title I Lender in such case will be less than 10% of the lesser
of the purchase price or the principal balance of the portfolio of loans
purchased, which may be the case with respect to the Transferor's purchase of
certain Title I Mortgage Loans and Title I Contracts from certain Title I
lenders and the transfer of the related insurance coverage from such lenders'
FHA Reserves. Additionally, pursuant to FHA Regulations, not more than $5,000 in
insurance coverage shall be transferred to or from a Title I Lender's insurance
coverage reserve account during any October 1 to September 30 fiscal year
without the approval of the Secretary of HUD. Such HUD approval is generally
viewed as automatic, provided the formal requirements for transfer are
satisfied, but HUD does have the right under FHA Regulations to withhold
approval.
Unlike most other FHA insurance programs, the obligation of the FHA to
reimburse a Title I Lender for losses in the portfolio of insured loans held by
such Title I Lender is limited to the amount in an FHA Reserve maintained on a
lender-by-lender basis and not on a loan-by-loan basis. Except when to do so
would be in HUD's best interest, the FHA does not track or "earmark" the loans
within a Title I Lender's portfolio to determine whether a reduction in such
lender's FHA Reserve as the result of an insurance claim by such lender are, in
fact, attributable to the insured loan with respect to which the claim was made.
For this reason, if a Title I Lender is holding insured loans as a fiduciary on
behalf of multiple non-affiliated beneficiaries, in order for such a lender to
cause its FHA Reserve to be reduced only by an amount to which a particular
beneficiary is entitled by reason of the insured loans beneficially held by it,
the Title I Lender must segregate or "earmark" its FHA Reserve on its own books
and records according to which beneficiary is entitled to what portion of the
insurance coverage in the Title I Lender's FHA Reserve as if the insurance
coverage were not commingled by the FHA in such FHA Reserve. If such Title I
Lender continues to submit claims with respect to loans held on behalf of a
beneficiary whose portion of insurance coverage in its FHA Reserve has been
exhausted, the FHA will continue to honor such claims until all insurance
coverage in such Title I Lender's FHA Reserve has been exhausted, even though
such FHA Reserve may, in fact, be held by the Title I Lender for the benefit of
a different beneficiary than the beneficiary of the insured loans to which the
claims relate under a separate contractual agreement. In addition, under certain
FHA administrative offset regulations, the FHA may offset an unsatisfied
obligation of a Title I Lender to repurchase loans that are determined to be
ineligible for insurance against future insurance claim payments owed by the FHA
to such lender. In the case of a given Series, if the related Trustee were to
hold loans insured under the Seller's or Issuer's FHA Reserve on behalf of
another entity, the FHA were to determine that insurance claims were paid in
respect of loans ineligible for insurance that related to such other entity, and
the Trustee, on behalf of such other entity, was unable or otherwise failed to
repurchase the ineligible loans, then the FHA could offset the amount of the
repurchase obligation against insurance proceeds payable with respect to one or
more Title I Mortgage Loans or Title I Contracts included in the Trust Property
of such Series. If the Trustee were unable to recover the amount of such offset
from the entity, the Securityholders with respect to such Series could
experience a loss as a result.
Accordingly, claims paid to the Trustee (or the Administrator, if any) by
the FHA with respect to Title I loans insured under FIC's FHA Reserve other than
the Title I Mortgage Loans and Title I Contracts may reduce the FHA Insurance
Amount. In the applicable Sale and Servicing Agreement or Pooling and Servicing
Agreement, FIC and the Trustee (or the Administrator, if any) will agree not to
submit claims to the FHA with respect to Title I loans other than the Title I
Mortgage Loans and Title I Contracts if the effect thereof would be to reduce
the FHA Insurance Amount. FIC has committed to use its FHA contract of insurance
under the Title I Program only to report the record ownership of loans
transferred and assigned to the Trustee pursuant to the applicable Sale and
Servicing Agreement or Pooling and Servicing Agreement and similar such
agreements that may be entered into by FIC in the future.
On the final Transfer Date, such FHA Insurance Amount will be the maximum
amount of insurance coverage in FIC's FHA Reserve that will be available for the
submission of claims on the Title I Mortgage Loans, and thereafter, such FHA
Insurance Amount will be decreased as a result of payments by the FHA in respect
of FHA Claims submitted for the Title I Mortgage Loans and Title I Contracts
after the Transfer Dates and as a result of the repurchase or substitution of
Title I Mortgage Loans and Title I Contracts by the Transferor. Except in
connection with the conveyance of any Subsequent Mortgage Loans that are Title I
Mortgage Loans and the substitution of Title I Mortgage Loans and Title I
Contracts, the FHA Insurance Amount for the Title I Mortgage Loans and Title I
Contracts will not be increased for any other Title I loans, either previously
or subsequently owned by the Seller or the Issuer and reported for insurance in
FIC's FHA Reserve.
On the final Transfer Date, the amount of FHA insurance coverage that will
have been transferred from the Transferor's FHA Reserve to FIC's FHA Reserve may
be less than the maximum amount of insurance coverage transferrable which would
otherwise equal 10% of the unpaid principal balance or the purchase price, if
less. However, if individual Title I Mortgage Loans and Title I Contracts are
repurchased from the applicable Trustee, by the Transferor, the Servicer and/or
any Subservicer, then with respect to any individual Title I Mortgage Loan or
Title I Contract the amount of FHA insurance coverage that will be transferred
from the Trustee's FHA Reserve, in all likelihood, will be the maximum amount of
insurance coverage of 10% of the unpaid principal balance or the purchase price,
if less, until such time as FIC's FHA Reserve has been reduced to a balance
which is less than such maximum amount. Accordingly, the transfer of insurance
coverage from FIC's FHA Reserve as the result of the repurchase of Title I
Mortgage Loans and Title I Contracts will cause a disproportionately larger
reduction to the FHA Insurance Amount for each individual Title I Mortgage Loan
and Title I Contract and if a significant amount of Title I Mortgage Loans and
Title I Contracts are repurchased, could result in a substantial reduction of
such FHA Insurance Amount and the relative percentage of such FHA Insurance
Amount to the principal balance of the Title I Mortgage Loans and Title I
Contracts remaining in the Trust Property.
REQUIREMENTS FOR TITLE I PROPERTY IMPROVEMENT LOANS AND CONTRACTS. The
proceeds of loans originated under the Title I Program for property improvements
may be used only for improvements that substantially protect or improve the
basic habitability or utility of an eligible property. Although Title I loans
are available for several types of properties, the Title I Mortgage Loans will
include primarily one-to four-family property improvement loans. FHA Regulations
require that the borrower have at least a one-half interest in (i) fee simple
title to the real property to be improved with the loan proceeds ("Secured
Property"), (ii) a lease on the Secured Property for a fixed term that expires
no sooner than six months after the maturity date of the property improvement
loan or (iii) a properly recorded land installment contract for the purchase of
the Secured Property. Any Title I property improvement loan originated after
August 1994 in excess of $7,500 must be secured by a recorded lien on the
improved property which is evidenced by a mortgage or deed of trust executed by
the borrower and all other owners in fee simple. Prior to August 1994, any Title
I property improvement loan in excess of $5,000 was required to be secured by
such a recorded lien.
The maximum principal amount of an eligible loan under the Title I Program,
must not exceed the actual cost of the project plus any authorized fees and
charges under the Title I Program as provided below; provided that such maximum
principal amount does not exceed $25,000 for a single family property
improvement loan. No single borrower is permitted to have more than an aggregate
of $25,000 in unpaid principal obligations with respect to Title I loans without
prior approval of HUD. Generally, the term of a Title I loan that is a property
improvement loan may not be less than six months nor greater than 20 years and
32 days. A borrower may obtain multiple Title I loans with respect to multiple
properties (subject to the aforementioned limit on loans to a single borrower),
and a borrower may obtain more than one Title I loan with respect to a single
property, in each case as long as the total outstanding balance of all Title I
loans on the same property does not exceed the maximum loan amount for the type
of Title I loan thereon having the highest permissible loan amount. If a
property improvement loan (or combination of loans on a single property) exceeds
$15,000, and either (i) the property is not owner occupied or (ii) the structure
on the property was completed within six months prior to the application for the
loan, the borrower is required to have equity in the property at least equal to
the loan amount. In all other cases, there is no requirement that the owner
contribute equity to the property other than fees and costs that may not be
added to the balance of the loan as described below.
Fees and charges that may be added to the balance of property improvement
loans include (i) architectural and engineering fees, (ii) building permit
costs, (iii) credit report costs, (vi) fees for required appraisals (if
applicable), (iv) title examination costs and (v) fees for required inspections
by the lender or its agent, up to $75. The Title I Lender is entitled to recover
the following fees and charges in connection with a property improvement loan
from the borrower as part of the borrower's initial payment: (i) an origination
fee not to exceed 1% of the loan amount, (ii) discount points, however, after
July 5, 1995, only to the extent a lender can demonstrate a clear relationship
between the charging of discount points and some tangible benefit to the
borrower such as a compensating decrease in the interest rate being charged,
(iii) recording fees, recording taxes, filing fees and documentary stamp taxes,
(iv) title insurance costs, (v) current year tax and insurance escrow payments,
(vi) fees necessary to establish the validity of the lien, (vii) appraisal fees
that are not eligible to be financed, (viii) survey costs, (ix) handling charges
for refinancing or modification of an existing loan, up to $100, (x) fees for
approving assumption or preparing assumption agreements, not to exceed 5%, (xi)
certain fees of closing agents and (xii) such other items as may be specified by
the FHA. FHA Regulations prohibit the advancement of such fees and charges to
the borrower by any party to the transaction.
FHA Regulations distinguish between "direct loans" and "dealer loans." A
loan is a "dealer loan" if an approved dealer having a direct or indirect
financial interest in the transaction assists the borrower in obtaining the
loan. A loan made by the lender to the borrower without the assistance of any
party with a financial interest in the loan transaction (other than the lender)
is a "direct loan."
With respect to dealer loans, the dealer-contractor typically enters into a
consumer credit contract or note with the borrower and, after completion of the
financed improvements, assigns the contract or note to the Title I Lender. The
dealer-contractor presents the loan application to the Title I Lender, receives
the check or money order representing the loan proceeds and may accompany the
borrower to the institution for the purpose of receiving payment. As a condition
to the disbursement of the proceeds of a dealer loan, the Title I Lender is
required to obtain a completion certificate signed by the borrower and the
dealer certifying that the improvements have been completed in accordance with
the contract and that the borrower has received no inducement from the dealer to
enter into the transaction other than discount points. The Title I Lender may
enter into an agreement under which the lender has full or partial recourse
against the dealer for a period of three years in the event the Title I Lender
sustains losses with respect to loans originated by such dealer and such loans
do not satisfy FHA Regulations. FHA Regulations require that each dealer meet
certain net worth and experience requirements and be approved by the FHA on an
annual basis. Any Title I Lender that makes dealer loans is required to
supervise and monitor the dealer's activities with respect to loans insured
under the Title I Program and to terminate a dealer's approval if the dealer
does not satisfactorily perform its contractual obligations or comply with Title
I Program requirements.
The note evidencing a property improvement loan insured under the Title I
Program is required to bear a genuine signature of the borrower and any co-maker
and co-signer, must be valid and enforceable, must be complete and regular on
its face and must have interest and principal stated separately. The interest
rate must be negotiated and agreed to by the borrower and the lender and must be
fixed for the term of the loan and recited in the note. Interest on the Title I
loan must accrue from the date of the loan and be calculated according to the
actuarial method, which allocates payments on the loan between principal and
interest such that a payment is applied first to accrued interest and any
remainder is subtracted from, or any deficiency is added to, the unpaid
principal balance.
Principal and interest on the note is required to be payable in equal
installments at least monthly except where the borrower has irregular cash flow.
The first and last payments may vary in amount from the regular installment
amount but may not exceed 150% of the regular installment amount. The first
payment may be due no later than two months from the date of the loan (i.e., the
date upon which proceeds are disbursed by the lender). Late charges may be
assessed only after fifteen days and cannot exceed the lesser of 5% of the
installment, up to a maximum of $10 and must be billed as an additional charge
to the borrower. In lieu of late charges, the note may provide for interest to
accrue on late installments on a daily basis at the note rate. The note must
include a provision for acceleration of maturity, at the option of the holder,
upon a default by the borrower and a provision permitting prepayment in part or
in full without penalty. The Title I Lender must assure that the note and all
other documents evidencing the loan are in compliance with applicable Federal,
state and local laws.
A written but unrecorded modification agreement executed by the borrower
may be used in lieu of refinancing a delinquent or defaulted loan to reduce or
increase the installment payment, but not to increase the term or interest rate.
A written modification agreement may also be used to refinance a loan in order
to reduce the interest rate, provided the loan is current. Alternatively, the
lender may negotiate an informal repayment plan for the borrower to cure a
temporary delinquency within a short period of time by sending a letter to the
borrower reciting the terms of the agreement. The lender may not release any
party from liability under the note or any lien securing an insured loan without
prior FHA approval.
FHA Regulations do not require that the borrower obtain title or fire and
casualty insurance as a condition to obtaining loan, except with respect to
manufactured home loans. If the property is located in a flood hazard area,
however, flood insurance in an amount at least equal to the loan amount is
required at the date of loan disbursement. The Borrower is required to maintain
flood insurance of at least the unpaid balance of the loan (or the value of the
property if state law so limits the amount of flood insurance).
REQUIREMENTS FOR TITLE I MANUFACTURED HOME CONTRACTS. The maximum principal
amount for any Title I Contract for a Manufactured Home must not exceed the sum
of certain itemized amounts, which include a specified percentage of the
purchase price of the manufactured home depending on whether it is a new or
existing home; provided that such maximum amount does not exceed the following
loan amounts: (i) $48,600 for a new or existing manufactured home purchase loan;
(ii) $16,200 for a manufactured home lot purchase; and (iii) $64,800 for a
combination loan (i.e. a loan to purchase a new or existing manufactured home
and the lot for such home). Generally, the term of a Title I Contract for a
Manufactured Home may not be less than six months nor greater than 20 years and
32 days, except that the maximum term of a manufactured home lot loan is limited
to 15 years and 32 days and the maximum term of a multimodule manufactured home
and lot in combination is limited to 25 years and 32 days.
Borrower eligibility for a Title I Contract for a Manufactured Home
requires that the borrower become the owner of the property to be financed with
such loan and occupy the manufactured home as the borrower's principal
residence, except for a manufactured home lot loan which allows six months from
the date of the loan to occupy the home as the borrower's principal residence.
If a manufactured home is classified as realty, then ownership of the home must
be in fee simple, and also, the ownership of the manufactured home lot must be
in fee simple, except for a lot which consists of a share in a cooperative
association that owns and operates a manufactured home park. The borrower's
minimum cash down payment requirement to obtain financing through a Title I
Contract for a Manufactured Home is as follows: (i) at least 5% of the first
$5,000 and 10% of the balance of the purchase price of a new manufactured home
and at least 10% of the purchase price of an existing manufactured home for a
manufactured home purchase loan, or in lieu of a full or partial cash down
payment, the trade-in of the borrower's equity in an existing manufactured home;
(ii) at least 10% of the purchase price and development costs of a lot for a
manufactured home lot loan; and (iii) at least 5% of the first $5,000 and 10% of
the balance of the purchase price of the manufactured home and lot for a
combination loan.
Any manufactured home financed by a Title I Contract must be certified by
the manufacturer to have been constructed in compliance with the National
Manufactured Housing Construction and Safety Standards Act of 1974 (42 U.S.C.
ss.ss. 5401-5426), so as to conform to all applicable Federal construction and
safety standards, and with respect to the purchase of a new manufactured home,
the manufacturer must furnish the borrower with a one year written warranty on a
HUD approved form which obligates the manufacturer to correct any nonconformity
with all applicable Federal construction and safety standards or any defects in
materials or workmanship which become evident within one year after the date of
delivery. The regulations under the Title I Program set forth certain additional
requirements relating to the construction, transportation and installation of
any manufactured home and standards for the manufactured homesite financed by
any Title I Contract. The proceeds from a Title I Contract for a Manufactured
Home may be used as follows: the purchase or refinancing of a manufactured home,
a suitably developed lot for a manufactured home already owned by the borrower
or a manufactured home and suitably developed lot for the home in combination;
or the refinancing of an existing manufactured home already owned by the
borrower in connection with the purchase of a manufactured home lot or an
existing lot already owned by the borrower in connection with the purchase of a
manufactured home. In addition, the proceeds for a Title I Contract for a
Manufactured Home which is a manufactured home purchase loan may be used for the
purchase, construction or installation of a garage, carport, patio or other
comparable appurtenance to the manufactured home, and the proceeds for a Title I
Contract for a Manufactured Home which is a combination loan may be used for the
purchase, construction or installation of a foundation, garage, carport, patio
or other comparable appurtenance to the manufactured home. The proceeds from a
Title I Contract for a Manufactured Home cannot be used for the purchase of
furniture or the financing of any items and activities which are set forth on
the list published by the Secretary of HUD as amended from time to time.
Any Title I Contract for a Manufactured Home must be secured by a recorded
lien on the manufactured home (or lot or home and lot, as appropriate), its
furnishings, equipment, accessories and appurtenance, which lien must be a first
lien, superior to any other lien on the property which is evidenced by a
properly recorded financing statement, a properly recorded security instrument
executed by the borrower and any other owner of the property or other acceptable
instrument. With respect to any Title I Contract involving a manufactured home
purchase loan or combination loan and the sale of the manufactured home by a
dealer, the lender or its agent (other than a manufactured home dealer) must
conduct a site-of-placement inspection within 60 days after the date of the loan
to verify that the terms and conditions of the purchase contract have been met,
the manufactured home and any options and appurtenances included in the purchase
price or financed with the loan have been delivered and installed and the
placement certificate executed by the borrower and the dealer is in order.
TITLE I UNDERWRITING REQUIREMENTS. FHA Regulations require that, before
making a loan insured under the Title I Program, a Title I Lender exercise
prudence and diligence in determining whether the borrower and any co-maker or
co-signer is solvent and an acceptable credit risk with a reasonable ability to
make payments on the loan obligation. Prior to loan approval, the Title I Lender
is required to satisfy specified credit underwriting requirements and to keep
documentation supporting its credit determination. As part of its credit
underwriting, the Title I Lender must obtain the following: (i) a dated credit
application executed by the borrower, any co-maker and any co-signer, (ii)
written verification of current employment and current income of the borrower
and any co-maker or co-signer, (iii) a consumer credit report stating the credit
accounts and payment history of the borrower and any co-maker or co-signer, (iv)
on loans in excess of $5,000, written evidence that the borrower is not over 30
days delinquent on any senior lien instruments encumbering the improved
property, (v) verification whether the borrower is in default on any obligation
owed to or insured or guaranteed by the Federal Government and (vi) written
verification of the source of funds for any initial payment required of the
borrower if such payment is in excess of 5% of the loan. Before making a final
credit determination, the lender is required to conduct a face-to-face or
telephone interview with the borrower and any co-maker or co-signer to resolve
any discrepancies in the information on the credit application and to assure
that the information is accurate and complete. The Title I Lender's files must
contain, among other things, the note or other debt instrument, the lien
instrument and a copy of the property improvement contract (in the case of a
dealer loan) or a detailed written description of the work to be performed, the
materials to be furnished and the estimated cost (for a loan not involving a
dealer or contractor).
The Title I Lender is required to satisfy itself that the borrower's income
is adequate to make the payments required under the loan and to pay the
borrower's housing and other recurring expenses. The borrower's housing and
other recurring expenses generally may not exceed a maximum percentage of gross
income as published from time to time in the Federal Register. The Title I
Lender is required to document any compensating factors that support the
approval of the loan if such expense-to-income ratios are not satisfied. A Title
I Lender is prohibited from approving a loan under the Title I Program without
the approval of the FHA if the lender has knowledge that the borrower is past
due more than 30 days under the original terms of an obligation owed to or
insured or guaranteed by the Federal Government or the borrower has made
material misstatements of fact on applications for loans or other assistance.
UNDER THE TITLE I PROGRAM, THE FHA DOES NOT REVIEW OR APPROVE FOR
QUALIFICATION FOR INSURANCE THE INDIVIDUAL LOAN INSURED THEREUNDER AT THE TIME
OF APPROVAL BY THE LENDING INSTITUTION (AS IS TYPICALLY THE CASE WITH OTHER
FEDERAL LOAN INSURANCE PROGRAMS). If, after a loan has been made and reported
for insurance under the Title I Program, a Title I Lender discovers any material
misstatement of fact or that the loan proceeds have been misused by the
borrower, dealer or any other party, such Title I Lender is required promptly to
report such finding to the FHA. In such case, provided that the validity of any
lien on the property has not been impaired, the insurance of the loan under the
Title I Program will not be affected unless such material misstatement of facts
or misuse of loan proceeds was caused by (or was knowingly sanctioned by) such
Title I Lender or its employees.
CLAIMS PROCEDURES UNDER TITLE I. The term "default" is defined under FHA
Regulations as the failure of the borrower to make any payment due under the
note for a period of 30 days after such payment is due. The "date of default" is
considered to be the date 30 days after the borrower's first failure to make an
installment payment on the note that is not covered by subsequent payments
applied to overdue installments in the order they became due. When a loan
reported for insurance under the Title I Program goes into default, a Title I
Lender is required to contact the borrower and any co-maker and co-signer by
telephone or in person to determine the reasons for the default and to seek a
cure. If such Title I Lender is not able to effect a cure after diligent
efforts, it may provide the borrower with a notice of default stating that the
loan will be accelerated in 30 days if the loan is not brought current or the
borrower does not enter into a loan modification agreement or repayment plan.
The notice of default must meet certain requirements set forth in the FHA
Regulations and must conform to applicable state law provisions. Such Title I
Lender is permitted to rescind the acceleration of maturity of the loan only if
the borrower brings the loan current, executes a modification agreement or
agrees to an acceptable repayment plan.
Following acceleration of maturity of a secured property improvement loan,
a Title I Lender has the option to proceed against the security or make a claim
under its contract of insurance. If a Title I Lender chooses to proceed against
the Secured Property under a security instrument (or if it accepts a voluntary
conveyance or surrender of the Secured Property), (i) the Title I Lender must
proceed against the loan security by foreclosure and acquire good, marketable
title to the property securing the loan and (ii) the Title I Lender must take
all actions necessary under applicable law to preserve its rights, if any, to
obtain a deficiency judgment against the borrower, provided however, the Title I
Lender may still file an FHA Insurance claim, but only with the prior approval
of the Secretary of HUD.
If a Title I Lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file, certification of
compliance with applicable state and local laws in carrying out any foreclosure
or repossession, and where the borrower is in bankruptcy or deceased, evidence
that the lender has properly filed proofs of claims. Generally, a Title I Lender
must file its claim of insurance with the FHA not later than nine months after
the date of default. Concurrently with filing the insurance claim, such Title I
Lender is required to assign to the United States of America it's entire
interest in the note (or a judgment in lieu of the note), in any securities held
and in any claims filed in any legal proceedings. If, at the time the note is
assigned to the United States, the Secretary of HUD has reason to believe that
the note is not valid or enforceable against the borrower, the FHA may deny the
claim and reassign the note to the Title I Lender. If either such defect is
discovered after the FHA has paid a claim, the FHA may require the Title I
Lender to repurchase the paid claim and to accept an assignment of the loan
note. If the Title I Lender subsequently obtains a valid and enforceable
judgment against the borrower, it may resubmit a new insurance claim with an
assignment of the judgment. The FHA may contest any insurance claim previously
paid by it and make a demand for repurchase of the loan with respect to which
the claim was paid at any time up to two years from the date the claim was
certified for payment and may do so thereafter in the event of fraud or
misrepresentation on the part of the Title I Lender.
A claim for reimbursement of loss with respect to a loan eligible for
insurance under the Title I Program is required to be made on an FHA-approved
form executed by a duly qualified officer of the Title I Lender and must be
accompanied by copies of certain relevant documents and documentation specified
in the FHA Regulations to support the claim. The Title I Lender is required,
among other things, to document its efforts to effect recourse against any
dealer in accordance with any recourse agreement with such dealer. If the loan
is subject to an unsatisfied dealer recourse agreement claim, the Title I Lender
is also required to assign its rights under such recourse agreement. The FHA has
the right to deny any claim for insurance in whole or in part based upon a
violation of the FHA Regulations unless a waiver of compliance is granted. The
Title I Lender is permitted to appeal any such claim denial and resubmit the
claim within six months of the date of the claim denial, subject to a
reprocessing fee. The applicable Sale and Servicing Agreement or Pooling and
Servicing Agreement provides that the Trustee (or the Administrator) shall
submit an FHA Claim with respect to any Title I Mortgage Loan or Title I
Contract that goes into default if the default cannot be cured.
If, as a result of the delay in the transfer of the FHA Insurance described
above, FHA Insurance is not available with respect to any defaulted Title I
Mortgage Loan or Title I Contract at the time it goes into default, then the
amount required to make interest payments to the Securityholders with respect to
the principal amount thereof, until such FHA Insurance becomes available and a
claim for insurance can be made, if at all, will be paid from other amounts, if
any, available in the Distribution Account.
NO RIGHTS OF SECURITYHOLDERS AGAINST FHA. Because the Trust and the
Securityholders will not hold an FHA contract of insurance, the FHA will not
recognize the Trust or the Securityholders as the owners of the Title I Mortgage
Loans, Title I Contracts or any portion thereof, entitled to submit FHA Claims
to the FHA. Accordingly, the Trust and the Securityholders will have no direct
right to receive insurance payments from the FHA. In the event the Trustee (or
the Administrator, if any) submits an FHA Claim to the FHA and the FHA approves
payment of such FHA Claim, the related FHA Insurance Proceeds will be payable
only to the Trustee or to the Administrator, if any, as agent and
attorney-in-fact for the Trustee. The Securityholders' rights relating to the
receipt of payment from and the administration, processing and submissions of
FHA Claims by the Trustee or the Administrator, if any, are limited and governed
by the related Sale and Servicing Agreement or Pooling and Servicing Agreement
and FHA Claims Administration Agreement and these functions are obligations of
the Trustee and the Administrator, if any, not the FHA.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes certain material federal income tax
consequences that may be relevant to a prospective purchaser of Certificates or
Notes. This discussion is based on current law. It is not exhaustive of all
possible tax considerations. It does not discuss state, local, or foreign tax
considerations, nor is it a detailed discussion of all of the aspects of federal
income taxation that may be relevant to a prospective investor in light of the
investor's particular circumstances or that may be relevant to certain types of
investors (including insurance companies, certain tax-exempt entities, financial
institutions, and broker/dealers) subject to special treatment under federal
income tax laws.
OPINION OF COUNSEL
Brown & Wood LLP ("Tax Counsel") will opine with respect to each Series
that (i) any Trust created with respect to a Series will not be a business
entity classified as a corporation, a publicly traded partnership treated as a
corporation, or a taxable mortgage pool and (ii) any Notes issued as part of any
Series, unless otherwise disclosed in the related Prospectus Supplement, will be
treated as debt instruments for federal income tax purposes. An opinion of Tax
Counsel is not, however, binding on the Internal Revenue Service ("IRS") or on
any court. No ruling on any of the issues discussed below will be sought from
the IRS. If specified in the Prospectus Supplement, with respect to a particular
series of Securities, an election may be made to treat the trust or one or more
segregated pools of assets therein as one or more FASITs within the meaning of
the Internal Revenue Code (the "Code").
Taxpayers and preparers of tax returns (including those filed by any
partnership or other issuers) should be aware that under applicable Treasury
Regulations a provider of advice on specific issues of law is not considered an
income tax return preparer unless the advice (i) is given with respect to events
that have occurred at the time the advice is rendered and is not given with
respect to the consequences of contemplated actions, and (ii) is directly
relevant to the determination of an entry on a tax return. Accordingly,
taxpayers should consult their respective tax advisors and return preparers
regarding the preparation of any item on a tax return, even where the
anticipated tax treatment has been discussed herein.
TRUSTS CHARACTERIZED AS GRANTOR TRUSTS
If a Trust is created pursuant to either a Pooling and Servicing Agreement
or a Trust Agreement (an "Agreement"), and (i) the Trust issues only one class
of Certificates that evidences the entire undivided interest in each item of
Trust Property, and (ii) no power exists under the Agreement to vary the
investment of the Certificateholders, then the Trust will be classified as a
trust for federal income tax purposes under Treasury Regulation ss.
301.7701-4(c) (a "Grantor Trust").
Generally, a Trust will be a Grantor Trust only if the entire ownership
interest in the Trust Property is vested in a single class of
Certificateholders. Thus, for instance, if the Seller were to retain an
uncertificated interest in any Excess Spread, the Trust might not qualify as a
Grantor Trust because the Seller would have a second class of ownership interest
in Trust Property that differed from that held by the Certificateholders. A
Trust will not, however, violate the general prohibition against multiple
classes of ownership and will qualify as a Grantor Trust if it issues more than
one class of ownership interests and each such class represents rights to
specific payments of principal or interest with respect to each Loan Asset. See
"Certain Federal Income Tax Consequences -- Certificates Treated as Stripped
Interests."
A power to vary the investment of the Certificateholders generally will not
exist if the Agreement prohibits the reinvestment of the proceeds of Trust
Property. The IRS has issued rulings indicating that a limited power to reinvest
during the initial 90 days following the creation of a trust would not be
considered an impermissible power to vary the investment. Thus, if a trust held
a pre-funding account and applied the cash held in that account to acquire Loan
Assets during a 90-day period following the creation of the trust, the
investment of the cash held in the pre-funding account would not be viewed as a
power to vary the Trust's investments.
If an Agreement conferred upon the Trustee or upon the Seller a power to
vary the investment of the Certificateholders that would preclude Grantor Trust
classification, the Trust would be classified as a business entity. A domestic
unincorporated business entity that has more than one owner is treated as a
partnership for federal income tax purposes. See "Trusts Classified As
Partnerships."
TAX TREATMENT OF CERTIFICATES OTHER THAN STRIPPED INTERESTS. Each
Certificateholder will be treated for federal tax purposes as an owner of an
undivided interest in each item of Trust Property. Each Grantor Trust
Certificateholder will be required to report on its federal income tax return in
accordance with such Grantor Trust Certificateholder's method of accounting its
pro rata share of the entire income from the Trust Property, including interest,
OID, if any, prepayment fees, assumption fees, any gain recognized upon an
assumption and late payment charges received by the Servicer. Under Sections 162
or 212 each Grantor Trust Certificateholder will be entitled to deduct its pro
rata share of servicing fees, prepayment fees, assumption fees, any loss
recognized upon an assumption and late payment charges retained by the Servicer,
provided that such amounts are reasonable compensation for services rendered to
the Trust. Grantor Trust Certificateholders who are individuals, estates, or
trusts will be entitled to deduct their share of expenses only to the extent
such expenses plus all other Section 212 expenses exceed two percent of the
Certificateholder's adjusted gross income. A Grantor Trust Certificateholder
using the cash method of accounting must take into account its pro rata share of
income and deductions as and when collected by or paid to the Servicer. A
Grantor Trust Certificateholder using an accrual method of accounting must take
into account its pro rata share of income and deductions as they become due or
are paid to the Servicer, whichever is earlier. If the servicing fees paid to
the Servicer are deemed to exceed reasonable servicing compensation, the amount
of such excess could be considered as an ownership interest retained by the
Servicer (or any person to whom the Servicer assigned for value all or a portion
of the servicing fees) in a portion of the interest payments on the Loan Assets.
The Loan Assets would then be subject to the "coupon stripping" rules of Section
1286 of the Code. If the coupon stripping rules were to apply to a Trust, such
application would not adversely affect the classification of the Trust as a
Grantor Trust. Moreover, such application would not adversely affect the
Certificateholders.
ORIGINAL ISSUE DISCOUNT. Generally, a Grantor Trust Certificateholder that
acquires an undivided interest in a Loan Asset issued with OID must include in
gross income the sum of the "daily portions," as defined below, of the OID on
such Loan Asset for each day on which it owns a Certificate, including the date
of purchase but excluding the date of disposition. The daily portions of OID
with respect to a Loan Asset generally would be determined as follows. A
calculation will be made of the portion of OID that accrues on the Loan Asset
during each successive monthly accrual period (or shorter period in respect of
the date of original issue or the final Distribution Date). This will be done,
in the case of each full monthly accrual period, by adding (i) the present value
of all remaining payments to be received on the Loan Asset under the prepayment
assumption used in respect of the Loan Assets and (ii) any payments received
during such accrual period, and subtracting from that total the "adjusted issue
price" of the Loan Asset at the beginning of such accrual period. No
representation is made that the Loan Assets will prepay at any prepayment
assumption. The "adjusted issue price" of a Loan Asset at the beginning of the
first accrual period is its issue price (as determined for purposes of the OID
rules of the Code) and the "adjusted issue price" of a Loan Asset at the
beginning of a subsequent accrual period is the "adjusted issue price" at the
beginning of the immediately preceding accrual period plus the amount of OID
allocable to that accrual period and reduced by the amount of any payment (other
than "qualified stated interest") made at the end of or during that accrual
period. The OID accruing during such accrual period will then be divided by the
number of days in the period to determine the daily portion of OID for each day
in the period. With respect to an initial accrual period shorter than a full
monthly accrual period, the daily portions of OID must be determined according
to a reasonable method, provided that such method is consistent with the method
used to determine the yield to maturity of the Loan Assets.
With respect to the Loan Assets, the method of calculating OID as described
above will cause the accrual of OID to either increase or decrease (but never
below zero) in any given accrual period to reflect the fact that prepayments are
occurring at a faster or slower rate than the prepayment assumption used in
respect of the Loan Assets.
MARKET DISCOUNT. A Grantor Trust Certificateholder that acquires an
undivided interest in Loan Assets may be subject to the market discount rules of
Sections 1276 through 1278 to the extent an undivided interest in a Loan Asset
is considered to have been purchased at a "market discount." Generally, the
amount of market discount is equal to the excess of the portion of the principal
amount of such Loan Asset allocable to such holder's undivided interest over
such holder's tax basis in such interest. Market discount with respect to a
Grantor Trust Certificate will be considered to be zero if the amount allocable
to the Grantor Trust Certificate is less than 0.25% of the Grantor Trust
Certificate's stated redemption price at maturity multiplied by the weighted
average maturity remaining after the date of purchase. Treasury regulations
implementing the market discount rules have not yet been issued; therefore,
investors should consult their own tax advisors regarding the application of
these rules and the advisability of making any of the elections allowed under
Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled payment
or a prepayment) or any gain on disposition of a market discount bond shall be
treated as ordinary income to the extent that it does not exceed the accrued
market discount at the time of such payment. The amount of accrued market
discount for purposes of determining the tax treatment of subsequent principal
payments or dispositions of the market discount bond is to be reduced by the
amount so treated as ordinary income.
The Code also grants the Treasury Department authority to issue regulations
providing for the computation of accrued market discount on debt instruments,
the principal of which is payable in more than one installment. While the
Treasury Department has not yet issued regulations, rules described in the
relevant legislative history will apply. Under those rules, the holder of a
market discount bond may elect to accrue market discount either on the basis of
a constant interest rate or according to one of the following methods. If a
Grantor Trust Certificate is issued with OID, the amount of market discount that
accrues during any accrual period would be equal to the product of (i) the total
remaining market discount and (ii) a fraction, the numerator of which is the OID
accruing during the period and the denominator of which is the total remaining
OID at the beginning of the accrual period. For Grantor Trust Certificates
issued without OID, the amount of market discount that accrues during a period
is equal to the product of (i) the total remaining market discount and (ii) a
fraction, the numerator of which is the amount of stated interest paid during
the accrual period and the denominator of which is the total amount of stated
interest remaining to be paid at the beginning of the accrual period. For
purposes of calculating market discount under any of the above methods in the
case of instruments (such as the Grantor Trust Certificates) that provide for
payments that may be accelerated by reason of prepayments of other obligations
securing such instruments, the same prepayment assumption applicable to
calculating the accrual of OID will apply. Because the regulations described
above have not been issued, it is impossible to predict what effect those
regulations might have on the tax treatment of a Grantor Trust Certificate
purchased at a discount or premium in the secondary market.
A holder who acquired a Grantor Trust Certificate at a market discount also
may be required to defer a portion of its interest deductions for the taxable
year attributable to any indebtedness incurred or continued to purchase or carry
such Grantor Trust Certificate purchased with market discount. For these
purposes, the de minimis rule referred above applies. Any such deferred interest
expense would not exceed the market discount that accrues during such taxable
year and is, in general, allowed as a deduction not later than the year in which
such market discount is includible in income. If such holder elects to include
market discount in income currently as it accrues on all market discount
instruments acquired by such holder in that taxable year or thereafter, the
interest deferral rule described above will not apply.
PREMIUM. To the extent a Grantor Trust Certificateholder is considered to
have purchased an undivided interest in a Loan Asset for an amount that is
greater than its stated redemption price at maturity of such Loan Asset, such
Grantor Trust Certificateholder will be considered to have purchased the Loan
Asset with "amortizable bond premium" equal in amount to such excess. A Grantor
Trust Certificateholder (who does not hold the Certificate for sale to customers
or in inventory) may elect under Section 171 of the Code to amortize such
premium. Under the Code, premium is allocated among the interest payments on the
Loan Assets to which it relates and is considered as an offset against (and thus
a reduction of) such interest payments. With certain exceptions, such an
election would apply to all debt instruments held or subsequently acquired by
the electing holder. Absent such an election, the premium will be deductible as
an ordinary loss only upon disposition of the Certificate or pro rata as
principal is paid on the Loan Assets.
ELECTION TO TREAT ALL INTEREST AS OID. The OID regulations permit a Grantor
Trust Certificateholder to elect to accrue all interest, discount (including de
minimis market or original issue discount) and premium in income as interest,
based on a constant yield method. If such an election were to be made with
respect to a Grantor Trust Certificate with market discount, the
Certificateholder would be deemed to have made an election to include in income
currently market discount with respect to all other debt instruments having
market discount that such Grantor Trust Certificateholder acquires during the
year of the election or thereafter. Similarly, a Grantor Trust Certificateholder
that makes this election for a Grantor Trust Certificate that is acquired at a
premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that such
Grantor Trust Certificateholder owns or acquires.
CERTIFICATES TREATED AS STRIPPED INTERESTS. A Grantor Trust Certificate
could represent the right to receive particular payments of interest or
principal with respect to each Loan Asset held in a Trust ("Stripped
Interests"). Grantor Trust Certificates that represent Stripped Interests are
subject to rules concerning the tax treatment of stripped coupons and stripped
bonds set out in section 1286 of the Code (the "Coupon Stripping Rules").
If a Grantor Trust Certificate represents an ownership interest in stripped
coupons, then, for purposes of computing OID, such stripped coupons are treated
as debt issued on the date on which the Certificateholder purchased the Grantor
Trust Certificate and as having an issue price equal to the purchase price paid
by the Certificateholder. The regulations that generally provide rules for
accrual of OID do not directly address the accrual of OID on instruments subject
to the Coupon Stripping Rules. However, a reasonable method for accrual of OID
on such instruments is that described above for accrual of OID on Loan Assets.
For information reporting purposes, the Trustee of the Grantor Trust will employ
that methodology.
SALE OR EXCHANGE OF A GRANTOR TRUST CERTIFICATE. Sale or exchange of a
Grantor Trust Certificate prior to its maturity will result in gain or loss
equal to the difference, if any, between the amount received and the owner's
adjusted basis in the Grantor Trust Certificate. Such adjusted basis generally
will equal the seller's purchase price for the Grantor Trust Certificate,
increased by the OID included in the seller's gross income with respect to the
Grantor Trust Certificate, and reduced by principal payments on the Grantor
Trust Certificate previously received by the seller. Such gain or loss will be
capital gain or loss to an owner for which a Grantor Trust Certificate is a
"capital asset" within the meaning of Section 1221. The Taxpayer Relief Act of
1997 reduces the maximum rates on a long-term capital gains recognized on
capital assets held by individual taxpayers for more than eighteen months as of
the date of disposition (and would further reduce the maximum rates on such
gains in the year 2001 and thereafter for certain individual taxpayers who meet
specified conditions). Prospective investors should consult their own tax
advisors concerning these tax law changes.
Grantor Trust Certificates will represent ownership of "evidences of
indebtedness" within the meaning of Section 582(c)(1), so that gain or loss
recognized from the sale of a Grantor Trust Certificate by a bank or a thrift
institution to which such section applies will be treated as ordinary income or
loss.
NON-U.S. PERSONS. Generally, interest or OID paid by the person required to
withhold tax under Section 1441 or 1442 to (i) an owner that is not a U.S.
Person (as defined below) or (ii) a Grantor Trust Certificateholder holding on
behalf of an owner that is not a U.S. Person and accrued OID recognized by the
owner on the sale or exchange of such a Grantor Trust Certificate will not be
subject to withholding to the extent that a Grantor Trust Certificate evidences
ownership in Loan Assets issued after July 18, 1984 by natural persons if such
Grantor Trust Certificateholder complies with certain identification
requirements (including delivery of a statement, signed by the Grantor Trust
Certificateholder under penalties of perjury, certifying that such Grantor Trust
Certificateholder is not a U.S. Person and providing the name and address of
such Grantor Trust Certificateholder). Additional restrictions apply to Loan
Assets where the obligor is not a natural person in order to qualify for the
exemption from withholding.
The term "U.S. Person" means (i) a citizen or resident of the United
States; (ii) a corporation (or entity treated as a corporation for tax purposes)
created or organized in the United States or under the laws of the United States
or of any state; (iii) a partnership (or entity treated as a partnership for tax
purposes) organized in the United States or under the laws of the United States
or of any state (unless provided otherwise by future Treasury regulations); (iv)
an estate whose income is includible in gross income for United States income
tax purposes regardless of its source; or, (v) a trust, if a court within the
United States is able to exercise primary supervision over the administration of
the trust and one or more U.S. Persons have authority to control all substantial
decisions of the trust. Notwithstanding the last clause of the preceding
sentence, to the extent provided in Treasury regulations, certain trusts in
existence on August 20, 1996, and treated as U.S. Persons prior to such date,
may elect to continue to be U.S. Persons.
INFORMATION REPORTING AND BACKUP WITHHOLDING. The Servicer will furnish or
make available, within a reasonable time after the end of each calendar year, to
each person who was a Grantor Trust Certificateholder at any time during such
year, such information as may be deemed necessary or desirable to assist Grantor
Trust Certificateholders in preparing their federal income tax returns, or to
enable holders to make such information available to beneficial owners or
financial intermediaries that hold Grantor Trust Certificates as nominees on
behalf of beneficial owners. If a holder, beneficial owner, financial
intermediary or other recipient of a payment on behalf of a beneficial owner
fails to supply a certified taxpayer identification number or if the Secretary
of the Treasury determines that such person has not reported all interest and
dividend income required to be shown on its federal income tax return, 31%
backup withholding may be required with respect to any payments. Any amounts
deducted and withheld from a distribution to a recipient would be allowed as a
credit against such recipient's federal income tax liability.
TRUSTS CHARACTERIZED AS PARTNERSHIPS
If a Trust is classified for federal income tax purposes as a partnership,
it will not be subject to federal income tax. Rather, each Certificateholder
will be required to separately take into account such holder's allocated share
of income, gains, losses, deductions and credits of the Trust. The Trust's
income will consist primarily of interest earned on the Loan Assets (including
appropriate adjustments for market discount, OID and bond premium) and any gain
upon foreclosure of Loan Assets. The Trust's deductions will consist primarily
of interest accruing with respect to the Notes, servicing and other fees, and
losses or deductions upon foreclosure of the Loan Assets.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Trust for each month equal to the sum of (i) the interest that accrues on the
Certificates in accordance with their terms for such month, including interest
accruing at the Pass Through Rate for such month and interest on amounts
previously due on the Certificates but not yet distributed; (ii) any Trust
income attributable to discount on the Loan Assets that corresponds to any
excess of the principal amount of the Certificates over their initial issue
price; (iii) prepayment premium payable to the Certificateholders for such
month; and (iv) any other amounts of income payable to the Certificateholders
for such month. Such allocation will be reduced by any amortization by the Trust
of premium on Loan Assets that corresponds to any excess of the issue price of
Certificates over their principal amount. All remaining taxable income of the
Trust will be allocated to the Seller. Based on the economic arrangement of the
parties, this approach for allocating Trust income should be permissible under
applicable Treasury regulations, although no assurance can be given that the IRS
would not require a greater amount of income to be allocated to
Certificateholders. Moreover, even under the foregoing method of allocation,
Certificateholders may be allocated income equal to the entire Pass Through Rate
plus the other items described above even though the Trust might not have
sufficient cash to make current cash distributions of such amount. Thus, cash
basis holders will in effect be required to report income from the Certificates
on the accrual basis and Certificateholders may become liable for taxes on Trust
income even if they have not received cash from the Trust to pay such taxes. In
addition, because tax allocations and tax reporting will be done on a uniform
basis for all Certificateholders but Certificateholders may be purchasing
Certificates at different times and at different prices, Certificateholders may
be required to report on their tax returns taxable income that is greater or
less than the amount reported to them by the Trust.
All of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute "unrelated business
taxable income" generally taxable to such a holder under the Code.
An individual taxpayer's share of expenses of the Trust (including fees to
the Servicer but not interest expense) would be miscellaneous itemized
deductions. Such deductions might be disallowed to the individual in whole or in
part and might result in such holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to such holder over the life of
the Trust.
The Trust intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Receivable, the Trust
might be required to incur additional expense but it is believed that there
would not be a material adverse effect on Certificateholders.
DISCOUNT AND PREMIUM. It is believed that the Loan Assets were not issued
with OID, and, therefore, the Trust should not have OID income. However, the
purchase price paid by the Trust for the Loan Assets may be greater or less than
the remaining principal balance of the Loan Assets at the time of purchase. If
so, the Loan Assets will have been acquired at a premium or discount, as the
case may be. (As indicated above, the Trust will make this calculation on an
aggregate basis, but might be required to recompute it on an asset-by-asset
basis.)
If the Trust acquires the Loan Assets at a market discount or premium, the
Trust will elect to include any such discount in income currently as it accrues
over the life of the Loan Assets or to offset any such premium against interest
income on the Loan Assets. As indicated above, a portion of such market discount
income or premium deduction may be allocated to Certificateholders.
SECTION 708 TERMINATION. Under Section 708 of the Code, the Trust will be
deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust are sold or exchanged within a
12-month period. If such a termination occurs, the Trust will be deemed to have
contributed all of its assets subject to all of its liabilities (including the
Notes) to a new partnership in exchange for interests in the new partnership,
immediately after which, the Trust would be treated as distributing interests in
the new partnership to the remaining Certificateholders and the new
Certificateholder(s). The Trust will not comply with certain technical
requirements that apply when such a constructive termination occurs. As a
result, the Trust may be subject to certain tax penalties and may incur
additional expenses if it is required to comply with those requirements.
Furthermore, the Trust might not be able to comply due to lack of data.
DISPOSITION OF CERTIFICATES. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A Certificateholder's tax basis in a Certificate will generally equal the
holder's cost increased by the holder's share of Trust income and decreased by
any distributions received with respect to such Certificate. In addition, both
the tax basis in the Certificates and the amount realized on a sale of a
Certificate would include the holder's share of the Notes and other liabilities
of the Trust. A holder acquiring Certificates at different prices will be
required to maintain a single aggregate adjusted tax basis in such Certificates,
and, upon sale or other disposition of some of the Certificates, allocate a
portion of such aggregate tax basis to the Certificates sold (rather than
maintaining a separate tax basis in each Certificate for purposes of computing
gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's share of
unrecognized accrued market discount on the Loan Assets would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The Trust does not expect to have any other assets that
would give rise to such special reporting requirements. Thus, to avoid those
special reporting requirements, the Trust will elect to include market discount
in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES. In general, the Trust's
taxable income and losses will be determined monthly and the tax items for a
particular calendar month will be apportioned among the Certificateholders in
proportion to the principal amount of Certificates owned by them as of the close
of the last day of such month. As a result, a holder purchasing Certificates may
be allocated tax items (which will affect its tax liability and tax basis)
attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust might be reallocated among the Certificateholders. The Seller is
authorized to revise the Trust's method of allocation between transferors and
transferees to conform to a method permitted by future regulations.
SECTION 754 ELECTION. If a Certificateholder sells its Certificates at a
profit (loss), the purchasing Certificateholder will have a higher (lower) basis
in the Certificates than the selling Certificateholder had. The tax basis of the
Trust's assets will not be adjusted to reflect that higher (or lower) basis
unless the Trust were to file an election under Section 754 of the Code. In
order to avoid the administrative complexities that would be involved in keeping
accurate accounting records, as well as potentially onerous information
reporting requirements, the Trust will not make such election. As a result,
Certificateholders might be allocated a greater or lesser amount of Trust income
than would be appropriate based on their own purchase price for Certificates.
ADMINISTRATIVE MATTERS. The Owner Trustee is required to keep or have kept
complete and accurate books of the Trust. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust will be set forth in the related Prospectus Supplement. The Trustee
will file a partnership information return (IRS Form 1065) with the IRS for each
taxable year of the Trust and will report each Certificateholder's allocable
share of items of Trust income and expense to holders and the IRS on Schedule
K-1. The Trust will provide the Schedule K-1 information to nominees that fail
to provide the Trust with the information statement described below and such
nominees will be required to forward such information to the beneficial owners
of the Certificates. Generally, holders must file tax returns that are
consistent with the information return filed by the Trust or be subject to
penalties unless the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust with
a statement containing certain information on the nominee, the beneficial owners
and the Certificates so held. Such information includes (i) the name, address
and taxpayer identification number of the nominee and (ii) as to each beneficial
owner (x) the name, address and identification number of such person, (y)
whether such person is a United States person, a tax-exempt entity or a foreign
government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust information as
to themselves and their ownership of Certificates. A clearing agency registered
under Section 17A of the Exchange Act is not required to furnish any such
information statement to the Trust. The information referred to above for any
calendar year must be furnished to the Trust on or before the following January
31. Nominees, brokers and financial institutions that fail to provide the Trust
with the information described above may be subject to penalties.
The Seller will be designated as the tax matters partner in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust by the appropriate taxing authorities could
result in an adjustment of the returns of the Certificateholders, and, under
certain circumstances, a Certificateholder may be precluded from separately
litigating a proposed adjustment to the items of the Trust. An adjustment could
also result in an audit of a Certificateholder's returns and adjustments of
items not related to the income and losses of the Trust.
TAX CONSEQUENCES TO FOREIGN CERTIFICATEHOLDERS. It is not clear whether the
Trust would be considered to be engaged in a trade or business in the United
States for purposes of federal withholding taxes with respect to non-U.S.
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust would be engaged in a trade or business in the United States for
such purposes, the Trust will withhold as if it were so engaged in order to
protect the Trust from possible adverse consequences of a failure to withhold.
The Trust expects to withhold on the portion of its taxable income that is
allocable to foreign Certificateholders pursuant to Section 1446 of the Code, as
if such income were effectively connected to a U.S. trade or business, at a rate
of 35% for foreign holders that are taxable as corporations and 39.6% for all
other foreign holders. Subsequent adoption of Treasury regulations or the
issuance of other administrative pronouncements may require the Trust to change
its withholding procedures. In determining a holder's withholding status, the
Trust may rely on IRS Form W-8, IRS Form W-9 or the holder's certification of
nonforeign status signed under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the Trust's income. Each foreign holder must obtain
a taxpayer identification number from the IRS and submit that number to the
Trust on Form W-8 in order to assure appropriate crediting of the taxes
withheld. A foreign holder generally would be entitled to file with the IRS a
claim for refund with respect to taxes withheld by the Trust, taking the
position that no taxes were due because the Trust was not engaged in a U.S.
trade or business. However, interest payments made (or accrued) to a
Certificateholder who is a foreign person generally will be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the Trust. If these interest payments are properly characterized
as guaranteed payments, then the interest will not be considered "portfolio
interest." As a result, Certificateholders will be subject to United States
federal income tax and withholding tax at a rate of 30 percent, unless reduced
or eliminated pursuant to an applicable treaty. In such case, a foreign holder
would only be entitled to claim a refund for that portion of the taxes in excess
of the taxes that should be withheld with respect to the guaranteed payments.
BACKUP WITHHOLDING. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
TREATMENT OF THE NOTES AS INDEBTEDNESS. The Seller will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. The discussion below assumes this
characterization of the Notes is correct.
OID, INDEXED SECURITIES, ETC. The discussion below assumes that all
payments on the Notes are denominated in U.S. dollars, and that the Notes are
not Indexed Securities, or Principal Only Securities. Moreover, the discussion
assumes that all interest payable on the Notes will be "qualified stated
interest" under Treasury regulations (the "OID regulations") relating to
original issue discount ("OID"). Under these assumptions, OID on the Notes would
represent the excess of the principal amount of the Notes over their issue
price. If OID on a Class of Notes does not exceed a de minimis amount (i.e.,
0.25% of their principal amount multiplied by their weighted average maturity),
the Notes would be treated as having been issued without OID. The balance of
this discussion assumes that the Notes will be issued without OID. If these
conditions are not satisfied with respect to any given Series of Notes,
additional tax considerations with respect to such Notes will be disclosed in
the applicable Prospectus Supplement.
INTEREST INCOME ON THE NOTES. Based on the above assumptions, except as
discussed in the following paragraph, the Notes will not be considered issued
with OID. The stated interest thereon will be taxable to a Noteholder as
ordinary interest income when received or accrued in accordance with such
Noteholder's method of tax accounting. Under the OID regulations, a holder of a
Note issued with a de minimis amount of OID must include such OID in income, on
a pro rata basis, as principal payments are made on the Note. A purchaser who
buys a Note for more or less than its principal amount will generally be
subject, respectively, to the premium amortization or market discount rules of
the Code.
A holder of a Note that has a fixed maturity date of not more than one year
from the issue date of such Note (a "Short-Term Note") may be subject to special
rules. An accrual basis holder of a Short-Term Note (and certain cash method
holders, including regulated investment companies, as set forth in Section 1281
of the Code) generally would be required to report interest income as interest
accrues on a straight-line basis over the term of each interest period. Other
cash basis holders of a Short-Term Note would, in general, be required to report
interest income as interest is paid (or, if earlier, upon the taxable
disposition of the Short-Term Note). However, a cash basis holder of a
Short-Term Note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the Short-Term Note until the taxable disposition of the
Short-Term Note. A cash basis taxpayer may elect under Section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
Short-Term Note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
SALE OR OTHER DISPOSITION. If a Noteholder sells a Note, the holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the holder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder will equal the holder's
cost for the Note, increased by any market discount, acquisition discount, OID
and gain previously included by such Noteholder in income with respect to the
Note and decreased by the amount of bond premium, if any, previously amortized
and by the amount of principal payments previously received by such Noteholder
with respect to such Note. Any such gain or loss will be capital gain or loss if
the Note was held as a capital asset, except for gain representing accrued
interest and accrued market discount not previously included in income. Capital
losses generally may be used only to offset capital gains. The Taxpayer Relief
Act of 1997 reduces the maximum rates on a long-term capital gains recognized on
capital assets held by individual taxpayers for more than eighteen months as of
the date of disposition (and would further reduce the maximum rates on such
gains in the year 2001 and thereafter for certain individual taxpayers who meet
specified conditions). Prospective investors should consult their own tax
advisors concerning these tax law changes.
FOREIGN HOLDERS. Interest paid to or accrued by a Noteholder who is a
non-U.S. Person (a "foreign person") generally will be considered "portfolio
interest", and generally will not be subject to United States federal income tax
and withholding tax, if the interest is not effectively connected with the
conduct of a trade or business within the United States by the foreign person
and the foreign person (i) is not actually or constructively a "10 percent
shareholder" of the Trust or the Seller (including a holder of 10% of the
outstanding Certificates) or a "controlled foreign corporation" with respect to
which the Trust or the Seller is a "related person" within the meaning of the
Code and (ii) provides the Owner Trustee or other person who is otherwise
required to withhold U.S. tax with respect to the Notes with an appropriate
statement (on Form W-8 or a similar form), signed under penalties of perjury,
certifying that the beneficial owner of the Note is a foreign person and
providing the foreign person's name and address. If a Note is held through a
securities clearing organization or certain other financial institutions, the
organization or institution may provide the relevant signed statement to the
withholding agent; in that case, however, the signed statement must be
accompanied by a Form W-8 or substitute form provided by the foreign person that
owns the Note. If such interest is not portfolio interest, then it will be
subject to United States federal income and withholding tax at a rate of 30
percent, unless reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
BACKUP WITHHOLDING. Each holder of a Note (other than an exempt holder such
as a corporation, tax-exempt organization, qualified pension and profit-sharing
trust, individual retirement account or nonresident alien who provides
certification as to status as a nonresident) will be required to provide, under
penalties of perjury, a certificate containing the holder's name, address,
correct federal taxpayer identification number and a statement that the holder
is not subject to backup withholding. Should a nonexempt Noteholder fail to
provide the required certification, the Trust will be required to withhold 31
percent of the amount otherwise payable to the holder, and remit the withheld
amount to the IRS as a credit against the holder's federal income tax liability.
POSSIBLE ALTERNATIVE TREATMENTS OF THE NOTES. If, contrary to the opinion
of Tax Counsel, the IRS successfully asserted that one or more of the Notes did
not represent debt for federal income tax purposes, the Notes might be treated
as equity interests in the Trust. The Trust might then be treated as a publicly
traded partnership that would not be taxable as a corporation because it would
meet certain qualifying income tests. Nonetheless, treatment of the Notes as
equity interests in such a publicly traded partnership could have adverse tax
consequences to certain holders. For example, income to certain tax-exempt
entities (including pension funds) would be "unrelated business taxable income",
income to foreign holders generally would be subject to U.S. tax and U.S. tax
return filing and withholding requirements, and individual holders might be
subject to certain limitations on their ability to deduct their share of Trust
expenses.
TRUSTS CHARACTERIZED AS FASITS
GENERAL. If a FASIT election is made with respect to a Series of
Securities, then the arrangement by which such Series are issued will be treated
as a FASIT so long as all of the provisions of the relevant Agreement are
complied with and the statutory and regulatory requirements are satisfied.
The Small Business and Job Protection Act of 1996 added Sections 860H
through 860L to the Code (the "FASIT Provisions"), which provide for a new type
of entity for federal income tax purposes known as a "financial asset
securitization investment trust" (a "FASIT"). Although the FASIT provisions of
the Code became effective on September 1, 1997, no Treasury regulations or other
administrative guidance have been issued with respect to those provisions.
Accordingly, definitive guidance cannot be provided with respect to many aspects
of the tax treatment of FASIT regular interest holders. Investors should also
note that the FASIT discussion contained herein constitutes only a summary of
the U.S. federal income tax consequences to the holders of FASIT interests. With
respect to each Series of FASIT regular interests, the related Prospectus
Supplement will provide a detailed discussion regarding the federal income tax
consequences associated with the particular transaction.
FASIT interests will be classified as either FASIT regular interests, which
generally will be treated as debt for federal income tax purposes, or FASIT
ownership interests, which generally are not treated as debt for such purposes,
but rather as representing rights and responsibilities with respect to the
taxable income or loss of the related FASIT. The Prospectus Supplement for each
Series of Securities will indicate which Securities of such Series will be
designated as regular interests, and which, if any, will be designated as
ownership interests.
QUALIFICATION AS A FASIT. A Trust Fund will qualify as a FASIT if (i) a
FASIT election is in effect, (ii) certain tests concerning (A) the composition
of the FASIT's assets and (B) the nature of the investors' interests in the
FASIT are met on a continuing basis, and (iii) the Trust Fund is not a regulated
investment company as defined in section 851(a) of the Code. A segregated pool
of assets may also qualify as a FASIT.
ASSET COMPOSITION. For a Trust Fund to be eligible for FASIT status,
substantially all of the Trust Fund Assets must consist of "permitted assets" as
of the close of the third month beginning after the closing date and at all
times thereafter (the "FASIT Qualification Test"). Permitted assets include (i)
cash or cash equivalents, (ii) debt instruments with fixed terms that would
qualify as regular interests if issued by a REMIC (generally, instruments that
provide for interest at a fixed rate, a qualifying variable rate, or a
qualifying interest-only ("IO") type rate), (iii) foreclosure property, (iv)
certain hedging instruments (generally, interest and currency rate swaps and
credit enhancement contracts) that are reasonably required to guarantee or hedge
against the FASIT's risks associated with being the obligor on FASIT interests,
(v) contract rights to acquire qualifying debt instruments or qualifying hedging
instruments, (vi) FASIT regular interest, and (vii) REMIC regular interests.
Permitted assets do not include any debt instruments issued by the holder
of the FASIT's ownership interest or by any person related to such holder. A
debt instrument is a permitted asset only if the instrument is indebtedness for
Federal income tax purposes including regular interests in a REMIC or regular
interests issued by another FASIT and it bears (1) fixed interest or (2)
variable interest of a type that relates to qualified variable rate debt (as
defined in Treasury regulations prescribed under section 860G(a)(1)(B)).
INTERESTS IN A FASIT. In addition to the foregoing asset qualification
requirements, the interests in a FASIT also must meet certain requirements. All
of the interests in a FASIT must belong to either of the following: (i) one or
more classes of regular interests or (ii) a single class of ownership interest
that is held by a fully taxable domestic C Corporation.
A FASIT interest generally qualifies as a regular interest if (i) it is
designated as a regular interest, (ii) it has a stated maturity no greater than
thirty years, (iii) it entitles its holder to a specified principal amount, (iv)
the issue price of the interest does not exceed 125% of its stated principal
amount, (v) the yield to maturity of the interest is less than the applicable
Treasury rate published by the IRS plus 5%, and (vi) if it pays interest, such
interest is payable at either (a) a fixed rate with respect to the principal
amount of the regular interest or (b) a permissible variable rate with respect
to such principal amount. Permissible variable rates for FASIT regular interests
are the same as those for REMIC regular interests (i.e., certain qualified
floating rates and weighted average rates). Interest will be considered to be
based on a permissible variable rate if generally, (i) such interest is
unconditionally payable at least annually, (ii) the issue price of the debt
instrument does not exceed the total noncontingent principal payments and (iii)
interest is based on a "qualified floating rate," an "objective rate," a
combination of a single fixed rate and one or more "qualified floating rate,"
one "qualified inverse floating rate," or a combination of "qualified floating
rates" that do not operate in a manner that significantly accelerates or defers
interest payments on such FASIT regular interest.
If an interest in a FASIT fails to meet one or more of the requirements set
out in clauses (iii), (iv), or (v) in the immediately preceding paragraph, but
otherwise meets all requirements to be treated as a FASIT, it may still qualify
as a type of regular interest known as a "High-Yield Interest." In addition, if
an interest in a FASIT fails to meet the requirement of clause (vi), but the
interest payable on the interest consists of a specified portion of the interest
payments on permitted assets and that portion does not vary over the life of the
security, the interest will also qualify as a High-Yield Interest. A High-Yield
Interest may be held only by domestic C corporations that are fully subject to
corporate income tax ("Eligible Corporations"), other FASITs, and dealers in
securities who acquire such interests as inventory, rather than for investment.
In addition, holders of High-Yield Interests are subject to limitations on
offset of income derived from such interest.
CONSEQUENCES OF DISQUALIFICATION AS A FASIT. If a Trust Fund fails to
comply with one or more of ongoing requirements for FASIT status during any
taxable year, the Code provides that its FASIT status may be lost for that year
and thereafter. If FASIT status is lost, the treatment of the former FASIT and
interests therein for federal income tax purposes is uncertain. Although the
Code authorizes the Treasury to issue regulations that address situations where
a failure to meet the requirements for FASIT status occurs inadvertently and in
good faith, such regulations have not yet been issued. It is possible that
disqualification relief might be accompanied by sanctions, such as the
imposition of a corporate tax on all or a portion of the FASIT's income for the
period of time in which the requirements for FASIT status are not satisfied.
TAXATION OF FASIT REGULAR INTERESTS. Payments received by holders of FASIT
regular interests generally will be accorded the same tax treatment under the
Code as payments received on other taxable debt instruments. Holders of FASIT
regular interests must report income from such Securities under an accrual
method of accounting, even if they otherwise would have used the cash receipts
and disbursements method. If the FASIT regular interests is sold, the Holder
generally will recognize gain or loss upon the sale.
Certificates representing regular interests in a FASIT are treated as debt
instruments. Stated interest on regular interests in FASITs will be taxable as
ordinary income and taken into account using the accrual method of accounting,
regardless of the Holder's normal accounting method.
TAXATION OF HIGH-YIELD INTEREST. High-Yield Interests are subject to
special rules regarding the eligibility of holders of such interest, and the
ability of such holders to offset income derived from those interests with
losses. High-Yield Interests only may be held by Eligible Corporations (i.e.,
Domestic Corporations), other than FASITs, and dealers in securities who acquire
such interests as inventory. If a securities dealer (other than an Eligible
Corporation) initially acquires a High-Yield Interest as inventory, but later
begins to hold it for investment, the dealer will be subject to an excise tax
equal to the income from the High-Yield Interest multiplied by the highest
corporate income tax rate. In addition, transfers of High-Yield Interests to
disqualified holders will be disregarded for federal income tax purposes, and
the transferor will continue to be treated as the holder of the High-Yield
Interest.
The Holder of a High-Yield Interest may not use non-FASIT current losses or
net operating loss carryforwards or carrybacks to offset any income derived from
the High-Yield Interest, for either regular federal income tax purposes or for
alternative minimum tax purposes. In addition, the FASIT provisions contain an
anti-abuse rule that imposes corporate income tax on income derived from a FASIT
regular interest that is held by a pass-through entity (other than another
FASIT) that issues debt or equity securities backed by the FASIT regular
interest and that have the same features as High-Yield Interests.
TAXATION OF FASIT OWNERSHIP INTEREST. A FASIT ownership interest represents
the residual equity interest in a FASIT. As such, the holder of a FASIT
ownership interest determines its taxable income by taking into account all
assets, liabilities, and items of income, gain, deduction, loss, and credit of a
FASIT. In general, the character of the income to the holder of a FASIT
ownership interest will be the same as the character of such income to the
FASIT, except that any tax-exempt interest income taken into account by the
holder of a FASIT ownership interest is treated as ordinary income. In
determining that taxable income, the holder of a FASIT ownership interest must
determine the amount of interest, original issue discount, market discount, and
premium recognized with respect to the FASIT's assets and the FASIT regular
interests issued by the FASIT according to a constant yield methodology and
under an accrual method of accounting. In addition, holders of FASIT Ownership
Securities are subject to the same limitations on their ability to use losses to
offset income from their FASIT regular interests as are holders of High-Yield
Interest.
Rules similar to the wash sale rules applicable to REMIC residual interests
also will apply to FASIT ownership interests. Accordingly, losses on
dispositions of a FASIT ownership interest generally will be disallowed where
within six months before or after the disposition, the seller of such interest
acquires any other FASIT ownership interest that is economically comparable to a
FASIT ownership interest. In addition, if any security that is sold or
contributed to a FASIT by the holders of the related FASIT ownership interest
was required to be marked-to-market under section 475 of the Code by such
holder, then section 475 of the Code will continue to apply to such securities,
except that the amount realized under the mark-to-market rules or the
securities' value after applying special valuation rules contained in the FASIT
provisions. Those special valuation rules generally require that the value of
debt instruments that are not traded on an established securities market be
determined by calculating the present value of the reasonably expected payments
under the instrument using a discount rate of 120% of the applicable Federal
rate, compounded semi-annually.
RESTRICTIONS ON HOLDERS. If a FASIT issues high-yield debt interests, such
interests cannot be held by a disqualified holder. A "disqualified holder"
generally is any holder other than (1) a domestic C corporation that does not
qualify as RIC, REIT, REMIC or a cooperative O (2) a dealer who acquires FASIT
debt for resale to customers in the ordinary course of business. A permitted
holder of the ownership interest in a FASIT generally is a non-exempt domestic C
corporation, other than a corporation that qualifies as a RIC, REIT, REMIC or
cooperative.
PROHIBITED TRANSACTION. The holder of a FASIT ownership interest is
required to pay a penalty excise tax equal to 100 percent of net income derived
from (1) an asset that is not a permitted asset, (2) any disposition of an asset
other than a permitted disposition, (3) any income attributable to loans
originated by the FASIT, and (4) compensation for services (other than fees for
a waiver, amendment, or consent under permitted assets not acquired through
foreclosure). A permitted disposition is any disposition of any permitted asset
(1) arising from complete liquidation of a class of regular interest (i.e., a
qualified liquidation); (2) incident to the foreclosure, default (or imminent
default) on an asset of the asset; (3) incident to the bankruptcy or insolvency
of the FASIT; (4) necessary to avoid a default on any indebtedness of the a
FASIT attributable to a default (or imminent default) on an asset of the FASIT;
(5) to facilitate a clean-up call; (6) to substitute a permitted debt instrument
for another such instrument; or (7) in order to reduce over-collateralization
where a principal purposes of the disposition was not to avoid recognition of
gain arising from an increase in its market value after its acquisition by the
FASIT. Notwithstanding this rule, the holder of an ownership interest in a FASIT
may currently deduct its losses incurred in prohibited transactions in computing
its taxable income for the year of the loss. A Series of Certificates for which
a FASIT election is made generally will be structured in order to avoid
application of the prohibited transactions tax.
NOTES ISSUED BY FIC
Notes issued by FIC, as Issuer, will be subject to the same rules of
taxation as Notes issued by a Trust, as described above under the heading "Tax
Consequences to Holders of the Notes."
THE TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR GENERAL INFORMATION
ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A SECURITYHOLDER'S PARTICULAR TAX
SITUATION. PROSPECTIVE PURCHASERS OF THE SECURITIES SHOULD CONSULT THEIR TAX
ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF THE SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL
OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
Section 406 of ERISA and Section 4975 of the Code prohibit a pension,
profit-sharing or other employee benefit plan, as well as individual retirement
accounts and certain types of Keogh Plans (each a "Benefit Plan"), from engaging
in certain transactions involving "plan assets" with persons that are "parties
in interest" under ERISA or "disqualified persons" under the Code with respect
to such Benefit Plan. ERISA also imposes certain duties on persons who are
fiduciaries of Benefit Plans subject to ERISA and prohibits certain transactions
between a Benefit Plan and parties in interest with respect to such Benefit
Plans. Under ERISA, any person who exercises any authority or control with
respect to the management or disposition of the assets of a Benefit Plan is
considered to be a fiduciary of such Benefit Plan (subject to certain exceptions
not here relevant). A violation of these "prohibited transaction" rules may
result in an excise tax or other penalties and liabilities under ERISA and the
Code for such persons.
Certain transactions involving an Issuer might be deemed to constitute
prohibited transactions under ERISA and the Code with respect to a Benefit Plan
that purchased Notes or Certificates if assets of the Issuer were deemed to be
assets of the Benefit Plan. Under a regulation issued by the United States
Department of Labor (the "Plan Assets Regulation"), the assets of an Issuer
would be treated as plan assets of a Benefit Plan for the purposes of ERISA and
the Code only if the Benefit Plan acquired an "equity interest" in the Issuer
and none of the exceptions contained in the Plan Assets Regulation was
applicable. An equity interest is defined under the Plan Assets Regulation as an
interest other than an instrument which is treated as indebtedness under
applicable local law and which has no substantial equity features. The likely
treatment in this context of Notes and Certificates of a given Series will be
discussed in the related Prospectus Supplement.
Employee benefit plans that are governmental plans (as defined in Section
3(32) of ERISA) and certain church plans (as defined in Section 3(33) of ERISA)
are not subject to ERISA requirements. Due to the complexities of the
"prohibited transaction" rules and the penalties imposed upon persons involved
in prohibited transactions, it is important that the fiduciary of any Benefit
Plan considering the purchase of Securities consult with its tax and/or legal
advisors regarding whether the assets of the related Issuer would be considered
plan assets, the possibility of exemptive relief from the prohibited transaction
rules and other issues and their potential consequences. Each fiduciary of a
Benefit Plan should also determine whether, under the general fiduciary
standards of investment prudence and diversification, an investment in
Securities of a particular Series is appropriate for the Benefit Plan, taking
into account the overall investment policy of the Benefit Plan and the
composition of the Benefit Plan's investment portfolio.
LEGAL INVESTMENT MATTERS
To the extent specified in the related Prospectus Supplement, the
Securities of a Series will not constitute "mortgage related securities" under
the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") because a
substantial number of the Mortgage Loans are secured by liens on real estate
that are not first liens, as required by SMMEA. Accordingly, many institutions
with legal authority to invest in "mortgage related securities" may not be
legally authorized to invest in the Offered Securities.
Institutions whose investment activities are subject to legal investment
laws or regulations or review by certain regulatory authorities may be subject
to restrictions on investment in certain Classes of the Securities. Any
financial institution which is subject to the jurisdiction of the Comptroller of
the Currency, the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation ("FDIC"), the Office of Thrift Supervision
("OTS"), the National Credit Union Administration ("NCUA"), or other federal or
state agencies with similar authority should review any applicable rules,
guidelines and regulations prior to purchasing the Securities. The Federal
Financial Institutions Examination Council, for example, has issued a
Supervisory Policy Statement on Securities Activities effective February 10,
1992 (the "Policy Statement"). The Policy Statement has been adopted by the
Comptroller of the Currency, the Federal Reserve Board, the FDIC, the OTS, and
the NCUA (with certain modifications), with respect to the depository
institutions that they regulate. The Policy Statement prohibits depository
institutions from investing in certain "high-risk mortgage securities"
(including securities such as certain Classes of Securities), except under
limited circumstances, and sets forth certain investment practices deemed to be
unsuitable for regulated institutions. The NCUA issued final regulations
effective December 2, 1991 that restrict and in some instances prohibit the
investment by federal credit unions in certain types of mortgage related
securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to "prudent investor" provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying", or in securities which are issued in book-entry
form.
Investors should consult their own legal advisors in determining whether
and to what extent the Securities constitute legal investments for such
investors.
PLAN OF DISTRIBUTION
Securities are being offered hereby in series through one or more
underwriters or groups of underwriters (the "Underwriters"). The related
Prospectus Supplement will set forth the terms of offering of a Series of
Securities, including the public offering or purchase price of each Class of
Securities of such Series being offered thereby or the method by which such
price will be determined and the net proceeds to the Issuer from the sale of
each such Class of Securities. Such Securities will be acquired by the
Underwriters for their own account and may be resold from time to time in one or
more transactions including negotiated transactions, at fixed public offering
prices or at varying prices to be determined at the time of sale or at the time
of commitment therefor. The managing Underwriter or Underwriters with respect to
the offer and sale of a particular Series of Securities will be set forth on the
cover of the Prospectus Supplement relating to such Series and the members of
the underwriting syndicate, if any, will be named in such Prospectus Supplement.
In connection with the sale of the Securities, Underwriters may receive
compensation from the related Issuer or from purchasers of the Securities in the
form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the Securities may be deemed to be
Underwriters in connection with such Securities, and any discounts or
commissions received by them from the related Issuer or the Seller and any
profit on the resale of Securities by them may be deemed to be underwriting
discounts and commissions under the Securities Act. The Prospectus Supplement
will describe any such compensation paid by the related Issuer.
It is anticipated that the underwriting agreement pertaining to the sale of
any Series of Securities will provide that the obligations of the Underwriters
will be subject to certain conditions precedent, that the Underwriters will be
obligated to purchase all such Securities if any are purchased and that the
related Issuer or the Seller will indemnify the underwriters against certain
civil liabilities, including liabilities under the Securities Act.
USE OF PROCEEDS
To the extent specified in an applicable Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of each
Series of Securities will be applied to the simultaneous purchase of the Loan
Assets related to such Series or to reimburse the amounts previously used to
effect such a purchase, the costs of carrying such Loan Assets until sale of the
Securities and other expenses connected with pooling the Loan Assets and issuing
the Securities.
LEGAL OPINIONS
Certain legal matters relating to the Securities of any Series will be
passed upon for the related Issuer, the Seller and the Servicer by Brown & Wood
LLP. In addition, certain United States federal tax and other matters will be
passed upon for the related Issuer by Brown & Wood LLP.
INDEX OF TERMS
PAGE
----
"Act"........................................................................68
"Administration Agreement"...................................................27
"Administration Fee".........................................................27
"Administrator"...............................................................2
"Agreement"..................................................................75
"Annual Reduction"...........................................................69
"Applicable Accounting Standards"............................................57
"APR"..........................................................................
"Assets".....................................................................ii
"Benefit Plan"...............................................................82
"BIF"........................................................................57
"Buster PlusTM Loans...........................................................
"Call Risk"..................................................................13
"Cedel"......................................................................34
"Cedel Participants".........................................................34
"Certificate Balance".........................................................3
"Certificate Pool Factors".....................................................
"Certificateholders"...........................................................
"Certificates"................................................................i
"Class"........................................................................
"Closing Date"................................................................7
"Code".........................................................................
"Collateral Value"...........................................................41
"Commission"..................................................................v
"Companion Class"............................................................14
"Companion Securities".......................................................30
"Compound Interest Securities"...............................................29
"Contract Pool"..............................................................ii
"Contracts"..................................................................ii
"Conventional Contracts"......................................................6
"Conventional Mortgage Loans".................................................6
"Cooperative Loans"..........................................................39
"Cooperatives"................................................................5
"Coupon Stripping Rules".......................................................
"Credit Enhancement"..........................................................5
"Cut-off Date"................................................................7
"Defaulted Loan"...............................................................
"Definitive Certificates"......................................................
"Definitive Notes".............................................................
"Definitive Securities"......................................................31
"Depository".................................................................22
"Distribution Date"..........................................................23
"DTC Participants"...........................................................22
"Eligible Corporations"........................................................
"ERISA".......................................................................8
"Euroclear"..................................................................34
"Euroclear Operator".........................................................34
"Euroclear Participants".....................................................34
"Events of Default"..........................................................24
"Excess Spread"..............................................................45
"Exchange Act"................................................................v
"Extension Risk".............................................................13
"FASIT"........................................................................
"FASIT Provisions".............................................................
"FASIT Qualification Test".....................................................
"FDIC".......................................................................57
"FFI".........................................................................1
"FHA Claims Administration Agreement"........................................16
"FHA Claims Administrator"...................................................16
"FHA Reserve"................................................................68
"FHA"........................................................................68
"FIC".........................................................................i
"Fixed Rate Securities"......................................................30
"Floating Rate Securities"...................................................30
"Garn-St. Germain Act".......................................................65
"Grantor Trust"..............................................................75
"Guaranty Policy"............................................................45
"Imminent Prepayment"..........................................................
"Indenture"...................................................................i
"Indenture Trustee"...........................................................i
"Index"......................................................................31
"Index Currencies"...........................................................31
"Indexed Principal Amount"...................................................31
"Indexed Securities".........................................................30
"Indirect DTC Participants"..................................................33
"Interest Only Securities"...................................................29
"Interest Rate"...............................................................2
"IRS"........................................................................75
"Issuer"......................................................................i
"Loan Asset Pool"............................................................ii
"Loan Assets"................................................................ii
"Manufacturer's Invoice Price"...............................................41
"Master Servicer".............................................................2
"Mortgage"...................................................................55
"Mortgage Loans".............................................................ii
"Mortgage Note"..............................................................55
"Mortgage Notes".............................................................39
"Mortgage Pool Insurance Policy".............................................46
"Mortgage Pool"..............................................................ii
"Mortgaged Properties".......................................................39
"Mortgage Rates"...............................................................
"Mortgages"..................................................................39
"NCUA".......................................................................83
"Non-Priority Securities"....................................................30
"Note Pool Factor".............................................................
"Noteholders"..................................................................
"Notes".......................................................................i
"Offered Securities".........................................................iv
"OID regulations"............................................................80
"OID"........................................................................80
"OTS"........................................................................65
"Omnibus Proxy"................................................................
"Owner Trustee"...............................................................i
"Pass Through Rate"...........................................................3
"Permitted Investments"......................................................43
"Person".......................................................................
"Plan Assets Regulation".....................................................82
"Policy Statement"...........................................................83
"Pool Insurer".................................................................
"Pooling and Servicing Agreement"..............................................
"Pre-Funding Account"........................................................42
"Pre-Funding Arrangement".....................................................7
"Pre-Funding Arrangements"...................................................42
"Principal Only Securities"..................................................29
"Priority Securities"........................................................30
"Prospectus Supplement"........................................................
"Rating Agency"...............................................................9
"Registration Statement"......................................................v
"Reigle Act".................................................................66
"Relief Act".................................................................18
"Reserve Fund"...............................................................47
"SAIF".......................................................................57
"Sale and Servicing Agreement"...............................................ii
"Schedule of Loan Assets"....................................................55
"Scheduled Amortization Security"............................................14
"Secured Contracts"..........................................................ii
"Secured Property"...........................................................70
"Securities Act"..............................................................v
"Securities"..................................................................i
"Securityholders"..............................................................
"Seller"......................................................................i
"Senior Securities"..........................................................30
"Series".......................................................................
"Servicer"....................................................................i
"Short Term Note"..............................................................
"SMMEA".......................................................................9
"Special Allocation Securities"..............................................30
"Special Hazard Insurance Policy"............................................46
"Stripped Interests"...........................................................
"Subordinated Securities"....................................................30
"Subsequent Loan Assets"......................................................7
"Subsequent Transfer Agreement"..............................................56
"Subservicer"................................................................49
"Subservicing Agreement".....................................................47
"Tax Counsel"................................................................74
"Terms and Conditions".......................................................35
"TIA"........................................................................26
"TILA".......................................................................66
"Title I Contracts"...........................................................6
"Title I Mortgage Loans"......................................................6
"Title V"....................................................................67
"Transfer and Servicing Agreements"..........................................54
"Transfer Report"............................................................68
"Transferor"..................................................................1
"Trust Agreement".............................................................i
"Trust Property".............................................................ii
"Trust"....................................................................i, 1
"Trustee".....................................................................i
"UCC"..........................................................................
"Underwriters".................................................................
"Unsecured Contracts"........................................................ii
"U.S. Person"..................................................................
"Window Period Loans"........................................................65
-----------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
Available Information......................................................
Reports to Securityholders.................................................
Summary of Terms...........................................................
Risk Factors...............................................................
Use of Proceeds............................................................
Description of the Trust...................................................
The Home Loan Pool.........................................................
The Seller.................................................................
The Transferor and Servicer................................................
Description of Credit Enhancement..........................................
Description of the Securities..............................................
Description of the Transfer and
Servicing Agreements.....................................................
Prepayment and Yield Considerations
Certain Federal Income Tax Consequences....................................
ERISA Considerations.......................................................
Underwriting...............................................................
Legal Investment...........................................................
Ratings....................................................................
Experts....................................................................
Legal Opinions.............................................................
Index of Terms.............................................................
PROSPECTUS
Prospectus Supplement......................................................iv
Available Information.......................................................v
Incorporation of Certain Documents by Reference.............................v
Table of Contents..........................................................vi
Summary of Terms............................................................1
Risk Factors...............................................................11
Description of the Notes...................................................23
Description of the Certificates............................................28
Pool Factors and Trading Information.......................................29
Certain Information Regarding the Securities...............................30
The Trusts.................................................................37
The Trustee................................................................38
Description of the Trust Property..........................................39
Credit Enhancement.........................................................44
Servicing of the Loan Assets ..............................................48
The Seller and the Issuer..................................................52
The Servicer and the Transferor............................................53
Description of the Transfer and
Servicing Agreements.....................................................55
Certain Legal Aspects of the Loan Assets...................................62
Certain Federal Income Tax Consequences....................................83
ERISA Considerations.......................................................96
Legal Investment Matters...................................................97
Plan of Distribution.......................................................97
Use of Proceeds............................................................98
Legal Opinions.............................................................98
Index of Terms.............................................................99
-----------
Until 90 days after the date of this Prospectus Supplement, all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus
Supplement and Prospectus. This obligation is in addition to the obligation of
dealers to deliver a Prospectus Supplement and Prospectus when acting as
nderwriters and with respect to their unsold allotments or subscriptions.
NO DEALER, SALESMAN, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IN CONNECTION WITH THE
OFFER CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE DEPOSITOR, ANY AFFILIATE OF THE DEPOSITOR
OR ANY UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
SHALL NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
OF THE SECURITIES OFFERED HEREBY IN ANY STATE TO ANY PERSON TO WHO IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH STATE. THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DOES NOT IMPLY THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
$__________________
FIRSTPLUS HOME LOAN TRUST 199_-_
FIRSTPLUS
INVESTMENT CORPORATION
(DEPOSITOR)
FIRSTPLUS FINANCIAL, INC.
(TRANSFEROR AND SERVICER)
___________
PROSPECTUS SUPPLEMENT
___________
[UNDERWRITER]
____________, 199_
SUBJECT TO COMPLETION; DATED JUNE __, 1998
PROSPECTUS
ASSET-BACKED CERTIFICATES
(ISSUABLE IN SERIES)
FIRSTPLUS INVESTMENT CORPORATION
This Prospectus relates to Asset-Backed Certificates (the
"Certificates") which may be issued from time to time in one or more series
(each, a "Series") by FIRSTPLUS Investment Corporation (the "Depositor") on
terms determined at the time of sale and described in this Prospectus and the
related Prospectus Supplement (a "Prospectus Supplement"). As specified in the
related Prospectus Supplement, the Certificates of a Series may be issued in one
or more classes (each, a "Class") and certain of these Classes of Certificates
(the "Offered Certificates") will be offered hereby and by such Prospectus
Supplement.
Each Series of Certificates will represent in the aggregate the entire
beneficial ownership interest in a trust fund (a "Trust Fund") to be formed by
the Depositor as the depositor pursuant to a Pooling and Servicing Agreement.
The issuer ("Issuer") with respect to a Series of Certificates will be the Trust
Fund. The Trust Fund for each Series of Certificates will consist primarily of a
segregated pool (a "Mortgage Asset Pool") of one or more of the following
mortgage related assets (the "Mortgage Assets"): (i) pools of single family
(one- to four-unit) residential mortgage loans, including mortgage loans that
are secured by first or junior liens on the related mortgaged properties,
mortgage loans for property improvement, debt consolidation and/or home equity
purposes, timeshare mortgage loans and loans evidenced by retail installment
sales or installment loan agreements that are secured by first or junior liens
on real property (the "Mortgage Loans"); (ii) pools of loans evidenced by retail
installment sales or installment loan agreements, including loans secured by new
or used Manufactured Homes (as defined herein) that are not considered to be
interests in real property because such Manufactured Homes are not permanently
affixed to real estate ("Secured Contracts") and unsecured loans for
Manufactured Homes, home improvement, debt consolidation and/or home equity
purposes ("Unsecured Contracts" and, together with the Secured Contracts, the
"Contracts"); and (iii) mortgage-backed certificates, mortgage pass-through
certificates or mortgage participation certificates (the "Agency Securities"),
issued or guaranteed by the Government National Mortgage Association ("GNMA"),
the Federal National Mortgage Association ("FNMA") or the Federal Home Loan
Mortgage Corporation ("FHLMC"). To the extent specified in the related
Prospectus Supplement, the Mortgage Loans and Contracts may include Title I
Mortgage Loans and Title I Contracts. If specified in the related Prospectus
Supplement, the Trust Fund for a Series of Certificates may include the rights
or other ancillary or incidental assets (together with the Mortgage Assets,
collectively, the "Assets") that are intended (i) to provide credit enhancement
for the ultimate or timely distributions of proceeds from the Mortgage Assets to
Certificateholders or (ii) to assure the servicing of the Mortgage Assets.
BEFORE PURCHASING ANY OFFERED CERTIFICATES, PROSPECTIVE INVESTORS
SHOULD REVIEW THE INFORMATION SET FORTH ON PAGE 17 HEREIN UNDER THE CAPTION
"RISK FACTORS" AND SUCH INFORMATION AS MAY BE SET FORTH UNDER THE CAPTION "RISK
FACTORS" IN THE RELATED PROSPECTUS SUPPLEMENT.
(cover continued on next page)
------------------------
PROCEEDS OF THE ASSETS OF A TRUST FUND WILL BE THE SOLE SOURCE OF PAYMENTS ON
THE OFFERED CERTIFICATES. THE OFFERED CERTIFICATES WILL NOT REPRESENT AN
INTEREST IN OR OBLIGATION OF THE DEPOSITOR OR ANY OF ITS AFFILIATES. EXCEPT AS
SET FORTH HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT, NEITHER THE OFFERED
CERTIFICATES NOR THE UNDERLYING MORTGAGE ASSETS WILL BE GUARANTEED OR INSURED BY
ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE DEPOSITOR, ANY OF ITS
AFFILIATES, OR ANY OTHER PERSON.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR ANY RELATED PROSPECTUS SUPPLEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
Offers of the Certificates may be made through one or more different
methods, including offerings through underwriters, as more fully described
herein and in the related Prospectus Supplement. See "Plan of Distribution"
herein. There will have been no public market for any Series of Certificates
prior to the offering thereof. There can be no assurance that a secondary market
will develop for the Certificates of any Series or, if it does develop, that
such market will continue.
RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE. THIS PROSPECTUS MAY NOT BE
USED TO CONSUMMATE SALES OF THE OFFERED CERTIFICATES FOR ANY SERIES UNLESS
ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.
The date of this Prospectus is June __, 1998.
(Cover continued from previous page)
******************************************************************************
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THESE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
******************************************************************************
EACH SERIES WILL BE ISSUED IN ONE OR MORE CLASSES, ONE OR MORE OF WHICH
MAY BE PRINCIPAL ONLY CERTIFICATES, INTEREST ONLY CERTIFICATES, COMPOUND
INTEREST CERTIFICATES, VARIABLE INTEREST RATE CERTIFICATES, SCHEDULED
AMORTIZATION CERTIFICATES, COMPANION CERTIFICATES, SPECIAL ALLOCATION
CERTIFICATES OR ANY OTHER CLASS OF CERTIFICATES, IF ANY, INCLUDED IN SUCH SERIES
AND DESCRIBED IN THE RELATED PROSPECTUS SUPPLEMENT. PRINCIPAL ONLY CERTIFICATES
WILL NOT ACCRUE, AND WILL NOT BE ENTITLED TO RECEIVE, ANY INTEREST. PAYMENTS OR
DISTRIBUTION OF INTEREST ON EACH CLASS OF CERTIFICATES OTHER THAN PRINCIPAL ONLY
CERTIFICATES AND COMPOUND INTEREST CERTIFICATES WILL BE MADE ON EACH
DISTRIBUTION DATE AS SPECIFIED IN THE RELATED PROSPECTUS SUPPLEMENT. INTEREST
WILL NOT BE PAID OR DISTRIBUTED ON COMPOUND INTEREST CERTIFICATES ON A CURRENT
BASIS UNTIL THE DATE OR PERIOD SPECIFIED IN THE RELATED PROSPECTUS SUPPLEMENT.
PRIOR TO SUCH TIME, INTEREST ON SUCH CLASS OF COMPOUND INTEREST CERTIFICATES
WILL ACCRUE AND THE AMOUNT OF INTEREST SO ACCRUED WILL BE ADDED TO THE PRINCIPAL
THEREOF ON EACH DISTRIBUTION DATE. THE AMOUNT OF PRINCIPAL AND INTEREST
AVAILABLE AND PAYABLE ON EACH SERIES ON EACH DISTRIBUTION DATE WILL BE APPLIED
TO THE CLASSES OF SUCH SERIES IN THE ORDER AND AS OTHERWISE SPECIFIED IN THE
RELATED PROSPECTUS SUPPLEMENT. PRINCIPAL PAYMENTS OR DISTRIBUTIONS ON EACH CLASS
OF A SERIES WILL BE MADE ON A PRO RATA, OR OTHER SELECTION BASIS AMONG
CERTIFICATES OF SUCH CLASS, AS SPECIFIED IN THE RELATED PROSPECTUS SUPPLEMENT.
CERTIFICATES OF A SERIES WILL BE SUBJECT TO REDEMPTION OR REPURCHASE ONLY UNDER
THE CIRCUMSTANCES AND ACCORDING TO THE PRIORITIES DESCRIBED HEREIN AND IN THE
RELATED PROSPECTUS SUPPLEMENT. THE DEPOSITOR OR ITS AFFILIATES MAY RETAIN OR
HOLD FOR SALE FROM TIME TO TIME ALL OR A PORTION OF ONE OR MORE CLASSES OF A
SERIES.
THE YIELD ON EACH CLASS OF A SERIES WILL BE AFFECTED BY THE RATE OF
PAYMENT OF PRINCIPAL AND INTEREST (INCLUDING PREPAYMENTS) ON THE RELATED
MORTGAGE ASSETS AND THE TIMING OF RECEIPT OF SUCH PAYMENTS AS DESCRIBED HEREIN
AND IN THE RELATED PROSPECTUS SUPPLEMENT.
IF SPECIFIED IN THE PROSPECTUS SUPPLEMENT FOR A SERIES, ONE OR MORE
ELECTIONS MAY BE MADE TO TREAT ALL OR SPECIFIED PORTIONS OF THE RELATED TRUST
FUND AS A "REAL ESTATE MORTGAGE INVESTMENT CONDUIT" ("REMIC") OR TO TREAT THE
ARRANGEMENT BY WHICH SUCH SERIES IS ISSUED AS A REMIC, FOR FEDERAL INCOME TAX
PURPOSES. IF APPLICABLE, THE PROSPECTUS SUPPLEMENT FOR A SERIES WILL SPECIFY
WHICH CLASS OR CLASSES OF SUCH SERIES OF CERTIFICATES WILL BE CONSIDERED TO BE
REGULAR INTERESTS IN THE RELATED REMIC AND WHICH CLASS OF CERTIFICATES OR OTHER
INTERESTS WILL BE DESIGNATED AS THE RESIDUAL INTEREST IN THE RELATED REMIC. IF
SPECIFIED IN THE PROSPECTUS SUPPLEMENT FOR A SERIES, ONE OR MORE ELECTIONS MAY
BE MADE TO TREAT ALL OR SPECIFIED PORTIONS OF THE RELATED TRUST FUND AS A
"FINANCIAL ASSET SECURITIZATION INVESTMENT TRUST" ("FASIT") OR TO TREAT THE
ARRANGEMENT BY WHICH SUCH SERIES IS ISSUED AS A FASIT, FOR FEDERAL INCOME TAX
PURPOSES. IF APPLICABLE, THE PROSPECTUS SUPPLEMENT FOR A SERIES WILL SPECIFY
WHICH CLASS OR CLASSES OF SUCH SERIES OF CERTIFICATES WILL BE CONSIDERED TO BE
REGULAR INTERESTS AND OWNERSHIP INTERESTS IN THE RELATED FASIT. SEE "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES" HEREIN. SEE "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES" HEREIN.
SEE "ERISA CONSIDERATIONS" HEREIN AND IN THE RELATED PROSPECTUS
SUPPLEMENT FOR A DISCUSSION OF RESTRICTIONS ON THE ACQUISITION OF CERTIFICATES
BY "PLAN FIDUCIARIES."
PROSPECTUS SUPPLEMENT
As further described herein, the Prospectus Supplement relating to each
series of Offered Certificates will, among other things, set forth, as and to
the extent appropriate: (i) a description of each Class of such Offered
Certificates, including with respect to each such Class the following (A) the
distribution provisions, (B) the aggregate principal amount, if any, (C) the
rate at which interest accrues from time to time, if at all, or the method of
determining such rate, and (D) whether interest will accrue from time to time on
its aggregate principal amount, if any, or on a specified notional amount, if at
all; (ii) information with respect to any other Classes of Certificates of the
same Series; (iii) the respective dates on which distributions are to be made;
(iv) information as to the Assets, including the Mortgage Assets and Credit
Enhancement, constituting the related Trust Fund; (v) the circumstances, if any,
under which the related Trust Fund may be subject to early termination; (vi)
additional information with respect to the method of distribution of such
Offered Certificates; (vii) whether one or more REMIC or FASIT elections will be
made and the designation of the "regular interests" and "residual interests" in
each REMIC to be created or the designation of the "regular interest,"
"high-yield interest" and "ownership interest" in each FASIT to be created and
the identity of the person (the "Administrator") responsible for the various
tax-related duties in respect of each REMIC or FASIT to be created; (viii) the
initial percentage ownership interest in the related Trust Fund to be evidenced
by each Class of Certificates of such Series; (ix) information concerning the
Trustee (as defined herein) of the related Trust Fund; (x) if the related Trust
Fund includes Mortgage Loans or Contracts, information concerning the Servicer
and any Master Servicer (each as defined herein) of such Mortgage Loans or
Contracts; (xi) information as to the nature and extent of subordination of any
Class of Certificates of such Series, including a Class of Offered Certificates;
and (xii) whether such Offered Certificates will be initially issued in
definitive or book-entry form.
The actual characteristics of the Mortgage Assets relating to a Series
will not deviate in any material respect from the parameters specified in the
related Prospectus Supplement; provided, however, that if the characteristics
described therein materially differ from the actual characteristics, a
supplement to such Prospectus Supplement will be distributed.
AVAILABLE INFORMATION
The Depositor is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith is required to file reports and other information (the
"Reports") with the Securities and Exchange Commission (the "Commission"). The
Depositor has filed with the Commission a Registration Statement under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Certificates. This Prospectus, which forms a part of the Registration Statement,
and the Prospectus Supplement relating to each Series of Certificates contain
summaries of the material documents referred to herein and therein, but do not
contain all of the information contained in such Registration Statement pursuant
to the rules and regulations of the Commission. For further information,
reference is made to such Registration Statement and the exhibits thereto. The
Registration Statement can be inspected and copied at prescribed rates at the
public reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street N.W., 1st Floor, Room 1024, Washington, D.C. 20549, and
at the following regional offices of the Commission: Chicago Regional Office,
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511 and New York Regional Office, 7 World Trade Center, 13th Floor, New
York, New York 10048. In addition, the Commission maintains a Web site on the
Internet that contains reports, proxy and information statements and other
information regarding the Depositor. The address of such Web site is
http://www.sec.gov.
The Depositor does not plan to send any financial information to
Certificateholders. The Trustee will include with each distribution to
Certificateholders a statement containing certain payment information with
respect to such Certificates.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the Depositor pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of the offering of the Certificates shall be deemed to
be incorporated by reference in this Prospectus and to be a part hereof from the
date of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in another subsequently filed document which also
is or is deemed to be incorporated by reference herein modifies or supersedes
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Depositor will provide without charge to each person to whom a copy
of this Prospectus has been delivered, upon the request of such person, a copy
of any or all of the documents referred to above which have been or may be
incorporated in this Prospectus by reference (other than exhibits to such
documents, unless such exhibits are specifically incorporated by reference into
any such document). Requests for such copies should be directed, on behalf of
FIRSTPLUS Investment Corporation, to 3773 Howard Hughes Parkway, Suite 300N, Las
Vegas, Nevada 89109, Attention: Lee F. Reddin, (702) 866-2236.
TABLE OF CONTENTS
Page
PROSPECTUS SUPPLEMENT........................................................iii
AVAILABLE INFORMATION.........................................................iv
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...............................iv
SUMMARY OF PROSPECTUS..........................................................1
RISK FACTORS..................................................................17
Limited Liquidity and Fluctuation in Value from Market Conditions..........17
Limited Assets of Trust Fund...............................................18
Effect of Prepayments on Average Life......................................19
Effect of Prepayments on Yield.............................................22
Limitations of Credit Enhancement..........................................22
Limited Nature of Ratings..................................................24
Adverse Tax Consequences...................................................25
Certain Factors Affecting Delinquencies, Foreclosures and Losses on
Underlying Loans...........................................................25
Risks Associated with Certain Mortgage Assets..............................29
Recharacterization of Sale of Mortgage Assets as Borrowing.................31
DESCRIPTION OF THE CERTIFICATES...............................................31
General....................................................................31
The Certificates--General..................................................32
Form of Certificates; Transfer and Exchange................................33
REMIC or FASIT Election....................................................33
Classes of Certificates....................................................34
Distributions of Principal and Interest....................................36
Termination................................................................39
Book Entry Registration....................................................39
Mutilated, Destroyed, Lost or Stolen Certificates..........................40
ASSETS SECURING OR UNDERLYING THE CERTIFICATES...............................410
General....................................................................41
Mortgage Loans.............................................................42
Agency Securities..........................................................43
Contracts..................................................................50
Modifications of Mortgage Loans and Contracts..............................52
Additions, Substitution and Withdrawal of Assets...........................53
Pre-Funding Arrangements...................................................53
CREDIT ENHANCEMENT............................................................54
General....................................................................54
Subordination..............................................................55
Overcollateralization......................................................56
Cross-Support..............................................................56
Certificate Insurance......................................................57
Pool Insurance.............................................................57
Special Hazard Insurance...................................................57
Reserve Funds..............................................................58
Other Insurance, Guarantees and Similar Instruments or Agreements.........598
SERVICING OF THE MORTGAGE LOANS AND CONTRACTS.................................59
Enforcement of Due-on-Sale Clauses.........................................59
Realization Upon Defaulted Mortgage Loans..................................60
Waivers and Deferments of Certain Payments.................................61
Subservicers..............................................................621
Removal and Resignation of Servicer........................................62
Advances...................................................................62
Servicing Procedures.......................................................62
Administration and Servicing Compensation and Payment of Expenses..........64
THE POOLING AND SERVICING AGREEMENT..........................................656
Assignment of Mortgage Assets..............................................65
Conveyance of Subsequent Mortgage Assets...................................67
Repurchase or Substitution of Mortgage Loans and Contracts.................68
Evidence as to Compliance..................................................69
List of Certificateholders.................................................69
Administration of the Certificate Account..................................69
Reports to Certificateholders.............................................710
Events of Default..........................................................71
Rights Upon Event of Default...............................................72
Amendment..................................................................72
USE OF PROCEEDS...............................................................73
THE DEPOSITOR.................................................................73
THE SERVICER AND THE TRANSFEROR...............................................74
THE TRUSTEE...................................................................77
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS..................................78
General Legal Considerations...............................................78
Foreclosure................................................................80
Truth in Lending Act.......................................................89
Applicability of Usury Laws................................................90
Soldiers' and Sailors' Civil Relief Act...................................910
The Title I Program........................................................91
LEGAL INVESTMENT MATTERS.....................................................102
ERISA CONSIDERATIONS.........................................................103
CERTAIN FEDERAL INCOME TAX CONSEQUENCES......................................105
FEDERAL INCOME TAX CONSEQUENCES FOR REMIC CERTIFICATES.......................105
General...................................................................105
Status of REMIC Certificates..............................................106
Taxation of Regular Certificates..........................................108
Taxation of Residual Certificates.........................................116
Treatment of Certain Items of REMIC Income and Expense....................119
Tax-Related Restrictions on Transfer of Residual Certificates.............121
Taxes That May Be Imposed on the REMIC Pool...............................125
Limitations on Deduction of Certain Expenses..............................126
Taxation of Certain Foreign Investors.....................................127
Backup Withholding........................................................128
Reporting Requirements....................................................128
FEDERAL INCOME TAX CONSEQUENCES FOR FASIT CERTIFICATES.......................129
General...................................................................129
Qualification as a FASIT..................................................130
Asset Composition.........................................................130
Interests in a FASIT......................................................130
Consequences of Disqualification as a FASIT...............................131
Taxation of FASIT Regular Interests.......................................131
Taxation of High-Yield Interest...........................................132
Taxation of FASIT Ownership Interest......................................132
Restrictions on Holders...................................................133
Prohibited Transaction....................................................133
FEDERAL INCOME TAX CONSEQUENCES FOR CERTIFICATES AS TO WHICH NO REMIC OR FASIT
ELECTION IS MADE.............................................................134
Standard Certificates.....................................................134
Premium and Discount.....................................................1365
Sale or Exchange of Certificates.........................................1387
Stripped Certificates.....................................................138
Taxation of Stripped Certificates.........................................140
Reporting Requirements and Backup Withholding.............................142
Taxation of Certain Foreign Investors.....................................142
STATE TAX CONSEQUENCES.......................................................142
PLAN OF DISTRIBUTION.........................................................143
LEGAL MATTERS................................................................143
FINANCIAL INFORMATION AND ADDITIONAL INFORMATION.............................143
APPENDIX A...................................................................145
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and in the
Prospectus Supplement with respect to the Series offered thereby and to the
related Pooling and Servicing Agreement. Unless otherwise specified, initially
capitalized terms used and not defined in this Summary of Prospectus have the
meanings given to them in this Prospectus and in the related Prospectus
Supplement. Reference is made to the "Index to Location of Principal Terms" set
forth in Appendix A for the location of certain capitalized terms.
SECURITIES OFFERED................ Asset Backed Certificates issuable in Series
as described in the Prospectus Supplement.
Certificates of a Series will be issued
pursuant to a pooling and servicing agreement
(each, a "Pooling and Servicing Agreement")
between the Depositor, as depositor, the
Servicer, any Administrators, the Master
Servicer, if any, and the Trustee for such
Series and will evidence beneficial interests
in the assets included in a trust fund (the
"Trust Fund") and assigned to the Trustee for
the applicable Series. Holders of
Certificates are referred to herein as
"Holders" or "Certificateholders."
The Certificates of any Series may be issued
in one or more classes (each a "Class"), as
specified in the related Prospectus
Supplement. One or more Classes of
Certificates of each Series:
(i) may be entitled to receive
distributions allocable only to principal
("Principal Only Certificates"), only to
interest ("Interest Only Certificates") or to
any combination thereof;
(ii) may be entitled to receive
distributions only of prepayments of
principal throughout the lives of the
Certificates of such Series or during
specified periods;
(iii) may be subordinated in the right
to receive distributions of scheduled
payments of principal, prepayments of
principal, interest or any combination
thereof to one or more other Classes of such
Series throughout the lives of the
Certificates of such Series or during
specified periods;
(iv) may be entitled to receive such
distributions only after the occurrence of
events specified in the Prospectus
Supplement;
(v) may be entitled to receive
distributions in accordance with a schedule
or formula or on the basis of collections
from designated portions of the Assets
securing such Series or in the related Trust
Fund;
(vi) may be entitled to receive interest
at a rate that is subject to change from time
to time ("Variable Interest Rate
Certificates") or at a fixed rate;
(vii) may accrue interest, with such
accrued interest added to the principal
amount of the Certificates of such Class and
no payments being made thereon until such
time as is specified in the related
Prospectus Supplement ("Compound Interest
Certificates").
As specified in the related Prospectus
Supplement, each Series of Certificates will
be entitled to distributions from the Assets
included in the related Trust Fund and any
other assets pledged or otherwise available
for the benefit of Holders of such Series.
The timing and amounts of such distributions
may vary among Classes, over time, or
otherwise as specified in the related
Prospectus Supplement.
The Depositor or its affiliates may retain or
hold for sale from time to time all or a
portion of one or more Classes of a Series.
The Certificates of each Class of a Series
will be issued either in fully registered
form or in book entry form in the authorized
denominations specified in the Prospectus
Supplement. The Certificates and Mortgage
Assets will be guaranteed or insured, if at
all, to the extent specified in the related
Prospectus Supplement; otherwise, the
Certificates will not be guaranteed or
insured by GNMA, FNMA, FHLMC, any
governmental entity or by any other person,
and the Mortgage Assets (other than Agency
Securities) relating to a Series will not be
guaranteed or insured by any governmental
agency or instrumentality or any other
insurer.
DEPOSITOR......................... FIRSTPLUS Investment Corporation will
transfer the Assets for a Series to the
related Trust Fund (the "Depositor"). See
"The Depositor."
ISSUER............................ The Issuer will be the Trust Fund established
by the Depositor pursuant to the related
Pooling and Servicing Agreement (the
"Issuer").
SERVICER.......................... If the related Trust Fund includes Mortgage
Loans or Contracts, the entity or entities
named as the Servicer in the related
Prospectus Supplement (the "Servicer"), that
will act as servicer with respect to such
Mortgage Loans or Contracts. The Servicer may
be an affiliate of the Depositor.
ADMINISTRATOR..................... The entity or entities named as
Administrator, if any, in the related
Prospectus Supplement (the "Administrator"),
will act as administrator with respect to one
or more aspects related to any Mortgage Loans
or Contracts included in the related Trust
Fund (e.g., REMIC Administrator, FHA Claims
Administrator, etc.). The Administrator may
be an affiliate of the Depositor.
MASTER SERVICER................... If the related Trust Fund includes Mortgage
Loans or Contracts, the entity or entities,
if any, named as the master servicer in the
related Prospectus Supplement (the "Master
Servicer"), that will act as master servicer
with respect to such Mortgage Loans or
Contracts. The Master Servicer may be an
affiliate of the Depositor.
TRUSTEE........................... A bank, trust company or other fiduciary
acting as a trustee and named in the related
Prospectus Supplement (the "Trustee"), that
will enter into the related Pooling and
Servicing Agreement.
DISTRIBUTIONS OF INTEREST......... Each Class of a Series (other than a Class of
Principal Only Certificates) will accrue
interest at the rate set forth in (or, in the
case of Variable Interest Certificates, as
determined as provided in) the related
Prospectus Supplement (the "Certificate
Interest Rate"). One or more Classes of a
Series may be entitled to receive
distributions of interest only to the extent
of amounts available to make such
distributions. Interest on each Class will
accrue during the respective periods and be
paid or distributed on the respective dates
specified in the related Prospectus
Supplement (each such period a "Due Period"
and each such date a "Distribution Date").
Interest on all Certificates that bear or
receive interest, other than Compound
Interest Certificates, will be distributed on
the Distribution Dates specified in the
related Prospectus Supplement. However,
failure to distribute interest on a current
basis may not necessarily be an Event of
Default with respect to a particular Series
or Class of Certificates. Interest on any
Class of Compound Interest Certificates will
not be paid or distributed currently, but
will accrue and the amount of the interest so
accrued will be added to the principal
thereof on each Distribution Date until such
time as is specified in the related
Prospectus Supplement. Principal Only
Certificates will not accrue, and will not be
entitled to receive, any interest. Upon
maturity or earlier termination of the
Certificates of any Class or earlier
termination of the Trust Fund for any Series,
interest will be paid to the date specified
in the related Prospectus Supplement.
Each payment of interest on each Class of
Certificates (or addition to principal of a
Class of Compound Interest Certificates) on a
Distribution Date will include all interest
accrued during the related Due Period. If the
Due Period for a Series ends on a date other
than a Distribution Date for such Series, the
yield realized by the Holders of such
Certificates may be lower than the yield that
would result if the Due Period ended on such
Distribution Date. Additionally, if specified
in the related Prospectus Supplement,
interest accrued for a Due Period for one or
more Classes may be calculated on the
assumption that principal distributions (and
additions to principal of the Certificates),
and allocations of losses on the Mortgage
Assets (if specified in the related
Prospectus Supplement), are made on the first
day of the preceding Due Period and not on
the Distribution Date for such preceding Due
Period when actually made or added. Such
method would produce a lower effective yield
than if interest were calculated on the basis
of the actual principal amount outstanding.
With respect to each Class of Variable
Interest Rate Certificates of a Series, the
related Prospectus Supplement will set forth:
(i) the initial Certificate Interest Rate,
(or the manner of determining the initial
Certificate Interest Rate); (ii) the formula,
index or other method by which the
Certificate Interest Rate will be determined
from time to time; (iii) the periodic
intervals at which such determination will be
made; (iv) the interest rate cap (the
"Maximum Variable Interest Rate") if any, and
the interest rate floor (the "Minimum
Variable Interest Rate"), if any, on the
Certificate Interest Rate for such Variable
Interest Rate Certificates; and (v) any other
terms relevant to such Class of Certificates.
See "Description of the Certificates n
Distributions of Principal and Interest" and
--"Distributions of Interest."
DISTRIBUTIONS OF PRINCIPAL........ Principal distributions on the Certificates
of a Series will be made from amounts
available therefor on each Distribution Date
in an aggregate amount determined as set
forth in the related Prospectus Supplement
and will be allocated among the respective
Classes of a Series of Certificates at the
times, in the manner and in the priority set
forth in the related Prospectus Supplement.
Except with respect to Compound Interest
Certificates and Interest Only Certificates,
on each Distribution Date principal
distributions will be made on the
Certificates of a Series in an aggregate
amount determined as specified in the related
Prospectus Supplement. If a Series has a
Class of Compound Interest Certificates,
additional principal distributions on the
Certificates of such Series will be made on
each Distribution Date in an amount equal to
the interest accrued, but not then payable or
distributable, on such Class of Compound
Interest Certificates for the related Due
Period. See "Description of the
Certificates--Distributions of Principal and
Interest--Distributions of Principal."
UNSCHEDULED DISTRIBUTIONS......... If specified in the related Prospectus
Supplement, the Certificates of a Series will
be subject to receipt of distributions before
the next scheduled Distribution Date as
described under "Description of
Certificates--Distributions of Principal and
Interest--Unscheduled Distributions."
ALLOCATION OF LOSSES.............. If specified in the related Prospectus
Supplement, on any Distribution Date on which
the principal balance of the Mortgage Assets
relating to a Series is reduced due to losses
on such Mortgage Assets, (i) the amount of
such losses will be allocated first, to
reduce the aggregate outstanding principal
balance of the Subordinate Certificates of
such Series or other subordination or
reserves, if any, and, thereafter, to reduce
the aggregate outstanding principal balance
of the remaining Certificates of such Series
in the priority and manner specified in such
Prospectus Supplement until the aggregate
outstanding principal balance of each Class
of such Certificates so specified has been
reduced to zero or paid in full, thus
reducing the amount of principal
distributable on each such Class of
Certificates or (ii) such losses may be
allocated in any other manner set forth in
the related Prospectus Supplement. As
specified in the related Prospectus
Supplement, such reductions of principal of a
Class or Classes of a Series of Certificates
will be allocated to the Holders of the
Certificates of such Class or Classes pro
rata in the proportion which the outstanding
principal of each Certificate of such Class
or Classes bears to the aggregate outstanding
principal balance of all Certificates of such
Class or Classes. See "Description of the
Certificates--Distributions of Principal and
Interest--Distributions of Principal."
SCHEDULED FINAL DISTRIBUTION DATE. The "Scheduled Final Distribution Date" for
each Class of Certificates of a Series will
be the date after which no Certificates of
such Class will remain outstanding, as
specified and determined on the basis of the
assumptions set forth in the related
Prospectus Supplement. The Scheduled Final
Distribution Date of a Class of Certificates
may equal the maturity date of the Mortgage
Asset in the related Trust Fund which has the
latest stated maturity or will be determined
as described in the related Prospectus
Supplement.
The actual maturity date of the Certificates
of a Series will depend primarily upon the
rate and timing of principal and interest
payments (including the level of prepayments)
with respect to the Mortgage Assets
(including in the case of Agency Securities
the Mortgage Assets that back such Agency
Securities) securing or underlying such
Series of Certificates. The actual maturity
of any Certificates is likely to occur
earlier and may occur substantially earlier
than the Scheduled Final Distribution Date of
the Certificates as a result of the
application of prepayments and the allocation
of other distributions to the reduction of
the principal balances of the Certificates.
The rate and timing of principal and interest
payments including prepayments on the
Mortgage Assets securing or underlying a
Series will depend on a variety of factors,
including certain characteristics of such
Mortgage Loans and the prevailing level of
interest rates from time to time, as well as
on a variety of economic, demographic, tax,
legal, social and other factors. No assurance
can be given as to the actual rate and timing
of principal and interest payments including
the level of prepayments experienced with
respect to a Series. See "Risk
Factors--Effect of Prepayments on Average
Life" herein.
ASSETS SECURING OR UNDERLYING
THE CERTIFICATES............... Each Series of Certificates will represent
beneficial ownership interests in a Trust
Fund. As specified in the related Prospectus
Supplement, the Mortgage Assets included in
the Trust Fund with respect to a Series of
Certificates will include Mortgage Assets
consisting of one or more of the following:
(i) a pool (a "Mortgage Pool") of single
family (one- to four-unit) residential
mortgage loans, including mortgage loans that
are secured by first or junior liens on the
related mortgaged properties, mortgage loans
for residential property acquisition or
refinancing, property improvement, debt
consolidation and/or home equity purposes,
timeshare mortgage loans and loans evidenced
by retail installment sales or installment
loan agreements that are secured by first or
junior liens on real property ("Mortgage
Loans");
(ii) a pool (a "Contract Pool") of loans
evidenced by retail installment sales or
installment loan agreements, including loans
secured by new or used Manufactured Homes (as
defined herein) that are not considered to be
interests in real property because such
Manufactured Homes are not permanently
affixed to real estate ("Secured Contracts")
and unsecured loans for Manufactured Homes or
for home improvement, debt consolidation
and/or home equity purposes ("Unsecured
Contracts" and, together with the Secured
Contracts, the "Contracts"); and
(iii) mortgage-backed certificates, mortgage
pass-through certificates or mortgage
participation certificates, including
residual interests ("Agency Securities")
issued or guaranteed by the Government
National Mortgage Association ("GNMA"), the
Federal National Mortgage Association
("FNMA") or the Federal Home Loan Mortgage
Corporation ("FHLMC");
As specified in the related Prospectus
Supplement, a Trust Fund may also include, or
the related Certificates may also have the
benefits of, certain rights and other
ancillary or incidental assets (together with
the Mortgage Assets, collectively, the
"Assets"), that are intended (i) to enhance
the likelihood of ultimate or timely
distributions of proceeds from the Mortgage
Assets to Certificateholders, including
letters of credit, insurance policies,
guaranties, reserve funds or other types of
credit enhancement or any combination thereof
(the "Credit Enhancement"), or (ii) to assure
the servicing of the Mortgage Assets,
including interest rate exchange agreements,
reinvestment income and cash accounts. The
Certificates of any Series will be entitled
to payment only from the Assets included in
the related Trust Fund and any other Assets
pledged or otherwise available for the
benefit of the holders of such Certificates
as specified in the related Prospectus
Supplement.
A. Mortgage Loans................ As specified in the related Prospectus
Supplement for a Series, "Mortgage Loans" may
include: (i) conventional (i.e., not insured
or guaranteed by any governmental agency)
Mortgage Loans secured by first liens on
one-to-four family residential properties;
(ii) Mortgage Loans secured by security
interests in shares issued by private,
non-profit, cooperative housing corporations
("Cooperatives") and in the related
proprietary leases or occupancy agreements
granting exclusive rights to occupy specific
dwelling units in such Cooperatives'
buildings; (iii) Mortgage Loans secured by
junior (i.e., second, third, etc.) liens on
the related mortgaged properties, including
loans for property improvements, debt
consolidation and/or home equity purposes
(which may be evidenced by retail installment
sales contracts and installment loan
agreements); (iv) loans secured by security
instruments creating first or junior liens on
the related borrower's leasehold interest in
real property; (v) Mortgage Loans secured by
timeshare estates representing an ownership
interest in common with other owners in one
or more vacation units entitling the owner
thereof to the exclusive use of unit and
access to the accompanying recreational
facilities for the week or weeks owned; and
(vi) loans evidenced by retail installment
sales and installment loan agreements that
are secured by first or junior liens on real
property. See "Assets Securing or Underlying
the Certificates--Mortgage Loans" herein. To
the extent described in the related
Prospectus Supplement, certain of the junior
lien Mortgage Loans will be conventional
(i.e., not insured or guaranteed by a
governmental agency) mortgage loans
("Conventional Mortgage Loans"), while other
junior lien Mortgage Loans that are property
improvement loans will be partially insured
by the Federal Housing Administration under
the Title I Program ("Title I Mortgage
Loans").
The related Prospectus Supplement for a
Series will describe any Mortgage Loans
included in the Trust Fund and will specify
certain information regarding the payment
terms of such Mortgage Loans. See "Assets
Securing or Underlying the
Certificates--Mortgage Loans."
B. Contracts..................... As specified in the related Prospectus
Supplement for a Series, "Contracts" may
include: (i) loans evidenced by retail
installments sales or loan agreements,
including loans secured by new or used
Manufactured Homes (as defined herein) that
are not considered to be interests in real
property because such Manufactured Homes are
not permanently affixed to real estate
("Secured Contracts") and (ii) unsecured
loans for Manufactured Homes or for property
improvement, debt consolidation and/or home
equity purposes (such unsecured loans are
collectively, "Unsecured Contracts"). See
"Assets Securing or Underlying the
Certificates--Contracts" herein. To the
extent described in the related Prospectus
Supplement, certain Contracts that are
secured by Manufactured Homes and Unsecured
Contracts will be conventional (i.e., not
insured or guaranteed by a governmental
agency) loan contracts ("Conventional
Contracts"), while other Contracts that are
secured by Manufactured Homes or that are
unsecured loans for Manufactured Homes or
property improvements will be partially
insured by the FHA under the Title I Program
("Title I Contracts"). The related Prospectus
Supplement for a Series will further describe
any Contracts included in the Trust Fund. See
"Assets Securing or Underlying the
Certificates--Contracts."
C. Agency Securities............. As specified in the related Prospectus
Supplement for a Series, "Agency Securities"
may include: (i) "fully modified
pass-through" mortgage-backed certificates
guaranteed as to timely payment of principal
and interest by GNMA ("GNMA Certificates");
(ii) guaranteed mortgage pass-through
certificates issued and guaranteed as to
timely payment of principal and interest by
FNMA ("FNMA Certificates"); (iii) mortgage
participation certificates issued and
guaranteed as to timely payment of interest
and, to the extent specified in the related
Prospectus Supplement, ultimate payment of
principal by FHLMC ("FHLMC Certificates");
(iv) stripped mortgage-backed securities
representing an undivided interest in all or
a part of either the principal distributions
(but not the interest distributions) or the
interest distributions (but not the principal
distributions) or in some specified portion
of the principal and interest distributions
(but not all of such distributions) on
certain GNMA, FNMA or FHLMC Certificates and,
unless otherwise specified in the Prospectus
Supplement, guaranteed to the same extent as
the underlying securities; (v) other types of
mortgage-backed certificates, mortgage
pass-through certificates or mortgage
participation certificates issued or
guaranteed by GNMA, FNMA or FHLMC, such as
FNMA Guaranteed REMIC Pass-Through
Certificates and FHLMC Multiclass Mortgage
Participation Certificates, and including
residual interest securities, as described in
the related Prospectus Supplement; or (vi) a
combination of such Agency Securities.
All GNMA Certificates will be backed by the
full faith and credit of the United States.
No FHLMC or FNMA Certificates will be backed,
directly or indirectly, by the full faith and
credit of the United States. See "Assets
Securing or Underlying the
Certificates--Agency Securities."
D. Pre-Funding Arrangements...... To the extent provided in the related
Prospectus Supplement for a Series, the
related Pooling and Servicing Agreement will
provide for a commitment by the related Trust
Fund to subsequently purchase additional
Mortgage Assets ("Subsequent Mortgage
Assets") from the Depositor following the
date on which the Trust Fund is established
and the related Certificates are issued (a
"Pre-Funding Arrangement"). See "Assets
Securing or Underlying the
Certificates--Pre-Funding Arrangements"
herein.
CREDIT ENHANCEMENT................ If specified in the related Prospectus
Supplement, a Series, or certain Classes
within such Series, may have the benefit of
one or more types of credit enhancement
("Credit Enhancement") including but not
limited to overcollateralization,
subordination, cross support, mortgage pool
insurance, certificate insurance, special
hazard insurance, a bankruptcy bond, reserve
funds, cash accounts, other insurance,
guarantees, letters of credit and similar
instruments and arrangements. The protection
against losses afforded by any such Credit
Enhancement will be limited. See "Risk
Factors--Limitations of Credit Enhancement"
and "Credit Enhancement" herein.
BOOK ENTRY REGISTRATION............If the Prospectus Supplement for a Series so
provides, Certificates of one or more Classes
of such Series may be issued in book entry
form ("Book Entry Certificates") in which
case a single Certificate will be issued in
the name of a clearing agency (a "Clearing
Agency") registered with the Securities and
Exchange Commission, or its nominee.
Transfers and pledges of Book Entry
Certificates may be made only through entries
on the books of the Clearing Agency in the
name of brokers, dealers, banks and other
organizations eligible to maintain accounts
with the Clearing Agency ("Clearing Agency
Participants") or their nominees. Transfers
and pledges by purchasers and other
beneficial owners of Book Entry Certificates
("Beneficial Owners") other than Clearing
Agency Participants may be effected only
through Clearing Agency Participants.
Beneficial Owners will receive distributions
of principal and interest, and, if
applicable, may tender Certificates for
repurchase to the related Trustee, only
through the Clearing Agency and Clearing
Agency Participants. Except as otherwise
specified in this Prospectus or a related
Prospectus Supplement, the terms
"Certificateholders" and "Holders" shall be
deemed to include Beneficial Owners. See
"Risk Factors n Limited Liquidity and
Fluctuation in Value from Market
Conditions--Book Entry Registration" and
"Description of the Certificates--Book Entry
Registration."
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES................... The federal income tax consequences to
Holders of a Series will depend on, among
other factors, whether one or more elections
are made to treat the related Trust Fund or
specified portions thereof as a "real estate
mortgage investment conduit" ("REMIC") or as
a "financial asset securitization investment
trust" ("FASIT") under the provisions of the
Internal Revenue Code of 1986, as amended
(the "Code"). The Prospectus Supplement for
each Series will specify whether such an
election will be made.
If the applicable Prospectus Supplement so
specifies with respect to a Series of
Certificates, one or more REMIC elections
will be made with respect to such Series of
Certificates. Certificates of such Series
will be designated as "regular interests" in
a REMIC ("Regular Certificates") or as
"residual interests" in a REMIC ("Residual
Certificates").
If the applicable Prospectus Supplement so
specifies with respect to a Series of
Certificates, one or more FASIT elections
will be made with respect to such Series of
Certificates. Certificates of such Series
will be designated as "regular interests" or
the "ownership interest" in a FASIT.
If the applicable Prospectus Supplement so
specifies with respect to a Series of
Certificates, the Certificates of such Series
will not be treated as interests in a REMIC
or a FASIT for federal income tax purposes
but instead will be treated as (i)
indebtedness of the Issuer, (ii) an undivided
beneficial ownership interest in the Mortgage
Assets (and the arrangement pursuant to which
the Mortgage Assets will be held and the
Certificates will be issued will be treated
as a grantor trust under Subpart E, part I of
subchapter J of Chapter 1 of Subtitle A of
the Code and not as an association taxable as
a corporation for federal income tax
purposes); (iii) equity interests in an
association that will satisfy the
requirements for qualification as a real
estate investment trust; or (iv) interests in
an entity that will satisfy the requirements
for qualification as a partnership for
federal income tax purposes. The federal
income tax consequences to Holders of any
such Series will be described in the related
Prospectus Supplement to the extent not
described herein.
Compound Interest Certificates and Principal
Only Certificates will, and certain other
Classes of Certificates may, be issued with
original issue discount that is not de
minimis. In such cases, the Holder will be
required to include the original issue
discount in gross income as it accrues, which
may be prior to the receipt of cash, or a
portion of the cash, attributable to such
income. If a Certificate is issued at a
premium, the Holder will be entitled to make
an election to amortize such premium on a
constant yield method. Certificates
constituting interests in a REMIC will
generally represent "loans secured by an
interest in real property" for domestic
building and loan associations and "real
estate assets" for real estate investment
trusts to the extent that the underlying
mortgage loans and interest thereon qualify
for such treatment. If 95% of a FASIT's
assets are "qualified mortgages" under the
REMIC rules, the FASIT's interests will also
be treated as qualified mortgages.
A Holder of a Residual Certificate will be
required to include in its income its pro
rata share of the taxable income of the
REMIC. In certain circumstances, the Holder
of a Residual Certificate may have REMIC
taxable income or tax liability attributable
to REMIC taxable income for a particular
period in excess of cash distributions for
such period or have an after-tax return that
is less than the after-tax return on
comparable debt instruments. In addition, a
portion (or, in some cases, all) of the
income from a Residual Certificate (i) may
not be subject to offset by losses from other
activities, (ii) for a Holder that is subject
to tax under the Code on unrelated business
taxable income, may be treated as unrelated
business taxable income and (iii) for a
foreign Holder, may not qualify for exemption
from or reduction of withholding. Further,
individual Holders are subject to limitations
on the deductibility of expenses of the
REMIC. If a FASIT election is made with
respect to a Series of Certificates, the
Certificates will be designated as regular
interests or as the ownership interest. The
FASIT generally will not be subject to an
entity-level tax. Rather, the taxable income
or net loss of the FASIT will be taken into
account by the holder of the ownership
interest whether or not the holder receives
cash distributions from the FASIT
attributable to such income. The ownership
interest generally must be held at all times
by a domestic C corporation ( an "Eligible
Corporation"). Furthermore, certain regular
interests referred to as high-yield interests
are only suitable investments for Eligible
Corporations. Income derived from holding
ownership interest and income derived from
holding high-yield interest generally may not
be offset by otherwise allowable deductions,
including net operating loss deductions. See
"Certain Federal Income Tax Consequences."
ERISA CONSIDERATIONS.............. A fiduciary of any employee benefit plan
subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"),
or the Code should carefully review with its
own legal advisors whether the purchase or
holding of Certificates could give rise to a
transaction prohibited or otherwise
impermissible under ERISA or the Code. See
"ERISA Considerations." To the extent
described in the Prospectus Supplement for a
Series, certain Classes of Certificates of
such Series may not be transferred unless the
Trustee and the Depositor are furnished with
a letter of representation or an opinion of
counsel to the effect that such transfer will
not result in a violation of the prohibited
transaction provisions of ERISA and the Code
and will not subject the Trustee, the
Depositor or the Servicer, the Master
Servicer, if any, or the Administrator, if
any, to additional obligations. If specified
in the related Prospectus Supplement, the
United States Department of Labor may have
issued to the Underwriter an administrative
exemption for certain classes of securities.
See "Description of the
Certificates--General" and "ERISA
Considerations."
LEGAL INVESTMENT MATTERS.......... Certificates of a Series will constitute
"mortgage related securities" under the
Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") if so specified in the related
Prospectus Supplement. Alternatively, the
related Prospectus Supplement may specify
that the Certificates of a Series will not be
"mortgage related securities" under SMMEA if
a substantial number of the Mortgage Loans
will be secured by liens on real estate that
are not first liens. Accordingly, many
institutions with legal authority to invest
in "mortgage related securities" may not be
legally authorized to invest in the
Certificates of any Series. Investors should
consult their own legal advisors in
determining whether and to what extent the
Certificates of any particular Series
constitute legal investments for such
investors.
USE OF PROCEEDS................... Substantially all of the net proceeds from
the sale of a Series will be applied to the
simultaneous purchase of the Mortgage Assets
included in the related Trust Fund or to
reimburse the amounts previously used to
effect such purchase, the costs of carrying
the Mortgage Assets until sale of such Series
and to pay other expenses connected with
pooling the Mortgage Assets and issuing such
Series. See "Use of Proceeds."
RATING............................ It is a condition to the issuance of each
Class of a Series specified as being offered
by the related Prospectus Supplement that the
Certificates of such Class be rated in one of
the four highest rating categories
established for such Certificates by a
nationally recognized statistical rating
agency (a "Rating Agency").
RISK FACTORS
In considering an investment in the Offered Certificates of any
Series, investors should consider, among other things, the following risk
factors and any other factors set forth under the heading "Risk Factors" in the
related Prospectus Supplement. In general, to the extent that the factors
discussed below pertain to or are influenced by the characteristics or behavior
of the underlying loans included in a particular Trust Fund (which comprise the
Mortgage Assets consisting of Mortgage Loans or the Contracts), they would
similarly pertain to and be influenced by the characteristics or behavior of the
mortgage loans underlying any Agency Securities included in such Trust Fund.
LIMITED LIQUIDITY AND FLUCTUATION IN VALUE FROM MARKET CONDITIONS
GENERAL. The Offered Certificates of any Series may have limited or no
liquidity. Accordingly, an investor may be forced to bear the risk of its
investment in any Offered Certificates for an indefinite period of time.
Furthermore, except to the extent described herein and in the related Prospectus
Supplement, Certificateholders will have no redemption rights, and the Offered
Certificates of each Series are subject to early retirement only under certain
specified circumstances described herein and in the related Prospectus
Supplement. See "Description of the Certificates--Termination" herein.
LACK OF A SECONDARY MARKET. There can be no assurance that a secondary
market for the Offered Certificates of any Series will develop or, if it does
develop, that it will provide holders with liquidity of investment or that it
will continue for as long as such Certificates remain outstanding. The
Prospectus Supplement for any Series of Offered Certificates may indicate that
an underwriter specified therein intends to establish a secondary market in such
Offered Certificates; however, no underwriter will be obligated to do so. Any
such secondary market may provide less liquidity to investors than any
comparable market for securities that evidence interests in single-family
mortgage loans. To the extent provided in the related Prospectus Supplement, the
Certificates may be listed on any securities exchange.
BOOK ENTRY REGISTRATION. Because transfers and pledges of Book Entry
Certificates can be effected only through book entries at a Clearing Agency
through Clearing Agency Participants, the liquidity of the secondary market for
Book Entry Certificates may be reduced to the extent that some investors are
unwilling to hold Certificates in book entry form in the name of Clearing Agency
Participants, and the ability to pledge Book Entry Certificates may be limited
due to lack of a physical certificate. Beneficial Owners of Book Entry
Certificates may, in certain cases, experience delay in the receipt of
distributions of principal and interest since such distributions will be
forwarded by the related Trustee to the Clearing Agency who will then forward
payment to the Clearing Agency Participants who will thereafter forward payment
to Beneficial Owners. In the event of the insolvency of the Clearing Agency or
of a Clearing Agency Participant in whose name Certificates are recorded, the
ability of Beneficial Owners to obtain timely payment and (if the limits of
applicable insurance coverage by the Securities Investor Protection Corporation
are exceeded, or if such coverage is otherwise unavailable) ultimate payment of
principal and interest on Book Entry Certificates may be impaired.
LIMITED NATURE OF ONGOING INFORMATION. The primary source of ongoing
information regarding the Offered Certificates of any Series, including
information regarding the status of the related Mortgage Assets and any Credit
Enhancement for such Certificates, will be the periodic reports to
Certificateholders to be delivered pursuant to the related Pooling and Servicing
Agreement as described herein under the heading "The Pooling and Servicing
Agreement--Reports to Certificateholders". There can be no assurance that any
additional ongoing information regarding the Offered Certificates of any Series
will be available through any other source. The limited nature of such
information in respect of a Series of Offered Certificates may adversely affect
the liquidity thereof, even if a secondary market for such Certificates does
develop.
SENSITIVITY TO FLUCTUATIONS IN PREVAILING INTEREST RATES. Insofar as a
secondary market does develop with respect to any Series of Offered Certificates
or Class thereof, the market value of such Certificates will be affected by
several factors, including the perceived liquidity thereof, the anticipated cash
flow thereon (which may vary widely depending upon the prepayment and default
assumptions applied in respect of the underlying Mortgage Loans) and prevailing
interest rates. The price payable at any given time in respect of certain
Classes of Offered Certificates (in particular, a Class with a relatively long
average life, or a Class of Companion Certificates, Interest Only Certificates
or Principal Only Certificates) may be extremely sensitive to small fluctuations
in prevailing interest rates; and the relative change in price for an Offered
Certificate in response to an upward or downward movement in prevailing interest
rates may not necessarily equal the relative change in price for such Offered
Certificate in response to an equal but opposite movement in such rates.
Accordingly, the sale of Offered Certificates by a holder in any secondary
market that may develop may be at a discount from the price paid by such holder.
The Depositor is not aware of any source through which price information about
the Offered Certificates will be generally available on an ongoing basis.
LIMITED ASSETS OF TRUST FUND
The Offered Certificates and Mortgage Assets for a Series will be
guaranteed or insured, if at all, to the extent specified in the related
Prospectus Supplement; otherwise neither the Offered Certificates of any Series
nor the Mortgage Assets in the related Trust Fund will be guaranteed or insured
by the Depositor or any of its affiliates, by any governmental agency or
instrumentality or by any other person, and no Offered Certificate of any Series
will represent a claim against or security interest in the Trust Funds for any
other Series. Accordingly, if the related Trust Fund has insufficient assets to
make payments on a Series of Offered Certificates, no other assets will be
available for payment of the deficiency, and the holders of one or more Classes
of such Offered Certificates will be required to bear the consequent loss. To
the extent provided in the related Prospectus Supplement for a Series that
consists of one or more Classes of Subordinate Certificates, on any Distribution
Date in respect of which losses or shortfalls in collections on the Mortgage
Assets have been incurred, all or a portion of the amount of such losses or
shortfalls will be borne first by one or more Classes of the Subordinate
Certificates, and, thereafter, by the remaining Classes of Certificates in the
priority and manner and subject to the limitations specified in such Prospectus
Supplement. Because distributions of principal on the Certificates of a Series
may, if provided in the related Prospectus Supplement, be applied to outstanding
Classes of such Series in the priority specified in the related Prospectus
Supplement, a deficiency that arises after Certificates of a Class of any such
Series having higher priority in payment have been fully or partially repaid
will have a disproportionately greater effect on the Certificates of Classes of
such Series having lower priority in payment. The disproportionate effect of any
such deficiency is further increased in the case of Classes of Compound Interest
Certificates of any Series because, prior to the retirement of all Classes of
such Series having higher priority in payment than such Compound Interest
Certificates, interest is not payable, to the extent provided in the related
Prospectus Supplement, but is accrued and added to the principal of such
Compound Interest Certificates.
ADDITIONS, SUBSTITUTIONS AND WITHDRAWALS OF ASSETS. To the extent
provided in the related Prospectus Supplement for a Series, the Depositor may,
subsequent to the issuance of such a Series, deliver additional Assets or
withdraw Assets previously included in the Trust Fund for such Series,
substituting assets therefore or depositing additional Assets or withdrawing
Assets previously deposited in a Reserve Fund for such Series. The effect of
delivery or substitution of other Assets may be to alter the characteristics and
composition of the Assets underlying such Series, either of which may alter the
timing and amount of distributions or the date of the final distribution on the
Certificates of such Series. See "Assets Securing or Underlying the
Certificates--Additions, Substitution and Withdrawal of Assets" herein.
Furthermore, certain amounts on deposit from time to time in certain funds or
accounts constituting part of a Trust Fund, including the Certificate Account
and any accounts maintained as Credit Enhancement, may be withdrawn under
certain conditions, if and to the extent described in the related Prospectus
Supplement, for purposes other than the payment of principal of or interest on
the related Series of Certificates.
MODIFICATIONS OF MORTGAGE LOANS AND CONTRACTS. With respect to a
Series of Certificates as to which a FASIT election has been made, the related
Master Servicer, Servicer or Subservicer, if any, may, subsequent to the
issuance of such Series of Certificates, effect certain modifications of the
terms of the related Mortgage Loans and Contracts to the extent that (i) the
related borrower has indicated an intention to refinance such Mortgage Loan or
Contract, if so specified in the related Prospectus Supplement, including
modification of the applicable interest rate, principal balance, monthly payment
and/or term to maturity, or (ii) such Mortgage Loan or Contract is in default
(or default is, in the judgment of the Master Servicer, Servicer or Subservicer,
as applicable, reasonably foreseeable), including deferral or forgiveness of
delinquent payments and modification of the applicable interest rate, principal
balance, monthly payment and/or term to maturity. See "Assets Securing or
Underlying the Certificates-- Modifications of Mortgage Loans and Contracts."
EFFECT OF PREPAYMENTS ON AVERAGE LIFE
As a result of prepayments on the underlying loans, which comprise the
Mortgage Assets consisting of Mortgage Loans or the Contracts or the mortgage
loans or contracts backing the Agency Securities included in any Trust Fund (in
either case, the "Underlying Loans"), the amount and timing of distributions of
principal and/or interest on the Offered Certificates of the related Series may
be highly unpredictable. Prepayments on the Underlying Loans in any Trust Fund
will result in a faster rate of principal payments on one or more Classes of the
related Series of Certificates than if payments on such Underlying Loans were
made as scheduled. Thus, the prepayment experience on the Underlying Loans in a
Trust Fund may affect the average life of one or more Classes of Certificates of
the related Series, including a Class of Offered Certificates. The rate of
principal payments on pools of mortgage loans and installment loan contracts
varies among pools and from time to time is influenced by a variety of economic,
demographic, geographic, social, tax and legal factors. For example, if
prevailing interest rates fall significantly below the interest rates borne by
the Underlying Loans included in a Trust Fund, then, subject to the particular
terms of the Underlying Loans (e.g., provisions that prohibit voluntary
prepayments during specified periods or impose penalties in connection
therewith) and the ability of borrowers to obtain new financing, principal
prepayments on such Underlying Loans are likely to be higher than if prevailing
interest rates remain at or above the rates borne by those Underlying Loans.
Conversely, if prevailing interest rates rise significantly above the interest
rates borne by the Underlying Loans included in a Trust Fund, then principal
prepayments on such Underlying Loans are likely to be lower than if prevailing
interest rates remain at or below the interest rates borne by those Underlying
Loans. In addition to fluctuations in prevailing interest rates, the rate of
prepayments on the Underlying Loans may be influenced by changes and
developments in the types and structures of loan products being offered to
consumers within the mortgage banking and consumer finance industry and by
technological developments and innovations to the loan underwriting and
origination process.
To the extent that the Mortgage Loans or Contracts of a Series are
subject to modification in lieu of refinancing as described under "--Limited
Assets of Trust Fund--Modifications of Mortgage Loans and Contracts" above,
modifications of the applicable interest rates and/or terms to maturity of
Mortgage Loans and Contracts would slow (or mitigate the acceleration of) the
rate of prepayment of Mortgage Loans and Contracts in the related Mortgage Pool.
Accordingly, there can be no assurance as to the actual rate of
prepayment on the Underlying Loans in any Trust Fund or that such rate of
prepayment will conform to any model described herein or in any Prospectus
Supplement. As a result, depending on the anticipated rate of prepayment for the
Underlying Loans in any Trust Fund, the retirement of any Class of Certificates
of the related Series could occur significantly earlier or later, and the
average life thereof could be significantly shorter or longer, than expected.
In comparison to first lien single family mortgage loans, the
Depositor is aware of only limited publicly available statistical information
regarding the rates of prepayment of the Contracts and junior lien Mortgage
Loans that is available for these types of loans based upon the historical loan
performance of this segment of the mortgage banking and consumer finance
industry. In fact, this segment of the mortgage banking and consumer finance
industry has undergone significant growth and expansion, including an increase
in new loan originations, as a result of certain social and economic factors,
including recent tax law changes that limit the deductibility of consumer
interest to indebtedness secured by an individual's principal residence and
changes and developments in the types and structures of loan products being
offered to consumers. Therefore, no assurance can be given as to the level of
prepayments that the Contracts and junior lien Mortgage Loans will experience.
In fact, a number of factors suggest that the prepayment experience of the
Contracts and junior lien Mortgage Loans may be significantly different from
that of any first lien Mortgage Loans with equivalent interest rates and
maturities.
Additional prepayment, yield and weighted average life considerations
with respect to a Series of Certificates will be set forth in the related
Prospectus Supplement.
The extent to which prepayments on the Underlying Loans included in
any Trust Fund ultimately affect the average life of any Class of Certificates
of the related Series will depend on the terms and provisions of such
Certificates. A Class of Certificates, including a Class of Offered
Certificates, may provide that on any Distribution Date the holders of such
Certificates are entitled to a pro rata share of the prepayments on the
Underlying Loans in the related Trust Fund that are distributable on such date,
to a disproportionately large share (which, in some cases, may be all) of such
prepayments, or to a disproportionately small share (which, in some cases, may
be none) of such prepayments. A Class of Certificates that entitles the holders
thereof to a disproportionately large share of the prepayments on the Underlying
Loans in the related Trust Fund increases the likelihood of early retirement of
such Class ("Call Risk") if the rate of prepayment is relatively fast; while a
Class of Certificates that entitles the holders thereof to a disproportionately
small share of the prepayments on the Underlying Loans in the related Trust Fund
increases the likelihood of an extended average life of such Class ("Extension
Risk") if the rate of prepayment is relatively slow. To the extent described in
the related Prospectus Supplement, the respective entitlement of the various
Classes of Certificateholders of such Series to receive payments (and, in
particular, prepayments) of principal of the Underlying Loans in the related
Trust Fund may vary based on the occurrence of certain events (e.g., the
retirement of one or more Classes of Certificates of such Series) or whether
certain contingencies do or do not occur (e.g., prepayment and default rates
with respect to such Underlying Loans).
A Series of Certificates may include one or more Classes of Scheduled
Amortization Certificates, which will entitle the holders thereof to receive
principal distributions according to a specified principal payment schedule.
Although prepayment risk cannot be eliminated entirely from any Class of
Certificates, a Classes of Scheduled Amortization Certificates will generally
provide a relatively stable cash flow so long as the actual rate of prepayment
on the Underlying Loans included in the related Trust Fund remains relatively
constant at the rate, or within the range of rates, of prepayment used to
establish the specific principal payment schedule for such Certificates.
Prepayment risk with respect to a given Mortgage Asset Pool does not disappear,
however, and the stability afforded to Scheduled Amortization Certificates comes
at the expense of one or more Companion Classes of the same Series, any of which
Companion Classes may also be a Class of Offered Certificates. In general, and
as more specifically described in the related Prospectus Supplement, a Companion
Class may entitle the holders thereof to a disproportionately large share of
prepayments on the Underlying Loans in the related Trust Fund when the rate of
prepayment is relatively fast, and/or may entitle the holders thereof to a
disproportionately small share of prepayments on the Underlying Loans in the
related Trust Fund when the rate of prepayment is relatively slow. As and to the
extent described in the related Prospectus Supplement, a Companion Class absorbs
some (but not all) of the Call Risk and/or Extension Risk that would otherwise
belong to the related Scheduled Amortization Certificates if all payments of
principal of the Underlying Loans in the related Trust Fund were allocated on a
pro rata basis. EFFECT OF PREPAYMENTS ON YIELD
A Series of Certificates may include one or more classes of Offered
Certificates offered at a premium or discount. Yields on such Classes of
Certificates will be sensitive, and in some cases extremely sensitive, to
prepayments on the Underlying Loans in the related Trust Fund and, where the
amount of interest payable with respect to a Class is disproportionately large,
as compared to the amount of principal, as with certain classes of Stripped
Interest Certificates, a holder might fail to recover its original investment
under some prepayment scenarios. The extent to which the yield to maturity of
any Class of Offered Certificates may vary from the anticipated yield will
depend upon the degree to which such Certificates are purchased at a discount or
premium and the amount and timing of distributions thereon. An investor should
consider, in the case of any Offered Certificate purchased at a premium, the
risk that a faster than anticipated rate of principal payments could result in
an actual yield to such investor that is lower than the anticipated yield.
LIMITATIONS OF CREDIT ENHANCEMENT
LIMITATIONS REGARDING TYPES OF LOSSES COVERED. The related Prospectus
Supplement for a Series of Certificates will describe any Credit Enhancement
provided with respect thereto. Use of Credit Enhancement will be subject to the
conditions and limitations described herein and in the related Prospectus
Supplement. Moreover, such Credit Enhancement may not cover all potential losses
or delays; for example, Credit Enhancement may or may not cover loss by reason
of fraud or negligence by a mortgage loan originator or other parties. Any such
losses or delays not covered by Credit Enhancement may, at least in part, be
allocated to, or affect distributions to, one or more Classes of Offered
Certificates.
DISPROPORTIONATE BENEFITS TO CERTAIN CLASSES AND SERIES. A Series of
Certificates may include one or more Classes of Subordinate Certificates (which
may include Offered Certificates), if provided in the related Prospectus
Supplement. Although subordination is intended to reduce the likelihood of
temporary shortfalls and ultimate losses to holders of Senior Certificates, the
amount of subordination will be limited and may decline under certain
circumstances. In addition, if principal payments on one or more Classes of
Offered Certificates of a Series are made in a specified order of priority, any
related Credit Enhancement may be exhausted before the principal of the later
paid classes of Offered Certificates of such Series has been repaid in full. As
a result, the impact of losses and shortfalls experienced with respect to the
Mortgage Assets may fall primarily upon those classes of Offered Certificates
having a later right of payments. Moreover, if a form of Credit Enhancement
covers the Offered Certificates of more than one Series and losses on the
related Mortgage Assets exceed the amount of such Credit Enhancement, it is
possible that the holders of Offered Certificates of one (or more) such Series
will be disproportionately benefited by such Credit Enhancement to the detriment
of the holders of Offered Certificates of one (or more) other such Series.
LIMITATIONS REGARDING THE AMOUNT OF CREDIT ENHANCEMENT. The amount of
any applicable Credit Enhancement supporting one or more classes of Offered
Certificates, including the subordination of one or more other Classes of
Certificates, will be determined on the basis of criteria established by each
Rating Agency rating such Classes of Certificates based on an assumed level of
defaults, delinquencies and losses on the Underlying Loans that comprise or back
the Mortgage Assets and certain other factors. There can be no assurance that
the default, delinquency and loss experience on such Underlying Loans will not
exceed such assumed levels. See "Credit Enhancement" herein. If the defaults,
delinquencies and losses on such Underlying Loans do exceed such assumed levels,
the holders of one or more Classes of Offered Certificates will be required to
bear such additional defaults, delinquencies and losses. Regardless of the form
of Credit Enhancement provided with respect to a Series, the amount of coverage
will be limited in amount and in most cases will be subject to periodic
reduction in accordance with a schedule or formula.
LIMITATIONS ON FHA INSURANCE. The related Prospectus Supplement will
specify the number and percentage of the Title I Mortgage Loans and/or Title I
Contracts, if any, included in the related Trust Fund that are partially insured
by the FHA pursuant to Title I Program. Since the FHA Insurance Amount for the
Title I Mortgage Loans and Title I Contracts is limited as described herein and
in the related Prospectus Supplement, and since the adequacy of such FHA
Insurance Amount is dependent upon future events, including reductions for the
payment of FHA claims, no assurance can be given that the FHA Insurance Amount
is or will be adequate to cover 90% of all potential losses on the Title I
Mortgage Loans and Title I Contracts included in the related Trust Fund. If the
FHA Insurance Amount for the Title I Mortgage Loans and Title I Contracts is
reduced to zero, such loans and contracts will be effectively uninsured from and
after the date of such reduction. Under the Title I Program, until a claim for
insurance reimbursement is submitted to the FHA, the FHA does not review or
approve for qualification for insurance the individual Title I Mortgage Loan or
Title I Contract insured thereunder (as is typically the case with other federal
loan insurance programs). Consequently, the FHA has not acknowledged that any of
the Title I Mortgage Loans and Title I Contracts are eligible for FHA insurance,
nor has the FHA reviewed or approved the underwriting and qualification by the
originating lenders of any individual Title I Mortgage Loans and Title I
Contracts. See "Certain Legal Aspects of the Mortgage Assets--The Title I
Program" herein.
The availability of FHA Insurance reimbursement following a default on
a Title I Mortgage Loan or Title I Contract is subject to a number of
conditions, including strict compliance by the originating lender of such loan,
the Depositor, the FHA Claims Administrator, the Servicer, any subservicer and
the Transferor with the FHA Regulations in originating and servicing such Title
I Mortgage Loan or Title I Contract, and limits on the aggregate insurance
coverage available in the Depositor's FHA Reserve. For example, the FHA
Regulations provide that, prior to originating a Title I Mortgage Loan or Title
I Contract, a Title I lender must exercise prudence and diligence in determining
whether the borrower and any co-maker or co-signer is solvent and an acceptable
credit risk with a reasonable ability to make payments on the loan. Although the
related Transferor will represent and warrant that the Title I Mortgage Loans
and Title I Contracts have been originated and serviced in compliance with all
FHA Regulations, these regulations are susceptible to substantial
interpretation. Failure to comply with all FHA Regulations may result in a
denial of FHA Claims, and there can be no assurance that the FHA's enforcement
of the FHA Regulations will not become stricter in the future. See "Certain
Legal Aspects of the Mortgage Assets--The Title I Program--General" herein.
Because the Trust Fund is not eligible to hold an FHA contract of
insurance under the Title I Program, the FHA will not recognize the Trust Fund
or the Certificateholders as the owners of the Title I Mortgage Loans or Title I
Contracts, or any portion thereof, entitled to submit FHA Claims. Accordingly,
the Trust Fund and the Certificateholders will have no direct right to receive
insurance payments from the FHA. The Depositor will contract with the Servicer
(or another person specified in the Prospectus Supplement) to serve as the
Administrator for FHA Claims (the "FHA Claims Administrator") pursuant to an FHA
claims administration agreement (the "FHA Claims Administration Agreement"),
which will provide for the FHA Claims Administrator to handle all aspects of
administering, processing and submitting FHA Claims with respect to the Title I
Mortgage Loans or Title I Contracts, in the name and on behalf of the Depositor.
The Certificateholders will be dependent on the FHA Claims Administrator to (i)
make claims on the Title I Mortgage Loans or Title I Contracts in accordance
with FHA Regulations and (ii) remit all FHA Insurance proceeds received from the
FHA in accordance with the related Pooling and Servicing Agreement. The
Certificateholders' rights relating to the receipt of payment from and the
administration, processing and submission of FHA Claims by the Depositor or any
FHA Claims Administrator are limited and governed by the related Pooling and
Servicing Agreement and the FHA Claims Administration Agreement and these
functions are obligations of the Depositor and the FHA Claims Administrator, not
the FHA. See "Certain Legal Aspects of the Mortgage Assets--The Title I
Program--Claims Procedures under Title I" herein.
LIMITED NATURE OF RATINGS
Any rating assigned by a Rating Agency to a Class of Offered
Certificates will reflect only its assessment of the likelihood that holders of
such Offered Certificates will receive distributions to which such
Certificateholders are entitled under the related Pooling and Servicing
Agreement. Such rating will not constitute an assessment of the likelihood that
principal prepayments on the Underlying Loans will be made, the degree to which
the rate of such prepayments might differ from that originally anticipated or
the likelihood of early optional termination of the related Trust Fund.
Furthermore, such rating will not address the possibility that prepayment of the
Underlying Loans at a higher or lower rate than anticipated by an investor may
cause such investor to experience a lower than anticipated yield or that an
investor that purchases an Offered Certificate at a significant premium might
fail to recover its initial investment under certain prepayment scenarios.
Hence, a rating assigned by a Rating Agency does not guarantee or ensure the
realization of any anticipated yield on a Class of Offered Certificates.
The amount, type and nature of Credit Enhancement, if any, provided
with respect to a Series of Certificates will be determined on the basis of
criteria established by each Rating Agency rating a Class of Certificates of
such Series. Those criteria are sometimes based upon an actuarial analysis of
the behavior of similar types of loans in a larger group. However, there can be
no assurance that the historical data supporting any such actuarial analysis
will accurately reflect future experience, or that the data derived from a large
pool of similar types of loans will accurately predict the delinquency, default
or loss experience of any particular pool of Underlying Loans. In other cases,
such criteria may be based upon determination of the values of the Mortgaged
Properties that provide security for the Underlying Loans. However, no assurance
can be given that those values will not decline in the future. As a result, the
Credit Enhancement required in respect of the Offered Certificates of any Series
may be insufficient to fully protect the holders thereof from losses on the
related Mortgage Asset Pool. See "Credit Enhancement" herein.
ADVERSE TAX CONSEQUENCES
ORIGINAL ISSUE DISCOUNT. All of the Compound Interest Certificates and
Principal Only Certificates will be, and certain of the other Certificates may
be, issued with original issue discount for federal income tax purposes. A
Holder of a Certificate issued with original issue discount will be required to
include original issue discount in ordinary gross income for federal income tax
purposes as it accrues, in advance of receipt of the cash, or a portion of the
cash, attributable to such income. Accrued but unpaid interest on the Compound
Interest Certificates generally will be treated as original issue discount for
this purpose. At certain rapid Mortgage Asset prepayment rates, original issue
discount may accrue on certain Classes of Certificates, including certain
variable rate Regular Certificates, that may never be received as cash,
resulting in a subsequent loss on such Certificates. See "Certain Federal Income
Tax Consequences--Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular Certificates--Original Issue Discount,"
"--Federal Income Tax Consequences fOR FASIT Certificates Taxation of FASIT
Regular Interests and "Certain Federal Income Tax Consequences--Federal Income
Tax Consequences for Certificates as to Which No REMIC or FASIT Election Is
Made--Standard Certificates--Premium and Discount n Original Issue Discount" and
"--Stripped Certificates--Taxation of StrippED Certificates--Original Issue
Discount."
RESIDUAL CERTIFICATES. An election may be made to treat all or any
portion of any Trust Fund as a REMIC for federal income tax purposes. Holders
("Residual Holders") of Certificates representing the residual interests in the
related REMIC ("Residual Certificates") must report on their federal income tax
returns their pro rata share of REMIC taxable income or loss. All or a portion
of the REMIC taxable income reportable by Residual Holders may be treated as
such holders' "excess inclusion" subject to special rules for federal income tax
purposes. The REMIC taxable income, and possibly the tax liabilities of the
Residual Holders, may exceed the cash distributions on the Residual Certificates
during certain periods. Residual Holders who are individuals may be subject to
limitations on the deductibility of servicing fees on the related Mortgage
Assets and other REMIC administrative expenses. Hence, Residual Holders may
experience an after-tax return that is significantly lower than would be
anticipated based upon the stated interest rate, if any, of their Residual
Certificates. See "Certain Federal Income Tax Consequences n Federal Income Tax
Consequences for REMIC Certificates n Taxation of Residual Certificates."
CERTAIN FACTORS AFFECTING DELINQUENCIES, FORECLOSURES AND LOSSES ON
UNDERLYING LOANS
GENERAL. The payment performance of the Offered Certificates of any
Series will be directly related to the payment performance of the Underlying
Loans included in the related Trust Fund. Set forth below is a discussion of
certain factors that will affect the full and timely payment of the Underlying
Loans included in any Trust Fund.
GEOGRAPHIC CONCENTRATION. Certain geographic regions of the United
States from time to time will experience weaker regional economic conditions and
housing markets, and, consequently, will experience higher rates of loss and
delinquency on mortgage loans generally. Any concentration of the Underlying
Loans in such a region may present risk considerations in addition to those
generally present for similar mortgage-backed or asset-backed securities without
such concentration.
DECLINE IN VALUE OF THE UNDERLYING ASSET. An investment in
Certificates secured by or evidencing an interest in a Mortgage Pool may be
adversely affected by, among other things, a decline in one-to-four family
residential property values. No assurance can be given that values of the
Mortgaged Properties have remained or will remain at the levels existing on the
dates of origination of the related Mortgage Loans. If the residential real
estate market should experience an overall decline in property values such that
the outstanding balances of the Mortgage Loans in a particular Mortgage Pool,
and any other financing on the Mortgaged Properties, become equal to or greater
than the value of the Mortgaged Properties, the actual rates of delinquencies,
defaults and losses could be higher than those now generally experienced with
respect to similar types of loans within the mortgage lending industry. To the
extent that such losses are not covered by applicable insurance policies, if
any, or by any Credit Enhancement as described in the related Prospectus
Supplement, Holders of Certificates secured by or evidencing interests in such
Mortgage Pool will bear all risk of loss resulting from defaults by borrowers
and will have to look primarily to the value of the related Mortgaged Properties
for recovery of the outstanding principal and unpaid interest of the defaulted
Mortgage Loans. See "Assets Securing or Underlying the Certificates--Mortgage
Loans."
An investment in Certificates secured by or evidencing interests in
Contracts may be affected by, among other things, a downturn in regional or
local economic conditions. These regional or local economic conditions are often
volatile, and historically have affected the delinquency, loan loss and
repossession experience of Contracts. To the extent that losses on Contracts are
not covered by applicable insurance policies, if any, or by any Credit
Enhancement, Holders of the Certificates secured by or evidencing interests in
such Contracts will bear all risk of loss resulting from default by borrowers
and will have to look primarily to the value of the underlying asset for
recovery of the outstanding principal and unpaid interest of the defaulted
Contracts. See "Assets Securing or Underlying the Certificates--Contracts."
ADEQUACY OF THE MORTGAGED PROPERTIES AS SECURITY FOR THE MORTGAGE
LOANS AND CONTRACTS. To the extent specified in the related Prospectus
Supplement, the combined loan-to-value ratios for the Mortgage Loans or
Contracts will generally be in excess of 100%. The related Mortgaged Properties,
therefore, will be highly unlikely to provide adequate security for such
Mortgage Loans. Even assuming that a Mortgaged Property provides adequate
security for the related Mortgage Loan or Contract, substantial delays could be
encountered in connection with the liquidation of a loan that would result in
current shortfalls in payments to Securityholders to the extent such shortfalls
are not covered by the applicable credit enhancement. In addition, liquidation
expenses (such as legal fees, real estate taxes, and maintenance and
preservation expenses) will reduce the liquidation proceeds otherwise available
for payment to Securityholders. In the event that any Mortgaged Property fails
to provide adequate security for the related loan, any losses in connection with
such loan will be borne by Securityholders to the extent that the applicable
credit enhancement is insufficient to absorb all such losses.
UNDERWRITING GUIDELINES. To the extent specified in the related
Prospectus Supplement, the assessment of the credit history of a borrower and
such borrower's capacity to make payments on the related Mortgage Loan or
Contract will have been the primary considerations in underwriting the Mortgage
Loans or Contracts included in the related Loan Asset Pool. The evaluation of
the adequacy of the value of the related Mortgaged Property, together with the
amount of all liens senior to the lien of the loan (i.e., the related "combined
loan-to-value ratio"), if so specified in the related Prospectus Supplement,
will have been given less consideration, and in certain cases no consideration,
in underwriting the Mortgage Loans or Contracts.
To the extent described in the related Prospectus Supplement, the
credit quality of some of the borrowers under the Mortgage Loans and Contracts
will be lower than that of borrowers under mortgage loans conforming to the FNMA
or FHLMC underwriting guidelines for first-lien, single family mortgage loans.
As a result of such lower credit quality and, if so specified in the related
prospectus Supplement, the high loan-to-value ratios of the Mortgage Loans and
Contracts, the loans will be likely to experience higher rates of delinquencies,
defaults and losses (which rates could be substantially higher) than those that
would be experienced by loans underwritten in conformity with the FNMA or FHLMC
underwriting guidelines for first-lien, single family mortgage loans. In
addition, in the case of Mortgage Loans and Contracts originated for purposes
other than acquisition of the related Mortgaged property, the losses sustained
from defaulted loans are likely to be more severe (and will frequently be total
losses) because the costs incurred in the collection and liquidation of such
defaulted loans in relation to the smaller principal balances thereof are
proportionately higher than for first-lien, single family mortgage loans, and
because substantially all of such loans will, to the extent described in the
related prospectus Supplement, be secured by junior liens on Mortgaged
Properties in which the borrowers had little or no equity at the time of
origination of such loans.
The underwriting requirements for certain types of Mortgage Loans and
Contracts may change from time to time, which in certain instances may result in
less stringent underwriting requirements. Depending upon the dates on which
loans were originated or purchased, such loans may have been originated or
purchased pursuant to different underwriting requirements, and accordingly,
certain Mortgage Loans or Contracts included in the related Loan Asset Pool may
be of a different credit quality and have different loan characteristics than
other loans included therein. To the extent that certain Mortgage Loans or
Contracts were originated or purchased under less stringent underwriting
requirements, such loans may be more likely to experience higher rates of
delinquencies, defaults and losses than those loans originated or purchased
pursuant to more stringent underwriting requirements.
LIMITATIONS ON REALIZATIONS OF JUNIOR LIENS. The primary risk with
respect to defaulted Mortgage Loans secured by junior liens is the possibility
that adequate funds will not be received in connection with a foreclosure of the
related Mortgaged Property to satisfy fully both the senior lien(s) and the
Mortgage Loan and that other insurance providing for reimbursement for losses
from such default (i.e., the FHA Insurance Amount for a Title I Mortgage Loan)
is not available. The claims of the senior lienholder(s) will be satisfied in
full out of proceeds of the liquidation of the related Mortgaged Property, if
such proceeds are sufficient, before the related Trust Fund as the junior
lienholder receives any payments in respect of the defaulted Mortgage Loan. If
the Master Servicer, Servicer or a Subservicer, if any, were to foreclose on any
junior lien Mortgage Loan, it would do so subject to any related senior lien(s).
In order for a junior lien Mortgage Loan to be paid in full at such sale, a
bidder at the foreclosure sale of such Mortgage Loan would have to both bid an
amount sufficient to pay off all sums due under the Mortgage Loan and the senior
lien(s) or purchase the Mortgaged Property subject to the senior lien(s). If
proceeds from a foreclosure and liquidation of the related Mortgaged Property
are insufficient to satisfy the costs of foreclosure and liquidation and the
amounts owed under the loans secured by the senior lien(s) and the junior lien
Mortgage Loan in the aggregate, the Trust Fund, as the junior lienholder, will
bear (i) the risk of delay in distributions while a deficiency judgment (which
may not be available in certain jurisdictions) against the borrower is obtained
and realized and (ii) the risk of loss if the deficiency judgment is not
obtained or realized. Any such delays or losses will be borne by the
Certificates of a Series to the extent that such delays or losses are not
otherwise covered by amounts available from any Credit Enhancement provided for
such Certificates, as specified in the related Prospectus Supplement. See
"Certain Legal Aspects of the Mortgage Assets n Foreclosure n Junior Liens"
herein.
CERTAIN LEGAL CONSIDERATIONS OF MORTGAGE LOANS AND CONTRACTS.
Applicable state laws generally regulate interest rates and other charges that
may be assessed on borrowers, require certain disclosures to borrowers, and may
require licensing of the Depositor, the Trustee, the Servicer, the
Administrator, if any, the Master Servicer, if any, and any Subservicer. In
addition, most states have other laws, public policies and general principles of
equity relating to the protection of consumers and the prevention of unfair and
deceptive practices which may apply to the origination, servicing and collection
of the Mortgage Loans and Contracts. The Mortgage Loans and Contracts also may
be subject to federal laws, including, if applicable, the following: (i) the
federal Truth-in-Lending Act and Regulation Z promulgated thereunder, which
require certain disclosures to the borrowers regarding the terms of the Mortgage
Loans and Contracts; (ii) the Real Estate Settlement Procedures Act and
Regulation X promulgated thereunder, which require certain disclosures to the
borrowers regarding the settlement and servicing of the Mortgage Loans and
Contracts; (iii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color, sex,
religion, marital status, national origin, receipt of public assistance or the
exercise of any right under the Consumer Credit Protection Act; (iv) the Fair
Credit Reporting Act, which regulates the use and reporting of information
related to the borrower's credit experience; (v) the Federal Trade Commission
Preservation of Consumers' Claims and Defenses Rule, 16 C.F.R. Part 433,
regarding the preservation of a consumer's rights; (vi) the Fair Housing Act, 42
U.S.C. 3601 et seq., relating to the creation and governance of the Title I
Program; (vii) the Home Ownership and Equity Protection Act; and (viii) the
Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the "Relief Act").
See "Certain Legal Aspects of the Mortgage Assets" herein. Federal and state
environmental laws and regulations may also impact the Servicer's or any
Subservicer's ability to realize value with respect to the Mortgaged Properties.
See "Certain Legal Aspects of the Mortgage Assets" herein.
Depending on the provisions of applicable law and the specific facts
and circumstances involved, violations of these laws, policies and principles
may limit the ability of the Servicer or any Subservicer to collect all or part
of the principal of or interest on the Mortgage Loans and Contracts, may entitle
the related borrower to a refund of amounts previously paid, and, in addition,
could subject the Master Servicer, Servicer or any Subservicer to damages and
administrative sanctions. Further, violations of state law can affect the
insurability of the Title I Mortgage Loans and Title I Contracts under FHA
Regulations. See "Certain Legal Aspects of the Mortgage Assets--The Title I
Program." If the Servicer or any Subservicer is unable to collect all or part of
the principal or interest on any Mortgage Loan or Contract because of a
violation of the aforementioned laws, public policies or general principles of
equity, distributions from the Trust Fund may be delayed or the Trust Fund may
be unable to make all distributions owed to the Certificateholders to the extent
any related losses are not otherwise covered by amounts available from any
Credit Enhancement provided for the Series of Certificates. Furthermore,
depending upon whether damages and sanctions are assessed against the Servicer,
the Master Servicer, if any, or any Subservicer, such violations may materially
impact the financial ability of the Master Servicer, if any, the Servicer or any
Subservicer to continue to act in such capacity.
To the extent specified in the related Prospectus Supplement, the
related Transferor or the Depositor will be required to repurchase or replace
any Mortgage Loan or Contract which, at the time of origination, did not comply
with applicable federal and state laws or regulations.
BALLOON PAYMENTS. Mortgage Loans that require "balloon payments"
involve a greater risk to the lender than fully amortizing loans because the
ability of a borrower to make a balloon payment typically will depend upon its
ability either to refinance the loan or to sell the related Mortgaged Property
at a price sufficient to permit the borrower to make the balloon payment. The
ability of a borrower to accomplish either of these goals will be affected by
all of the factors described above affecting property value as well as a number
of other factors at the time of attempted sale or refinancing, including the
level of available mortgage rates and prevailing economic conditions.
RISKS ASSOCIATED WITH CERTAIN MORTGAGE ASSETS
NO HAZARD INSURANCE FOR TITLE I MORTGAGE LOANS. With respect to any
Title I Mortgage Loans, the FHA Regulations do not require that a borrower
obtain title or fire and casualty insurance as a condition to obtaining a
property improvement loan. With respect to both manufactured home contracts that
are Title I Contracts and property improvement loans that are Title I Mortgage
Loans, if the related Mortgage Property is located in a flood hazard area,
however, flood insurance in an amount at least equal to the loan amount is
required. In addition, the FHA Regulations do not require that the related
borrower obtain insurance against physical damage arising from earth movement
(including earthquakes, landslides and mudflows) as a condition to obtaining a
property improvement loan insured under the Title I Program. Accordingly, if a
Mortgaged Property that secures a Title I Mortgage Loan suffers any uninsured
hazard or casualty losses, holders of any Offered Certificates secured in whole
or in part by Title I Mortgage Loans may bear the risk of loss resulting from a
default by the related borrower to the extent such losses are not recovered by
foreclosure on the defaulted loans or from any FHA Claims payments. Such loss
may be otherwise covered by amounts available from the credit enhancement
provided for the Offered Certificates, as specified in the related Prospectus
Supplement.
CONTRACTS SECURED BY MANUFACTURED HOMES. The Secured Contracts will be
secured by security interests in Manufactured Homes that are not considered to
be real property because they are not permanently affixed to real estate.
Perfection of security interests in such Manufactured Homes and enforcement of
rights to realize upon the value of such Manufactured Homes as collateral for
the Contracts are subject to a number of Federal and state laws, including the
Uniform Commercial Code as adopted in each state and each state's certificate of
title statutes. The steps necessary to perfect the security interest in a
Manufactured Home will vary from state to state. Because of the expense and
administrative inconvenience involved, the Servicer of a Contract will not amend
any certificate of title to change the lienholder specified therein from such
Servicer to the Trustee and will not deliver any certificate of title to such
Trustee or note thereon the Trustee's interest. Consequently, in some states, in
the absence of such an amendment, the assignment to such Trustee of the security
interest in the Manufactured Home may not be effective or such security interest
may not be perfected and, in the absence of such notation or delivery to such
Trustee, the assignment of the security interest in the Manufactured Home may
not be effective against creditors of the Servicer or a trustee in bankruptcy of
such servicer. If any related Credit Enhancement is exhausted and a Contract is
in default, then recovery of amounts due on such Contracts is dependent on
repossession and resale of the Manufactured Home securing such Contract. Certain
other factors may limit the ability of the Holders to realize upon the
Manufactured Homes or may limit the amount realized to less than the amount due.
UNSECURED CONTRACTS. The obligations of the borrower under any
Unsecured Contract included in the related Trust Fund will not be secured by an
interest in the related real estate or otherwise, and the Trust Fund, as the
owner of such Contract, will be a general unsecured creditor as to such
obligations. As a consequence, in the event of a default under an Unsecured
Contract, the related Trust Fund will have recourse only against the related
borrower's assets generally, along with all other general unsecured creditors of
the related borrower. In a bankruptcy or insolvency proceeding relating to a
borrower on an Unsecured Contract, the obligations of the related borrower under
such Unsecured Contract may be discharged in their entirety, notwithstanding the
fact that the portion of such borrower's assets made available to the related
Trust Fund as a general unsecured creditor to pay amounts due and owing
thereunder are insufficient to pay all such amounts. A borrower on an Unsecured
Contract may not demonstrate the same degree of concern over performance of the
borrower's obligations under such Unsecured Contract as if such obligations were
secured by a single family residence owned by such borrower.
CONSUMER PROTECTION LAWS RELATED TO CONTRACTS. Numerous federal and
state consumer protection laws impose requirements on lending under retail
installment sales contracts and installment loan agreements such as the
Contracts, and the failure by the lender or seller of goods to comply with such
requirements could give rise to liabilities of assignees for amounts due under
such agreements and claims by such assignees may be subject to set-off as a
result of such lender's or seller's noncompliance. These laws would apply to a
Trustee as an assignee of Contracts. Each Transferor of Contracts will warrant
that each Contract complies with all requirements of law and with respect to any
Secured Contract will make certain warranties relating to the validity,
subsistence, perfection and priority of the security interest in each
Manufactured Home securing such Contract. A breach of any such warranty that
materially adversely affects any Contract would create an obligation of the
Transferor to repurchase or replace such Contract unless such breach is cured.
RELIANCE ON MANAGEMENT OF TIMESHARE UNITS. Unlike most conventional
single-family residential properties, the value of a timeshare unit is
substantially dependent on the management of the resort property in which it is
located. Management of timeshare resort properties includes operation of a
reservation system, maintenance of the physical structure, refurbishing of
individual units, maintenance and management of common areas and recreational
facilities, and facilitating the rental of individual units on behalf of
timeshare owners. In addition, timeshare units, which are purchased for
intervals of one or more specified weeks each year, are marketed as the owner's
purchase of future vacation opportunities rather than as a primary residence, a
second home or an investment. Accordingly, while borrowers are obligated to make
payments under their Mortgage Loans irrespective of any defect in, damage to or
change in conditions (such as poor management, faulty construction or physical,
social or environmental conditions) relating to the timeshare properties, any
such defect, damage or change in conditions could result in delays in payment or
in defaults by borrowers whose timeshare units are affected.
RECHARACTERIZATION OF SALE OF MORTGAGE ASSETS AS BORROWING
The Depositor will agree in the Pooling and Servicing Agreement that
the transfer of the Mortgage Assets to the Trust Fund is intended as a valid
sale and transfer of the Mortgage Assets to the Trustee for the benefit of the
Certificateholders. However, if the Mortgage Assets are held to be property of
the Depositor or if for any reason the Pooling and Servicing Agreement is held
to create a security interest in the Mortgage Assets, the Depositor will agree
in the Pooling and Servicing Agreement that such transfer shall be treated as
the grant of a security interest in the Mortgage Assets to the Trust Fund. Also,
the Depositor will warrant that if the transfer of the Mortgage Assets by it is
deemed to be a grant of a security interest in the Mortgage Assets, the Trustee
will have a perfected first-priority security interest therein. The Depositor is
required to take all actions that are required under law to protect the Trust
Fund's security interest in the Mortgage Assets. If the transfer of the Mortgage
Assets to the Trust Fund is deemed to create a security interest therein, a tax
or government lien on property of the Depositor arising before the Mortgage
Assets came into existence may have priority over the Trusts Fund's interest in
such Mortgage Assets.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The following summaries describe certain features common to each
Series. Such summaries do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, all of the provisions of the
Pooling and Servicing Agreement and the Prospectus Supplement relating to each
Series. When particular provisions or terms used or referred to in a Pooling and
Servicing Agreement are referred to herein, such provisions or terms shall be as
used or referred to in such Pooling and Servicing Agreement.
The Certificates will not be insured or guaranteed by GNMA, FNMA,
FHLMC, any governmental entity or, to the extent specified in the related
Prospectus Supplement, any other person. To the extent specified in the related
Prospectus Supplement, the Depositor's only obligations with respect to a Series
will be to obtain certain representations and warranties from each Transferor
and to assign to the related Trustee the Depositor's rights with respect
thereto, and its obligations pursuant to certain representations and warranties
made by it.
To the extent specified in the related Prospectus Supplement, the
Mortgage Assets relating to a Series, other than the Agency Securities and the
Title I Mortgage Loans and Title I Contracts, will not be insured or guaranteed
by any governmental entity or, any other person. With respect to a Series for
which the related Trust Fund includes Mortgage Loans or Contracts, to the extent
that delinquent payments on or losses in respect of defaulted Mortgage Loans or
Contracts, are not paid from any applicable Credit Enhancement, such
delinquencies may result in delays in distributions to the Holders of one or
more Classes of such Series, and such losses will be borne by the Holders of one
or more Classes of such Series. To the extent specified in the related
Prospectus Supplement, the Servicer will have no obligation to advance such
delinquencies.
In addition, with respect to a Series for which the related Trust Fund
includes Mortgage Assets, late payments on such Mortgage Assets may result in
delays in distributions to the Holders of one or more Classes of such Series,
and losses on such Mortgage Assets will be borne by the Holders of one or more
Classes of such Series, to the extent such late payments and losses are not
advanced or paid from any applicable Credit Enhancement.
THE CERTIFICATES--GENERAL
The Certificates will be issued in Series pursuant to separate Pooling
and Servicing Agreements (each, a "Pooling and Servicing Agreement") between the
Depositor, the Servicer, the Administrator, if any, the Master Servicer, if any,
and the related Trustee named in the Prospectus Supplement. A form of Pooling
and Servicing Agreement has been filed as an Exhibit to the Registration
Statement of which this Prospectus forms a part. The Pooling and Servicing
Agreement relating to a Series of Certificates will be filed as an Exhibit to a
Report on Form 8-K to be filed with the Commission within 15 days following the
issuance of such Series of Certificates.
The "Issuer" with respect to a Series of Certificates will be the
related Trust Fund established by the Depositor pursuant to the related Pooling
and Servicing Agreement. Each Series of Certificates will be entitled to
distributions only from the Assets included in the related Trust Fund and any
other assets pledged or otherwise available for the benefit of the Holders of
such Series as specified in the related Prospectus Supplement. Accordingly, the
investment characteristics of a Series of Certificates will be determined by the
Assets included in the related Trust Fund. The Certificates of a Series will not
represent obligations of the Depositor, the Servicer, any Administrator, any
Master Servicer, the Trustee or any affiliate thereof.
FORM OF CERTIFICATES; TRANSFER AND EXCHANGE
As specified in the related Prospectus Supplement, the Certificates of
each Series will be issued either in book entry form or fully registered
certificated form in the minimum denominations for each Class specified in the
related Prospectus Supplement. To the extent specified in the Prospectus
Supplement, the original Principal Balance of each Certificate will equal the
aggregate distributions allocable to principal to which such Certificate is
entitled. To the extent specified in the related Prospectus Supplement,
distributions allocable to interest on each Certificate of a Series that is not
entitled to distributions allocable to principal will be calculated based on the
Notional Principal Balance of such Certificate. The "Notional Principal Balance"
of a Certificate will be a notional amount assigned to such certificate and will
not evidence an interest in or entitlement to distributions allocable to
principal, but will be used solely for convenience in expressing the calculation
of interest and for certain other purposes.
Except as described below under "Book Entry Registration" with respect
to Book Entry Certificates, the Certificates of each Series will be transferable
and exchangeable on a register to be maintained at the corporate trust office of
the related Trustee or such other office or agency maintained for such purposes
by the Trustee. To the extent specified in the Prospectus Supplement with
respect to a Series, under the related Pooling and Servicing Agreement, the
Trustee will be appointed initially as the "Registrar" for such Series for
purposes of maintaining books and records of the ownership and transfer of the
Certificates of such Series. To the extent specified in the Prospectus
Supplement with respect to a Series, no service change will be made for any
registration of transfer or exchange of Certificates of such Series, but payment
of a sum sufficient to cover any tax or other governmental charge may be
required.
Under current law the purchase and holding of a Class of Certificates
entitled only to a specified percentage of distributions of either interest or
principal or a notional amount of either interest or principal on the related
Mortgage Assets or a Class of Certificates entitled to receive distributions of
interest and principal on the Mortgage Assets only after distributions to other
Classes or after the occurrence of certain specified events by or on behalf of
any employee benefit plan or other retirement arrangement (including individual
retirement accounts and annuities, Keogh plans and collective investment funds
in which such plans, accounts or arrangements are invested) subject to
provisions of ERISA or the Code, may result in "prohibited transactions" within
the meaning of ERISA and the Code. See "ERISA Considerations." To the extent
specified in the related Prospectus Supplement, transfer of Certificates of such
a Class will not be registered unless the transferee (i) executes a
representation letter stating that it is not, and is not purchasing on behalf
of, any such plan, account or arrangement or (ii) provides an opinion of counsel
satisfactory to the related Trustee and the Depositor that the purchase of
Certificates of such a Class by or on behalf of such plan, account or
arrangement is permissible under applicable law and will not subject the related
Trustee, the Servicer, the Administrator, if any, the Master Servicer, if any,
or the Depositor to any obligation or liability in addition to those undertaken
in the Pooling and Servicing Agreement.
REMIC OR FASIT ELECTION
As to each Series, one or more elections may be made to treat all or
specified portions of the related Trust Fund as a REMIC or FASIT for federal
income tax purposes. The related Prospectus Supplement will specify whether a
REMIC or FASIT election is to be made. Alternatively, the Pooling and Servicing
Agreement for a Series may provide that a REMIC or FASIT election may be made at
the discretion of the Depositor, the Servicer, the Administrator, if any, the
Master Servicer, if any, or another entity and may only be made if certain
conditions are satisfied. As to any such Series, the terms and provisions
applicable to the making of a REMIC or FASIT election, as well as any material
federal income tax consequences to Holders of such Series not otherwise
described herein, will be set forth in the related Prospectus Supplement. If a
REMIC election is made with respect to a Series, one of the Classes of such
Series will be designated as evidencing the "residual interests" in the related
REMIC, as defined in the Code. All other Classes of such Series will constitute
"regular interests" in the related REMIC, as defined in the Code. If a FASIT
election is made with respect to a Series, one of the Classes of such Series
will be designated as evidencing the "ownership interest" in the related FASIT
as defined in the Code. All other Classes of such Series will constitute
"regular interests" or "high-yield interests" in the related FASIT, as defined
in the Code. As to each Series with respect to which a REMIC or FASIT election
is to be made, the Servicer, the Administrator, if any, the related Trustee, a
Residual Holder, an Ownership Interest Holder or another person as specified in
the related Prospectus Supplement will be obligated to take all actions required
in order to comply with applicable laws and regulations and will be obligated to
pay any prohibited transaction taxes. The person so specified, to the extent
provided in the related Prospectus Supplement, will be entitled to reimbursement
for any such payment from the assets of the related Trust Fund or, if
applicable, from any Residual Holder or Ownership Interest Holder.
CLASSES OF CERTIFICATES
Each Series will be issued in one or more Classes. If specified in the
Prospectus Supplement, one or more Classes of a Series may evidence beneficial
ownership interests in separate groups of Assets included in the related Trust
Fund or otherwise available for the benefit of such Series. The Certificates of
a Series will have an aggregate original principal balance as specified in the
related Prospectus Supplement. The original principal balance of the
Certificates of a Series and the Certificate Interest Rate on the Classes of
such Certificates will be determined in the manner specified in the Prospectus
Supplement.
Each Class of Certificates that is entitled to distributions allocable
to interest will bear interest at the applicable Certificate Interest Rate,
which may be a fixed rate (which may be zero) or, in the case of Variable
Interest Certificates, may be a rate that is subject to change from time to time
(a) in accordance with a schedule, (b) in reference to an index, or (c)
otherwise in each case as specified in the related Prospectus Supplement.
Notwithstanding the foregoing, if specified in the related Prospectus
Supplement, one or more Classes of a Series may be entitled to receive
distributions of interest only to the extent of amounts available to make such
distributions. One or more Classes of Certificates may provide for interest that
accrues, but is not currently payable ("Compound Interest Certificates"). With
respect to any Class of Compound Interest Certificates, if specified in the
related Prospectus Supplement, any interest that has accrued but is not paid on
a given Distribution Date will be added to the aggregate principal balance of
such Class on that Distribution Date.
A Series may include one or more Classes entitled only to
distributions (i) allocable to interest ("Interest Only Certificates"), (ii)
allocable to principal ("Principal Only Certificates"), and allocable as between
scheduled payments of principal and Principal Prepayments, as defined below
under "Distributions of Principal and Interest" or (iii) allocable to both
principal (and allocable as between scheduled payments of principal and
Principal Prepayments) and interest. A Series may include one or more classes as
to which distributions will be allocated (i) on the basis of collections from
designated portions of the Assets included in the related Trust Fund, (ii) in
accordance with a schedule or formula, (iii) in relation to the occurrence of
events, or (iv) otherwise, in each case as specified in the related Prospectus
Supplement. The timing and amounts of such distributions may vary among Classes,
over time or otherwise, in each case as specified in the related Prospectus
Supplement.
A Series of Certificates may include one or more Classes of Scheduled
Amortization Certificates and Companion Certificates. "Scheduled Amortization
Certificates" are Certificates with respect to which distributions of principal
are to be made in specified amounts on specified Distribution Dates, to the
extent of funds available on such Distribution Date. "Companion Certificates"
are Certificates which receive distributions of all or a portion of any funds
available on a given Distribution Date which are in excess of amounts required
to be applied to distributions on Scheduled Amortization Certificates on such
Distribution Date. Because of the manner of application of distributions of
principal to Companion Certificates, the weighted average lives of Companion
Certificates of a Series may be expected to be more sensitive to the actual rate
of prepayments on the Mortgage Assets in the related Trust Fund than will the
Scheduled Amortization Certificates of such Series.
One or more Series of Certificates may constitute a Series of "Special
Allocation Certificates" which may include Senior Certificates, Subordinated
Certificates, Priority Certificates and Non-Priority Certificates. As more fully
described in the related Prospectus Supplement for a Series of Special
Allocation Certificates, Special Allocation Certificates are Certificates for
which the timing and/or priority of distributions of principal and/or interest
may favor one or more Classes of such Certificates over one or more other
Classes of such Certificates. Such timing and/or priority may be modified or
reordered upon the occurrence of one or more specified events. To the extent
specified in the related Prospectus Supplement for a Series of Special
Allocation Certificates, losses on the Assets included in the related Trust Fund
may be disproportionately borne by one or more Classes of such Series, and the
proceeds and distributions from such Assets may be applied to the payment in
full of one or more Classes of such Series before the balance, if any, of such
proceeds are applied to one or more other Classes within such Series. For
example, Special Allocation Certificates in a Series may be comprised of one or
more Classes of Senior Certificates having a priority in right to distributions
of principal and interest over one or more Classes of Subordinated Certificates,
to the extent described in the related Prospectus Supplement, as a form of
Credit Enhancement. See "Credit Enhancement--Subordination". Typically,
Subordinated Certificates of a Series will carry a rating by the rating agencies
rating the Certificates of such Series lower than that of the Senior
Certificates of such Series. In addition, one or more Classes of Certificates of
a Series ("Priority Certificates") may be entitled to a priority of
distributions of principal or interest from Assets included in the related Trust
Fund over another Class of Certificates of such Series ("Non-Priority
Certificates"), but only after the exhaustion of other Credit Enhancement
applicable to such Series. Priority Certificates and Non-Priority Certificates
nonetheless may be within the same rating category.
DISTRIBUTIONS OF PRINCIPAL AND INTEREST
GENERAL. Distributions of principal and interest on the Certificates
of a Series will be made by the related Trustee, to the extent of funds
available therefor, on the related Distribution Date. Distributions will be made
to the persons in whose names the Certificates of such Series are registered at
the close of business on the dates specified in the related Prospectus
Supplement (each, a "Record Date"). With respect to Certificates other than Book
Entry Certificates, distributions will be made by check or money order mailed to
Certificateholders of such Series at their addresses appearing in the books and
records maintained by or on behalf of the Issuer of such Series or, if specified
in the related Prospectus Supplement, in the case of Certificates that are of a
certain minimum denomination as specified in the related Prospectus Supplement,
upon written request by a Holder of such Series, by wire transfer or by such
other means as are agreed upon with such Certificateholder; provided, however,
that the final distribution in retirement of a Series (other than Book Entry
Certificates) will be made only upon presentation and surrender of such
Certificates at the office or agency of the related Trustee specified in the
notice to Certificateholders of such final distribution. With respect to Book
Entry Certificates, such distributions will be made as described below under
"Book Entry Registration" and in the related Prospectus Supplement.
To the extent specified in the related Prospectus Supplement,
distributions allocable to principal and interest on the Certificates of a
Series will be made by the related Trustee out of, and only to the extent of,
funds in a separate account established and maintained under the related Pooling
and Servicing Agreement for the benefit of Certificateholders of such Series
(the "Certificate Account"), including any funds transferred from any related
Reserve Fund or otherwise applicable accounts maintained by the Trustee. As
between Certificates of different Classes of a Series and as between
distributions of principal (and, if applicable, between distributions of
Principal Prepayments) and interest, distributions made on any Distribution Date
will be applied as specified in the related Prospectus Supplement. To the extent
specified in the related Prospectus Supplement, distributions to any Class of
Certificates will be made pro rata to all Certificateholders of that Class. If
specified in the related Prospectus Supplement, the amounts received by the
Trustee as described below under "Assets Securing or Underlying the
Certificates" will be invested in the Permitted Investments specified herein and
in the related Prospectus Supplement, and all income or other gain from such
investments will be deposited in the related Certificate Account and will be
available to make distributions on the Certificates of the applicable Series on
the next succeeding Distribution Date in the manner specified in the related
Prospectus Supplement.
DISTRIBUTIONS OF INTEREST. Each Class of a Series (other than a Class
of Principal Only Certificates) will accrue interest at the applicable
Certificate Interest Rate. One or more Classes may be entitled to receive
distributions of interest only to the extent of amounts available to make such
distributions. Interest on each Class will accrue during the related Due Period
and will be distributed on the related Distribution Date. Interest on all
Certificates which bear or receive interest, other than Compound Interest
Certificates, will be distributed on the Distribution Dates specified in the
related Prospectus Supplement. However, failure to distribute interest on a
current basis may not necessarily be an Event of Default with respect to a
particular Series or Class of Certificates. Interest on any Class of Compound
Interest Certificates or similar securities will not be distributed currently,
but will accrue and the amount of the interest so accrued will be added to the
principal thereof on each Distribution Date until the date specified in the
related Prospectus Supplement. Principal Only Certificates will not accrue, and
will not be entitled to receive, any interest. Upon maturity or earlier
repurchase of the Certificates of any Class, interest will be paid to the date
specified in the related Prospectus Supplement. If so specified in the related
Prospectus Supplement, the Certificate Interest Rate applicable to one or more
Classes of Certificates may increase or decrease upon the occurrence of certain
events.
Each payment of interest on each Class of Certificates (or addition to
principal of a Class of Compound Interest Certificates) on a Distribution Date
will include all interest accrued during the related Due Period. If the Due
Period for a Series ends on a date other than a Distribution Date for such
Series, the yield realized by the Holders of such Certificates may be lower than
the yield that would result if the Due Period ended on such Distribution Date.
Additionally, if specified in the related Prospectus Supplement, interest
accrued for a Due Period for one or more Classes may be calculated on the
assumption that principal distributions (and additions to principal of the
Certificates), and allocations of losses on the Mortgage Assets (if specified in
the related Prospectus Supplement), are made on the first day of the preceding
Due Period and not on the Distribution Date for such preceding Due Period when
actually made or added. Such method would produce a lower effective yield than
if interest were calculated on the basis of the actual principal amount
outstanding.
A Series may include one or more Classes of Variable Interest Rate
Certificates. With respect to each Class of Variable Interest Certificates of a
Series, the related Prospectus Supplement will set forth: (i) the initial
Certificate Interest Rate (or the manner of determining the initial Certificate
Interest Rate); (ii) the formula, index or other method by which the Certificate
Interest Rate will be determined from time to time; (iii) the periodic intervals
at which such determination will be made; (iv) the Maximum Variable Interest
Rate, if any, and the Minimum Variable Interest Rate; and (v) any other terms
relevant to such Class of Certificates.
DISTRIBUTIONS OF PRINCIPAL. Principal distributions on the
Certificates of a Series will be made from amounts available therefor on each
Distribution Date in an aggregate amount determined as set forth in the related
Prospectus Supplement and will be allocated among the respective Classes of a
Series of Certificates at the times, in the manner and in the priority set forth
in the related Prospectus Supplement.
Except with respect to Compound Interest Certificates and Interest
Only Certificates or similar securities, unless specified otherwise in the
related Prospectus Supplement, on each Distribution Date principal distributions
will be made on the Certificates of a Series in an aggregate amount determined
in the related Prospectus Supplement. If a Series of Certificates has a Class of
Compound Interest Certificates, additional principal payments on the
Certificates of such Series will be made on each Distribution Date in an amount
equal to the interest accrued, but not then distributable, on such Class of
Compound Interest Certificates for the related Due Period.
If specified in the related Prospectus Supplement, on any Distribution
Date on which the principal balance of the Mortgage Assets relating to a Series
is reduced due to losses on such Mortgage Assets, (i) the amount of such losses
will be allocated first, to reduce the aggregate outstanding principal balance
of the Subordinate Certificates of such Series (or other subordination, if any,)
and, thereafter, to reduce the aggregate outstanding principal balance of the
remaining Certificates of such Series in the priority and manner specified in
such Prospectus Supplement until the aggregate outstanding principal balance of
each Class of such Certificates of such Series so specified has been reduced to
zero or paid in full, thus reducing the amount of principal distributable on
each such Class of Certificates or (ii) such losses may be allocated in any
other manner set forth in the related Prospectus Supplement. To the extent
specified in the related Prospectus Supplement, such reductions of principal of
a Class or Classes of Certificates will be allocated to the Holders of the
Certificates of such Class or Classes pro rata in the proportion which the
outstanding principal of each Certificate of such Class or Classes bears to the
aggregate outstanding principal balance of all Certificates of such Class.
If provided in the related Prospectus Supplement, one or more Classes
of Senior Certificates of a Series will be entitled to receive all or a
disproportionate percentage of the payments of principal which are received on
the related Mortgage Assets in advance of their scheduled due dates and are not
accompanied by amounts representing scheduled interest due after the month of
such payments ("Principal Prepayments") in the percentages and under the
circumstances or for the periods specified in the Prospectus Supplement. To the
extent provided in the related Prospectus Supplement, any such allocation of
principal prepayments to such Class or Classes will have the effect of
accelerating the amortization of such Senior Certificates while increasing the
interests evidenced by the Subordinated Certificates in rights to the benefit of
the Assets in the related Trust Fund. Increasing the interests of the
Subordinated Certificates relative to that of the Senior Certificates is
intended to preserve the availability of the subordination credit enhancement
provided to the Priority Certificates by the Subordinated Certificates. See
"Credit Enhancement--Subordination."
UNSCHEDULED DISTRIBUTIONS. If specified in the related Prospectus
Supplement, the Certificates of a Series will be subject to receipt of
distributions before the next scheduled Distribution Date under the
circumstances and in the manner described below and in the related Prospectus
Supplement. If applicable, the related Trustee will be required to make such
unscheduled distributions on the Certificates of a Series on the date and in the
amount specified in the related Prospectus Supplement if, due to substantial
payments of principal (including Principal Prepayments) on the related Mortgage
Assets, low rates then available for reinvestment of such payments or both, the
Trustee determines, based on the assumptions specified in the related Pooling
and Servicing Agreement, that the amount anticipated to be on deposit in the
Certificate Account for such Series on the next related Distribution Date,
together with, if applicable, any amounts available to be withdrawn from any
related Reserve Fund or from any other Credit Enhancement provided for such
Series, may be insufficient to make required distributions on the Certificates
of such Series on such Distribution Date. To the extent specified in the related
Prospectus Supplement, the amount of any such unscheduled distribution that is
allocable to principal will not exceed the amount that would otherwise have been
required to be distributed as principal on the Certificates of such Series on
the next Distribution Date. To the extent specified in the related Prospectus
Supplement, all unscheduled distributions will include interest at the
applicable Certificate Interest Rate (if any) on the amount of the unscheduled
distribution allocable to principal for the period and to the date specified in
such Prospectus Supplement.
To the extent specified in the related Prospectus Supplement, all
distributions allocable to principal in any unscheduled distribution made on the
Certificates of a Series will be made in the same priority and manner as
distributions of principal on such Certificates would have been made on the next
Distribution Date, and with respect to Certificates of the same Class,
unscheduled distributions of principal will be made on a pro rata basis. Notice
of any unscheduled distribution will be given by the Trustee prior to the date
of such distribution.
TERMINATION
The obligations created by the Pooling and Servicing Agreement for
each Series of Certificates will terminate following (i) the final payment or
other liquidation of the last Mortgage Asset subject thereto or the disposition
of all property acquired upon foreclosure of any Mortgage Loan subject thereto
and (ii) the payment (or provision for payment) to the Certificateholders of
that Series of all amounts required to be paid to them pursuant to such Pooling
and Servicing Agreement. Written notice of termination of a Pooling and
Servicing Agreement will be given to each Certificateholder of the related
Series, and the final distribution will be made only upon presentation and
surrender of the Certificates of such Series at the location to be specified in
the notice of termination.
If specified in the related Prospectus Supplement, a Series of
Certificates may be subject to optional early termination through the repurchase
of the Mortgage Assets in the related Trust Fund by the party or parties
specified therein, under the circumstances and in the manner set forth therein.
If provided in the related Prospectus Supplement upon the reduction of the Class
Principal Balance of a specified Class or Classes of Certificates by a specified
percentage or amount or upon a specified date, a party designated therein may be
authorized or required to repurchase or to solicit bids for the purchase of the
Mortgage Assets of the related Trust Fund, or of a sufficient portion of such
Mortgage Assets to retire such class or classes, under the circumstances and in
the manner set forth therein. If a REMIC or FASIT election will be made with
respect to a Series of Certificates, there may be additional conditions to the
termination of the related Trust Fund which will be set forth in the related
Pooling and Servicing Agreement for such Series of Certificates.
BOOK ENTRY REGISTRATION
If the Prospectus Supplement for a Series so provides, Certificates of
any Class of such Series may be issued in book entry form ("Book Entry
Certificates") and held in the form of a single certificate issued in the name
of a Clearing Agency ("Clearing Agency") registered with the Securities and
Exchange Commission or its nominee. Transfers and pledges of Book Entry
Certificates may be made only through entries on the books of the Clearing
Agency in the name of brokers, dealers, banks and other organizations eligible
to maintain accounts with the Clearing Agency ("Clearing Agency Participants")
or their nominees. Clearing Agency Participants may also be Beneficial Owners
(as defined below) of Book Entry Certificates.
Purchasers and other Beneficial Owners of Book Entry Certificates
("Beneficial Owners") may not hold Book Entry Certificates directly, but may
hold, transfer or pledge their ownership interest in the Book Entry Certificates
only through Clearing Agency Participants. Additionally, Beneficial Owners will
receive all distributions of principal and interest with respect to Book Entry
Certificates, and, if applicable, may request repurchase of Book Entry
Certificates only through the Clearing Agency and the Clearing Agency
Participants. Beneficial Owners will not be registered holders of Certificates
or be entitled to receive definitive certificates representing their ownership
interest in the Certificates except under the limited circumstances, if any,
described in the related Prospectus Supplement. See "Risk Factors--Limited
Liquidity and Fluctuation in Value from Market Conditions--Book Entry
Registration."
If Certificates of a Series are issued as Book Entry Certificates, the
Clearing Agency will be required to make book entry transfers among Clearing
Agency Participants, to receive and transmit distributions of principal and
interest with respect to the Certificates of such Series, and to receive and
transmit requests for repurchase with respect to such Certificates. Clearing
Agency Participants with whom Beneficial Owners have accounts with respect to
such Book Entry Certificates will be similarly required to make book entry
transfers and receive and transmit distributions and repurchase requests on
behalf of their respective Beneficial Owners. Accordingly, although Beneficial
Owners will not be registered holders of Certificates and will not possess
physical certificates, a method will be provided whereby Beneficial Owners may
receive distributions, transfer their interests, and submit repurchase requests.
MUTILATED, DESTROYED, LOST OR STOLEN CERTIFICATES
To the extent specified in the related Prospectus Supplement, (i) any
mutilated Certificate is surrendered to the Certificate Registrar, or the
Trustee receives evidence to its satisfaction of the destruction, loss or theft
of any Certificate, and (ii) there is delivered to the Depositor, the Trustee
and the Certificate Registrar such security or indemnity as may be required by
each of them to hold each of them harmless, then, in the absence of notice to
the Depositor, the Trustee and the Certificate Registrar that such Certificate
has been acquired by a bona fide purchaser, the Trustee shall execute, deliver
and authenticate, in exchange for or in lieu of any such mutilated, destroyed,
lost or stolen Certificate, a new Certificate of like tenor and Percentage
Interest, but bearing a number not contemporaneously outstanding. Upon the
issuance of any such new Certificate, the Depositor and the Trustee may require
the payment of a sum sufficient to cover any tax or other governmental charge
that may be imposed in relation thereto and any other expenses connected
therewith. Any such duplicate Certificate shall constitute complete and
indefeasible evidence of ownership in the Trust Fund, as if originally issued,
whether or not the mutilated, destroyed, lost or stolen Certificate shall be
found at any time.
ASSETS SECURING OR UNDERLYING THE CERTIFICATES
GENERAL
Each Series of Certificates will represent a beneficial interest in
the Assets included in the related Trust Fund and transferred to the related
Trustee by the Depositor. Such Assets may include (i) Mortgage Assets and
payments or distributions thereon (subject, if specified in the Prospectus
Supplement, to certain exclusions); (ii) if specified in the Prospectus
Supplement, reinvestment income on such payments or distributions; (iii) with
respect to a Trust Fund that includes Mortgage Loans or Contracts, all property
acquired by foreclosure or deed in lieu of foreclosure with respect to any such
Mortgage Loan or Contract and certain rights of the Administrator, if any, and
the Servicer under any policies required to be maintained in respect of the
related Mortgage Assets; and (iv) if specified in the Prospectus Supplement, one
or more forms of Credit Enhancement. The primary Assets of any Trust Fund will
consist of Mortgage Assets.
With respect to a Series, the Depositor will acquire the Mortgage
Assets in the open market or in privately negotiated transactions from one or
more entities, and each such entity from whom the Depositor so acquires a
significant portion of the Mortgage Assets (individually or collectively, the
"Transferor") will be described in the related Prospectus Supplement, including
a description of any affiliation between the Transferor and the Depositor. To
the extent specified in the related prospectus supplement, the Mortgage Assets
will have been originated or acquired by the Transferor in one of four ways: (i)
the indirect origination and purchase of retail installment sales contracts from
a network of independent contractors or dealers professionally installing
property improvements ("indirect originations"); (ii) the origination of loans
directly to consumers, including but not limited to solicitations through
advertising and telemarketing , refinancing of existing mortgage loans and
referrals from home improvement contractors, mortgage brokers and credit unions
("direct originations"); (iii) the purchase of loans, on a flow basis,
originated by unaffiliated lenders, as correspondents ("correspondent
originations"), including delegated underwriting corespondents; or (iv) the
purchase, on a bulk basis, of loan portfolios originated by other unaffiliated
lenders ("portfolio acquisitions"). In acquiring the Mortgage Assets from a
Transferor, the Depositor will rely on the representations and warranties made
by the Transferor with respect to such Mortgage Assets. For a summary
description of the expected representations and warranties with respect to such
Mortgage Assets, See "The Pooling and Servicing Agreement--Assignment of
Mortgage Assets" herein. As further described in the related Prospectus
Supplement for a Series, the Transferor will be obligated to repurchase or
replace any Mortgage Assets that, subject to the lapse of any applicable cure
period, are in breach of a representation or warranty made by the Transferor and
such breach has a material and adverse affect on the value of such Mortgage
Assets or the interest of Certificateholders therein. To the extent that the
Depositor has any obligation to repurchase or replace any Mortgage Assets for a
material breach of any representations or warranties made by the Depositor, the
Depositor is not expected to have the financial capability to repurchase or
replace such defective Mortgage Assets, but rather the Depositor will be relying
on the related Transferor of such defective Mortgage Assets to repurchase or
replace them. See "The Depositor" herein.
The following is a brief description of the Mortgage Assets expected
to be included in the Trust Funds. If specific information respecting the
Mortgage Assets is not known at the time a Series is initially offered, more
general information of the nature described below will be provided in the
related Prospectus Supplement, and specific information will be set forth in a
report on Form 8-K to be filed with the Securities and Exchange Commission
within fifteen days after the initial issuance of such Series. A copy of the
related Pooling and Servicing Agreement with respect to each Series will be
attached to the Form 8-K and will be available for inspection at the corporate
trust office of the related Trustee specified in the related Prospectus
Supplement. A schedule of the Mortgage Assets relating to each Series, will be
attached to the related Pooling and Servicing Agreement delivered to the Trustee
upon delivery of such Series.
MORTGAGE LOANS
The Mortgage Loans will be evidenced by promissory notes, retail
installment sales contracts or other evidences of indebtedness (the "Mortgage
Notes") and will be secured by mortgages, deeds of trust, deeds to secure debt
or other similar security instruments (the "Mortgages") creating a lien or
security interest on single family (one-to-four unit) residences, units in
planned unit developments, units in condominium developments, townhomes and
Manufactured Homes (as defined herein) (the "Mortgaged Properties") located in
various states. If specified in the Prospectus Supplement, the Mortgage Loans
may include cooperative apartment or manufactured housing loans ("Cooperative
Loans") secured by security interests in shares issued by private, non-profit,
cooperative housing corporations ("Cooperatives") and in the related proprietary
leases or occupancy agreements granting exclusive rights to occupy specific
units in such Cooperatives. To the extent specified in the related Prospectus
Supplement, either (i) all or the substantial majority of the Mortgages will be
first liens on the related Mortgaged Properties, or (ii) all or a portion of the
Mortgages will be junior liens on the related Mortgaged Properties, and the
related superior liens will not be included in the related Mortgage Loan Pool.
Certain of the Mortgage Loans may be partially insured to the extent described
in the related Prospectus Supplement (and subject to the conditions described
herein and in the related Prospectus Supplement) by the FHA under the Title I
Program (the "Title I Mortgage Loans"). To the extent specified in the related
Prospectus Supplement, the Mortgage Loans will have scheduled monthly payment
dates throughout a month, and no Mortgage Loan will provide for deferred
interest or negative amortization, and no commercial (other than mixed use) or
multifamily loans will be included in any Mortgage Loan Pool.
The payment terms of the Mortgage Loans to be included in a Trust Fund
for a Series or will be described in the related Prospectus Supplement and may
include any of the following features or combinations thereof or other features
described in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable from
time to time in relation to an index, a rate that is fixed for a period of time
or under certain circumstances and is followed by an adjustable rate, a rate
that otherwise varies from time to time, or a rate that is convertible from an
adjustable rate to a fixed rate. Changes to an adjustable rate may be subject to
periodic limitations, maximum rates, minimum rates or a combination of such
limitations. Accrued interest may be deferred and added to the principal of a
loan for such periods and under such circumstances as may be specified in the
related Prospectus Supplement. Mortgage Loans may provide for the payment of
interest at a rate lower than the specified mortgage rate for a period of time
or for the life of the Mortgage Loan with the amount of any difference
contributed from funds supplied by the seller of the Mortgaged Property or
another source.
(b) Principal may be payable on a level debt service basis to fully
amortize the Mortgage Loan over its term, may be calculated on the basis of an
amortization schedule that is significantly longer than the original term to
maturity or on an interest rate that is different from the interest rate on the
Mortgage Loan or may not be amortized during all or a portion of the original
term. Payment of all or a substantial portion of the principal may be due on
maturity. Principal may include interest that has been deferred and added to the
principal balance of the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed for the
life of the loan, may increase over a specified period of time or may change
from period to period. Mortgage Loans may include limits on periodic increases
or decreases in the amount of monthly payments and may include maximum or
minimum amounts of monthly payments.
(d) Prepayments of principal may be subject to a prepayment fee (which
may be waived), which may be fixed for the life of the related Mortgage Loan or
may decline over time, and may be prohibited for the life of the loan or for
certain periods ("lockout periods"). Certain Mortgage Loans may permit
prepayments after expiration of the applicable lockout period and may require
the payment of a prepayment fee in connection with any such subsequent
prepayment. Other Mortgage Loans may permit prepayments without payment of a fee
unless the prepayment occurs during specified time periods. The Mortgage Loans
may include "due-on-sale" clauses which permit the mortgagee to demand payment
of the entire mortgage loan in connection with the sale or certain transfers of
the related Mortgaged Property. Other Mortgage Loans may be assumable by persons
meeting the then applicable underwriting standards of the Depositor.
With respect to a Series for which the related Trust Fund includes
Mortgage Loans the related Prospectus Supplement may specify, among other
things, information regarding the interest rates (the "Mortgage Rates"), the
average principal balance and the aggregate principal balance of such Mortgage
Loans, the years of origination, geographic dispersion and original principal
balances and the loan-to-value ratios of such Mortgage Loans.
AGENCY SECURITIES
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA). GNMA is a
wholly-owned corporate instrumentality of the United States within the United
States Department of Housing and Urban Development. Section 306(g) of Title III
of the National Housing Act of 1934, as amended (the "Housing Act"), authorizes
GNMA to guarantee the timely payment of the principal of and interest on
certificates which represent an interest in a pool of mortgage loans insured by
the Federal Housing Administration ("FHA Loans"), or guaranteed by the Farmers
Home Administration ("FmHA Loans") or partially guaranteed by the Veterans'
Administration ("VA Loans").
Section 306(g) of the Housing Act provides that "the full faith and
credit of the United States is pledged to the payment of all amounts which may
be required to be paid under any guarantee under this subsection." In order to
meet its obligations under any such guarantee, GNMA may, under Section 306(d) of
the Housing Act, borrow from the United States Treasury in an amount which is at
any time sufficient to enable GNMA, with no limitations as to amount, to perform
its obligations under its guarantee.
GNMA CERTIFICATES. Each GNMA Certificate relating to a series (which
may be issued under either the GNMA I program or the GNMA II program, as
referred to by GNMA) will be a "fully modified pass-through" mortgage-backed
certificate issued and serviced by a mortgage banking company or other financial
concern ("GNMA Issuer") approved by GNMA or approved by FNMA as a seller
servicer of FHA Loans, FmHA Loans and/or VA Loans. Each GNMA Certificate will
represent a fractional undivided interest in a pool of mortgage loans which may
include FHA Loans, FmHA Loans and/or VA Loans. Each such mortgage loan is
secured by a one- to four-family residential property. Each such GNMA
Certificate will provide for the payment by or on behalf of the GNMA Issuer to
the registered holder of such GNMA Certificate of scheduled monthly payments of
principal and interest equal to the registered holder's proportionate interest
in the aggregate amount of the monthly principal and interest payment on each
FHA Loan, FmHA Loan or VA Loan underlying such GNMA Certificate, less the
applicable servicing and guarantee fee which together equal the difference
between the interest on the FHA Loan, FmHA Loan or VA Loan and the pass-through
rate on the GNMA Certificate. In addition, each payment will include
proportionate pass-through payments of any prepayments of principal on the FHA
Loans, FmHA Loans or VA Loans underlying such GNMA Certificate and liquidation
proceeds in the event of a foreclosure or other disposition of any such FHA
Loans, FmHA Loans or VA Loans.
The full and timely payment of principal of and interest on each GNMA
Certificate will be guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States.
Each such GNMA Certificate will have an original maturity of not more
than 30 years (but may have an original maturity of substantially less than 30
years). GNMA will approve the issuance of each such GNMA Certificate in
accordance with a guarantee agreement (a "Guaranty Agreement") between GNMA and
the GNMA Issuer. Pursuant to its Guaranty Agreement, a GNMA Issuer will be
required to advance its own funds in order to make timely payments of all
amounts due on the GNMA Certificate, even if the payments received by the GNMA
Issuer on the mortgage loans underlying each such GNMA Certificate are less than
the amounts due on such GNMA Certificate.
If a GNMA Issuer is unable to make payments on a GNMA Certificate as
such payments become due, it is required promptly to notify GNMA and request
GNMA to make such payments. Upon such notification and request, GNMA will make
such payments directly to the registered holder of the GNMA Certificate. In the
event no payment is made by a GNMA Issuer and the GNMA Issuer fails to notify
and request GNMA to make such payment, the holder of the GNMA Certificate will
have recourse only against GNMA to obtain such payment. In the case of GNMA
Certificates issued in definitive form, the Trustee, as registered holder of the
GNMA Certificates, will have the right to proceed directly against GNMA under
the terms of the Guaranty Agreements relating to such GNMA Certificates for any
amounts that are not paid when due. In the case of GNMA Certificates issued in
book-entry form, The Participants Trust Corporation ("PTC"), or its nominee,
will have the right to proceed against GNMA in such event.
All mortgage loans underlying a particular GNMA I Certificate must
have the same interest rate (except for pools of mortgage loans secured by
manufactured homes) over the term of the loan. The interest rate on each GNMA I
Certificate will equal the interest rate on the mortgage loans included in the
pool of mortgage loans underlying such GNMA I Certificate, less one-half
percentage point per annum of the unpaid principal balance of the mortgage
loans.
Mortgage loans underlying a particular GNMA II Certificate may have
per annum interest rates that vary from each other by up to one percentage
point. The interest rate on each GNMA II Certificate will be between one-half
percentage point and one and one-half percentage points lower than the highest
interest rate on the mortgage loans included in the pool of mortgage loans
underlying such GNMA II Certificate (except for pools of mortgage loans secured
by manufactured homes).
Regular monthly installment payments on each GNMA Certificate relating
to a series will be comprised of interest due as specified on such GNMA
Certificate plus the scheduled principal payments on the FHA Loans of VA Loans
underlying such GNMA Certificate due on the first day of the month in which the
scheduled monthly installment on such GNMA Certificate is due. Such regular
monthly installments on each such GNMA Certificate are required to be paid to
the Trustee as registered holder by the 15th day of each month in the case of a
GNMA I Certificate and are required to be mailed to the Trustee by the 20th day
of each month in the case of a GNMA II Certificate. Any principal prepayments on
any FHA Loans, FmHA Loans or VA Loans underlying a GNMA Certificate relating to
a series or any other early recovery of principal on such loan will be passed
through to the Trustee as the registered holder of such GNMA Certificate.
GNMA Certificates may be backed by graduated payment mortgage loans or
by "buydown" mortgage loans for which funds will have been provided (and
deposited into escrow accounts) for application to the payment of a portion of
the borrowers' monthly payments during the early years of such mortgage loan.
Payments due the registered holders of GNMA Certificates backed by pools
containing "buydown" mortgage loans will be computed in the same manner as
payments derived from non-"buydown" GNMA Certificates and will include amounts
to be collected from both the borrower and the related escrow account. The
graduated payment mortgage loans will provide for graduated interest payments
that, during the early years of such mortgage loans, will be less than the
amount of stated interest on such mortgage loans. The interest not so paid will
be added to the principal of such graduated payment mortgage loans and, together
with interest thereon, will be paid in subsequent years. The obligations of GNMA
and of a GNMA Issuer will be the same irrespective of whether the GNMA
Certificates relating to a series of Certificates are backed by graduated
payment mortgage loans or "buydown" mortgage loans. No statistics comparable to
the FHA's prepayment experience on level payment, non-"buydown" mortgage loans
are available in respect of graduated payment or " buydown" mortgages. GNMA
Certificates included in the Trust Fund for a Series may be held in book-entry
form.
If specified in the related Prospectus Supplement, GNMA Certificates
included in the Trust Fund for a Series may be held on deposit at PTC, a limited
purpose trust company organized under the banking law of the State of New York.
PTC operates a private sector, industry-owned depository and settlement facility
for the book-entry transfer of interests in GNMA Certificates. Distributions of
principal of and interest on each GNMA Certificate held through PTC will be
credited by PTC to the PTC participant on whose account the GNMA Certificate is
credited.
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA). FNMA is a federally
chartered and privately owned corporation organized and existing under the
Federal National Mortgage Association Charter Act (the "Charter Act"). FNMA was
originally established in 1938 as a United States government agency to provide
supplemental liquidity to the mortgage market and was transformed into a
stockholder-owned and privately-managed corporation by legislation enacted in
1968.
FNMA provides funds to the mortgage market primarily by purchasing
mortgage loans from lenders, thereby replenishing their funds for additional
lending. FNMA acquires funds to purchase mortgage loans from many capital market
investors that may not ordinarily invest in mortgages, thereby expanding the
total amount of funds available for housing. Operating nationwide, FNMA helps to
redistribute mortgage funds from capital surplus to capital-short areas.
FNMA CERTIFICATES. FNMA Certificates are Guaranteed Mortgage
Pass-Through Certificates representing fractional undivided interests in a pool
of mortgage loans formed by FNMA. Each mortgage loan must meet the applicable
standards of the FNMA purchase program. Mortgage loans comprising a pool are
either provided by FNMA from its own portfolio or purchased pursuant to the
criteria of the FNMA purchase program.
Mortgage loans underlying FNMA Certificates relating to a series will
consist of conventional mortgage loans, FHA Loans or VA Loans. Original
maturities of substantially all of the conventional, level payment mortgage
loans underlying a FNMA Certificate are expected to be between either 8 to 15
years or 20 to 30 years. The original maturities of substantially all of the
fixed rate level payment FHA Loans or VA Loans are expected to be 30 years.
Mortgage loans underlying a FNMA Certificate may have annual interest
rates that vary by as much as two percentage points from each other. The rate of
interest payable on a FNMA Certificate is equal to the lowest interest rate of
any mortgage loan in the related pool, less a specified minimum annual
percentage representing servicing compensation and FNMA's guaranty fee. Thus,
the annual interest rates on the mortgage loans underlying a FNMA Certificate
will generally be between 50 basis points and 250 points greater than the annual
FNMA Certificate pass-through rate. If specified in the related Prospectus
Supplement, FNMA Certificates included in the Trust Fund with respect to a
Series may be backed by adjustable rate mortgages.
Regular monthly installment payments on each FNMA Certificate will be
comprised of interest due as specified by such FNMA Certificate plus the
scheduled principal payments on the Mortgage Loans underlying such FNMA
Certificate due during the period beginning on the second day of the month prior
to the month in which the scheduled monthly installment on such FNMA Certificate
is due and ending on the first day of such month in which the scheduled monthly
installment on such FNMA Certificate is due. Such regular monthly installments
on each such FNMA Certificate will be distributed to the holder of record on the
25th day of each month. Any principal prepayments on the mortgage loans
underlying any FNMA Certificate included in the Trust Fund with respect to a
Series or any other early recovery of principal on such mortgage loans will be
passed through to the holder of record of such FNMA Certificate on the 25th day
of the month next following such prepayment or recovery and, in turn, a portion
of such amounts will be paid or distributed to Holders of such Series, secured
thereby, as additional principal payments.
FNMA guarantees to each registered holder of a FNMA Certificate that
it will distribute amounts representing such holder's proportionate share of
scheduled principal and interest payments at the applicable pass-through rate
provided for by such FNMA Certificate on the underlying mortgage loans, whether
or not received, and such holder's proportionate share of the full principal
amount of any foreclosed or other finally liquidated mortgage loan, whether or
not such principal amount is actually recovered. The obligations of FNMA under
its guarantees are obligations solely of FNMA and are not backed by, nor
entitled to, the full faith and credit of the United States. Although the
Secretary of the Treasury of the United States has discretionary authority to
lend FNMA up to $2.25 billion outstanding at any time, neither the United States
nor any agency thereof is obligated to finance FNMA's operations or to assist
FNMA in any other manner. If FNMA were unable to satisfy its obligations,
distributions to holders of FNMA Certificates would consist solely of payments
and other recoveries on the underlying mortgage loans and, accordingly, monthly
distributions to holders of FNMA Certificates would be affected by delinquent
payments and defaults on such mortgage loans.
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC). FHLMC is a corporate
instrumentality of the United States created pursuant to Title III of the
Emergency Home Finance Act of 1970, as amended (the "FHLMC Act"). The common
stock of FHLMC is owned by the Federal Home Loan Banks. FHLMC was established
primarily for the purpose of increasing the availability of mortgage credit for
the financing of urgently needed housing. It seeks to provide an enhanced degree
of liquidity for residential mortgage investments primarily by assisting in the
development of secondary markets for conventional mortgages. The principal
activity of FHLMC currently consists of the purchase of first lien conventional
mortgage loans or participation interests in such mortgage loans and the sale of
the mortgage loans or participations so purchased in the form of mortgage
securities, primarily FHLMC Certificates. FHLMC is confined to purchasing, so
far as practicable, mortgage loans that it deems to be of such quality, type and
class as to meet generally the purchase standards imposed by private
institutional mortgage investors.
FHLMC CERTIFICATES. Each FHLMC Certificate represents an undivided
interest in a pool of mortgage loans that may consist of first lien conventional
loans, FHA Loans or VA Loans (a "FHLMC Certificate Group"). FHLMC Certificates
are sold under the terms of a Mortgage Participation Certificate Agreement. A
FHLMC Certificate may be issued under either FHLMC's Cash Program or Guarantor
Program.
To the extent described in the related Prospectus Supplement, mortgage
loans underlying the FHLMC Certificates relating to a series will consist of
mortgage loans with original terms to maturity of between 10 and 30 years. Each
such mortgage loan must meet the applicable standards set forth in FHLMC Act. A
FHLMC Certificate group may include whole loans, participation interests in
whole loans and undivided interests in whole loans and/or participations
comprising another FHLMC Certificate group. Under the Guarantor Program any such
FHLMC Certificate group may include only whole loans or participation interests
in whole loans.
FHLMC guarantees to each registered holder of a FHLMC Certificate the
timely payment of interest on the underlying mortgage loans to the extent of the
applicable Certificate rate on the registered holder's pro rata share of the
unpaid principal balance outstanding on the underlying mortgage loans in the
FHLMC Certificate group represented by such FHLMC Certificate, whether or not
received. FHLMC also guarantees to each registered holder of a FHLMC Certificate
collection by such holder of all principal on the underlying mortgage loans,
without any offset or deduction, to the extent of such holder's pro rata share
thereof, but does not, except if and to the extent specified in the Prospectus
Supplement for a Series, guarantee the timely payment of scheduled principal.
Under FHLMC's Gold PC Program, FHLMC guarantees the timely payment of principal
based on the difference between the pool factor published in the month preceding
the month of distribution and the pool factor published in such month of
distribution. Pursuant to its guarantees, FHLMC indemnifies holders of FHLMC
Certificates against any diminution in principal by reason of charges for
property repairs, maintenance and foreclosure. FHLMC may remit the amount due on
account of its guarantee of collection of principal at any time after default on
an underlying mortgage loan, but not later than (i) 30 days following
foreclosure sale, (ii) 30 days following payment of the claim by any mortgage
insurer, or (iii) 30 days following the expiration of any right of redemption,
whichever occurs later, but in any event no later than one year after demand has
been made upon the borrower for accelerated payment of principal. In taking
actions regarding the collection of principal after default on the mortgage
loans underlying FHLMC Certificates, including the timing of demand for
acceleration, FHLMC reserves the right to exercise its judgment with respect to
the mortgage loans in the same manner as for mortgage loans which it has
purchased but not sold. The length of time necessary for FHLMC to determine that
a mortgage loan should be accelerated varies with the particular circumstances
of each borrower, and FHLMC has not adopted standards which require that the
demand be made within any specified period.
FHLMC Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of FHLMC under its
guarantee are obligations solely of FHLMC and are not backed by, nor entitled
to, the full faith and credit of the United States. If FHLMC were unable to
satisfy such obligations, distributions to holders of FHLMC Certificates would
consist solely of payments and other recoveries on the underlying mortgage loans
and, accordingly, monthly distributions to holders of FHLMC Certificates would
be affected by delinquent payments and defaults on such mortgage loans.
In addition to FHLMC's guarantees of timely payment of interest and
ultimate collection of principal, FHLMC guarantees with respect to FHLMC
Certificates representing certain qualifying mortgage loans the timely payment
by each borrower of the monthly principal scheduled to be paid under the
amortization schedule applicable to each such mortgage loan ("Scheduled
Principal"). Servicers of the mortgage loans comprising these FHLMC Certificates
are required to pay Scheduled Principal to FHLMC whether or not received from
the borrowers. FHLMC, in turn, guarantees to pay Scheduled Principal to each
registered holder of such FHLMC Certificates whether or not received from the
servicers. FHLMC monthly payments of Scheduled Principal are computed based upon
the servicer's monthly report to FHLMC of the amount of Scheduled Principal due
to be paid on the related mortgage loans. The Prospectus Supplement for each
Series for which the related Trust Fund includes FHLMC Certificates will set
forth the nature of FHLMC's guarantee with respect to scheduled principal
payments on the mortgage loans in the pools represented by such FHLMC
Certificates.
Requests for registration of ownership of FHLMC Certificates made on
or before the last business day of a month are made effective as of the first
day of that month. With respect to FHLMC Certificates sold by FHLMC on or after
January 2, 1985, a Federal Reserve Bank which maintains book-entry accounts with
respect thereto will make payments of interest and principal each month to
holders in accordance with the holders' instructions. The first payment to a
holder of a FHLMC Certificate will normally be received by the 15th day of the
second month following the month in which the purchaser became recognized as the
holder of such FHLMC Certificate. Thereafter, payments will normally be received
by the 15th day of each month.
A FHLMC Certificate may be issued under programs created by FHLMC,
including its Cash Program or Guarantor Program. Under FHLMC's Cash Program, the
pooled mortgage loans underlying a FHLMC Certificate are purchased for cash from
a number of sellers. With respect to FHLMC Certificate Pools formed prior to
June 1, 1987, under the Cash Program, there is no limitation on the amount by
which interest rates on the mortgage loans underlying a FHLMC Certificate may
exceed the interest rate on the FHLMC Certificate. Under such program, FHLMC
purchases groups of whole mortgage loans at specified percentages of their
unpaid principal balances, adjusted for accrued or prepaid interest, which, when
applied to the interest rate of the mortgage loans purchased, results in the
yield (expressed as a percentage) required by FHLMC. The required yield, which
includes a minimum servicing fee retained by the servicer, is calculated using
the outstanding principal balance of the mortgage loans, an assumed term and a
prepayment period as determined by FHLMC. No mortgage loan is purchased by FHLMC
at greater than 100% of its outstanding principal balance. Thus, the range of
interest rates on the mortgage loans in a FHLMC Certificate Pool formed prior to
June 1987 under the Cash Program will vary since mortgage loans are purchased
and identified to a FHLMC Certificate Pool based upon their yield to FHLMC
rather than on the interest rates on the mortgage loans. With respect to FHLMC
Certificate Pools formed on or after June 1, 1987, the range of interest rates
on the mortgage loans and participations in a FHLMC Certificate Pool which is
comprised of 15- or 30-year fixed-rate single family mortgage loans bought by
FHLMC under the Cash Program will be restricted to one percentage point. In
addition, the minimum interest rate on any mortgage loan in a FHLMC Certificate
Pool will be greater than or equal to the annual pass-through rate on the
related FHLMC Certificate, and the maximum interest rate will not be more than
two percentage points above such pass-through rate.
Under FHLMC's Guarantor Program, the mortgage loans underlying a FHLMC
Certificate are purchased from a single seller in exchange for such FHLMC
Certificate. The interest rate on a FHLMC Certificate under such program is
established based upon the lowest interest rate on the underlying mortgage
loans, minus a minimum servicing fee and the amount of FHLMC's management and
guaranty income as agreed upon between the seller and FHLMC. Under the Guarantor
Program, the range between the lowest and highest annual interest rates on the
mortgage loans in a FHLMC Certificate Pool may not exceed two percentage points.
For some FHLMC Certificates issued pursuant to purchase contracts under the
Guarantor Program on or after September 1, 1987, the range of the interest rates
on the mortgage loans in a FHLMC Certificate Pool will not exceed one percentage
point.
STRIPPED AGENCY SECURITIES. Agency Securities may consist of one or
more stripped mortgage-backed securities, each as described herein and in the
related Prospectus Supplement. Each such Agency Security will represent an
undivided interest in all or part of either the principal distributions (but not
the interest distributions) or the interest distributions (but not the principal
distributions), or in some specified portion of the principal and interest
distributions (but not all of such distributions) on certain GNMA Certificates,
FNMA Certificates, FHLMC Certificates, or other Agency Securities. The
underlying securities will be held under a trust agreement by GNMA, FNMA or
FHLMC each as trustee, or by another trustee named in the related Prospectus
Supplement. FHLMC, FNMA or GNMA will guarantee each stripped Agency Security to
the same extent as such entity guarantees the underlying securities backing such
stripped Agency Security, to the extent specified in the related Prospectus
Supplement.
OTHER AGENCY SECURITIES. If specified in the related Prospectus
Supplement, a Trust Fund may include other mortgage pass-through or
participation certificates issued or guaranteed by GNMA, FNMA or FHLMC,
including but not limited to FNMA Guaranteed REMIC Pass-Through Certificates and
FHLMC Multiclass Mortgage Participation Certificates. The characteristics of any
such mortgage pass-through or participation certificates will be described in
such Prospectus Supplement. If specified, a combination of different types of
Agency Securities may be included in a Trust Fund.
CONTRACTS
As specified in the related Prospectus Supplement for a Series,
"Contracts" may include: (i) loans evidenced by retail installments sales or
loan agreements, including loans secured by new or used Manufactured Homes (as
defined herein) that are not considered to be interests in real property because
such Manufactured Homes are not permanently affixed to real estate ("Secured
Contracts") and (ii) unsecured loans for Manufactured Homes and for property
improvement, debt consolidation and/or home equity purposes (such unsecured
loans are collectively, the "Unsecured Contracts"). To the extent described in
the related Prospectus Supplement, certain Contracts that are secured by
Manufactured Homes and Unsecured Contracts will be conventional (i.e., not
insured or guaranteed by a governmental agency) loan contracts (the
"Conventional Contracts"), while other Contracts that are secured by
Manufactured Homes or that are unsecured loans for Manufactured Homes or
property improvements will be partially insured by the FHA under the Title I
Program (the "Title I Contracts"). To the extent specified in the related
Prospectus Supplement, the Contracts included in the Trust Fund with respect to
a Series will be fully amortizing and will bear interest at a fixed annual
percentage rate ("APR"). The Secured Contracts differ from Mortgage Loans in
that the Secured Contracts are not secured by an interest in real property, but
rather by an interest in a Manufactured Home that is not permanently affixed to
real estate. In addition, the Contracts differ from Mortgage Loans in that they
are generally originated by a network of independent contractors or dealers that
professionally install property improvements, rather than by financial
institutions or other traditional mortgage lenders.
While the Unsecured Contracts are not secured by a security interest
in any related real or personal property, such contracts are still subject to
the same underwriting criteria as the Mortgage Loans and the Secured Contracts.
For example, in underwriting an Unsecured Contract, the Transferor will consider
the borrower's credit history and ability to repay the related debt as well as
the value of real or personal property owned by the borrower which could be the
subject of a junior lien in favor of the Transferor; however, because the
Unsecured Contracts generally have smaller principal amounts than the Mortgage
Loans or the Secured Contracts, a junior lien with respect to such real or
personal property will not be obtained because the costs associated with
obtaining and perfecting such a junior lien will not justify the benefits
provided by such a lien, including any realization from the enforcement of such
lien.
The Manufactured Homes securing the Secured Contracts consist of
manufactured homes within the meaning of 42 United States Code, Section 5402(6),
which defines a "Manufactured Home" as "a structure, transportable in one or
more sections, which in the traveling mode, is eight body feet or more in width
or forty body feet or more in length, or, when erected on site, is three hundred
twenty or more square feet, and which is built on a permanent chassis and
designed to be used as a dwelling with or without permanent foundation when
connected to the required utilities, and includes the plumbing, heating,
air-conditioning, and electrical systems contained therein; except that such
term shall include any structure which meets all the requirements of [this]
paragraph except the size requirements and with respect to which the
manufacturer voluntarily files a certification required by the Secretary of
Housing and Urban Development and complies with the standards established under
[this] chapter." Moreover, if an election is made to treat a Trust Fund
including Secured Contracts as a REMIC or a FASIT as described in "Certain
Federal Income Tax Consequences," the related Manufactured Homes will have a
minimum of 400 square feet of living space and a minimum width in excess of 102
inches.
To the extent specified in the Prospectus Supplement with respect to a
Series for which the related Trust Fund includes Secured Contracts, for purposes
of calculating the loan-to-value ratio of a Secured Contract relating to a new
Manufactured Home, the "Collateral Value" is no greater than the sum of a fixed
percentage of the list price of the unit actually billed by the manufacturer to
the dealer (exclusive of freight to the dealer site) including "accessories"
identified in the invoice (the "Manufacturer's Invoice Price"), plus the actual
cost of any accessories purchased from the dealer, a delivery and set-up
allowance, depending on the size of the unit and the cost of state and local
taxes, filing fees and up to three years prepaid hazard insurance premiums. To
the extent specified in the related Prospectus Supplement, the Collateral Value
of a used Manufactured Home is the least of the sales price, the appraised
value, and the National Automobile Dealer's Association book value plus prepaid
taxes and hazard insurance premiums. The appraised value of a Manufactured Home
is based upon the age and condition of the manufactured housing unit and the
quality and condition of the mobile home park in which it is situated, if
applicable.
The related Prospectus Supplement may specify for the Contracts
contained in the related Contract Pool, among other things, the date of
origination of the Contracts; the APRs on the Contracts; the Contract
Loan-to-Value Ratios; the minimum and maximum outstanding principal balance as
of the cut-off date and the average outstanding principal balance; the
outstanding principal balances of the Contracts included in the Contract Pool;
and the original maturities of the Contracts and the last maturity date of any
Contract.
MODIFICATIONS OF MORTGAGE LOANS AND CONTRACTS
With respect to a Series of Certificates as to which a FASIT election
has been made, if so specified in the related Prospectus Supplement, the related
Master Servicer, Servicer or Special Servicer, if any, may, subsequent to the
issuance of a Series of Certificates, effect certain modifications of the terms
of any related Mortgage Loan or Contract to the extent that the related borrower
has indicated an intention to refinance such Mortgage Loan or Contract (an
"Imminent Prepayment"). The Master Servicer, Servicer or any Subservicer will
also be authorized, to the extent provided in the applicable Sale and Servicing
Agreement, to modify the terms of any Mortgage Loan or Contract that is in
default or as to which default is, in the judgment of the Master Servicer,
Servicer or Subservicer, as applicable, reasonably foreseeable (a "Defaulted
Loan").
In the case of an Imminent Prepayment, if so specified in the related
Prospectus Supplement, the Master Servicer, Servicer or any Special Servicer
will be authorized, provided that the related borrower satisfies certain minimum
credit criteria, to reduce the interest rate applicable to such Mortgage Loan or
Contract, to reduce (or increase) the applicable monthly payment, and/or to
extend (or to shorten) the applicable term to maturity of such Mortgage Loan or
Contract. Any fees payable by a borrower in connection with such a modification
may be retained by the Master Servicer, Servicer or Special Servicer, as
applicable, or other applicable party, or such fees may be an asset of the
related Trust. If so specified in the related Prospectus Supplement, the amount
of such fees may be added to the principal balance of the applicable Mortgage
Loan or Contract, which additional amount may be retained by the applicable
party or may be an asset of the Trust. In such event the modified Mortgage Loan
or Contract will remain an asset of the applicable Trust Fund with the modified
terms. Such modifications will generally have the effect of reducing funds
available to Certificateholders on subsequent Distribution Dates, and could
affect the yields to maturity and weighted average lives of the related
Certificates.
In the case of a Defaulted Loan, the Master Servicer, Servicer or any
Special Servicer may, in its judgment in accordance with accepted servicing
practices and the applicable Sale and Servicing Agreement, increase the
outstanding principal balance of such Mortgage Loan or Contract by the amount of
interest accrued on delinquent payments, extend the term to maturity of such
Mortgage Loan by the number of months of payment delinquency and defer payment
of delinquent monthly payments, modify the applicable interest rate, principal
balance, monthly payment and/or term to maturity, forgive all or part of the
amount of delinquent monthly payments or generally take such similar actions or
make such similar modifications as in its judgment can be expected to maximize
the amount realized by the related Trust Fund on behalf of Certificateholders.
Such actions or modifications could delay distributions to Certificateholders,
could reduce amounts ultimately available for distribution to Certificateholders
and could affect the yields to maturity and weighted average lives of the
related Certificates.
ADDITIONS, SUBSTITUTION AND WITHDRAWAL OF ASSETS
With respect to a Series, as described in the related Prospectus
Supplement, the related Transferor or the Depositor may, subsequent to the
issuance of a Series, (i) deliver additional Assets to the related Trust Fund,
(ii) withdraw Assets previously included in a Trust Fund for such Series and
substitute comparable assets therefor, or (iii) withdraw Assets previously
included in a Reserve Fund for such Series. Assets may be added to the Trust
Fund for a Series subsequent to the issuance of such Series in the manner
described under "Pre-Funding Arrangements" below. In addition, Assets may be
withdrawn from or substituted in the Trust Fund for a Series for the following
reasons: (a) curing any breaches of representations and warranties with respect
to such Assets, (b) curing certain immaterial irregularities with respect to
such Assets that do not constitute a breach of such representations and
warranties, or (c) achieving certain targeted or desired Mortgage Asset Pool
characteristics with respect to the Assets of a particular Series, including,
without limitation, those characteristics that accommodate the requests of a
Rating Agency, the Underwriters or a third party provider of Credit Enhancement.
Any such additions, withdrawals or substitutions of Assets by the related
Transferor or the Depositor will be subject to the applicable limitations,
requirements and conditions provided in the related Pooling and Servicing
Agreement (and described in the related Prospectus Supplement) for such Series.
PRE-FUNDING ARRANGEMENTS
To the extent provided in the related Prospectus Supplement for a
Series, the related Pooling and Servicing Agreement will provide for a
commitment by the related Trust Fund to subsequently purchase additional
Mortgage Assets ("Subsequent Mortgage Assets") from the Depositor following the
date on which the Trust Fund is established and the related Certificates are
issued (a "Pre-Funding Arrangement"). With respect to a Series, the Pre-Funding
Arrangement will require that any Subsequent Mortgage Assets transferred to the
Trust Fund conform to the requirements and conditions provided in the related
Pooling and Servicing Agreement. If a Pre-Funding Arrangement is utilized in
connection with the issuance of the Series of Certificates, on the closing date
for the issuance of such Series the related Trustee will be required to deposit
in a segregated account (a "Pre-Funding Account") all or a portion of the
proceeds received by the Trustee in connection with the sale of one or more
Classes of Certificates of such Series; and subsequently, the Trust Fund will
acquire Subsequent Mortgage Assets from the Depositor in exchange for the
release of money from the Pre-Funding Account for such Series. In addition, the
Pre-Funding Arrangement will be limited to a specified period, not to exceed
three months, during which time any transfers of Subsequent Mortgage Assets must
occur and to a maximum deposit to the related Pre-Funding Account of no more
than thirty-five percent (35%) of the aggregate proceeds received from the sale
of all Classes of Certificates of such Series.
If all of the funds originally deposited in the such Pre-Funding
Account are not used by the end of such specified period, then any remaining
amount of such funds will be applied as a mandatory prepayment of a Class or
Classes of Certificates as specified in the related Prospectus Supplement.
Although it is intended that the principal amount of Subsequent Mortgage Assets
transferred to the Trust Fund after the closing date for the issuance of any
particular Series will require application of substantially all of the
Pre-Funding Account, and it is not anticipated that there will be any material
amount of principal distributions from amounts remaining on deposit in the
Pre-Funding Account in reduction of the principal balances of any Certificates,
no assurance can be given that such a distribution with respect to the
Certificates will not occur on the Distribution Date following the Due Period in
which the Pre-Funding Arrangement ends. In any event, it is unlikely that the
Transferor will be able to deliver Subsequent Mortgage Assets with aggregate
principal balances that exactly equal the Pre-Funding Account, and the portion
of the Pre-Funding Account remaining at the end of the Pre-Funding Arrangement,
if any, will be distributed in reduction of the principal balance of the
Certificates of the related Series, as set forth in related Prospectus
Supplement.
As may be further specified in the related Prospectus Supplement,
amounts on deposit in the Pre-Funding Account will be invested in short-term
debt obligations of, or debt obligations guaranteed by, the United States,
repurchase agreements that satisfy the criteria specified in the Pooling and
Servicing Agreement, certificates of deposit, time deposits and bankers
acceptances of any United States depository institution or trust company, FDIC
insured deposits, including deposits with the Trustee, commercial paper, debt
obligations, and money market funds; provided such investments are acceptable to
each Rating Agency rating the Series of Certificates at the time at which the
investments are made (collectively "Permitted Investments"); and provided
further that an investment in such Permitted Investments will not require the
Trust Fund for a Series to be registered as an "investment company" under the
Investment Company Act of 1940, as amended. Permitted Investments will consist
of short term investments that convert into cash or mature within a short period
of time, have minimal or no exposure to fluctuations in value as a result of
market changes in prevailing interest rates and are acceptable to each Rating
Agency rating the applicable Series of Certificates.
The utilization of a Pre-Funding Arrangement is intended to improve
the efficiency of the issuance of a Series of Certificates and the sale of the
Mortgage Assets to the related Trust Fund through the incremental delivery of
the Mortgage Assets on the closing date and during the three month period
following the closing date for such Series, which allows for a more even
accumulation of the Mortgage Assets by the Depositor and the related Transferor
and the issuance of a larger principal amount of Certificates for such Series
than would be the case without a Pre-Funding Arrangement.
CREDIT ENHANCEMENT
GENERAL
Various forms of credit enhancement ("Credit Enhancement") may be
provided with respect to one or more Classes of a Series or with respect to the
Assets in the related Trust Fund. Credit Enhancement may be in the form of the
subordination of one or more Classes of such Series, the overcollateralization
of the Trust Fund with respect to a Series, the establishment of one or more
Reserve Funds, the use of a cross-support feature, the use of a Mortgage Pool
Insurance Policy, Certificate Insurance Policy, Special Hazard Insurance Policy,
bankruptcy bond, surety bond, letter of credit, credit or liquidity facility,
guaranteed investment contract, swap or other interest rate protection
agreement, repurchase obligation, yield maintenance agreement, other agreements
with respect to third party payments or other support, cash deposits or such
other form of Credit Enhancement as may be described in the related Prospectus
Supplement, or any combination of two or more of the foregoing. If specified in
the related Prospectus Supplement, Credit Enhancement for a Class of
Certificates may cover one or more other Classes of Certificates of the same
Series, and Credit Enhancement for a Series of Securities may cover one or more
other Series of Certificates.
The presence of Credit Enhancement for the benefit of any Class or
Series of Certificates is intended to enhance the likelihood of receipt by the
Certificateholders of such Class or Series of the full amount of principal and
interest due thereon and to decrease the likelihood that such Certificateholders
will experience losses. To the extent specified in the related Prospectus
Supplement, any Credit Enhancement with respect to a Series will not provide
protection against all risks of loss and will not guarantee repayment of the
entire principal balance of the Certificates of such Series and interest
thereon. If losses occur which exceed the amount covered by such Credit
Enhancement or which are not covered by the Credit Enhancement, Holders will
bear their allocable share of deficiencies, as described in the related
Prospectus Supplement. In addition, if a form of Credit Enhancement covers more
than one Class or Series of Certificates, Certificateholders of any such Class
or Series will be subject to the risk that such credit enhancement will be
exhausted by the claims of Certificateholders of other Classes or Series.
SUBORDINATION
If specified in the related Prospectus Supplement, distributions in
respect of scheduled principal, interest or any combination thereof that
otherwise would have been payable or distributable to one or more Classes of a
Series (the "Subordinated Certificates") will instead be payable to one or more
other Classes of such Series (the "Senior Certificates") under the circumstances
and to the extent provided in such Prospectus Supplement. If specified in the
Prospectus Supplement, delays in receipt of scheduled payments on the Mortgage
Assets and losses on defaulted Mortgage Assets will be borne first by the
various Classes of Subordinated Certificates and thereafter by the various
Classes of Senior Certificates, in each case under the circumstances and subject
to the limitations specified in the Prospectus Supplement. The aggregate
distributions in respect of delinquent payments or distributions on the Mortgage
Assets over the lives of the Certificates of a Series or at any time, the
aggregate losses in respect of defaulted Mortgage Assets which must be borne by
the Subordinated Certificates by virtue of subordination and the amount of the
distributions otherwise distributable to the Subordinated Certificates that will
be distributable to Holders of Senior Certificates on any Distribution Date may
be limited as specified in the related Prospectus Supplement. If aggregate
distributions in respect of delinquent payments or distributions on the Mortgage
Assets or aggregate losses in respect of such Mortgage Assets were to exceed the
total amounts distributable and available for distribution to Holders of
Subordinated Certificates were to exceed the specified maximum amount, Holders
of Senior Certificates could experience losses on their Certificates.
In addition to or in lieu of the foregoing, if specified in the
related Prospectus Supplement, all or any portion of distributions otherwise
distributable to Holders of Subordinated Certificates on any Distribution Date
may instead be deposited into one or more Reserve Fund (as defined below)
established by the related Trustee. If specified in the related Prospectus
Supplement, such deposits may be made (i) on each Distribution Date, (ii) on
each Distribution Date for specified periods, or (iii) on each Distribution Date
until the balance in the Reserve Fund has reached a specified amount and,
following payments from the Reserve Fund to Holders of Senior Certificates or
otherwise, thereafter to the extent necessary to restore the balance in the
Reserve Fund to required levels, in each case as specified in such Prospectus
Supplement. If specified in the related Prospectus Supplement, amounts on
deposit in the Reserve Fund may be released to the Depositor or the Holders of
any Class of Certificates at the times and under the circumstances specified in
such Prospectus Supplement.
If specified in the related Prospectus Supplement, various Classes of
Senior Certificates and Subordinated Certificates may themselves be subordinate
in their right to receive certain distributions to other Classes of Senior and
Subordinated Certificates, respectively, through a cross-support mechanism or
otherwise.
As between Classes of Senior Certificates and as between Classes of
Subordinated Certificates, distributions may be allocated among such Classes (i)
in the order of their Scheduled Final Distribution Dates, (ii) in accordance
with a schedule or formula, (iii) in relation to the occurrence of events, or
(iv) otherwise, in each case as specified in the related Prospectus Supplement.
As between Classes of Subordinated Certificates, distributions to Holders of
Senior Certificates on account of delinquencies or losses and payments to any
Reserve Fund will be allocated as specified in the related Prospectus
Supplement.
OVERCOLLATERALIZATION
If provided in the related Prospectus Supplement, the aggregate
principal balance of the Mortgage Assets included in the Trust Fund may exceed
the aggregate original principal balance of the Certificates in a Series thereby
creating an "Excess Spread" on each Distribution Date. If provided in the
related Prospectus Supplement, such Excess Spread may be distributed to holders
of Senior Certificates to produce and maintain a specified level of
overcollateralization. With respect to a Series of Certificates, the
overcollateralization level may be fixed or may increase or decrease over time,
subject to certain floors, caps and triggers, as set forth in the related
Prospectus Supplement and the related Pooling and Servicing Agreement.
CROSS-SUPPORT
If specified in the related Prospectus Supplement, separate Classes of
related Series of Certificates may represent the beneficial ownership of or be
separately secured by, separate groups of Assets included in the Trust Fund for
a Series or otherwise available for the benefit of such Certificates. In such
case, Credit Enhancement may be provided by a cross-support feature which may
require that distributions be made with respect to Certificates evidencing
beneficial ownership of or secured by one or more asset groups prior to
distributions to Subordinated Certificates evidencing a beneficial ownership
interest in or secured by other asset groups within the same Trust Fund. The
Prospectus Supplement for a Series which includes a cross-support feature will
describe the manner and conditions for applying such cross-support feature.
If specified in the Prospectus Supplement, the coverage provided by
one or more forms of Credit Enhancement may apply concurrently to two or more
separate Trust Funds for a separate Series of Certificates. If applicable, the
Prospectus Supplement will identify the Trust Funds to which such credit support
relates and the manner of determining the amount of the coverage provided
thereby and of the application of such coverage to the identified Trust Funds.
CERTIFICATE INSURANCE
If specified in the Prospectus Supplement, one or more Certificate
Guaranty Insurance Policies (each, a "Certificate Guaranty Policy") will be
obtained. Such Certificate Guaranty Policy with respect to a Series will,
subject to limitations described in the related Prospectus Supplement, provide
to the Holders of the insured Certificates of such Series a guarantee of payment
of any interest and/or principal payments due to such Holders on each
Distribution Date. The related Prospectus Supplement will describe the terms of
any Certificate Guaranty Policy and will set forth certain information with
respect to the Certificate Insurer.
POOL INSURANCE
With respect to a Series for which the related Trust Fund includes
Mortgage Loans (and, if specified in the related Prospectus Supplement, a Series
for which the related Trust Fund includes Contracts), in order to decrease the
likelihood that Holders of the Certificates of such Series will experience
losses in respect of such Mortgage Loans, if specified in the related Prospectus
Supplement, one or more mortgage pool insurance policies (each, a "Mortgage Pool
Insurance Policy") will be obtained. Such Mortgage Pool Insurance Policy will,
subject to the limitations described below and in the Prospectus Supplement,
cover loss by reason of default in payments on such Mortgage Loans up to the
amounts specified in the Prospectus Supplement or reported on Form 8-K and for
the periods specified in the Prospectus Supplement. To the extent specified in
the related Prospectus Supplement, the Servicer under the related Pooling and
Servicing Agreement will agree to use its best reasonable efforts to cause to be
maintained in effect any such Mortgage Pool Insurance Policy and to file claims
thereunder to the issuer of such Mortgage Pool Insurance Policy (the "Pool
Insurer"). A Mortgage Pool Insurance Policy, however, is not a blanket policy
against loss, since claims thereunder may only be made respecting particular
defaulted Mortgage Loans and only upon satisfaction of certain conditions
precedent set forth in such policy as described in the related Prospectus
Supplement. To the extent specified in the related Prospectus Supplement, the
Mortgage Pool Insurance Policies, if any, will not cover losses due to a failure
to pay or denial of a claim under a primary mortgage insurance policy,
irrespective of the reason therefor. The related Prospectus Supplement will
describe the terms of any applicable Mortgage Pool Insurance Policy and will set
forth certain information with respect to the related Pool Insurer.
SPECIAL HAZARD INSURANCE
With respect to a Series for which the related Trust Fund includes
Mortgage Loans (and, if specified in the related Prospectus Supplement, each
Series for which the related Trust Fund includes Contracts), in order to
decrease the likelihood that Holders of the Certificates of such Series will
experience losses in respect of such Mortgage Loans, if specified in the related
Prospectus Supplement, one or more Special Hazard Insurance Policies (each, a
"Special Hazard Insurance Policy") will be obtained. Such Special Hazard
Insurance Policy with respect to a Series will, subject to limitations described
below and in the related Prospectus Supplement, protect Holders of the
Certificates of such Series from loss caused by reason of (i) damage to
Mortgaged Properties caused by certain hazards (including earthquakes and, to a
limited extent, tidal waves and related water damage) not covered by the
standard form of hazard insurance policy for the respective states in which the
Mortgaged Properties are located or under flood insurance policies, if any,
covering the Mortgaged Properties, and (ii) loss caused by reason of the
application of the coinsurance clause contained in hazard insurance policies.
See "Servicing of the Mortgage Loans and Contracts--Standard Hazard Insurance."
Any Special Hazard Insurance Policy may not cover losses occasioned by war,
civil insurrection, certain governmental actions, errors in design, faulty
workmanship or materials (except under certain circumstances), nuclear reaction,
flood (if the Mortgaged Property is located in a federally designated flood
area), chemical contamination and certain other risks. Aggregate claims under
each Special Hazard Insurance Policy will be limited as described in the related
Prospectus Supplement. Any Special Hazard Insurance Policy may also provide that
no claim may be paid unless hazard and if applicable, flood insurance on the
Mortgaged Property has been kept in force and other protection and preservation
expenses have been paid.
The related Prospectus Supplement will describe the terms of any
applicable Special Hazard Insurance Policy and will set forth certain
information with respect to the related Special Hazard Insurer.
RESERVE FUNDS
If specified in the Prospectus Supplement with respect to a Series,
assets such as cash, U.S. Treasury securities, instruments evidencing ownership
of principal or interest payments thereon, letters of credit, demand notes,
certificates of deposit or a combination thereof in the aggregate amount
specified in such Prospectus Supplement will be deposited by the related
Transferor or the Depositor in one or more accounts (each, a "Reserve Fund")
established and maintained with the related Trustee. Such cash and the payments
on such other assets will be used to enhance the likelihood of timely
distribution of principal of, and interest on, or, if specified in the related
Prospectus Supplement, to provide additional protection against losses in
respect of, the Assets in the related Trust Fund, to pay the expenses of the
related Trust Fund or for such other purposes specified in such Prospectus
Supplement. Whether or not the related Transferor or the Depositor has any
obligation to make such a deposit, certain amounts to which the Holders of the
Subordinated Certificates of such Series, if any, the related Transferor or the
Depositor would otherwise be entitled may instead be deposited into the Reserve
Fund from time to time and in the amounts as specified in the related Prospectus
Supplement. Any cash in any Reserve Fund and the proceeds of any other
instrument upon maturity will be invested in Permitted Investments. If a letter
of credit is deposited with the Trustee, such letter of credit will be
irrevocable. To the extent specified in the Prospectus Supplement with respect
to a Series, any instrument deposited therein will name the related Trustee, in
its capacity as trustee for the Holders of the Certificates of such Series, as
beneficiary and will be issued by an entity acceptable to each rating agency
that rates such Certificates. Additional information with respect to such
instruments deposited in the Reserve Funds may be set forth in the Prospectus
Supplement.
OTHER INSURANCE, GUARANTEES AND SIMILAR INSTRUMENTS OR AGREEMENTS
If specified in the Prospectus Supplement with respect to a Series,
the related Trust Fund may also include, or the Certificates of such Series may
also have the benefits of, assets such as insurance, guarantees, surety bonds,
letters of credit, guaranteed investment contracts, swap agreements, option
agreements or similar arrangements for the purpose of (i) maintaining timely
payments or providing additional protection against losses on the Assets
included in such Trust Fund, (ii) paying administrative expenses, (iii)
establishing a minimum reinvestment rate on the distributions made in respect of
such Assets, (iv) guaranteeing timely distribution of principal and interest on
the Certificates of such Series, or (v) for such other purpose as is specified
in such Prospectus Supplement. Such arrangements may include agreements under
which Holders of the Certificates of a Series are entitled to receive amounts
deposited in various accounts held by the related Trustee upon the terms
specified in the related Prospectus Supplement. Such arrangements may be in lieu
of any obligation of the Servicers or the Administrator, if any, to advance
delinquent installments in respect of the Mortgage Loans. See "Servicing of
Mortgage Loans and Contracts--Advances".
SERVICING OF THE MORTGAGE LOANS AND CONTRACTS
Except as otherwise noted, the description set forth below of the
servicing of Mortgage Loans is applicable to Mortgage Loans included in the
Trust Fund with respect to a Series of Certificates.
To the extent provided in the related Prospectus Supplement, with
respect to a Series of Certificates for which the related Trust Fund includes
Mortgage Loans or Contracts, the Mortgage Loans or Contracts included in the
Trust Fund for a Series of Certificates will be serviced either (i) by the
related Servicer as sole servicer, (ii) by the related Master Servicer as
administrator or master servicer, (iii) by one or more loan servicing
institutions as servicers or (iv) by another institution as master servicer. If
an institution other than the Servicer acts as the sole servicer or as the
master servicer for a Series, the Servicer may have no servicing obligations
with respect to such Series. Generally, the discussion in this section of the
Prospectus is applicable under circumstances when the Servicer is an affiliate
of the Depositor. If the Servicer is not an affiliate of the Depositor, the
discussion relating to the servicing of the Mortgage Loans and Contracts as set
forth below may be modified or superseded by any discussion relating to the
servicing of the Mortgage Loans and Contracts set forth in the Prospectus
Supplement.
To the extent specified in the related Prospectus Supplement, the
Mortgage Loans and Contracts will be serviced by one or more loan servicing
institutions, which may include the Servicer or a Subservicer, pursuant to a
subservicing agreement between each Subservicer and the Servicer (each, a
"Subservicing Agreement"), which may be entered into only with the prior written
consent of the Trustee and the Administrator, if any.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
When a Mortgaged Property has been or is about to be conveyed by the
borrower, the Servicer, on behalf of the Trustee, will generally, except as
specified below and to the extent it has knowledge of such conveyance or
prospective conveyance, enforce the rights of the Trustee as the mortgagee of
record to accelerate the maturity of the related Mortgage Loan under any
"due-on-sale" clause contained in the related Mortgage or Note; provided,
however, that the Master Servicer, Servicer or Subservicer, if any, shall not
exercise any such right if the "due-on-sale" clause, in the reasonable belief of
the Master Servicer, Servicer or Subservicer, if any, is not enforceable under
applicable law. In such event or in the event the related Mortgage and Note do
not contain a "due-on-sale" clause, the Master Servicer, Servicer or
Subservicer, if any, shall enter into an assumption and modification Agreement
with the person to whom such property has been or is about to be conveyed,
pursuant to which such person becomes liable under the Note and, unless
prohibited by applicable law or the mortgage documents, the related borrower
remains liable thereon. The Servicer is also authorized to enter into a
substitution of liability agreement with such purchaser, pursuant to which the
original borrower is released from liability and such purchaser is substituted
as borrower and becomes liable under the Note.
In addition, in certain cases the Master Servicer, Servicer or
Subservicer, if any, may, in a manner consistent with its servicing practices,
permit a borrower who is selling his principal residence and purchasing a new
one to substitute the new Mortgaged Property as collateral for the related
Mortgage Loan, or may simply release its lien on the existing collateral,
leaving the related Mortgage Loan unsecured. In such event, the Master Servicer,
Servicer or Subservicer may require the borrower to make a partial prepayment in
reduction of the principal balance of the Mortgage Loan to the extent that the
borrower has received proceeds from the sale of the prior residence that will
not be applied to the purchase of the new residence.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
With respect to any defaulted Mortgage Loan as to which no
satisfactory arrangements can be made for collection of delinquent payments or
the cure of any other event of default, the Master Servicer, Servicer or
Subservicer, if any, will take such action as it shall deem to be in the best
interest of the Certificateholders. Without limiting the generality of the
preceding sentence, the Master Servicer, Servicer or Subservicer, if any, will,
in accordance with the servicing standard described above, (i) in the case of
Title I Mortgage Loans and Title I Contracts only, direct the Trustee (or any
Administrator) to submit an FHA Claim to the FHA, in accordance with FHA
Regulations, or (ii) in the case of Mortgage Loans and Contracts, take such
other action as the Master Servicer, Servicer or Subservicer, if any, deems to
be in the best interests of the Certificateholders, which if no superior lien
exists on the related Mortgaged Property, could include a foreclosure upon such
Mortgaged Property in the name of the Trustee for the benefit of the
Certificateholders, provided such action was economically justified and would
not affect the status of the REMIC or FASIT or cause a tax to be imposed upon
the REMIC or FASIT for federal income tax purposes. Typically, however, the
Master Servicer, Servicer or Subservicer, if any, has chosen not to pursue
foreclosures of defaulted loans comparable to the Mortgage Loans and Contracts
due to the costs involved. In servicing mortgage loans and contracts secured by
junior liens in their portfolios, it will not be the Master Servicer's or any
Subservicer's practice to satisfy the senior mortgage(s) at or prior to the
foreclosure sale of the Mortgaged Property, or to advance funds to keep the
senior mortgage(s) current. In addition, if a defaulted mortgage loan or
contract (together with any senior lien indebtedness) has a high loan-to-value
ratio, then the Master Servicer, Servicer or Subservicer, if any, will be less
likely to foreclose on the related mortgaged property, even if the Master
Servicer, Servicer or Subservicer, if any, has a first-lien position for such
mortgage loan or contract. In the event an FHA Claim is rejected by the FHA due
to circumstances that constitute a breach of the Transferor's representations
and warranties in the Pooling and Servicing Agreement, the Transferor will be
required to repurchase the related Title I Mortgage Loan or Title I Contract at
the purchase price and in the manner set forth in the Pooling and Servicing
Agreement.
In connection with any collection activities or foreclosure, the
Master Servicer, Servicer or Subservicer, if any, is required to exercise
collection and foreclosure procedures with the same degree of care and skill in
its exercise or use, as it would exercise or use under the circumstances in the
conduct of its own affairs.
WAIVERS AND DEFERMENTS OF CERTAIN PAYMENTS
The Pooling and Servicing Agreement requires the Master Servicer,
Servicer or Subservicer, if any, to make reasonable efforts to collect all
payments called for under the terms and provisions of the Mortgage Loans and the
Contracts. Consistent with the foregoing, the Servicer may at its own discretion
waive any late payment charge, assumption fee or any penalty interest in
connection with the payment of a Mortgage Loan or a Contract or any other fee or
charge which the Servicer would be entitled to retain as servicing compensation
and may waive, vary or modify any term of any Mortgage Loan or Contract or
consent to the postponement of strict compliance with any such term or in any
matter grant indulgence to any borrower, subject to the limitations set forth in
the Pooling and Servicing Agreement and the FHA Regulations, if applicable.
The Master Servicer, Servicer or Subservicer, as applicable, may
permit a borrower who is delinquent in payment but has established an ability to
repay the related Mortgage Loan to repay such delinquent amount in increments
over time. In such event, such borrower will be permitted to remain delinquent
in payment for an extended period of time.
As described under "Certain legal Aspects of the Loan
Assets-Foreclosure-Anti-Deficiency Legislation and Other Limitations on
Lenders," a court with federal bankruptcy jurisdiction may permit a debtor
through his or her Chapter 11 or Chapter 13 rehabilitative plan to cure a
default in respect of a Loan Asset by paying the delinquent amount over a period
of time. Such borrowers will be reported by the Master Servicer, Servicer or
Subservicer, as applicable, as being current in payment to the extent that they
are meeting the requirements of the applicable repayment plan.
The Master Servicer, Servicer or Subservicer may waive or vary the terms of
a Loan Asset, including reducing the interest rate or extending the term to
maturity, in order to obtain a reaffirmation of debt from a bankrupt borrower.
See "Assets Securing or Underlying Certificates--Modifications of
Mortgage Loans and Contracts."
SUBSERVICERS
The Servicer is permitted under the Pooling and Servicing Agreement to
enter into servicing arrangements with subservicers meeting the requirements of
the Pooling and Servicing Agreement, provided that the Trustee gives written
consent thereto. Notwithstanding any subservicing arrangements, the Servicer
shall not be relieved of its obligations under the Pooling and Servicing
Agreement to the Trustee and the Certificateholders, and the Servicer shall be
obligated to the same extent and under the same terms and conditions as if it
alone were servicing and administering the Mortgage Loans and the Contracts.
REMOVAL AND RESIGNATION OF SERVICER
To the extent specified in the Prospectus Supplement, the Trustee may
remove the Servicer upon the occurrence and continuation beyond the applicable
cure period of certain events described in the related Pooling and Servicing
Agreement. To the extent specified in the Prospectus Supplement, the Servicer
will not be permitted to resign from its obligations and duties except by mutual
consent of the Servicer, the Depositor, the Trustee and any other persons so
specified in the related Pooling and Servicing Agreement, or upon the
determination that the Servicer's duties are no longer permissible under
applicable law and such incapacity cannot be cured by the Servicer. No such
resignation shall become effective until a qualified successor has assumed the
Servicer's responsibilities and obligations. Upon removal or resignation of the
Servicer, a successor servicer will be appointed pursuant to the terms and
conditions set forth in the applicable Pooling and Servicing Agreement.
ADVANCES
To the extent specified in the Prospectus Supplement, neither the
Servicer, nor any Subservicer on behalf of the Servicer, shall have any
obligation to advance its own funds for any delinquent scheduled payments of
principal and interest on any Mortgage Asset or to satisfy or keep current the
indebtedness secured by any Superior Liens on the related Mortgaged Property. To
the extent specified in the Prospectus Supplement, no costs incurred by the
Master Servicer, Servicer or any Subservicer in respect of servicing advances
shall, for the purposes of distributions to Certificateholders, be added to the
amount owing under the related Mortgage Asset.
SERVICING PROCEDURES
To the extent specified in the related Prospectus Supplement, the
Servicer and each Subservicer will service the Mortgage Loans and Contracts
pursuant to written guidelines promulgated by the Depositor or the Servicer. The
Servicer will exercise its best reasonable efforts to insure that the
Subservicers service the Mortgage Loans and Contracts in compliance with such
guidelines and in a manner consistent with industry standards.
MORTGAGE LOANS. To the extent specified in the related Prospectus
Supplement, the Master Servicer, Servicer and any Subservicer will be required
to service and administer the Mortgage Loans and will have full power and
authority, acting alone, to do any and all things in connection with such
servicing and administration which the Servicer may deem necessary or desirable
and consistent with the terms of the Pooling and Servicing Agreement. The Master
Servicer, Servicer or Subservicer, if any, in servicing and administering the
Mortgage Loans, will be required to employ or cause to be employed procedures
(including collection, foreclosure, liquidation and REO Property management and
liquidation procedures) and exercise the same care that it customarily employs
and exercises in servicing and administering loans of the same type as the
Mortgage Loans for its own account, all in accordance with accepted servicing
practices of prudent lending institutions and servicers of loans of the same
type as the Mortgage Loans and giving due consideration to the
Certificateholders' reliance on the Servicer. With respect to any Title I
Mortgage Loan, the foregoing servicing standard also shall include the
requirement that the Servicer will and will cause any Subservicer to, comply
with FHA Regulations in servicing the Title I Mortgage Loans so that the FHA
Insurance remains in full force and effect with respect to the Title I Mortgage
Loans, except for good faith disputes relating to FHA Regulations or such FHA
Insurance, unless such disputes would result in the termination or suspension of
such FHA Insurance. The Master Servicer, Servicer or Subservicer, if any, will
be required to maintain the facilities, procedures and experienced personnel
necessary to comply with such servicing standard and the duties of the Servicer
set forth in the Pooling and Servicing Agreement relating to the servicing of
the Mortgage Loans.
The Master Servicer, Servicer or Subservicer, if any, will expend its
own funds to restore property securing a Mortgage Loan which has sustained
uninsured damage only if it determines that such restoration will increase the
proceeds of liquidation of the Mortgage Loan after the reimbursement to the
Servicer of its expenses and after the satisfaction of any senior liens.
With respect to Cooperative Loans, any prospective purchaser will
generally have to obtain the approval of the board of directors of the relevant
Cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. See "Certain Legal Aspects of the
Mortgage Assets" herein. This approval is usually based on the purchaser's
income and net worth and numerous other factors. Although the Cooperative's
approval is unlikely to be unreasonably withheld or delayed, the necessity of
acquiring such approval could limit the number of potential purchasers for those
shares and otherwise limit the ability to sell and realize the value of those
shares.
In general, a "tenant-stockholder" (as defined in Code Section
216(b)(2)) of a corporation that qualifies as a "cooperative housing
corporation" within the meaning of Code Section 216(b)(1) is allowed a deduction
for amounts paid or accrued within his taxable year to the corporation
representing his proportionate share of certain interest expenses and certain
real estate taxes allowable as a deduction under Code Section 216(a) to the
corporation under Code Sections 163 and 164. In order for a corporation to
qualify under Code Section 216(b)(1) for its taxable year in which such items
are allowable as a deduction to the corporation, such Code Section requires,
among other things, that at least 80% of the gross income of the corporation be
derived from its tenant-stockholders (as defined in Code Section 216(b)(2). By
virtue of this requirement, the status of a corporation for purposes of Code
Section 216(b)(1) must be determined on a year-to-year basis. Consequently,
there can be no assurance that Cooperatives relating to the Cooperative Loans
will qualify under such Code Section for any particular year. In the event that
such a Cooperative fails to qualify for one or more years, the value of the
collateral securing any related Cooperative Loans could be significantly
impaired because no deduction would be allowable to tenant-stockholders under
Code Section 216(a) with respect to those years. In view of the significance of
the tax benefits accorded tenant-stockholders of a corporation that qualifies
under Code Section 216(b)(1), the likelihood that such a failure would be
permitted to continue over a period of years appears remote.
So long as it acts as servicer of the Mortgage Loans, the Servicer
will be required to maintain certain insurance covering errors and omissions in
the performance of its obligations as servicer and certain fidelity bond
coverage ensuring against losses through wrongdoing of its officers, employees
and agents.
CONTRACTS. With respect to a Trust Fund that includes Contracts, the
Servicer will service and administer the Contracts assigned to the Trustee
pursuant to the related Pooling and Servicing Agreement. The Servicer, either
directly or through Subservicers subject to general supervision by the Servicer,
will perform diligently all services and duties specified in each Pooling and
Servicing Agreement, in the same manner as prudent lending institutions of
property improvement and/or manufactured housing installment sales contracts of
the same type as the Contracts in those jurisdictions where the related
borrowers are located. The Servicer will monitor the performance of each
Subservicer, if any, and, unless the related Prospectus Supplement states
otherwise, will remain liable for the servicing of the Contracts in accordance
with the terms of the Pooling and Servicing Agreement. The duties to be
performed by the Servicer or the Subservicer, if any, will include collection
and remittance of principal and interest payments, collection of insurance
claims and, if necessary, repossession.
ADMINISTRATION AND SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Master Servicer or Servicer, and each Subservicer, if any, will be
entitled to a monthly fee as specified in the related Prospectus Supplement. In
addition to the primary compensation, the Master Servicer, Servicer or
Subservicer, if any, will retain all assumption underwriting fees and late
payment charges, to the extent collected from Borrowers, and may be entitled to
retain investment income on amounts in certain accounts.
The Servicer and any Subservicer will be entitled to reimbursement for
certain expenses incurred by it in connection with the liquidation of defaulted
Mortgage Loans and Contracts. No loss will be suffered on the Certificates by
reason of such expenses to the extent claims for such expenses are paid directly
under any applicable Mortgage Pool Insurance Policy, a primary mortgage
insurance policy, or from other forms of Credit Enhancement. In the event,
however, that the defaulted Mortgage Loans are not covered by a Mortgage Pool
Insurance Policy, Primary Mortgage Insurance Policies, or another form of Credit
Enhancement, or claims are either not made or not paid under such policies or
Credit Enhancement, or if coverage thereunder has ceased, a loss will occur on
the Certificates of the affected Series to the extent that the proceeds from the
liquidation of a defaulted Mortgage Loan or Contract, after reimbursement of the
Servicer's and the Subservicer's expenses, are less than the principal balance
of such defaulted Mortgage Loan or Contract.
To the extent specified in the related Prospectus Supplement, the
Master Servicer or Servicer will be responsible for payment of certain fees and
expenses of the related Trust Fund.
THE POOLING AND SERVICING AGREEMENT
The following summaries describe certain provisions of the Pooling and
Servicing Agreement not described elsewhere in this Prospectus. Where particular
provisions or terms used in the Pooling and Servicing Agreements are referred
to, the actual provisions (including definitions of terms) are incorporated by
reference as a part of such summaries. The description set forth below is
subject to modification in the Prospectus Supplement for a Series of
Certificates to describe the terms and provisions of the particular Pooling and
Servicing Agreement relating to such Series of Certificates.
Generally, the discussion in this section of the Prospectus is
applicable under circumstances when the Servicer is an affiliate of the
Depositor. If the Servicer is not an affiliate of the Depositor, the discussion
relating to pooling and administration (or master servicing) as set forth below
may be modified or superseded by any discussion relating to the pooling and
administration (or master servicing) set forth in the Prospectus Supplement. In
addition, certain of the following summaries only apply to a Pooling and
Servicing Agreement relating to series of Certificates for which the related
Trust Fund includes Mortgage Loans or Contracts. Provisions of Pooling and
Servicing Agreements relating to series of Certificates for which the related
Trust Fund includes other types of Mortgage Assets will be summarized and
described in the related Prospectus Supplement.
ASSIGNMENT OF MORTGAGE ASSETS
ASSIGNMENT OF MORTGAGE LOANS. At the time of issuance of the
Certificates of a Series, the Depositor will assign the Mortgage Loans to the
related Trustee, together with all principal and interest (subject to exclusions
or adjustments specified in the related Prospectus Supplement received by the
Depositor on or with respect to such Mortgage Loans on or after the cut-off
date) other than principal and interest due and payable on or before the date
specified in the related Prospectus Supplement. The Trustee will, concurrently
with such assignment, execute, countersign and deliver the Certificates to the
Depositor in exchange for the Mortgage Loans. Each Mortgage Loan will be
identified in a schedule appearing as an exhibit to the Pooling and Servicing
Agreement.
In addition, as to each Mortgage Loan, the Depositor will deliver to
the Trustee or its custodian, as specified in the related Prospectus Supplement,
the Mortgage Note and Mortgage, any assumption and modification agreement, an
assignment of the Mortgage in recordable form, evidence of title insurance and,
if applicable, the certificate of private mortgage insurance. In instances where
recorded documents cannot be delivered due to delays in connection with
recording, the Depositor may deliver copies thereof and deliver the original
recorded documents promptly upon receipt.
The Transferor will not be required to record assignments of the
Mortgages to the applicable Trustee in the real property records of certain
states. The Transferor, in its capacity as the Servicer, will retain record
title to such Mortgages on behalf of the applicable Trustee and the holders of
Certificates of the related Series. If the Transferor or the Seller were to
sell, assign, satisfy or discharge any Mortgage Loan prior to recording the
related assignment in favor of the applicable Trustee, the other parties to such
sale, assignment, satisfaction or discharge may have rights superior to those of
the applicable Trustee. In some states, in the absence of such recordation of
the assignments of the Mortgages, the transfer to the applicable Trustee of the
Mortgage Loans may not be effective against certain creditors or purchasers from
the Transferor or a trustee in bankruptcy of the Transferor.
With respect to any Mortgage Loans which are Cooperative Loans, the
Depositor, as depositor, will cause to be delivered to the Trustee or its
custodian, as specified in the related Prospectus Supplement, the related
original Cooperative note endorsed to the order of the Trustee, the original
security agreement, the proprietary lease or occupancy agreement, the
recognition agreement, an executed financing agreement and the relevant stock
certificate and related blank stock powers. The Depositor will file in the
appropriate office an assignment and a financing statement evidencing the
Trustee's security interest in each Cooperative Loan.
To the extent specified in the related Prospectus Supplement, in the
Pooling and Servicing Agreement the Depositor generally will represent and
warrant to the Trustee, among other things, that (i) the information with
respect to each Mortgage Loan set forth in the schedule of Mortgage Loans
attached thereto is true and correct in all material respects; (ii) at the date
of initial issuance of the Certificates, the Depositor has good and marketable
title to the Mortgage Loans included in the Trust Fund and such other items
comprising the corpus of the Trust Fund are free and clear of any lien,
mortgage, pledge, charge, security interest or other encumbrance; (iii) at the
date of initial issuance of the Certificates, no Mortgage Loan is 30 or more
days delinquent and there are no delinquent tax or assessment liens against the
property covered by the related Mortgage; and (iv) each Mortgage Loan at the
time it was made complied in all material respects with applicable state and
federal laws, including, without limitation, consumer, usury, truth-in-lending,
consumer credit protection, equal credit opportunity and disclosure laws and
with respect to any Title I Mortgage Loans, the FHA Regulations.
If specified in the related Prospectus Supplement, the Depositor may,
in lieu of making the representations set forth in the preceding paragraph,
cause the entity from which such Mortgage Loans were acquired to make such
representations (other than those regarding the Depositor's title to the
Mortgage Loans, which will in all events be made by the Depositor), in the sales
agreement pursuant to which such Mortgage Loans are acquired, or if such entity
is acting as Servicer, in the Pooling and Servicing Agreement, or if such entity
is acting as a Subservicer, in its Subservicing Agreement. In such event such
representations, and the Depositor's rights against such entity in the event of
a breach thereof, will be assigned to the Trustee for the benefit of the holders
of the Certificates of such Series.
ASSIGNMENT OF CONTRACTS. The Depositor will cause the Contracts to be
assigned to the Trustee, together with principal and interest due on or with
respect to the Contracts after the date specified in the related Prospectus
Supplement. Each Contract will be identified in a loan schedule ("Contract Loan
Schedule") appearing as an exhibit to the related Pooling and Servicing
Agreement.
In addition, with respect to each Contract for a Manufactured Home,
the Depositor will deliver or cause to be delivered to the Trustee, the original
Contract and copies of documents and instruments related to each Contract and
the security interest in the Manufactured Home securing each Contract. To give
notice of the right, title and interest of the Certificateholders to the
Contracts, the Depositor will cause a UCC-1 financing statement to be filed
identifying the Trustee as the secured party and identifying all Contracts as
collateral. To the extent specified in the related Prospectus Supplement, the
Contracts will not be stamped or otherwise marked to reflect their assignment
from the Depositor to the Trustee. Therefore, if a subsequent purchaser were
able to take physical possession of the Contracts without notice of such
assignment, the interest of the Holders of the Certificates of the applicable
Series in the Contracts could be defeated. See "Certain Legal Aspects of the
Mortgage Assets."
To the extent specified in the Prospectus Supplement, the Depositor
will provide limited representations and warranties to the Trustee concerning
the Contracts. Such representations and warranties will include: (i) that the
information with respect to each Contract set forth in the Contract Loan
Schedule provides an accurate listing of the Contracts and that the information
respecting such Contracts set forth in such Contract Loan Schedule is true and
correct in all material respects at the date or dates respecting which such
information is furnished; (ii) that, immediately prior to the conveyance of the
Contracts, the Depositor had good and marketable title to, and was sole owner
of, each such Contract; and (iii) that there has been no other sale by it of
such Contract.
ASSIGNMENT OF AGENCY SECURITIES. With respect to each Series, to the
extent specified in the related Prospectus Supplement, the Depositor will cause
any Agency Securities included in the related Trust Fund to be registered in the
name of the Trustee. The Trustee (or its custodian as specified in the related
Prospectus Supplement) will have possession of any certificated Agency
Securities. To the extent specified in the related Prospectus Supplement, the
Trustee will not be in possession of or be assignee of record of any underlying
assets for an Agency Security. Each Agency Security will be identified in a
schedule appearing as an exhibit to the related Pooling and Servicing Agreement.
The Depositor will represent and warrant to the Trustee, among other things, the
information contained in such schedule is true and correct and that immediately
prior to the transfer of the related securities to the Trustee, the Depositor
had good and marketable title to, and was the sole owner of, each such security.
CONVEYANCE OF SUBSEQUENT MORTGAGE ASSETS
With respect to a Series of Certificates for which a PreFunding
Arrangement is provided, in connection with any conveyance of Subsequent
Mortgage Assets to the Trust Fund after the issuance of such Series, the related
Pooling and Servicing Agreement will require the Transferor and Depositor to
satisfy the following conditions, among others: (i) each Subsequent Mortgage
Asset purchased after the Closing Date must satisfy the representations and
warranties contained in the subsequent transfer agreement to be entered into by
the Transferor, the Trustee and the Depositor (the "Subsequent Transfer
Agreement") and in the related Pooling and Servicing Agreement; (ii) the
Transferor will not select such Subsequent Mortgage Assets in a manner that it
believes is adverse to the interests of the Certificateholders; (iii) as of the
related cut-off date, all of the Mortgage Assets in the Mortgage Asset Pool at
that time, including the Subsequent Mortgage Assets purchased after the closing
date will satisfy the criteria set forth in the related Pooling and Servicing
Agreement; (iv) the Subsequent Mortgage Assets will have been approved by any
third party provider of Credit Enhancement, if applicable; and (v) prior to the
purchase of each Subsequent Mortgage Asset the Trustee will perform an initial
review of certain related loan file documentation for such Mortgage Asset and
issue an initial certification for which the required documentation in such loan
file has been received with respect to each such Subsequent Mortgage Asset. The
Subsequent Mortgage Assets on an aggregate basis, will have characteristics
similar to the characteristics of the pool of Initial Mortgage Assets as
described in the related Prospectus Supplement. Each acquisition of any
Subsequent Mortgage Assets will be subject to review by any third party provider
of Credit Enhancement, if applicable, and the Rating Agencies and, to the extent
specified in the related Prospectus Supplement, review by the Transferor's
accountants of the aggregate statistical characteristics of the related Mortgage
Asset Pool for compliance with the applicable statistical criteria set forth in
the related Pooling and Servicing Agreement.
REPURCHASE OR SUBSTITUTION OF MORTGAGE LOANS AND CONTRACTS
The Trustee (or its custodian as specified in the related Prospectus
Supplement) will review the documents delivered to it with respect to the
Mortgage Loans and Contracts included in the related Trust Fund. To the extent
specified in the related Prospectus Supplement, if any document is not delivered
or is found to be defective in any material respect and the Depositor cannot
deliver such document or cure such defect within 60 days after notice thereof
(which the Trustee will undertake to give within 45 days of the delivery of such
documents), and if any other party obligated to deliver such document or cure
such defect has not done so and has not substituted or repurchased the affected
Mortgage Loan or Contract, then the Depositor will, not later than the
Determination Date next succeeding the end of such 60-day period (a) if provided
in the Prospectus Supplement remove the affected Mortgage Loan or Contract from
the Trust Fund and substitute one or more other Mortgage Loans or Contracts
therefor or (b) repurchase the Mortgage Loan or Contract from the Trustee for a
price equal to 100% of its principal balance plus interest thereon as the date
specified in the related Prospectus Supplement, plus the amount of unreimbursed
servicing advances made by the Servicer or any Subservicer with respect to such
Mortgage Loan. The Depositor will be similarly obligated to repurchase any
Mortgage Loan or Contract as to which a breach of a representation or warranty
of such party materially and adversely affects the interests of
Certificateholders in such Mortgage Loan or Contract. To the extent specified in
the related Prospectus Supplement, such purchase price will be deposited in the
Collection Account on such Determination Date and such repurchase and, if
applicable, substitution obligation will constitute the sole remedy available to
Holders of the Certificates of the applicable Series or the Trustee against the
Depositor for a material defect in a document relating to a Mortgage Loan or
Contract.
If the Prospectus Supplement for a Series of Certificates so provides,
then in lieu of agreeing to repurchase or substitute Mortgage Loans or Contracts
as described above, the Depositor may obtain such an agreement from the entity
which sold such Mortgage Loans or Contracts to the Depositor, which agreement
will be assigned to the Trustee for the benefit of the holders of the
Certificates of such series.
If a REMIC election is to be made with respect to all or a portion of
a Trust Fund, there may be federal income tax limitations on the right to
substitute Mortgage Loans or Contracts as described above.
EVIDENCE AS TO COMPLIANCE
The related Pooling and Servicing Agreement will provide that on or
before a specified date after the end of each of the Servicer's fiscal years
elapsing during the term of its appointment, beginning with the first fiscal
year ending after the Closing Date, the Servicer, at its expense, will furnish
to the Trustee and certain other Persons (i) an opinion by a firm of independent
certified public accountants on the financial position of the Servicer at the
end of the relevant fiscal year and the results of operations and changes in
financial position of the Servicer for such year then ended on the basis of an
examination conducted in accordance with generally accepted auditing standards,
and (ii) if the Servicer is then servicing any Mortgage Loans, a statement from
such independent certified public accountants to the effect that based on an
examination of certain specified documents and records relating to the servicing
of the Servicer's mortgage loan portfolio conducted substantially in compliance
with the audit program for mortgages serviced for the United States Department
of Housing and Urban Development Mortgage Audit Standards, or the Uniform Single
Audit Program for Mortgage Bankers (the "Applicable Accounting Standards"), such
firm is of the opinion that such servicing has been conducted in compliance with
the Applicable Accounting Standards except for (a) such exceptions as such firm
shall believe to be immaterial and (b) such other exceptions as shall be set
forth in such statement.
LIST OF CERTIFICATEHOLDERS
Upon written request of the Trustee, the Registrar for a Series of
Certificates will provide to the Trustee, within fifteen days after receipt of
such request, a list of the names and addresses of all Holders of record of such
Series as of the most recent Record Date for payment of distributions to Holders
of that Series. Upon written request of three or more Holders of record of a
Series of Certificates for purposes of communicating with other Holders with
respect to their rights under the Pooling and Servicing Agreement for such
Series, the Trustee will afford such Holders access during business hours to the
most recent list of Holders of that Series held by the Trustee. With respect to
Book Entry Certificates, the only named Holder on the Certificate Register will
be the Clearing Agency.
The Pooling and Servicing Agreement will not provide for the holding
of any annual or other meetings of Holders of Certificates.
ADMINISTRATION OF THE CERTIFICATE ACCOUNT
The Pooling and Servicing Agreement with respect to a Series will
require that the Certificate Account be any of the following: (i) an account
maintained with a depository institution the debt obligations of which (or, in
the case of a depository institution which is a part of a holding company
structure, the debt obligations of the holding company of which) have a
long-term or short-term rating acceptable to each rating agency that rated the
Certificates; (ii) an account or accounts the deposits in which are fully
insured by either the Bank Insurance Fund (the "BIF"), the Federal Deposit
Insurance Corporation (the "FDIC") or the Savings Association Insurance Fund (as
successor to the Federal Savings and Loan Insurance Corporation) ("SAIF") of the
FDIC; (iii) a trust account (which shall be a "segregated trust account")
maintained with the corporate trust department of a federal or state chartered
depository institution or trust company with trust powers and acting in its
fiduciary capacity for the benefit of the Trustee which depository institution
or trust company will be required to have capital and surplus of not less than
the amount specified in the related Pooling and Servicing Agreement; or (v) an
account that will not cause any rating agency rating the Certificates of such
Series to downgrade or withdraw its then-current rating assigned to the
Certificates as evidenced in writing by such rating agency. The instruments in
which amounts in the Certificate Account may be invested are limited Permitted
Investments. To the extent specified in the related Prospectus Supplement, a
Certificate Account may be maintained as an interest bearing account, or the
funds held therein may be invested pending each succeeding Distribution Date in
Permitted Investments. To the extent specified in the related Prospectus
Supplement, the Depositor or the Trustee will be entitled to receive any such
interest or other income earned on funds in the Certificate Account as
additional compensation. To the extent specified in the related Prospectus
Supplement, the following payments and collections received subsequent to the
cut-off date will be deposited in the Certificate Account:
(i) all payments on account of scheduled principal;
(ii) all payments on account of interest accruing and collected on and
after the date specified in the related Prospectus Supplement, subject to
exclusions or adjustments described in such Prospectus Supplement;
(iii) all Liquidation Proceeds net of certain amounts reimbursed to
the Subservicers or the Servicer, as described in the related Pooling and
Servicing Agreement;
(iv) all Insurance Proceeds;
(v) all proceeds of any Mortgage Loan or Contract or property acquired
in respect thereof repurchased by the Servicer, the Depositor or the Transferor
or otherwise as described above or under "Termination" below;
(vi) all amounts, if any, required to be transferred to the
Certificate Account from any Credit Enhancement for the related Series; and
(vii) all other amounts required to be deposited in the Certificate
Account pursuant to the related Pooling and Servicing Agreement.
REPORTS TO CERTIFICATEHOLDERS
Concurrently with each distribution on the Certificates of a Series,
to the extent specified in the related Prospectus Supplement, the Trustee will
furnish to Holders of such Certificates a statement generally setting forth, to
the extent applicable to such Series, among other things:
(i) the aggregate amount of such distribution allocable to principal,
separately identifying the amount allocable to each Class;
(ii) the amount of such distribution allocable to interest, separately
identifying the amount allocable to each Class;
(iii) the aggregate principal balance of each Class of the
Certificates after giving effect to distributions on such Distribution Date;
(iv) if applicable, the aggregate principal balance of any Class
Certificates which are Compound Interest Certificates after giving effect to any
increase in such principal balance that results from the accrual of interest
that is not yet distributable thereon;
(v) if applicable, the amount otherwise distributable to Holders of
any Class of Certificates that was distributed to Holders of other Classes of
Certificates;
(vi) if any Class of Certificates has priority in the right to receive
Principal Prepayments, the amount of Principal Prepayments in respect of the
related Mortgage Assets;
(vii) certain performance information, including delinquency and
foreclosure information specified in the related Pooling and Servicing
Agreement;
(viii) the amount of coverage then remaining under any Credit
Enhancement; and
(ix) all other information required to be provided pursuant to the
related Pooling and Servicing Agreement.
The Servicer or the Trustee will also furnish annually customary
information deemed necessary for Holders of such Certificates to prepare their
tax returns.
EVENTS OF DEFAULT
"Events of Default" under the Pooling and Servicing Agreement with
respect to a Series will consist of (i) any failure by the Servicer to duly
observe or perform in any material respect any of its covenants or agreements in
such Pooling and Servicing Agreement materially affecting the rights of Holders
of the Certificates of such Series which continues unremedied for 60 days after
the giving of written notice of such failure to the Servicer by the Trustee or
to the Servicer or the Trustee by the Holders of such Certificates evidencing
interests aggregating not less than 25% of the affected Class of Certificates;
and (ii) certain events of insolvency, readjustment of debt, marshaling of
assets and liabilities or similar proceedings and certain actions by the
Servicer indicating its insolvency, reorganization or inability to pay its
obligations.
RIGHTS UPON EVENT OF DEFAULT
As long as an Event of Default under a Pooling and Servicing Agreement
remains unremedied by the Servicer, the Trustee, or Holders of Certificates of
each Class of Certificates affected thereby evidencing, as to each such Class
interests aggregating not less than 51%, may terminate all of the rights and
obligations of the Servicer under the Pooling and Servicing Agreement, whereupon
the Trustee, or a new Servicer appointed pursuant to the Pooling and Servicing
Agreement, will succeed to all the responsibilities, duties and liabilities of
the Servicer under the Pooling and Servicing Agreement and will be entitled to
similar compensation arrangements. Notwithstanding its termination as Servicer,
the Servicer will be entitled to receive amounts earned by it under the Pooling
and Servicing Agreement prior to such termination. If at the time of any such
termination the Servicer is also servicing as the Administrator, the Servicer's
status as Administrator will be simultaneously terminated by the Trustee and the
Servicer's responsibilities as such shall be transferred to the successor
servicer, if such person is then qualified to so act), or to another successor
Administrator retained by the Trustee, or to the Trustee itself if a successor
Administrator cannot be retained in a timely manner. To the extent provided in
the related Prospectus Supplement, unless and until a successor servicer is
appointed, the Trustee will be required to fulfill the duties of the Servicer.
No Holder of Certificates will have any right under the Pooling and
Servicing Agreement to institute any proceeding with respect to the Pooling and
Servicing Agreement, unless such Holder previously has given to the Trustee
written notice of default and unless the Holders of Certificates as specified in
the Prospectus Supplement have made written request to the Trustee to institute
such proceeding in its own name as Trustee thereunder and have offered to the
Trustee reasonable indemnity and the Trustee for 60 days has neglected or
refused to institute any such proceedings. However, the Trustee is under no
obligation to exercise any of the trusts or powers vested in it by the Pooling
and Servicing Agreement or to make any investigation of matters arising
thereunder or to institute, conduct or defend any litigation thereunder or in
relation thereto at the request, order or direction of any of the Holders,
unless such Holders have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which may be incurred therein or
thereby.
AMENDMENT
The Pooling and Servicing Agreement with respect to a Series may be
amended by the Depositor, the Servicer and the Trustee without the consent of
the Holder of the Certificates of such Series, to cure any error or ambiguity,
to correct or supplement any provision therein which may be defective or
inconsistent with any other provision therein or to add any other provisions
with respect to matters or questions arising under the Pooling and Servicing
Agreement provided that such action will not adversely affect in any material
respect the interests of any Holders of that Series. An amendment described
above shall not be deemed to adversely affect in any material respect the
interests of the Holders of that Series if either (a) an opinion of counsel
satisfactory to the Trustee is obtained to such effect, or (b) the person
requesting the amendment obtains a letter from each of the rating agencies then
rating the Certificates of that Series to the effect that the amendment, if
made, would not result in a downgrading or withdrawal of the rating then
assigned by it to such Certificates. Notwithstanding the foregoing, the
Depositor, the Servicer and the Trustee may amend each Pooling and Servicing
Agreement without the consent of the Holders of the Certificates of the relevant
Series in order to modify, eliminate or add to any of its provisions to such
extent as may be appropriate or necessary to maintain REMIC or FASIT status of
all or any portion of any Trust Fund as to which a REMIC or FASIT election has
been made with respect to the applicable Certificates or to avoid or minimize
the risk of the imposition of any tax on the Trust Fund created by such Pooling
and Servicing Agreement that would be a claim against the Trustee at any time
prior to final redemption of the Certificates, provided that the Trustee has
obtained the opinion of independent counsel to the effect that such action is
necessary or appropriate to maintain REMIC or FASIT status or to avoid or
minimize the risk of the imposition of such a tax.
To the extent specified in the Prospectus Supplement, the Pooling and
Servicing Agreement may also be amended by the Depositor, the Servicer, and the
Trustee with the consent of the Holders of Certificates evidencing interests
aggregating in excess of 50% of the aggregate principal balance of the
Certificates of the applicable Series for the purpose of adding any provisions
to or changing in any manner or eliminating any of the provisions of such
Pooling and Servicing Agreement or of modifying in any manner the rights of
Holders of Certificates of that Series; provided, however, that no such
amendment may (i) reduce in any manner the amount of, or delay the timing of,
collections of payments received on the related Mortgage Assets or distributions
which are required to be made on any Certificate without the consent of the
Holder of such Certificate, (ii) adversely affect in any material respect the
interests of the Holders of any Class of Certificates in any manner other than
as described in clause, (i) without the consent of the Holders of Certificates
of 100% of such Class or (iii) reduce the aforesaid percentage of Certificates
of any Class required to consent to any such amendment, without the consent of
the Holders of 100% of the Certificates of such Class then outstanding.
USE OF PROCEEDS
To the extent specified in an applicable Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of each
Series of Certificates will be applied to the simultaneous purchase of the
Mortgage Assets related to such Series or to reimburse the amounts previously
used to effect such a purchase, the costs of carrying such Mortgage Assets until
sale of the Certificates and other expenses connected with pooling the Mortgage
Assets and issuing the Certificates.
THE DEPOSITOR
FIRSTPLUS Investment Corporation (the "Depositor"), a Nevada
corporation, was incorporated in 1995 as a limited purpose finance corporation.
All of the outstanding capital stock of the Depositor is owned by FIRSTPLUS
Financial Group, Inc., the common stock of which is traded on the New York Stock
Exchange. The Depositor maintains its principal office at 3773 Howard Hughes
Parkway, Suite 300N, Las Vegas, Nevada 89109, and its telephone number is (702)
892-3772.
As a limited purpose finance corporation under the Rating Agency
guidelines, the business operations of the Depositor will be limited to
functions relating to the issuance of one or more Series of Certificates or
similar series of asset-backed or mortgage-backed securities, the acquisition
and resale of Mortgage Assets and other incidental activities related thereto.
The Depositor does not have, and is not expected in the future to have, any
significant assets. If the Depositor were required to repurchase a Mortgage
Asset included in the Trust Fund for a Series, its only sources of funds to make
such repurchase would be funds obtained from the enforcement of a corresponding
obligation, if any, on the part of the Transferor of such Mortgage Asset or the
related Servicer, as the case may be, or from a Reserve Fund, if any,
established to provide funds for such repurchases.
Neither the Depositor nor any of its affiliates will insure or
guarantee the Certificates of any Series or the Mortgage Assets backing any such
Series. See "Risk Factors--Limited Assets of Trust Fund."
THE SERVICER AND THE TRANSFEROR
To the extent specified in the related Prospectus Supplement, the
Servicer with respect to any series of Certificates evidencing interests in
Mortgage Loans or Contracts may be FIRSTPLUS FINANCIAL, INC. ("FFI"), an
affiliate of the Depositor. In addition, to the extent specified in the related
Prospectus Supplement for a Series, the related Transferor of the Mortgage
Assets to the Depositor for such Series may also be FFI. See "Assets Securing or
Underlying the Certificates--General".
The delinquency and loss experience of FFI for the periods indicated
is set forth below. In the event that FFI is not the Servicer with respect to a
Series, or if an entity other than FFI acts as Servicer with respect to a
Series, the delinquency experience of such Servicer will be set forth in the
related Prospectus Supplement.
DELINQUENCY EXPERIENCE
As of
-------------------------------------------
Dec. 31 Mar. 31 June 30 Sept. 30
1994 1995 1995 1995
---- ---- ---- ----
DELINQUENCY DATA:
Delinquencies in Serviced Loan
Portfolio (at period end) (1):
31-60 days ..................... 3.7% 2.3% 1.7% 1.8%
61-90 days ..................... 1.4 1.0 0.7 0.7
91 days and over ............... 3.2 3.3 1.9 2.2
--- --- --- ---
Total .................. 8.3% 6.6% 4.3% 4.7%
==== ==== ==== ====
Serviced Loan Portfolio
(at period end)
(dollars in thousands).......... $60,850 $70,410 $177,901 $238,583
As of
-------------------------------------------
Dec. 31 Mar. 31 June 30 Sept. 30
1995 1996 1996 1996
---- ---- ---- ----
DELINQUENCY DATA:
Delinquencies in Serviced Loan
Portfolio (at period end) (1):
31-60 days ..................... 1.5% 1.4% 1.1% 0.8%
61-90 days ..................... 0.5 0.6 0.5 0.4
91 days and over ............... 2.1 1.9 1.9 1.6
--- --- --- ---
Total .................. 4.1% 3.9% 3.5% 2.8%
==== ==== ==== ====
Serviced Loan Portfolio
(at period end)
(dollars in thousands).......... $387,343 $504,623 $750,529 $1,267,147
As of
-------------------------------------------
Dec. 31 Mar. 31 June 30
1996 1997 1997
---- ---- ----
DELINQUENCY DATA:
Delinquencies in Serviced Loan
Portfolio (at period end) (1):
31-60 days...................... 1.0% 0.9% 0.78%
61-90 days...................... 0.4 0.4 0.37
91 days and over................ 1.3 1.1 1.06
--- --- ----
Total 2.7% 2.4% 2.21%
==== ==== =====
Serviced Loan Portfolio
(at period end)
(dollars in thousands)........... $1,882,187 $2,713,108 $3,612,241
As of
--------------------------------------------
Sept. 30 Dec. 31 Mar. 31
1997 1997 1998
---- ---- ----
DELINQUENCY DATA:
Delinquencies in Serviced Loan
Portfolio (at period end) (1):
31-60 days....................... 0.90% 0.97% 0.84%
61-90 days....................... 0.43 0.45 0.35
91 days and over................. 1.18 1.19 1.09
---- ---- ----
Total 2.51% 2.61% 2.29%
===== ===== =====
Serviced Loan Portfolio
(at period end)
(dollars in thousands)............ $4,657,669 $5,605,433 $6,402,383
Year Ended
--------------------------------------------
Dec. 31 Dec. 31 Sept. 30
1994 1995 1996
---- ---- ----
DEFAULT DATA:
Defaults as a percentage of
the average
Serviced Loan Portfolio(2)....... 2.64% 0.69% 1.29%
Three Months Ended
--------------------------------------------
Dec. 31 Mar. 31 June 30
1996 1997 1997
---- ---- ----
DEFAULT DATA:
Defaults as a percentage of
the average
Serviced Loan Portfolio(2)....... 0.35% 0.31% 0.35%
Three Months Ended
--------------------------------------------
Sept. 30 Dec. 31 Mar. 31
1997 1997 1998
---- ---- ----
DEFAULT DATA:
Defaults as a percentage of
the average
Serviced Loan Portfolio(2)............ 0.39% 0.45% 0.51%
- -----------------------------------
(1) Delinquencies (as a percentage of the total serviced loan portfolio
balance) typically increase in November and December of each calendar
year.
(2) The average serviced loan portfolio is calculated by adding the
beginning and ending balances for the period presented and dividing the
sum by two.
BECAUSE THE SUBSTANTIAL MAJORITY OF FFI'S SERVICED LOAN PORTFOLIO
CONSISTS OF LOANS THAT HAD COMBINED LOAN-TO-VALUE RATIOS AT ORIGINATION NEAR OR
IN EXCESS OF 100%, LOSSES SUSTAINED FROM DEFAULTED LOANS ARE LIKELY TO MORE
SEVERE THAN IN THE CASE OF OTHER LOANS, AND WILL FREQUENTLY BE TOTAL LOSSES.
PROSPECTIVE INVESTORS SHOULD GENERALLY ASSUME THAT THE RATE OF NET LOSSES ON
FFI'S SERVICED LOAN PORTFOLIO WILL BE SUBSTANTIALLY THE SAME AS THE RATE OF
DEFAULTS.
The preceding tables generally indicate that FFI experienced declining
delinquency rates on its serviced loan portfolio as a whole before delinquency
rates began increasing in the second half of 1997. There can be no assurance
that such rates will not continue to increase. THE RELATIVELY LOW DELINQUENCY
RATES ON THE SERVICED LOAN PORTFOLIO IN RECENT PERIODS ARE PRINCIPALLY
ATTRIBUTABLE TO THE INCREASED VOLUME OF LOANS ORIGINATED BY FFI. FFI CALCULATES
ITS DELINQUENCY AND DEFAULT RATES BY DIVIDING THE AMOUNT OF DELINQUENT OR
DEFAULTED LOANS IN ITS SERVICED LOAN PORTFOLIO BY THE TOTAL DOLLAR AMOUNT OF THE
SERVICED LOAN PORTFOLIO ON SUCH DATE. BECAUSE FFI AND ITS AFFILIATES ARE
ORIGINATING HIGHER VOLUMES OF NEW LOANS THAT, DUE TO THEIR LACK OF SEASONING,
TEND TO HAVE LOWER DELINQUENCY AND DEFAULT RATES, FFI'S OVERALL DELINQUENCY AND
DEFAULT RATES HAVE BEEN LOWER IN RECENT PERIODS THAN IN EARLIER PERIODS.
Because delinquencies and losses typically occur months or years after
a loan is originated, data relating to delinquencies and losses as a percentage
of the current portfolio can understate the risk of future delinquencies, losses
or foreclosures. There is no assurance that the delinquency and foreclosure
experience with respect to any of the Mortgage Assets or with respect to any
Mortgage Asset Pool will be comparable to the experience reflected above for
assets originated and serviced by FFI or its affiliates. Because certain
Mortgage Assets may have been underwritten pursuant to standards that rely
primarily on the the creditworthiness of the related mortgagor rather than the
value of the related Mortgaged Property, the actual rates of delinquencies,
foreclosures and losses on such Mortgage Assets, particularly in periods during
which the value of the related Mortgage Properties has declined, could be higher
than those historically experienced by the mortgage lending industry in general.
In addition, the rate of delinquencies, foreclosures and losses with respect to
the Mortgage Assets will also be affected by, among other things, interest rate
fluctuations and general and regional economic conditions. See "Risk
Factors--Certain Factors Affecting Delinquencies, Foreclosures and Losses on
Underlying Loans".
THE TRUSTEE
Any commercial bank or trust company serving as Trustee may have
normal banking relationships with the Depositor or the Servicer. In addition,
the Trustee will have the power and the responsibility for appointing
co-trustees or separate trustees of all or any part of the Trust Fund relating
to a particular Series of Certificates. In the event of such appointment, all
rights, powers, duties and obligations conferred or imposed upon the Trustee by
the Pooling and Servicing Agreement shall be conferred or imposed upon the
Trustee and such separate trustee or co-trustee jointly, or in any jurisdiction
in which the Trustee shall be incompetent or unqualified to perform certain
acts, singly upon such separate trustee or co-trustee who shall exercise and
perform such rights, powers, duties and obligations solely at the direction of
the Trustee.
The Trustee will make no representations as to the validity or
sufficiency of the applicable Pooling and Servicing Agreement, the related
Certificates, or of any Mortgage Loan, Agency Security, Contract or related
document, and will not be accountable for the use or application by the
Depositor or an Transferor of any funds paid to the Depositor or such Transferor
in respect of the Certificates or the related Assets, or amounts deposited in
the related Certificate Account or deposited into any other account for purposes
of making payments or distributions to Holders. If no Event of Default has
occurred, the Trustee will be required to perform only those duties specifically
required of it under the applicable Pooling and Servicing Agreement. However,
upon receipt of the various certificates, reports or other instruments required
to be furnished to it, the Trustee will be required to examine them to determine
whether they conform to the requirements of the applicable Pooling and Servicing
Agreement.
The Trustee may resign at any time and the Depositor or the Servicer,
as applicable, may remove the Trustee if the Trustee ceases to be eligible to
continue as such under the applicable Pooling and Servicing Agreement, if the
Trustee becomes insolvent or in such other instances, if any, as are set forth
in the applicable Pooling and Servicing Agreement. Following any resignation or
removal of the Trustee, the Depositor or Servicer, as applicable, will be
obligated to appoint a successor Trustee. Any resignation or removal of the
Trustee and appointment of a successor Trustee does not become effective until
acceptance of the appointment by the successor Trustee.
At any time, for the purpose of meeting any legal requirements of any
jurisdiction in which any part of the Trust Fund or property securing the same
may at the time be located, the Depositor and the Trustee acting jointly shall
have the power and shall execute and deliver all instruments to appoint one or
more Persons approved by the Trustee to act as co-trustee or co-trustees,
jointly with the Trustee, or separate trustee or separate trustees, of all or
any part of the Trust Fund, and to vest in such Person or Persons, in such
capacity, such title to the Trust Fund, or any part thereof, and, subject to the
provisions of the Pooling and Servicing Agreement, such powers, duties,
obligations, rights and trusts as the Depositor and the Trustee may consider
necessary or desirable.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS
The following discussion contains summaries of certain legal aspects
of residential mortgage loans which are general in nature. Because such legal
aspects are governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the Mortgage Loans is situated. The summaries are qualified in
their entirety by reference to the applicable federal and state laws governing
the Mortgage Loans.
In addition, the following discussion also contains a summary of the
Title I Program, which may be applicable to certain of the Mortgage Loans and
Contracts. With respect to each Series for which the related Trust Fund includes
Contracts, the related Prospectus Supplement will contain a discussion of
certain legal aspects of manufactured housing contracts.
GENERAL LEGAL CONSIDERATIONS
Applicable state laws generally regulate interest rates and other
charges that may be assessed on borrowers, require certain disclosures to
borrowers, and may require licensing of the Transferor, the Depositor, the
Trustee, the Administrator, the Servicer and any Subservicer. In addition, most
states have other laws, public policies and general principles of equity
relating to the protection of consumers and the prevention of unfair and
deceptive practices which may apply to the origination, servicing and collection
of the Mortgage Loans.
The Mortgage Loans are also subject to federal laws, including: (i)
the federal Truth-in-Lending Act and Regulation Z promulgated thereunder, which
require certain disclosures to the borrowers regarding the terms of the Mortgage
Loans; (ii) the Real Estate Settlement Procedures Act and Regulation X
promulgated thereunder, which require certain disclosures to the borrowers
regarding the settlement and servicing of the Mortgage Loans; (iii) the Equal
Credit Opportunity Act and Regulation B promulgated thereunder, which prohibit
discrimination on the basis of age, race, color, sex, religion, marital status,
national origin, receipt of public assistance or the exercise of any right under
the Consumer Credit Protection Act; (iv) the Fair Credit Reporting Act, which
regulates the use and reporting of information related to the borrower's credit
experience; (v) the Federal Trade Commission Preservation of Consumers' Claims
and Defenses Rule, 16 C.F.R. Part 433, regarding the preservation of a
consumer's rights; (vi) the Fair Housing Act, 42 U.S.C. 3601 et seq., relating
to the creation and governance of the Title I Program; (vii) the Home Ownership
and Equity Protection Act; and (viii) if applied, the Soldiers' and Sailors'
Civil Relief Act of 1940, as amended (the "Relief Act").
MORTGAGES. The Mortgage Loans will be secured by either deeds of
trust, mortgages, deeds to secure debt or chattel mortgages, depending upon the
prevailing practice in the state in which the Mortgaged Property subject to a
Mortgage Loan is located. In some states, a mortgage creates a lien upon the
real property encumbered by the mortgage. In other states, a mortgage conveys
legal title to the related real property to the related mortgagee subject to a
condition subsequent, i.e., the payment of the indebtedness secured thereby.
There are two parties to a mortgage, the borrower, who is the owner of the real
property and usually the borrower, and the mortgagee, who is the lender. Under
the mortgage instrument, the borrower delivers to the mortgagee a note or bond
and the mortgage. Although a deed of trust is similar to a mortgage, a deed of
trust has three parties, the owner of the real property and usually the
borrower, called the trustor (similar to a borrower), a lender called the
beneficiary (similar to a mortgagee), and a third-party grantee called the
trustee. Under a deed of trust, the borrower grants the property, irrevocably
until the debt is paid, in trust, generally with a power of sale, to the trustee
to secure payment of the obligation. The trustee's authority under a deed of
trust and the mortgagee's authority under a mortgage are governed by applicable
state law, the express provisions of the deed of trust or mortgage, and, in some
cases, with respect to deeds of trust, the directions of the beneficiary. Some
states use a security deed or deed to secure debt which is similar to a deed of
trust except that it has only two parties: a grantor (similar to a borrower) and
a grantee (similar to a mortgagee). Mortgages, deeds of trust and deeds to
secure debt generally are not prior to liens for real estate taxes and
assessments and other charges imposed under governmental police powers. Priority
with respect to mortgages, deeds of trust and deeds to secure debt and other
encumbrances depends on their terms, the knowledge of the parties to such
instrument and generally on the order of recordation of the mortgage, deed of
trust or the deed to secure debt in the appropriate recording office and other
relevant state law.
COOPERATIVE LOANS. Certain of the Mortgage Loans may be Cooperative
Loans. The private, non-profit, cooperative apartment corporation owns all the
real property that comprises the project, including the land, separate dwelling
units and all common areas. The cooperative is directly responsible for project
management and, in most cases, payment of real estate taxes and hazard and
liability insurance. If there is a blanket mortgage on the cooperative apartment
building and/or underlying land, as is generally the case, the cooperative, as
project borrower, is also responsible for meeting these mortgage obligations. A
blanket mortgage is ordinarily incurred by the cooperative in connection with
the construction or purchase of the cooperative's apartment building. The
interest of the occupant under proprietary leases or occupancy agreements to
which that cooperative is a party are generally subordinate to the interest of
the holder of the blanket mortgage in that building. If the cooperative is
unable to meet the payment obligations arising under its blanket mortgage, the
mortgagee holding the blanket mortgage could foreclose on that mortgage and
terminate all subordinate proprietary leases and occupancy agreements. In
addition, the blanket mortgage on a cooperative may provide financing in the
form of a mortgage that does not fully amortize with a significant portion of
principal being due in one lump sum at final maturity. The inability of the
cooperative to refinance this mortgage and its consequent inability to make such
final payment could lead to foreclosure by the mortgagee providing the
financing. A foreclosure in either event by the holder of the blanket mortgage
could eliminate or significantly diminish the value of any collateral held by
the lender who financed the purchase by an individual tenant-stockholder of
cooperative shares or, in the case of a pool of Mortgage Loans including
Cooperative Loans, the collateral securing the Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through ownership
of stock shares or membership certificates in the corporation allocated to
specific units, receive proprietary leases or occupancy agreements which confer
exclusive rights to occupy the related units. Generally, a tenant-stockholder of
a cooperative must make a monthly payment to the cooperative representing such
tenant-stockholder's pro rata share of the cooperative's payments for its
blanket mortgage, real property taxes, maintenance expenses and other capital or
ordinary expenses. An ownership interest in a cooperative and accompanying
occupancy rights is financed through a cooperative share loan evidenced by a
promissory note and secured by a security interest in the occupancy agreement or
proprietary lease and in the related cooperative shares. The lender takes
possession of the share certificate and a counterpart of the proprietary lease
or occupancy agreement and a financing statement covering the proprietary lease
or occupancy agreement and the cooperative shares is filed in the appropriate
state and local offices to perfect the lender's interest in its collateral.
Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in the
security agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of cooperative shares.
FORECLOSURE
MORTGAGES. Foreclosure of a mortgage is generally accomplished by
judicial action. Generally, the action is initiated by the service of legal
pleadings upon all parties having an interest of record in the real property.
Delays in completion of the foreclosure may occasionally result from
difficulties in locating necessary parties defendant. Judicial foreclosure
proceedings are often not contested by any of the defendant parties. However,
when a mortgagee's right to foreclose is contested, the legal proceedings
necessary to resolve the issue can be time consuming. After the completion of a
judicial foreclosure, the court generally issues a judgment of foreclosure and
appoints a referee or other court officer to conduct the sale of the property.
An action to foreclose a mortgage is an action to recover the mortgage
debt by enforcing the mortgagee's rights under the mortgage. Foreclosure is
regulated by statutes and rules and is subject to the court's equitable powers.
Generally, a borrower is bound by the terms of the mortgage note and the
mortgage as made and cannot be relieved from his default if the mortgagee has
exercised his rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature the court may exercise
equitable powers to relieve a borrower of a default and deny the mortgagee
foreclosure on proof that either the borrower's default was neither willful nor
in bad faith or the mortgagee's action established a waiver, fraud, bad faith or
oppressive or unconscionable conduct such as to warrant a court of equity to
refuse affirmative relief to the mortgagee. Under certain circumstances a court
of equity may relieve a borrower from an entirely technical default where such
default was not willful.
A foreclosure action is subject to most of the delays and expenses of
other lawsuits if defenses or counterclaims are interposed, sometimes requiring
up to several years to complete. Moreover, a non-collusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of the
parties' intent, if a court determines that the sale was for less than
reasonably equivalent value and such sale occurred while the borrower was
insolvent and within one year (or within the state statute of limitations if the
trustee in bankruptcy elects to proceed under state fraudulent conveyance law)
of the filing of bankruptcy. Similarly, a suit against the debtor on the
mortgage note may take several years and, generally, is a remedy alternative to
foreclosure, the mortgagee being precluded from pursuing both at the same time.
In some states, mortgages may also be foreclosed by advertisement
pursuant to a power of sale provided in the mortgage. Foreclosure of a mortgage
by advertisement is essentially similar to foreclosure of a deed of trust by
nonjudicial power of sale.
Foreclosure of a deed of trust or a deed to secure debt is generally
accomplished by a non-judicial trustee's sale under a specific provision in the
deed of trust or deed to secure debt which authorizes the trustee to sell the
property upon default by the borrower under the terms of the note, deed of trust
or deed to secure debt. In some states, prior to such sale, the trustee must
record a notice of default and send a copy to the borrower-trustor and to any
person who has recorded a request for a copy of a notice of default and notice
of sale. In addition, in some states, prior to such sale, the trustee must
provide notice to any other individual having an interest of record in the real
property, including any junior lienholders. In some states, the borrower, or any
other person having a junior encumbrance on the real estate, may, during a
reinstatement period, cure the default by paying the entire amount in arrears
plus the costs and expenses incurred in enforcing the obligations, including
attorney's and trustee's fees to the extent allowed by applicable law. Certain
states may require notices of sale to be published periodically for a prescribed
period in a specified manner prior to the date of the trustee's sale. In
addition, some state laws require that a copy of the notice of sale be posted on
the property and sent to all parties having an interest in the real property. In
certain states, foreclosure under a deed of trust may also be accomplished by
judicial action in the manner provided for foreclosure of mortgages.
In case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is generally a
public sale. Because of the difficulty a potential buyer at the sale might have
in determining the exact status of title and because the physical condition of
the property may have deteriorated during the foreclosure proceedings, a third
party may be unwilling to purchase the property at a foreclosure sale. For these
and other reasons, it is common for the lender to purchase the property from the
trustee, referee or other court officer for an amount equal to the principal
amount of the indebtedness secured by the mortgage or deed of trust, plus
accrued and unpaid interest and the expenses of foreclosure. Generally, state
law controls the amount of foreclosure costs and expenses, including attorneys'
and trustee's fees, which may be recovered by a lender. In some states there is
a statutory minimum purchase price which the lender may offer for the property.
Thereafter, subject to the right of the borrower in some states to remain in
possession during the redemption period, the lender will assume ownership of the
mortgaged property and, therefore, the burdens of ownership, including the
obligation to pay taxes, obtain casualty insurance and to make such repairs at
its own expense as are necessary to render the property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Any loss may be mitigated by the
receipt of any mortgage insurance proceeds.
A second mortgagee may not foreclose on the property securing a second
mortgage unless it forecloses subject to the first mortgage and any other prior
liens, in which case it must either pay the entire amount due on the first
mortgage and such other liens, prior to or at the time of the foreclosure sale
or undertake the obligation to make payments on the first mortgage and such
liens, in either event adding the amounts expended to the balance due on the
second loan, and may be subrogated to the rights of the first mortgagee. In
addition, in the event that the foreclosure of a second mortgage triggers the
enforcement of a "due-on-sale" clause, the second mortgagee may be required to
pay the full amount of the first mortgage to the first mortgagee. Accordingly,
with respect to those Mortgage Loans which are second mortgage loans, if the
lender purchases the property, the lender's title will be subject to all senior
liens and claims and certain governmental liens.
The proceeds received by the referee or trustee from the sale are
applied first to the costs, fees and expenses of sale and then in satisfaction
of the indebtedness secured by the mortgage or deed of trust under which the
sale was conducted. Any remaining proceeds are generally payable to the holders
of junior mortgages or deeds of trust and other liens and claims in order of
their priority, whether or not the borrower is in default. Any additional
proceeds are generally payable to the borrower or trustor. The payment of the
proceeds to the holders of junior mortgages may occur in the foreclosure action
of the senior mortgagee; however, a junior lienholder whose rights in the
property are terminated pursuant to foreclosure by a senior lienholder will not
share in the proceeds from the subsequent disposition of the property. Junior
lienholders may also institute legal proceedings separate from the foreclosure
proceedings of the senior lienholders.
With respect to any Series for which a REMIC election is made, the
REMIC provisions of the Code and the Pooling and Servicing Agreement may require
the Servicer to hire an independent contractor to operate any REO Property. The
costs of such operation may be significantly greater than the cost of direct
operation by the Servicer.
Some states impose prohibitions or limitations on remedies available
to the mortgagee, including the right to recover the debt from the borrower. See
"Certain Legal Aspects of the Mortgage Assets--Foreclosure--Anti-Deficiency
Legislation and Other Limitations on Lenders below".
COOPERATIVE LOANS. The cooperative shares owned by the
tenant-stockholder and pledged to the lender are, in almost all cases, subject
to restrictions on transfer as set forth in the cooperative's Certificate of
Incorporation and Bylaws, as well as the proprietary lease or occupancy
agreement, and may be canceled by the cooperative for failure by the
tenant-stockholder to pay rent or other obligations or charges owned by such
tenant-stockholder, including mechanics' liens against the cooperative apartment
building incurred by such tenant-stockholder. The proprietary lease or occupancy
agreement generally permits the cooperative to terminate such lease or agreement
in the event a borrower fails to make payments or defaults in the performance of
covenants required thereunder. Typically, the lender and the cooperative enter
into a recognition agreement which establishes the rights and obligations of
both parties in the event of a default by the tenant-stockholder on its
obligations under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from a sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the cooperative loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure
on a cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the cooperative shares is accomplished
by a sale in accordance with the provisions of Article 9 of the Uniform
Commercial Code (the "UCC") and the security agreement relating to those shares.
Article 9 of the UCC requires that a sale be conducted in a "commercially
reasonable" manner. Whether a foreclosure sale has been conducted in a
"commercially reasonable" manner will depend on the facts in each case. In
determining commercial reasonableness, a court will look to the notice given the
debtor and the method, manner, time, place and terms of the foreclosure.
Generally, a sale conducted according to the usual practice of banks selling
similar collateral will be considered reasonably conducted. Article 9 of the UCC
provides that the proceeds of the sale will be applied first to pay the costs
and expenses of the sale and then to satisfy the indebtedness secured by the
lender's security interest. The recognition agreement, however, generally
provides that the lender's right to reimbursement is subject to the right of the
cooperative corporation to receive sums due under the proprietary lease or
occupancy agreement. If there are proceeds remaining, the lender must account to
the tenant-stockholder for the surplus. Conversely, if a portion of the
indebtedness remains unpaid, the tenant-stockholder is generally responsible for
the deficiency. See "--Foreclosure--Anti-Deficiency Legislation and Other
Limitations on Lenders" below.
JUNIOR LIENS. Certain of the Mortgage Loans, including the Title I
Mortgage Loans, may be secured by junior lien mortgages or deeds of trust (i.e.,
second mortgages). Second mortgages or deeds of trust are generally junior to
first mortgages or deeds of trust held by other lenders, and third mortgages or
deeds of trust are generally junior to first and second mortgages or deeds of
trust held by other lenders, and so forth. The rights of the Certificateholders
as the holders of a junior deed of trust or a junior mortgage, are subordinate
in lien and in payment to those of the holder of the senior mortgage or deed of
trust, including the prior rights of the senior mortgagee or beneficiary to
receive and apply hazard insurance and condemnation proceeds and, upon default
of the related borrower, to cause a foreclosure on the related property. Upon
completion of the foreclosure proceedings by the holder of the senior mortgage,
the junior mortgagee's or junior beneficiary's lien will be extinguished unless
the junior mortgagee satisfies the defaulted senior loan or asserts its
subordinate interest in a property in foreclosure proceedings. A junior
mortgagee or beneficiary in some states may satisfy a defaulted senior lien in
full and in some states may cure such default and bring the senior loan current,
in either event, adding the amounts expended to the balance due on the junior
loan. In most states, absent a provision in the mortgage or deed of trust to the
contrary, no notice of default is required to be given to a junior mortgagee or
beneficiary.
Furthermore, the terms of a junior mortgage or deed of trust are
subordinate to the terms of the senior mortgage or deed of trust. In the event
of a conflict between the terms of the senior mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the senior mortgage or deed of
trust will generally govern. Upon a failure of the borrower or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the right to perform
the obligation itself. Generally, all sums so expended by the senior mortgagee
or beneficiary become part of the indebtedness secured by the senior mortgage or
deed of trust. To the extent a senior mortgagee expends such sums, such sums
will generally have priority over all sums due under the junior mortgage.
RIGHT OF REDEMPTION. The purposes of a foreclosure action are to
enable the mortgagee to realize upon its security and to bar the borrower, and
all persons who have an interest in the property which is subordinate to the
foreclosing mortgagee, from their "equity of redemption." The doctrine of equity
of redemption provides that, until the property covered by a mortgage has been
sold in accordance with a properly conducted foreclosure and foreclosure sale,
those having an interest which is subordinate to that of the foreclosing
mortgagee have an equity of redemption and may redeem the property by paying the
entire debt with interest. In addition, in some states, when a foreclosure
action has been commenced, the redeeming party must pay certain costs of such
action. Those having an equity of redemption must generally be made parties and
duly summoned to the foreclosure action in order for their equity of redemption
to be barred.
The equity of redemption which is a non-statutory right that must be
exercised prior to foreclosure sale should be distinguished from statutory
rights of redemption. In some states, after sale pursuant to a deed of trust or
foreclosure of a mortgage, the borrower and foreclosed junior lienors are given
a statutory period in which to redeem the property from the foreclosure sale. In
some states, statutory redemption may occur only upon payment of the foreclosure
sale price. In other states, redemption may be authorized if the former borrower
pays only a portion of the sums due. The effect of a statutory right of
redemption is to diminish the ability of the lender to sell the foreclosed
property. The exercise of a right of redemption would defeat the title of any
purchaser subsequent to foreclosure or sale under a deed of trust. Consequently,
the practical effect of the redemption right is to force the lender to maintain
the property and pay the expenses of ownership until the redemption period has
expired.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS. Certain
states have imposed statutory prohibitions that limit the remedies of a
beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the net amount realized
upon the public sale of the real property and the amount due to the lender.
Other statutes require the beneficiary or mortgagee to exhaust the security
afforded under a deed of trust or mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the borrower. In
certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. Consequently, the
practical effect of the election requirement, in those states permitting such
election, is that lenders will usually proceed against the security first rather
than bringing a personal action against the borrower. Finally, other statutory
provisions limit any deficiency judgment against the former borrower following a
judicial sale to the excess of the outstanding debt over the fair market value
of the property at the time of the public sale. The purpose of these statutes is
generally to prevent a beneficiary or a mortgagee from obtaining a large
deficiency judgment against the former borrower as a result of low or no bids at
the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including the federal bankruptcy laws, the
Relief Act and state laws affording relief to debtors, may interfere with or
affect the ability of the secured mortgage lender to realize upon collateral
and/or enforce a deficiency judgment. For example, with respect to federal
bankruptcy law, a court with federal bankruptcy jurisdiction may permit a debtor
through his or her Chapter 11 or Chapter 13 rehabilitative plan to cure a
monetary default in respect of a mortgage loan on a debtor's residence by paying
arrearages within a reasonable time period and reinstating the original mortgage
loan payment schedule even though the lender accelerated the mortgage loan and
final judgment of foreclosure had been entered in state court (provided no sale
of the residence had yet occurred) prior to the filing of the debtor's petition.
Some courts with federal bankruptcy jurisdiction have approved plans, based on
the particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that
the terms of a mortgage loan secured by property of the debtor may be modified.
These courts have suggested that such modifications may include reducing the
amount of each monthly payment, changing the rate of interest, altering the
repayment schedule or forgiving all or a portion of the debt. Additionally, a
federal bankruptcy court in a Chapter 11 bankruptcy case may be able to reduce
the lender's security interest to the value of the residence, thus leaving the
lender a general unsecured creditor for the difference between the value of the
residence and the outstanding balance of the loan; however, the United States
Supreme Court has recently eliminated such a risk in Chapter 7 and Chapter 13
bankruptcy cases.
The Internal Revenue Code of 1986, as amended provides priority to
certain tax liens over the lien of a mortgage or deed of trust. In addition,
substantive requirements are imposed upon lenders in connection with the
origination and the servicing of mortgage loans by numerous federal and some
state consumer protection laws. These laws include the federal Truth-in-Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act, and related statutes and
regulations. These federal laws impose specific statutory liabilities upon
lenders who originate mortgage loans and who fail to comply with the provisions
of the applicable laws. In some cases, this liability may affect assignees of
the Mortgage Loans.
ENFORCEABILITY OF CERTAIN PROVISIONS. Certain of the Mortgage Loans
will contain a debt-acceleration clause, which permits the lender to accelerate
the debt upon a monetary default of the borrower, after the applicable cure
period. Courts will generally enforce clauses providing for acceleration in the
event of a material payment default. However, courts, exercising equity
jurisdiction, may refuse to allow a lender to foreclose a mortgage or deed of
trust when an acceleration of the indebtedness would be inequitable or unjust
and the circumstances would render the acceleration unconscionable.
Some courts have imposed general equitable principles to limit the
remedies available in connection with foreclosure. These equitable principles
are generally designed to relieve the borrower from the legal effect of his
defaults under the loan documents. For example, some courts have required that
the lender undertake affirmative and expensive actions to determine the causes
for the borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lenders' judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right of
lenders to foreclose if the default under the mortgage instrument or deed of
trust is not monetary, such as the borrower's failure to adequately maintain the
property or the borrower's execution of a second mortgage or deed of trust
affecting the property. The exercise by the court of its equity powers will
depend on the individual circumstances of each case. Finally, some courts have
been faced with the issue of whether federal or state constitutional provisions
reflecting due process concerns for adequate notice require that borrowers under
deeds of trust receive notices in addition to those prescribed statutorily. For
the most part, these cases have upheld the statutory notice provisions as being
reasonable or have found that the sale by a trustee under a deed of trust or
under a mortgage having a power of sale does not involve sufficient state action
to afford constitutional protection to the borrower.
Some of the Mortgage Loans may not restrict secondary financing,
thereby permitting the borrower to use the Mortgaged Property as security for
one or more additional loans. Where the borrower encumbers the Mortgaged
Property with one or more junior liens, the senior lender is subjected to
additional risk. First, the borrower may have difficulty servicing and repaying
multiple loans. Second, acts of the senior lender which prejudice the junior
lender or impair the junior lender's security may create a superior equity in
favor of the junior lender. For example, if the borrower and the senior lender
agree to an increase in the principal amount of or the interest rate payable on
the senior loan, the senior lender may lose its priority to the extent any
existing junior lender is harmed or the borrower is additionally burdened.
Third, if the borrower defaults on the senior loan and/or any junior loan or
loans, the existence of junior loans and actions taken by junior lenders can
impair the security available to the senior lender and can interfere with or
delay the taking of action by the senior lender. The bankruptcy of a junior
lender may operate to stay foreclosure or similar proceedings by the senior
lender.
Forms of notes, mortgages and deeds of trust used by lenders may
contain provisions obligating the borrower to pay a late charge if payments are
not timely made. In certain states, there are or may be specific limitations
upon the late charges which a lender may collect from a borrower for delinquent
payments. Late charges are typically retained by servicers as additional
servicing compensation.
A portion of the Mortgage Loans contain "due-on-sale" clauses. These
clauses permit the lender to accelerate the maturity of the loan if the borrower
sells, transfers or coveys the property. The enforceability of these clauses has
been the subject of legislation or litigation in many states, and in some cases
the enforceability of these clauses was limited or denied. However, the Garn-St.
Germain Depository Institutions Act of 1982 (the "Garn-St. Germain Act")
preempts state constitutional, statutory and case law that prohibits the
enforcement of due-on-sale clauses and permits lenders to enforce these clauses
in accordance with their terms, subject to certain limited exceptions. The
Garn-St. Germain Act does "encourage" lenders to permit assumption of loans at
the original rate of interest or at some other rate less than the average of the
original rate and the market rate.
Exempted from the general rule of enforceability of due-on-sale
clauses were mortgage loans (originated other than by federal savings and loan
associations and federal savings banks) that were made or assumed during the
period beginning on the date a state, by statute or final appellate court
decision having statewide effect, prohibited the exercise of due-on-sale clauses
and ending on October 15, 1982 ("Window Period Loans"). However, this exception
applied only to transfers of property underlying Window Period Loans occurring
between October 15, 1982 and October 15, 1985 and does not restrict enforcement
of a due-on-sale clause in connection with current transfers of property
underlying Window Period Loans. Due-on-sale clauses contained in mortgage loans
originated by federal savings and loan associations or federal savings banks are
fully enforceable pursuant to regulations of the Office of Thrift Supervision
(the "OTS"), as successor to the Federal Home Loan Bank Board which preempt
state law restrictions on the enforcement of due-on-sale clauses.
The Garn-St. Germain Act also sets forth nine instances in which a
mortgage lender covered by the Garn-St. Germain Act may not exercise a
due-on-sale clause, notwithstanding the fact that transfer of the property may
have occurred. These include intrafamily transfers, certain transfers by
operation of law, leases of fewer than three years and the creation of a junior
encumbrance. The Garn-St. Germain Act also grants the Director of the Office of
Thrift Supervision (successor to the Federal Home Loan Bank Board) authority to
prescribe by regulation further instances in which a due-on-sale clause may not
be exercised upon the transfer of the property. To date no such regulations have
been issued. Regulations promulgated under the Garn-St. Germain Act also
prohibit the imposition of a prepayment penalty upon the acceleration of a loan
pursuant to a "due-on-sale" clause.
If interest rates were to rise above the interest rates on the
Mortgage Loans, then any inability of the Servicer or the subservicer to enforce
due-on-sale clauses may result in the Trust Fund containing a greater number of
Mortgage Loans bearing below-market interest rates than would otherwise be the
case, since a transferee of the property underlying a Mortgage Loan would have a
greater incentive in such circumstances to assume the seller's Mortgage Loan.
Any inability to enforce due-on-sale clauses may affect the average life of the
Mortgage Loans and the number of Mortgage Loans that may be outstanding until
maturity.
Upon foreclosure, courts have imposed general equitable principles.
These equitable principles are generally designed to relieve the borrower from
the legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include requirements that the lender undertake
affirmative and expensive actions to determine the causes for the borrower's
default and the likelihood that the borrower will be able to reinstate the loan.
In some cases, courts have substituted their judgment for the lender's judgment
and have required that lenders reinstate loans or recast payment schedules in
order to accommodate borrowers who are suffering from temporary financial
disability. In other cases, courts have limited the right of the lender to
foreclose if the default under the mortgage instrument is not monetary, such as
the borrower failing to adequately maintain the property or the borrower
executing a second mortgage or deed of trust affecting the property. Finally,
some courts have been faced with the issue of whether or not federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that borrowers under deeds of trust or mortgages receive notices in
addition to the statutorily-prescribed minimum. For the most part, these cases
have upheld the notice provisions as being reasonable or have found that the
sale by a trustee under a deed of trust, or under a mortgage having a power of
sale, does not involve sufficient state action to afford constitutional
protections to the borrower.
ADJUSTABLE RATE LOANS. The laws of certain states may provide that
mortgage notes relating to adjustable rate loans are not negotiable instruments
under the Uniform Commercial Code. In such event, the Trustee will not be deemed
to be a "holder in due course" within the meaning of the Uniform Commercial Code
and may take such a mortgage note subject to certain restrictions on its ability
to foreclose and to certain contractual defenses available to a borrower.
ENVIRONMENTAL LEGISLATION. Certain states impose a statutory lien for
associated costs on property that is the subject of a cleanup action by the
state on account of hazardous wastes or hazardous substances released or
disposed of on the property. Such a lien will generally have priority over all
subsequent liens on the property and, in certain of these states, will have
priority over prior recorded liens including the lien of a mortgage. In
addition, under federal environmental legislation and under state law in a
number of states, a secured party which takes a deed in lieu of foreclosure or
acquires a mortgaged property at a foreclosure sale or assumes active control
over the operation or management of a property so as to be deemed an "owner" or
"operator" of the property may be liable for the costs of cleaning up a
contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a secured lender (such as a Certificate
Trustee, a PMBS Trustee, or a Trust Fund) to homeowners. In the event that title
to a property securing a Mortgage Loan in a pool of Mortgage Loans was acquired
by a Certificate Trustee, a PMBS Trustee, or a Trust Fund and cleanup costs were
incurred in respect of the property, the Holders of the related Certificates
might realize a loss if such costs were required to be paid. In addition, the
presence of certain environmental contamination, including, but not limited to,
lead-based paint, asbestos and leaking underground storage tanks could result in
the holders of the related Certificates realizing a loss if associated costs
were required to be paid. The Depositor, the Administrator, the Underwriters,
the Transferors, the Servicers, and any of their respective affiliates (i) have
not caused any environmental site assessments or evaluations to be conducted
with respect to any properties securing the Mortgage Loans, (ii) are not
required to make any such assessments or evaluations and (iii) make no
representations or warranties and assume no liability with respect to the
absence or effect of hazardous wastes or hazardous substances on any property or
any casualty resulting from the presence or effect of hazardous wastes or
hazardous substances.
TRUTH IN LENDING ACT
In September 1994, the Reigle Community Development and Regulatory
Improvement Act of 1994 (the "Reigle Act") was enacted which incorporates the
Home Ownership and Equity Protection Act of 1994, and which adds certain
additional provisions to Regulation Z, the implementing regulation of the
Truth-in-Lending Act ("TILA"). These provisions impose additional disclosure and
other requirements on creditors with respect to non-purchase money mortgage
loans with high interest rates or high up-front fees and charges ("covered
loans"). In general, mortgage loans within the purview of the Reigle Act have
annual percentage rates over 10% greater than the yield on Treasury Securities
of comparable maturity and/or fees and points which exceed the greater of 8% of
the total loan amount or $400. The provisions of the Reigle Act apply on a
mandatory basis to all mortgage loans originated on or after October 1, 1995.
These provisions can impose specific statutory liabilities upon creditors who
fail to comply with their provisions and may affect the enforceability of the
related loans. In addition, any assignee of a creditor would generally be
subject to all claims and defenses that the consumer could assert against the
creditor, including, without limitation, the right to rescind the mortgage loan.
A substantial majority of the loans originated or purchased by the Transferor
are covered by the Reigle Act.
The Reigle Act provisions impose additional disclosure requirements on
lenders originating covered loans and prohibit lenders from originating covered
loans that are underwritten solely on the basis of the borrower's home equity
without regard to the borrower's ability to repay the loan. The Transferor
believes that only a small portion of its loans originated in fiscal 1994 and
fiscal 1995 are of the type that, unless modified, would be prohibited by the
Reigle Act. As a result of the Reigle Act provisions, with respect to all
covered loans, the Transferor applies loan underwriting criteria that take into
consideration the borrower's ability to repay.
The Reigle Act provisions also prohibit lenders from including
prepayment fee clauses in covered loans to borrowers with debt-to-income ratios
in excess of 50% or covered loans used to refinance existing loans originated by
the same lender. The Transferor reported immaterial amounts of prepayment fee
revenues in fiscal 1993, 1994 and 1995, respectively. The Transferor will
continue to collect prepayment fees on loans originated prior to effectiveness
of the Reigle Act provisions and on non-covered loans, as well as on covered
loans in permitted circumstances following the effectiveness of the Reigle Act
provisions. The Reigle Act provisions impose other restrictions on covered
loans, including restrictions on balloon payments and negative amortization
features, which the Transferor does not believe will have a material effect on
its operations.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V"), provides that state
usury limitations shall not apply to certain types of home improvement first
mortgage loans originated by certain lenders after March 31, 1980. A similar
federal statute was in effect with respect to mortgage loans made during the
first three months of 1980. The Office of Thrift Supervision is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized any state to reimpose interest
rate limits by adopting, before April 1, 1983, a law or constitutional provision
which expressly rejects application of the federal law. In addition, even where
Title V is not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on mortgage loans covered by
Title V. Certain states have taken action to reimpose interest rate limits
and/or to limit discount points or other charges.
A similar federal statute, adopted in 1976, provides federal usury
preemption with respect to Title I Mortgage Loans, such as the Title I Mortgage
Loans. This statute also permits states to reimpose interest rate limits by
passing legislation at any time after June 30, 1976. To date, no state has
enacted any reported statute to reimpose interest rate limits with respect to
any loans, mortgage or advance that is insured under Title I.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended (the "Relief Act"), a borrower who enters military
service after the origination of such borrower's Mortgage Loan (including a
borrower who is a member of the National Guard or is in reserve status at the
time of the origination of the Mortgage Loan and is later called to active duty)
may not be charged interest above an annual rate of 6% during the period of such
borrower's active duty status, unless a court orders otherwise upon application
of the lender. It is possible that such interest rate limitation or similar
limitations under state law could have an effect, for an indeterminate period of
time, on the ability of the Servicer or the subservicer to collect full amounts
of interest on certain of the Mortgage Loans. Any shortfall in interest
collections resulting from the application of the Relief Act or similar
legislation, which would not be recoverable from the related Mortgage Loans,
would result in a reduction of the amounts available for distribution to the
holders of the Offered Certificates, but the Offered Certificates would receive
the full amount otherwise distributable to such holders to the extent that
amounts are available from the credit enhancement provided for the Offered
Certificates. See "Risk Factors--Limitations of Credit Enhancement" herein. In
addition, the Relief Act imposes limitations which would impair the ability of
the Servicer or subservicer to foreclose on an affected Mortgage Loan during the
borrower's period of active duty status. Thus, in the event that such a Mortgage
Loan goes into default there may be delays and losses occasioned by the
inability to realize upon the related Mortgaged Property in a timely fashion.
THE TITLE I PROGRAM
GENERAL. Sections 1 and 2(a) of the National Housing Act of 1934, as
amended (the "Act"), authorize the creation of the Federal Housing
Administration (which is an agency within the Untied States Department of
Housing and Urban Development; such agency and department are referred to
together herein as the "FHA") and the Title I Program. Certain of the Mortgage
Loans or Contracts contained in a Trust Fund may be loans insured under the
Title I Program. FHA Regulations contain the requirements under which approved
Title I Lenders may obtain insurance against a portion of losses incurred with
respect to eligible loans that have been originated and serviced in accordance
with FHA Regulations, up to the amount of such Title I Lender's FHA Reserve, as
described below, and subject to the terms and conditions established under the
Act and FHA Regulations. While FHA Regulations permit the Secretary of HUD,
subject to statutory limitations, to waive a Title I Lender's noncompliance with
FHA Regulations if enforcement would impose an injustice on the lender (provided
the Title I Lender has acted in good faith, is in substantial compliance with
FHA Regulations and has credited the borrower for any excess charges), in
general, an insurance claim against the FHA will be denied if the Title I loan
to which it relates does not strictly satisfy the requirements of the Act and
FHA Regulations.
Unlike certain other government loan insurance programs, loans under
the Title I Program (other than loans in excess of $25,000) are not subject to
prior review by the FHA. Under the Title I Program, the FHA disburses insurance
proceeds with respect to defaulted loans for which insurance claims have been
filed by a Title I Lender prior to any review of such loans. A Title I Lender is
required to repurchase a Title I loan from the FHA that is determined to be
ineligible for insurance after insurance claim payments for such loan have been
paid to such lender. Under the FHA Regulations, if the Title I Lender's
obligation to repurchase the Title I loan is unsatisfied, the FHA is permitted
to offset the unsatisfied obligation against future insurance claim payments
owed by the FHA to such lender. FHA Regulations permit the FHA to disallow an
insurance claim with respect to any loan that does not qualify for insurance for
a period of up to two years after the claim is made and to require the Title I
Lender that has submitted the insurance claim to repurchase the loan. Pursuant
to a letter ruling issued by the FHA in October 1994, the FHA has stated that,
as a policy, the FHA will strive to review all insurance claim submissions in a
timely manner and limit the period of time within which it will request the
repurchase of a loan to a period of one year after claim submission. The letter
further states, however, that the FHA may find it necessary with respect to some
claim submissions to apply the foregoing two-year incontestability provision
strictly.
The proceeds of loans under the Title I Program may be used only for
permitted purposes, including, but not limited to, the alteration, repair or
improvement of residential property, the purchase of a manufactured home or lot
(or cooperative interest therein) on which to place such home or the purchase of
both a manufactured home loan and the lot (or cooperative interest therein) on
which such home is placed. Title I Program loans may be made directly to the
owners of the property to be improved or purchased ("direct loans") or with the
assistance of a dealer or home improvement contractor that will have an interest
in the proceeds of the loan ("dealer loans").
Subject to certain limitations described below, eligible Title I loans
are insured by the FHA for 90% of an amount equal to the sum of (i) the net
unpaid principal amount and the uncollected interest earned to the date of
default, (ii) interest on the unpaid loan obligation from the date of default to
the date of the initial submission of the insurance claim, plus 15 calendar days
(the total period not to exceed nine months) at a rate of 7% per annum, (iii)
uncollected court costs, (iv) title examination costs, (v) fees for required
inspections by the lenders or its agents, up to $75, and (vi) effective July 5,
1995, origination fees up to a maximum of 5% of the loan amount. However, the
insurance coverage provided by the FHA is limited to the extent of the balance
in the Title I Lender's FHA Reserve maintained by the FHA. Accordingly if
sufficient insurance coverage is available in such FHA Reserve, then the Title I
Lender bears the risk of losses on a Title I loan for which a claim for
reimbursement is paid by the FHA of at least 10% of the unpaid principal,
uncollected interest earned to the date of default, interest from the date of
default to the date of the initial claim submission and certain expenses.
Under the Title I Program, the FHA maintains an FHA insurance coverage
reserve account (a "FHA Reserve") for each Title I Lender. The amount in each
Title I Lender's FHA Reserve is a maximum of 10% of the amounts disbursed,
advanced or expended by a Title I Lender in originating or purchasing eligible
loans registered with the FHA for Title I Insurance, with certain adjustments
permitted or required by FHA Regulations. The balance of such FHA Reserve is the
maximum amount of insurance claims the FHA is required to pay to the related
Title I Lender. Mortgage loans to be insured under the Title I Program will be
registered for insurance by the FHA, and the increase in Title I insurance
coverage to which the Title I Lender is entitled by reason of the reporting of
such loans under the Title I Lender's contract of insurance will be included in
the FHA Reserve for the originating Title I Lender following the receipt and
acknowledgment by the FHA of a transfer of note report on the prescribed form
(the "Transfer Report") pursuant to FHA Regulations.
Under the Title I Program the FHA will reduce the insurance coverage
available in a Title I Lender's FHA Reserve with the respect to loans insured
under such Title I Lender's contract of insurance by (i) the amount of FHA
Insurance claims approved for payment related to such loans, (ii) prior to
October 1, 1995, after a Title I Lender has held its Title I contract of
insurance for five years, the amount of the annual reduction (the "Annual
Reduction") equal to 10% of the amount of insurance coverage contained in the
related FHA Reserve as of that date, and (iii) the amount of reduction of the
Title I Lender's FHA Reserve by reason of the sale, assignment or transfer of
loans registered under the Title I Lender's contract of insurance. Such
insurance coverage also may be reduced for any FHA insurance claims previously
disbursed to the Title I Lender that are subsequently rejected by the FHA. On
June 5, 1995, the FHA announced the elimination of Annual Reductions, effective
as of October 1, 1995.
Upon the receipt and acknowledgment by the FHA of a Transfer Report,
originations of new loans will increase a Title I Lender's insurance coverage
reserve account balance by 10% of the amount disbursed, advanced or expended in
originating such loans registered with the FHA for insurance under the Title I
Program. A Title I Lender is permitted to sell or otherwise transfer loans
reported for insurance under the Title I Program only to another Title I Lender.
Upon any such transfer, except a transfer with recourse or under a guaranty or
repurchase Agreement, the seller is required to file a Transfer Report with the
FHA reporting the transfer of such loans. Upon notification and approval of such
transfer, the FHA Reserve of the selling Title I Lender is reduced, and the FHA
Reserve of the purchasing Title I Lender is increased, by an amount equal to the
lesser of 10% of the actual purchase price of the loans or the net unpaid
principal balance of the loans, up to the total amount of the selling Title I
Lender's FHA Reserve. Thus, in the event the selling Title I Lender's FHA
Reserve was less than 10% of the unpaid principal balance of its portfolio of
loans reported for insurance under the Title I Program prior to the sale, the
seller's FHA Reserve may be exhausted as the result of a sale of only a portion
of its total portfolio, with the result that its remaining Title I Program
portfolio may be ineligible for Title I Program benefits until the lender
originates or otherwise acquires additional loans reported for insurance under
the Title I Program. Accordingly, the insurance coverage reserves transferred to
the purchasing Title I Lender in such case will be less than 10% of the lesser
of the purchase price or the principal balance of the portfolio of loans
purchased, which may be the case with respect to the Transferor's purchase of
certain Title I Mortgage Loans and Title I Contracts from certain Title I
lenders and the transfer of the related insurance coverage from such lenders'
FHA Reserves. Additionally, pursuant to FHA Regulations, not more than $5,000 in
insurance coverage shall be transferred to or from a Title I Lender's insurance
coverage reserve account during any October 1 to September 30 fiscal year
without the approval of the Secretary of HUD. Such HUD approval is generally
viewed as automatic, provided the formal requirements for transfer are
satisfied, but HUD does have the right under FHA Regulations to withhold
approval.
Unlike most other FHA insurance programs, the obligation of the FHA to
reimburse a Title I Lender for losses in the portfolio of insured loans held by
such Title I Lender is limited to the amount in an FHA Reserve maintained on a
lender-by-lender basis and not on a loan-by-loan basis. Except when to do so
would be in HUD's best interest, the FHA does not track or "earmark" the loans
within a Title I Lender's portfolio to determine whether a reduction in such
lender's FHA Reserve as the result of an insurance claim by such lender are, in
fact, attributable to the insured loan with respect to which the claim was made.
For this reason, if a Title I Lender is holding insured loans as a fiduciary on
behalf of multiple non-affiliated beneficiaries, in order for such a lender to
cause its FHA Reserve to be reduced only by an amount to which a particular
beneficiary is entitled by reason of the insured loans beneficially held by it,
the Title I Lender must segregate or "earmark" its FHA Reserve on its own books
and records according to which beneficiary is entitled to what portion of the
insurance coverage in the Title I Lender's FHA Reserve as if the insurance
coverage were not commingled by the FHA in such FHA Reserve. If such Title I
Lender continues to submit claims with respect to loans held on behalf of a
beneficiary whose portion of insurance coverage in its FHA Reserve has been
exhausted, the FHA will continue to honor such claims until all insurance
coverage in such Title I Lender's FHA Reserve has been exhausted, even though
such FHA Reserve may, in fact, be held by the Title I Lender for the benefit of
a different beneficiary than the beneficiary of the insured loans to which the
claims relate under a separate contractual agreement. In addition, under certain
FHA administrative offset regulations, the FHA may offset an unsatisfied
obligation of a Title I Lender to repurchase loans that are determined to be
ineligible for insurance against future insurance claim payments owed by the FHA
to such lender. In the case of the related Trust Fund, if the Trustee were to
hold loans insured under the Depositor's FHA Reserve on behalf of another trust
fund, the FHA were to determine that insurance claims were paid in respect of
loans ineligible for insurance that related to such other trust fund and the
Trustee, on behalf of such other trust fund, was unable or otherwise failed to
repurchase the ineligible loans, then the FHA could offset the amount of the
repurchase obligation against insurance proceeds payable with respect to one or
more Title I Mortgage Loans or Title I Contract included in the related Trust
Fund. If the Trustee were unable to recover the amount of such offset from the
other trust fund, the Trust Fund could experience a loss as a result.
Accordingly, claims paid to the Trustee (or the Administrator, if any)
by the FHA with respect to Title I loans insured under the Depositor's FHA
Reserve other than the Title I Mortgage Loans and Title I Contracts may reduce
the FHA Insurance Amount. In the Pooling and Servicing Agreement, the Depositor
and the Trustee (or the Administrator, if any) will agree not to submit claims
to the FHA with respect to Title I loans other than the Title I Mortgage Loans
and Title I Contracts if the effect thereof would be to reduce the FHA Insurance
Amount. The Depositor has committed to use its FHA contract of insurance under
the Title I Program only to report the record ownership of loans transferred and
assigned to the Trustee pursuant to the Pooling and Servicing Agreement and
similar pooling and servicing agreements that may be entered into by the
Depositor in the future.
On the final Transfer Date, such FHA Insurance Amount will be the
maximum amount of insurance coverage in the Depositor's FHA Reserve that will be
available for the submission of claims on the Title I Mortgage Loans, and
thereafter, such FHA Insurance Amount will be decreased as a result of payments
by the FHA in respect of FHA Claims submitted for the Title I Mortgage Loans and
Title I Contracts after the Transfer Dates and as a result of the repurchase or
substitution of Title I Mortgage Loans and Title I Contracts by the Transferor.
Except in connection with the conveyance to the Trust Fund of any Subsequent
Mortgage Loans that are Title I Mortgage Loans and the substitution of Title I
Mortgage Loans and Title I Contracts, the FHA Insurance Amount for the Title I
Mortgage Loans and Title I Contracts will not be increased for any other Title I
loans, either previously or subsequently owned by the Depositor and reported for
insurance in the Depositor's FHA Reserve.
On the final Transfer Date, the amount of FHA insurance coverage that
will have been transferred from the Transferor's FHA Reserve to the Depositor's
FHA Reserve may be less than the maximum amount of insurance coverage
transferrable which would otherwise equal 10% of the unpaid principal balance or
the purchase price, if less. However, if individual Title I Mortgage Loans and
Title I Contracts are repurchased from the Trustee, on behalf of the Trust Fund,
by the Transferor, the Servicer and/or any Subservicer, then with respect to any
individual Title I Mortgage Loan or Title I Contract the amount of FHA insurance
coverage that will be transferred from the Trustee's FHA Reserve, in all
likelihood, will be the maximum amount of insurance coverage of 10% of the
unpaid principal balance or the purchase price, if less, until such time as the
Depositor's FHA Reserve has been reduced to a balance which is less than such
maximum amount. Accordingly, the transfer of insurance coverage from the
Depositor's FHA Reserve as the result of the repurchase of Title I Mortgage
Loans and Title I Contracts will cause a disproportionately larger reduction to
the FHA Insurance Amount for each individual Title I Mortgage Loan and Title I
Contract and if a significant amount of Title I Mortgage Loans and Title I
Contracts are repurchased, could result in a substantial reduction of such FHA
Insurance Amount and the relative percentage of such FHA Insurance Amount to the
principal balance of the Title I Mortgage Loans and Title I Contracts remaining
in the Trust Fund.
REQUIREMENTS FOR TITLE I PROPERTY IMPROVEMENT LOANS AND CONTRACTS. The
proceeds of loans originated under the Title I Program for property improvements
may be used only for improvements that substantially protect or improve the
basic habitability or utility of an eligible property. Although Title I loans
are available for several types of properties, the Title I Mortgage Loans will
include primarily one-to four-family property improvement loans. FHA Regulations
require that the borrower have at least a one-half interest in (i) fee simple
title to the real property to be improved with the loan proceeds ("Secured
Property"), (ii) a lease on the Secured Property for a fixed term that expires
no sooner than six months after the maturity date of the property improvement
loan or (iii) a properly recorded land installment contract for the purchase of
the Secured Property. Any Title I property improvement loan originated after
August 1994 in excess of $7,500 must be secured by a recorded lien on the
improved property which is evidenced by a mortgage or deed of trust executed by
the borrower and all other owners in fee simple. Prior to August 1994, any Title
I property improvement loan in excess of $5,000 was required to be secured by
such a recorded lien.
The maximum principal amount of an eligible loan under the Title I
Program, must not exceed the actual cost of the project plus any authorized fees
and charges under the Title I Program as provided below; provided that such
maximum principal amount does not exceed $25,000 for a single family property
improvement loan. No single borrower is permitted to have more than an aggregate
of $25,000 in unpaid principal obligations with respect to Title I loans without
prior approval of HUD. Generally, the term of a Title I loan that is a property
improvement loan may not be less than six months nor greater than 20 years and
32 days. A borrower may obtain multiple Title I loans with respect to multiple
properties (subject to the aforementioned limit on loans to a single borrower),
and a borrower may obtain more than one Title I loan with respect to a single
property, in each case as long as the total outstanding balance of all Title I
loans on the same property does not exceed the maximum loan amount for the type
of Title I loan thereon having the highest permissible loan amount. If a
property improvement loan (or combination of loans on a single property) exceeds
$15,000, and either (i) the property is not owner occupied or (ii) the structure
on the property was completed within six months prior to the application for the
loan, the borrower is required to have equity in the property at least equal to
the loan amount. In all other cases, there is no requirement that the owner
contribute equity to the property other than fees and costs that may not be
added to the balance of the loan as described below.
Fees and charges that may be added to the balance of property
improvement loans include (i) architectural and engineering fees, (ii) building
permit costs, (iii) credit report costs, (vi) fees for required appraisals (if
applicable), (iv) title examination costs and (v) fees for required inspections
by the lender or its agent, up to $75. The Title I Lender is entitled to recover
the following fees and charges in connection with a property improvement loan
from the borrower as part of the borrower's initial payment: (i) an origination
fee not to exceed 1% of the loan amount, (ii) discount points, however, after
July 5, 1995, only to the extent a lender can demonstrate a clear relationship
between the charging of discount points and some tangible benefit to the
borrower such as a compensating decrease in the interest rate being charged,
(iii) recording fees, recording taxes, filing fees and documentary stamp taxes,
(iv) title insurance costs, (v) current year tax and insurance escrow payments,
(vi) fees necessary to establish the validity of the lien, (vii) appraisal fees
that are not eligible to be financed, (viii) survey costs, (ix) handling charges
for refinancing or modification of an existing loan, up to $100, (x) fees for
approving assumption or preparing assumption agreements, not to exceed 5%, (xi)
certain fees of closing agents and (xii) such other items as may be specified by
the FHA. FHA Regulations prohibit the advancement of such fees and charges to
the borrower by any party to the transaction.
FHA Regulations distinguish between "direct loans" and "dealer loans."
A loan is a "dealer loan" if an approved dealer having a direct or indirect
financial interest in the transaction assists the borrower in obtaining the
loan. A loan made by the lender to the borrower without the assistance of any
party with a financial interest in the loan transaction (other than the lender)
is a "direct loan."
With respect to dealer loans, the dealer-contractor typically enters
into a consumer credit contract or note with the borrower and, after completion
of the financed improvements, assigns the contract or note to the Title I
Lender. The dealer contractor presents the loan application to the Title I
Lender, receives the check or money order representing the loan proceeds and may
accompany the borrower to the institution for the purpose of receiving payment.
As a condition to the disbursement of the proceeds of a dealer loan, the Title I
Lender is required to obtain a completion certificate signed by the borrower and
the dealer certifying that the improvements have been completed in accordance
with the contract and that the borrower has received no inducement from the
dealer to enter into the transaction other than discount points. The Title I
Lender may enter into an agreement under which the lender has full or partial
recourse against the dealer for a period of three years in the event the Title I
Lender sustains losses with respect to loans originated by such dealer and such
loans do not satisfy FHA Regulations. FHA Regulations require that each dealer
meet certain net worth and experience requirements and be approved by the FHA on
an annual basis. Any Title I Lender that makes dealer loans is required to
supervise and monitor the dealer's activities with respect to loans insured
under the Title I Program and to terminate a dealer's approval if the dealer
does not satisfactorily perform its contractual obligations or comply with Title
I Program requirements.
The note evidencing a property improvement loan insured under the
Title I Program is required to bear a genuine signature of the borrower and any
co-maker and co-signer, must be valid and enforceable, must be complete and
regular on its face and must have interest and principal stated separately. The
interest rate must be negotiated and agreed to by the borrower and the lender
and must be fixed for the term of the loan and recited in the note. Interest on
the Title I loan must accrue from the date of the loan and be calculated
according to the actuarial method, which allocates payments on the loan between
principal and interest such that a payment is applied first to accrued interest
and any remainder is subtracted from, or any deficiency is added to, the unpaid
principal balance.
Principal and interest on the note is required to be payable in equal
installments at least monthly except where the borrower has irregular cash flow.
The first and last payments may vary in amount from the regular installment
amount but may not exceed 150% of the regular installment amount. The first
payment may be due no later than two months from the date of the loan (i.e., the
date upon which proceeds are disbursed by the lender). Late charges may be
assessed only after fifteen days and cannot exceed the lesser of 5% of the
installment, up to a maximum of $10 and must be billed as an additional charge
to the borrower. In lieu of late charges, the note may provide for interest to
accrue on late installments on a daily basis at the note rate. The note must
include a provision for acceleration of maturity, at the option of the holder,
upon a default by the borrower and a provision permitting prepayment in part or
in full without penalty. The Title I Lender must assure that the note and all
other documents evidencing the loan are in compliance with applicable Federal,
state and local laws.
A written but unrecorded modification agreement executed by the
borrower may be used in lieu of refinancing a delinquent or defaulted loan to
reduce or increase the installment payment, but not to increase the term or
interest rate. A written modification agreement may also be used to refinance a
loan in order to reduce the interest rate, provided the loan is current.
Alternatively, the lender may negotiate an informal repayment plan for the
borrower to cure a temporary delinquency within a short period of time by
sending a letter to the borrower reciting the terms of the agreement. The lender
may not release any party from liability under the note or any lien securing an
insured loan without prior FHA approval.
FHA Regulations do not require that the borrower obtain title or fire
and casualty insurance as a condition to obtaining loan, except with respect to
manufactured home loans. If the property is located in a flood hazard area,
however, flood insurance in an amount at least equal to the loan amount is
required at the date of loan disbursement. The Borrower is required to maintain
flood insurance of at least the unpaid balance of the loan (or the value of the
property if state law so limits the amount of flood insurance).
REQUIREMENTS FOR TITLE I MANUFACTURED HOME CONTRACTS. The maximum
principal amount for any Title I Contract for a Manufactured Home must not
exceed the sum of certain itemized amounts, which include a specified percentage
of the purchase price of the manufactured home depending on whether it is a new
or existing home; provided that such maximum amount does not exceed the
following loan amounts: (i) $48,600 for a new or existing manufactured home
purchase loan; (ii) $16,200 for a manufactured home lot purchase; and (iii)
$64,800 for a combination loan (i.e. a loan to purchase a new or existing
manufactured home and the lot for such home). Generally, the term of a Title I
Contract for a Manufacture Home may not be less than six months nor greater than
20 years and 32 days, except that the maximum term of a manufactured home lot
loan is limited to 15 years and 32 days and the maximum term of a multimodule
manufactured home and lot in combination is limited to 25 years and 32 days.
Borrower eligibility for a Title I Contract for a Manufactured Home
requires that the borrower become the owner of the property to be financed with
such loan and occupy the manufactured home as the borrower's principal
residence, except for a manufactured home lot loan which allows six months from
the date of the loan to occupy the home as the borrower's principal residence.
If a manufactured home is classified as realty, then ownership of the home must
be in fee simple, and also, the ownership of the manufactured home lot must be
in fee simple, except for a lot which consists of a share in a cooperative
association that owns and operates a manufactured home park. The borrower's
minimum cash down payment requirement to obtain financing through a Title I
Contract for a Manufactured Home is as follows: (i) at least 5% of the first
$5,000 and 10% of the balance of the purchase price of a new manufactured home
and at least 10% of the purchase price of an existing manufactured home for a
manufactured home purchase loan, or in lieu of a full or partial cash down
payment, the trade-in of the borrower's equity in an existing manufactured home;
(ii) at least 10% of the purchase price and development costs of a lot for a
manufactured home lot loan; and (iii) at least 5% of the first $5,000 and 10% of
the balance of the purchase price of the manufactured home and lot for a
combination loan.
Any manufactured home financed by a Title I Contract must be certified
by the manufacturer to have been constructed in compliance with the National
Manufactured Housing Construction and Safety Standards Act of 1974 (42 U.S.C.
ss.ss. 5401-5426), so as to conform to all applicable Federal construction and
safety standards, and with respect to the purchase of a new manufactured home,
the manufacturer must furnish the borrower with a one year written warranty on a
HUD approved form which obligates the manufacturer to correct any nonconformity
with all applicable Federal construction and safety standards or any defects in
materials or workmanship which become evident within one year after the date of
delivery. The regulations under the Title I Program set forth certain additional
requirements relating to the construction, transportation and installation of
any manufactured home and standards for the manufactured homesite financed by
any Title I Contract. The proceeds from a Title I Contract for a Manufactured
Home may be used as follows: the purchase or refinancing of a manufactured home,
a suitably developed lot for a manufactured home already owned by the borrower
or a manufactured home and suitably developed lot for the home in combination;
or the refinancing of an existing manufactured home already owned by the
borrower in connection with the purchase of a manufactured home lot or an
existing lot already owned by the borrower in connection with the purchase of a
manufactured home. In addition, the proceeds for a Title I Contract for a
Manufactured Home which is a manufactured home purchase loan may be used for the
purchase, construction or installation of a garage, carport, patio or other
comparable appurtenance to the manufactured home, and the proceeds for a Title I
Contract for a Manufactured Home which is a combination loan may be used for the
purchase, construction or installation of a foundation, garage, carport, patio
or other comparable appurtenance to the manufactured home. The proceeds from a
Title I Contract for a Manufactured Home cannot be used for the purchase of
furniture or the financing of any items and activities which are set forth on
the list published by the Secretary of HUD as amended from time to time.
Any Title I Contract for a Manufactured Home must be secured by a
recorded lien on the manufactured home (or lot or home and lot, as appropriate),
its furnishings, equipment, accessories and appurtenance, which lien must be a
first lien, superior to any other lien on the property which is evidenced by a
properly recorded financing statement, a properly recorded security instrument
executed by the borrower and any other owner of the property or other acceptable
instrument. With respect to any Title I Contract involving a manufactured home
purchase loan or combination loan and the sale of the manufactured home by a
dealer, the lender or its agent (other than a manufactured home dealer) must
conduct a site-of-placement inspection within 60 days after the date of the loan
to verify that the terms and conditions of the purchase contract have been met,
the manufactured home and any options and appurtenances included in the purchase
price or financed with the loan have been delivered and installed and the
placement certificate executed by the borrower and the dealer is in order.
TITLE I UNDERWRITING REQUIREMENTS. FHA Regulations require that,
before making a loan insured under the Title I Program, a Title I Lender
exercise prudence and diligence in determining whether the borrower and any
co-maker or co-signer is solvent and an acceptable credit risk with a reasonable
ability to make payments on the loan obligation. Prior to loan approval, the
Title I Lender is required to satisfy specified credit underwriting requirements
and to keep documentation supporting its credit determination. As part of its
credit underwriting, the Title I Lender must obtain the following: (i) a dated
credit application executed by the borrower, any co-maker and any co-signer,
(ii) written verification of current employment and current income of the
borrower and any co-maker or co-signer, (iii) a consumer credit report stating
the credit accounts and payment history of the borrower and any co-maker or
co-signer, (iv) on loans in excess of $5,000, written evidence that the borrower
is not over 30 days delinquent on any senior lien instruments encumbering the
improved property, (v) verification whether the borrower is in default on any
obligation owed to or insured or guaranteed by the Federal Government and (vi)
written verification of the source of funds for any initial payment required of
the borrower if such payment is in excess of 5% of the loan. Before making a
final credit determination, the lender is required to conduct a face-to-face or
telephone interview with the borrower and any co-maker or co-signer to resolve
any discrepancies in the information on the credit application and to assure
that the information is accurate and complete. The Title I Lender's files must
contain, among other things, the note or other debt instrument, the lien
instrument and a copy of the property improvement contract (in the case of a
dealer loan) or a detailed written description of the work to be performed, the
materials to be furnished and the estimated cost (for a loan not involving a
dealer or contractor).
The Title I Lender is required to satisfy itself that the borrower's
income is adequate to make the payments required under the loan and to pay the
borrower's housing and other recurring expenses. The borrower's housing and
other recurring expenses generally may not exceed a maximum percentage of gross
income as published from time to time in the Federal Register. The Title I
Lender is required to document any compensating factors that support the
approval of the loan if such expense-to-income ratios are not satisfied. A Title
I Lender is prohibited from approving a loan under the Title I Program without
the approval of the FHA if the lender has knowledge that the borrower is past
due more than 30 days under the original terms of an obligation owed to or
insured or guaranteed by the Federal Government or the borrower has made
material misstatements of fact on applications for loans or other assistance.
Under the Title I Program, the FHA does not review or approve for
qualification for insurance the individual loan insured thereunder at the time
of approval by the lending institution (as is typically the case with other
Federal loan insurance programs). If, after a loan has been made and reported
for insurance under the Title I Program, a Title I Lender discovers any material
misstatement of fact or that the loan proceeds have been misused by the
borrower, dealer or any other party, such Title I Lender is required promptly to
report such finding to the FHA. In such case, provided that the validity of any
lien on the property has not been impaired, the insurance of the loan under the
Title I Program will not be affected unless such material misstatement of facts
or misuse of loan proceeds was caused by (or was knowingly sanctioned by) such
Title I Lender or its employees.
CLAIMS PROCEDURES UNDER TITLE I. The term "default" is defined under
FHA Regulations as the failure of the borrower to make any payment due under the
note for a period of 30 days after such payment is due. The "date of default" is
considered to be the date 30 days after the borrower's first failure to make an
installment payment on the note that is not covered by subsequent payments
applied to overdue installments in the order they became due. When a loan
reported for insurance under the Title I Program goes into default, a Title I
Lender is required to contact the borrower and any co-maker and co-signer by
telephone or in person to determine the reasons for the default and to seek a
cure. If such Title I Lender is not able to effect a cure after diligent
efforts, it may provide the borrower with a notice of default stating that the
loan will be accelerated in 30 days if the loan is not brought current or the
borrower does not enter into a loan modification agreement or repayment plan.
The notice of default must meet certain requirements set forth in the FHA
Regulations and must conform to applicable state law provisions. Such Title I
Lender is permitted to rescind the acceleration of maturity of the loan only if
the borrower brings the loan current, executes a modification agreement or
agrees to an acceptable repayment plan.
Following acceleration of maturity of a secured property improvement
loan, a Title I Lender has the option to proceed against the security or make a
claim under its contract of insurance. If a Title I Lender chooses to proceed
against the Secured Property under a security instrument (or if it accepts a
voluntary conveyance or surrender of the Secured Property), (i) the Title I
Lender must proceed against the loan security by foreclosure and acquire good,
marketable title to the property securing the loan and (ii) the Title I Lender
must take all actions necessary under applicable law to preserve its rights, if
any, to obtain a deficiency judgment against the borrower, provided however, the
Title I Lender may still file an FHA Insurance claim, but only with the prior
approval of the Secretary of HUD.
If a Title I Lender files an insurance claim with the FHA under the
Title I Program, the FHA reviews the claim, the complete loan file,
certification of compliance with applicable state and local laws in carrying out
any foreclosure or repossession, and where the borrower is in bankruptcy or
deceased, evidence that the lender has properly filed proofs of claims.
Generally, a Title I Lender must file its claim of insurance with the FHA not
later than nine months after the date of default. Concurrently with filing the
insurance claim, such Title I Lender is required to assign to the United States
of America it's entire interest in the note (or a judgment in lieu of the note),
in any securities held and in any claims filed in any legal proceedings. If, at
the time the note is assigned to the United States, the Secretary of HUD has
reason to believe that the note is not valid or enforceable against the
borrower, the FHA may deny the claim and reassign the note to the Title I
Lender. If either such defect is discovered after the FHA has paid a claim, the
FHA may require the Title I Lender to repurchase the paid claim and to accept an
assignment of the loan note. If the Title I Lender subsequently obtains a valid
and enforceable judgment against the borrower, it may resubmit a new insurance
claim with an assignment of the judgment. The FHA may contest any insurance
claim previously paid by it and make a demand for repurchase of the loan with
respect to which the claim was paid at any time up to two years from the date
the claim was certified for payment and may do so thereafter in the event of
fraud or misrepresentation on the part of the Title I Lender.
A claim for reimbursement of loss with respect to a loan eligible for
insurance under the Title I Program is required to be made on an FHA-approved
form executed by a duly qualified officer of the Title I Lender and must be
accompanied by copies of certain relevant documents and documentation specified
in the FHA Regulations to support the claim. The Title I Lender is required,
among other things, to document its efforts to effect recourse against any
dealer in accordance with any recourse agreement with such dealer. If the loan
is subject to an unsatisfied dealer recourse agreement claim, the Title I Lender
is also required to assign its rights under such recourse agreement. The FHA has
the right to deny any claim for insurance in whole or in part based upon a
violation of the FHA Regulations unless a waiver of compliance is granted. The
Title I Lender is permitted to appeal any such claim denial and resubmit the
claim within six months of the date of the claim denial, subject to a
reprocessing fee. The Pooling and Servicing Agreement provides that the Trustee
(or the Administrator) shall submit an FHA Claim with respect to any Title I
Mortgage Loan or Title I Contract that goes into default if the default cannot
be cured.
If, as a result of the delay in the transfer of the FHA Insurance
described above, FHA Insurance is not available with respect to any defaulted
Title I Mortgage Loan or Title I Contract at the time it goes into default, then
the amount required to make interest payments to the Certificateholders with
respect to the principal amount thereof, until such FHA Insurance becomes
available and a claim for insurance can be made, if at all, will be paid from
other amounts, if any, available in the Certificate Account.
NO RIGHTS OF CERTIFICATEHOLDERS AGAINST FHA. Because the Trust Fund
and the Certificateholders will not hold an FHA contract of insurance, the FHA
will not recognize the Trust Fund or the Certificateholders as the owners of the
Title I Mortgage Loans, Title I Contracts or any portion thereof, entitled to
submit FHA Claims to the FHA. Accordingly, the Trust Fund and the
Certificateholders will have no direct right to receive insurance payments from
the FHA. In the event the Trustee (or the Administrator, if any) submits an FHA
Claim to the FHA and the FHA approves payment of such FHA Claim, the related FHA
Insurance Proceeds will be payable only to the Trustee or to the Administrator,
if any, as agent and attorney-in-fact for the Trustee. The Certificateholders'
rights relating to the receipt of payment from and the administration,
processing and submissions of FHA Claims by the Trustee or the Administrator, if
any, are limited and governed by the related Pooling and Servicing Agreement and
FHA Claims Administration Agreement and these functions are obligations of the
Trustee and the Administrator, if any, not the FHA.
LEGAL INVESTMENT MATTERS
If so specified in the related Prospectus Supplement, the Certificates
of a Series will constitute "mortgage related securities" under the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA"). Alternatively, the related
Prospectus Supplement may specify that the Certificates of a Series will not be
"mortgage related securities" under SMMEA because a substantial number of the
Mortgage Loans are secured by liens on real estate that are not first liens, as
required by SMMEA. Accordingly, many institutions with legal authority to invest
in "mortgage related securities" may not be legally authorized to invest in the
Offered Certificates.
Institutions whose investment activities are subject to legal
investment laws or regulations or review by certain regulatory authorities may
be subject to restrictions on investment in certain Classes of the Certificates.
Any financial institution which is subject to the jurisdiction of the
Comptroller of the Currency, the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation ("FDIC"), the Office of Thrift
Supervision ("OTS"), the National Credit Union Administration ("NCUA"), or other
federal or state agencies with similar authority should review any applicable
rules, guidelines and regulations prior to purchasing the Certificates. The
Federal Financial Institutions Examination Council, for example, has issued a
Supervisory Policy Statement on Securities Activities effective February 10,
1992 (the "Policy Statement"). The Policy Statement has been adopted by the
Comptroller of the Currency, the Federal Reserve Board, the FDIC, the OTS, and
the NCUA (with certain modifications), with respect to the depository
institutions that they regulate. The Policy Statement prohibits depository
institutions from investing in certain "high-risk mortgage securities"
(including securities such as certain Classes of Certificates), except under
limited circumstances, and sets forth certain investment practices deemed to be
unsuitable for regulated institutions. The NCUA issued final regulations
effective December 2, 1991 that restrict and in some instances prohibit the
investment by federal credit unions in certain types of mortgage related
securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to "prudent investor" provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying", or in securities which are issued in book-entry
form.
Investors should consult their own legal advisors in determining
whether and to what extent the Certificates constitute legal investments for
such investors.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and Section 4975 of the Code impose requirements on employee benefit
plans (and on certain other retirement plans and arrangements, including
individual retirement accounts and annuities, Keogh plans and collective
investment funds and separate accounts in which such plans, accounts or
arrangements are invested) (collectively, "Plans") subject to ERISA and Section
4975 of the Code and on persons who are fiduciaries with respect to such Plans.
Among other things, ERISA requires that the assets of Plans be held in trust and
that the trustee, or other duly authorized fiduciary, have exclusive authority
and discretion to manage and control the assets of such Plans. ERISA also
imposes certain duties on persons who are fiduciaries of Plans. Under ERISA, any
person who exercises any authority or control respecting the management or
disposition of the assets of a Plan is considered to be a fiduciary of such Plan
(subject to certain exceptions not here relevant). In addition to the imposition
of general fiduciary standards of investment prudence and diversification, ERISA
prohibits a broad range of transactions ("Prohibited Transactions") involving
Plan assets and persons ("Parties in Interest") having certain specified
relationships to a Plan and imposes additional prohibitions where Parties in
Interest are fiduciaries with respect to such Plan. Section 4975 of the Code
provides many requirements and prohibitions similar to those under ERISA and
subjects persons who have engaged in Prohibited Transactions to excise taxes.
The United States Department of Labor (the "DOL") has issued
regulations concerning the definition of what constitutes the assets of a Plan
(DOL Reg. Section 2510.3-101, the "Plan Asset Regulations"). Under the Plan
Asset Regulations, the underlying assets and properties of corporations,
partnerships, trusts and certain other entities in which a Plan makes an
"equity" investment could be deemed for purposes of ERISA to be assets of the
investing Plan in certain circumstances. In such case, the fiduciary making such
an investment for the Plan could be deemed to have delegated his or her asset
management responsibility, and the underlying assets and properties could be
subject to ERISA reporting and disclosure requirements. The Certificates of a
Series will be treated as "equity" for purposes of ERISA. Certain exceptions to
the Plan Asset Regulations may apply in the case of a Plan's investment in
Certificates that constitute "equity" investments, but the Depositor cannot
predict in advance whether such exceptions apply due to the factual nature of
the conditions to be met. Accordingly, because the Mortgage Loans or Agency
Securities may be deemed Plan assets of each Plan that purchases such
Certificates, an investment in such Certificates by a Plan might give rise to a
Prohibited Transaction under ERISA Sections 406 and 407 and be subject to an
excise tax under Code Section 4975 unless a statutory, regulatory or
administrative exemption applies.
DOL Prohibited Transaction Class Exemption 83-1 ("PTCE 83-1") exempts
from ERISA's Prohibited Transaction rules certain transactions relating to the
operation of residential mortgage pool investment trusts and the purchase, sale
and holding of "mortgage pool pass-through certificates" in the initial issuance
of such certificates. PTCE 83-1 permits, subject to certain conditions,
transactions which might otherwise be prohibited between Plans and Parties in
Interest with respect to those Plans involving the origination, maintenance and
termination of mortgage pools consisting of mortgage loans secured by first or
second mortgages or deeds of trust on single-family residential property, and
the acquisition and holding of certain mortgage pool pass-through certificates
representing an interest in such mortgage pools by Plans.
PTCE 83-1 sets forth three general conditions which must be satisfied
for any transaction to be eligible for exemption: (i) the maintenance of a
system of insurance or other protection for the pooled mortgage loans and
property securing such loans, and for indemnifying certificateholders against
reductions in pass-through payments due to property damage or defaults in loan
payments in an amount not less than the greater of one percent of the aggregate
principal balance of all covered pooled mortgage loans or the principal balance
of the largest covered pooled mortgage loan; (ii) the existence of a pool
trustee who is not an affiliate of the pool sponsor; and (iii) a limitation on
the amount of the payments retained by the pool sponsor, together with other
funds inuring to its benefit, to not more than adequate consideration for
selling the mortgage loans plus reasonable compensation for services provided by
the pool sponsor to the Mortgage Pool.
Although the Trustee for any series of Certificates will be
unaffiliated with the Depositor, there can be no assurance that the system of
insurance or subordination will meet the general or specific conditions referred
to above. In addition, the nature of a Trust Fund's assets or the
characteristics of one or more classes of the related series of Certificates may
not be included within the scope of PTCE 83-1 or any other class exemption under
ERISA. The Prospectus Supplement will provide additional information with
respect to the application of ERISA and the Code to the related Certificates.
Several underwriters of mortgage-backed securities have applied for
and obtained ERISA prohibited transactions exemptions which are in some respects
broader than PTCE 83-1. Such exemptions can only apply to mortgage-backed
securities which, among other conditions, are sold in an offering with respect
to which such underwriter serves as the sole or a managing underwriter, or as a
selling or placement agent. Several other underwriters have applied for similar
exemptions. If such an exemption might be applicable to a Series of
Certificates, the related Prospectus Supplement will refer to such possibility.
Each Plan fiduciary who is responsible for making the investment
decisions whether to purchase or commit to purchase and to hold Certificates
must make its own determination as to whether the general and the specific
conditions of PTCE 83-1 have been satisfied, or as to the availability of any
other Prohibited Transaction exemptions. Each Plan fiduciary should also
determine whether, under the general fiduciary standards of investment prudence
and diversification, an investment in the Certificates is appropriate for the
Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
Any Plan proposing to invest in Certificates should consult with its
counsel to confirm that such investment will not result in a Prohibited
Transaction and will satisfy the other requirements of ERISA and the Code.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following general discussion of the anticipated material federal
income tax consequences of the purchase, ownership and disposition of
Certificates of any Series, to the extent it relates to matters of law or legal
conclusions with respect thereto, represents the opinion of counsel to the
Depositor with respect to that Series on the material matters associated with
such consequences, subject to any qualifications set forth herein. Counsel to
the Depositor for each Series will be Brown & Wood LLP ("Counsel to the
Depositor"). In connection with each Series of Certificates, Counsel to the
Depositor will issue an opinion with respect to the material tax aspects of such
Series, and the Depositor will cause such opinion to be timely filed with the
Commission as an exhibit to a Form 8-K. The discussion below does not purport to
address all federal income tax consequences that may be applicable to particular
categories of investors, some of which may be subject to special rules. The
authorities on which this discussion is based are subject to change or differing
interpretations, and any such change or interpretation could apply
retroactively. This discussion reflects the enactment of the Tax Reform Act of
1986 (the "1986 Act"), the Technical and Miscellaneous Revenue Act of 1988
("TAMRA"), the Revenue Reconciliation Act of 1993, the Small Business and Job
Protection Act of 1996 and the Taxpayer Relief Act of 1997, as well as Treasury
regulations promulgated by the U.S. Department of the Treasury. Investors should
consult their own tax advisors in determining the federal, state, local and any
other tax consequences to them of the purchase, ownership and disposition of
Certificates. The Prospectus Supplement for each series of Certificates will
discuss any special tax consideration applicable to any Class or Classes of
Certificates of such Series, and the discussion below is qualified by any such
discussion in the related Prospectus Supplement.
For purposes of this discussion, where the applicable Prospectus
Supplement provides for a fixed retained yield with respect to the Mortgage
Loans, Agency Securities or Contracts underlying a Series of Certificates,
references to the Mortgage Loans, Agency Securities or Contracts will be deemed
to refer to that portion of the Mortgage Loans, Agency Securities or Contracts
held by the Trust Fund which does not include the fixed retained yield.
FEDERAL INCOME TAX CONSEQUENCES FOR REMIC CERTIFICATES
GENERAL
With respect to a particular Series of Certificates, an election may
be made to treat the Trust Fund or one or more segregated pools of assets
therein as one or more REMICs within the meaning of Code Section 860D. A Trust
Fund or a portion or portions thereof as to which a REMIC election will be made
will be referred to as a "REMIC Pool." For purposes of this discussion,
Certificates of a Series as to which one or more REMIC elections are made are
referred to as "REMIC Certificates" and will consist of one or more Classes of
"Regular Certificates" and one Class of "Residual Certificates" in the case of
each REMIC Pool. Qualification as a REMIC requires ongoing compliance with
certain conditions. Upon the issuance of each Series of REMIC Certificates,
Counsel to the Depositor will give its opinion generally to the effect that,
assuming (i) the making of an appropriate election, (ii) compliance with the
Pooling and Servicing Agreement, and (iii) continuing compliance with the
applicable provisions of the Code, as it may be amended from time to time, and
any applicable Treasury regulations adopted thereunder, each REMIC Pool will
qualify as a REMIC. The following general discussion of the anticipated federal
income tax consequences of the purchase, ownership and disposition of REMIC
Certificates, to the extent it relates to matters of law or legal conclusions
with respect thereto, represents the opinion of Counsel to the Depositor,
subject to any qualifications set forth herein. In addition, Counsel to the
Depositor has prepared or reviewed the statements in this Prospectus under the
heading "Certain Federal Income Tax Consequences--Federal Income Tax
Consequences for REMIC Certificates," and is of the opinion that such statements
are correct in all material respects. Such statements are intended as an
explanatory discussion of the possible effects of the classification of any
Trust Fund (or applicable portion thereof) as a REMIC for federal income tax
purposes on investors generally and of related tax matters affecting investors
generally, but do not purport to furnish information in the level of detail or
with the attention to an investor's specific tax circumstances that would be
provided by an investor's own tax advisor. Accordingly, each investor is advised
to consult its own tax advisors with regard to the tax consequences to it of
investing in REMIC Certificates. With respect to each Series of REMIC
Certificates, the Regular Certificates will be considered to be "regular
interests" in the REMIC Pool and generally will be treated for federal income
tax purposes as if they were newly originated debt instruments, and the Residual
Certificates will be considered to be "residual interests" in the REMIC Pool.
The Prospectus Supplement for each Series of Certificates will indicate whether
one or more REMIC elections with respect to the related Trust Fund will be made,
in which event references to "REMIC" or "REMIC Pool" herein shall be deemed to
refer to each such REMIC Pool. For purposes of this discussion, to the extent
specified herein or in the applicable Prospectus Supplement, the term "Mortgage
Loans" will be used to refer to Mortgage Loans, Agency Securities and Contracts.
STATUS OF REMIC CERTIFICATES
REMIC Certificates held by a mutual savings bank or a domestic
building and loan association (a "Thrift Institution") will constitute
"qualifying real property loans" within the meaning of Code Section 593(d)(1) in
the same proportion that the assets of the REMIC Pool would be so treated. REMIC
Certificates held by a domestic building and loan association will constitute "a
regular or residual interest in a REMIC" within the meaning of Code Section
7701(a)(19)(C)(xi) in the same proportion that the assets of the REMIC Pool
would be treated as "loans secured by an interest in real property" within the
meaning of Code Section 7701(a)(19)(C)(v) or as other assets described in Code
Section 7701(a)(19)(C). REMIC Certificates held by a real estate investment
trust (a "REIT") will constitute "real estate assets" within the meaning of Code
Section 856(c)(5)(B), and interest on the REMIC Certificates will be considered
"interest on obligations secured by mortgages on real property or on interests
in real property" within the meaning of Code Section 856(c)(3)(B) in the same
proportion that, for both purposes, the assets of the REMIC Pool would be so
treated. However, if at all times 95% or more of the assets of the REMIC Pool
constitute qualifying assets for Thrift Institutions and REITs, the REMIC
Certificates will be treated entirely as qualifying assets for such entities
(and the income will be treated entirely as qualifying income). Moreover, the
Final REMIC Regulations provide that, for purposes of Code Sections 593(d)(1)
and 856(c)(5)(B), payments of principal and interest on the Mortgage Loans that
are reinvested pending distribution to holders of REMIC Certificates constitute
qualifying assets for such entities. Where two REMIC Pools are part of a tiered
structure they will be treated as one REMIC for purposes of the tests described
above respecting asset ownership of more or less than 95%. Notwithstanding the
foregoing, however, REMIC income received by a REIT owning a residual interest
in a REMIC Pool could be treated in part as non-qualifying REIT income if the
REMIC Pool holds Mortgage Loans with respect to which income is contingent on
borrower profits or property appreciation. In addition, if the assets of the
REMIC include buy-down Mortgage Loans, it is possible that the percentage of
such assets constituting "loans secured by an interest in real property" for
purposes of Code Section 7701(a)(19)(C)(v) may be required to be reduced by the
amount of the related buy-down funds. REMIC Certificates held by a regulated
investment company will not constitute "Government securities" within the
meaning of Code Section 851(b)(3)(A)(i). REMIC Certificates held by certain
financial institutions will constitute an "evidence of indebtedness" within the
meaning of Code Section 582(c)(1). However, REMIC Regular Certificates acquired
by another REMIC on its Startup Day (as defined below) in exchange for regular
or residual interests in the REMIC will constitute "qualified mortgages" within
the meaning of Code Section 860G(a)(3). Qualification as a REMIC In order for
the REMIC Pool to qualify as a REMIC, there must be ongoing compliance on the
part of the REMIC Pool with the requirements set forth in the Code. The REMIC
Pool must fulfill an asset test, which requires that no more than a de minimis
amount of the assets of the REMIC Pool, as of the close of the third calendar
month beginning after the "Startup Day" (which for purposes of this discussion
is the date of issuance of the REMIC Certificates) and at all times thereafter,
may consist of assets other than "qualified mortgages" and "permitted
investments." The Final REMIC Regulations provide a "safe harbor" pursuant to
which the de minimis requirement will be met if at all times the aggregate
adjusted basis of any nonqualified assets (i.e., assets other than qualified
mortgages and permitted investments) is less than 1% of the aggregate adjusted
basis of all the REMIC Pool's assets.
If a REMIC Pool fails to comply with one or more of the requirements
of the Code for REMIC status during any taxable year, the REMIC Pool will not be
treated as a REMIC for such year and thereafter. In this event, the
classification of the REMIC for federal income tax purposes is uncertain. The
REMIC Pool might be entitled to treatment as a grantor trust under the rules
described in "--Federal Income Tax Consequences for Certificates as to Which No
REMIC Election Is Made" herein. In that case, no entity-level tax would be
imposed on the REMIC Pool. Alternatively, the Regular Certificates may continue
to be treated as debt instruments for federal income tax purposes; but the REMIC
Pool could be treated as a taxable mortgage pool (a "TMP"). If the REMIC Pool is
treated as a TMP, any residual income of the REMIC Pool (i.e. , income from the
Mortgage Loans less interest and original issue discount expense allocable to
the Regular Certificates and any administrative expenses of the REMIC Pool)
would be subject to corporate income tax at the REMIC Pool level. On the other
hand, an entity with multiple classes of ownership interests may be treated as a
separate association taxable as a corporation under Treasury regulations, and
the Regular Certificates may be treated as equity interests therein. The Code,
however, authorizes the Treasury Department to issue regulations that address
situations where failure to meet one or more of the requirements for REMIC
status occurs inadvertently and in good faith, and disqualification of the REMIC
Pool would occur absent regulatory relief. Investors should be aware, however,
that the Conference Committee Report to the 1986 Act (the "Committee Report")
indicates that the relief may be accompanied by sanctions, such as the
imposition of a corporate tax on all or a portion of the REMIC Pool's income for
the period of time in which the requirements for REMIC status are not satisfied.
TAXATION OF REGULAR CERTIFICATES
GENERAL. Payments received by holders of Regular Certificates
generally should be accorded the same tax treatment under the Code as payments
received on ordinary taxable corporate debt instruments. In general, interest,
original issue discount and market discount on a Regular Certificate will be
treated as ordinary income to a holder of the Regular Certificate (the "Regular
Certificateholder") as they accrue, and principal payments on a Regular
Certificate will be treated as a return of capital to the extent of the Regular
Certificateholder's basis in the Regular Certificate allocable thereto. Regular
Certificateholders must use the accrual method of accounting with regard to
Regular Certificates, regardless of the method of accounting otherwise used by
such Regular Certificateholders.
ORIGINAL ISSUE DISCOUNT. Regular Certificates may be issued with
"original issue discount" within the meaning of Code Section 1273(a). Holders of
any class of Regular Certificates having original issue discount generally must
include original issue discount in ordinary income for federal income tax
purposes as it accrues, in accordance with a constant interest method that takes
into account the compounding of interest, in advance of receipt of the cash or a
portion of the cash attributable to such income. Based in part on Treasury
regulations under Code Sections 1271 through 1273 and 1275 (the "OID
Regulations") and in part on Code Section 1272(a)(6), the Depositor anticipates
that the amount of original issue discount required to be included in a Regular
Certificateholder's income in any taxable year will be computed in a manner
substantially as described below. Code Section 1272(a)(6) requires that the
amount and rate of accrual or original issue discount be calculated based on a
reasonable assumed prepayment rate for the Mortgage Loans in a manner prescribed
by regulations not yet issued ("Prepayment Assumption") and provides for
adjusting the amount and rate of accrual of such discount where the actual
prepayment rate differs from the Prepayment Assumption. The Committee Report
indicates that the regulations will require that the Prepayment Assumption be
the prepayment assumption that is used in determining the initial offering price
of such Certificates. The Prospectus Supplement for each Series of such
Certificates will specify the Prepayment Assumption determined by the Depositor
for the purposes of determining the amount and rate of accrual of original issue
discount. No representation is made that the Certificates will prepay at the
Prepayment Assumption or at any other rate. Moreover, the OID Regulations
include an anti-abuse rule allowing the Internal Revenue Service ("IRS") to
apply or depart from the OID Regulations where necessary or appropriate to
ensure a reasonable tax result in light of the applicable statutory provisions.
A tax result will not be considered unreasonable under the anti-abuse rule in
the absence of a substantial effect on the present value of a taxpayer's tax
liability. Investors are advised to consult their own tax advisors as to the
discussion herein and the appropriate method for reporting interest and original
issue discount with respect to the Regular Certificates.
Under the OID Regulations, each Regular Certificate (except to the
extent described below with respect to a Regular Certificate on which
distributions of principal are made in a single installment or upon an earlier
distribution by lot of a specified principal amount upon the request of a
Regular Certificateholder or by random lot (a "Retail Class Certificate")) will
be treated as a single installment obligation for purposes of determining the
original issue discount includible in a Regular Certificateholder's income. The
total amount of original issue discount on a Regular Certificate is the excess
of the "stated redemption price at maturity" of the Regular Certificate over its
"issue price." The issue price of a Regular Certificate is the first price at
which a substantial amount of Regular Certificates of that class are first sold
(other than to bond houses, brokers, underwriters and wholesalers). Unless
specified otherwise in the Prospectus Supplement, the Depositor will determine
original issue discount by including the amount paid by an initial Regular
Certificateholder for accrued interest that relates to a period prior to the
issue date of the Regular Certificate in the issue price of a Regular
Certificate and will include in the stated redemption price at maturity any
interest paid on the first Distribution Date to the extent such interest is
attributable to a period in excess of the number of days between the issue date
and such first Distribution Date. The stated redemption price at maturity of a
Regular Certificate always includes the original principal amount of the Regular
Certificate, but generally will not include distributions of stated interest if
such interest distributions constitute "qualified stated interest." Under the
OID Regulations, qualified stated interest generally means stated interest that
is unconditionally payable in cash or in property (other than debt instruments
of the issuer), or that will be constructively received, at least annually at a
single fixed rate. Special rules apply for variable rate Regular Certificates as
described below. Any stated interest in excess of the qualified stated interest
is included in the stated redemption price at maturity. If the amount of
original issue discount is "de minimis" as described below, the amount of
original issue discount is treated as zero, and all stated interest is treated
as qualified stated interest. Distributions of interest on Regular Certificates
with respect to which deferred interest will accrue may not constitute qualified
stated interest, in which case the stated redemption price at maturity of such
Regular Certificates includes all distributions of interest as well as principal
thereon. Moreover, if the interval between the issue date and the first
Distribution Date on a Regular Certificate is longer than the interval between
subsequent Distribution Dates (and interest paid on the first Distribution Date
is less than would have been earned if the stated interest rate were applied to
outstanding principal during each day in such interval), the stated interest
distributions on such Regular Certificate technically do not constitute
qualified stated interest. The OID Regulations provide that in such case a
special rule, applying solely for the purpose of determining whether original
issue discount is de minimis, provides that the interest shortfall for the long
first period (i.e., the interest that would have been earned if interest had
been paid on the first Distribution Date for each day the Regular Certificate
was outstanding) is treated as original issue discount assuming the stated
interest would otherwise be qualified stated interest. Also in such case the
stated redemption price at maturity is treated as equal to the issue price plus
the greater of the amount of foregone interest or the excess, if any, of the
Certificate's stated principal amount over its issue price. The OID Regulations
indicate that all interest on a long first period Regular Certificate that is
issued with non-de minimis original issue discount will be included in the
Regular Certificate's stated redemption price at maturity. Regular
Certificateholders should consult their own tax advisors to determine the issue
price and stated redemption price at maturity of a Regular Certificate.
Under a de minimis rule, original issue discount on a Regular
Certificate will be considered to be zero if such original issue discount is
less than 0.25% of the stated redemption price at maturity of the Regular
Certificate multiplied by the weighted average maturity of the Regular
Certificate. For this purpose, the weighted average maturity of the Regular
Certificate is computed as the sum of the amounts determined by multiplying the
number of full years (i.e., rounding down partial years) from the issue date
until each distribution in reduction of stated redemption price at maturity is
scheduled to be made by a fraction, the numerator of which is the amount of each
distribution included in the stated redemption price at maturity of the Regular
Certificate and the denominator of which is the stated redemption price at
maturity of the Regular Certificate. Although currently unclear, it appears that
the schedule of such distributions should be determined in accordance with the
Prepayment Assumption. In addition, if the original issue discount is de minimis
all stated interest (including stated interest that would otherwise be treated
as original issue discount) is treated as qualified stated interest. Unless the
Holder of a Regular Certificate elects to accrue all discount under a constant
yield to maturity method, as described below, the holder of a debt instrument
includes any de minimis original issue discount in income pro rata as capital
gain recognized on retirement of the Regular Certificate as stated principal
payments are received. If a subsequent Holder of a Regular Certificate issued
with de minimis original issue discount purchases the Regular Certificate at a
premium, the subsequent Holder does not include any original issue discount in
income. If a subsequent Holder purchases such Regular Certificate at a discount
all discount is reported as market discount, as described below.
Of the total amount of original issue discount on a Regular
Certificate, the Regular Certificateholder generally must include in gross
income for any taxable year the sum of the "daily portions," as defined below,
of the original issue discount on the Regular Certificate accrued during an
accrual period for each day on which he holds the Regular Certificate, including
the date of purchase but excluding the date of disposition. Although not free
from doubt, the Depositor intends to treat the monthly period ending on the day
before each Distribution Date as the accrual period, rather than the monthly
period corresponding to the prior calendar month. With respect to each Regular
Certificate, a calculation will be made of the original issue discount that
accrues during each successive full accrual period (or shorter period from the
date of original issue) that ends on the day before the related Distribution
Date for the Regular Certificate. The original issue discount accruing in a full
accrual period would be the excess, if any, of (i) the sum of (a) the present
value of all of the remaining distributions to be made on the Regular
Certificate as of the end of that accrual period that are included in the
Regular Certificate's stated redemption price at maturity and (b) the
distributions made on the Regular Certificate during the accrual period that are
included in the Regular Certificate's stated redemption price at maturity, over
(ii) the adjusted issue price of the Regular Certificate at the beginning of the
accrual period. The present value of the remaining distributions referred to in
the preceding sentence is calculated based on (i) the yield to maturity of the
Regular Certificate at the issue date giving the effect to the Prepayment
Assumption, (ii) events (including actual prepayments) that have occurred prior
to the end of the accrual period and (iii) the Prepayment Assumption. The effect
of these rules is to adjust the rate of original issue discount accrual to
correspond to the actual prepayment experience. For these purposes, the adjusted
issue price of a Regular Certificate at the beginning of any accrual period
equals the issue price of the Regular Certificate, increased by the aggregate
amount of original issue discount with respect to the Regular Certificate that
accrued in all prior accrual periods and reduced by the amount of distributions
included in the Regular Certificate's stated redemption price at maturity that
were made on the Regular Certificate in such prior periods. The original issue
discount accruing during any accrual period (as determined in this paragraph)
will then be divided by the number of days in the period to determine the daily
portion of original issue discount for each day in the period. With respect to
an initial accrual period shorter than a full accrual period, the daily portions
of original issue discount must be determined using a reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Certificateholder
generally will increase to take into account prepayments on the Regular
Certificates as a result of prepayments on the Mortgage Loans that exceed the
Prepayment Assumption, and generally will decrease (but not below zero for any
period) if the prepayments are slower than the Prepayment Assumption. To the
extent specified in the applicable Prospectus Supplement, an increase in
prepayments on the Mortgage Loans with respect to a Series of Regular
Certificates can result in both a change in the priority of principal payments
with respect to certain Classes of Regular Certificates and either an increase
or decrease in the daily portions of original issue discount with respect to
such Regular Certificates.
In the case of a Retail Class Certificate, the yield to maturity of
such Certificate will be determined based upon the anticipated payment
characteristics of the Class as a whole under the Prepayment Assumption. In
general, the original issue discount accruing on each Retail Class Certificate
in a full accrual period would be its allocable share of the original issue
discount with respect to the entire Class, as determined in accordance with the
preceding paragraph. However, in the case of a distribution of the entire
principal amount of any Retail Class Certificate (or portion thereof), (a) the
remaining unaccrued original issue discount allocable to such Certificate (or to
such portion) will accrue at the time of such distribution, and (b) the accrual
of original issue discount allocable to each remaining Certificate of such Class
(or the remaining principal amount of a Retail Class Certificate after a
distribution in reduction of a portion of its principal amount has been
received) will be adjusted by reducing the present value of the remaining
payments on such Class and the adjusted issue price of such Class to the extent
attributable to the portion of the principal amount thereof that was
distributed.
A subsequent holder of a Certificate issued with original issue
discount who purchases the Certificate at a cost less than the remaining stated
redemption price at maturity will also be required to include in gross income
the sum of the daily portions of original issue discount on the Certificate. In
computing the daily portions of original issue discount for a subsequent
purchaser (as well as an initial purchaser who purchases a Certificate at a
price higher than the issue price but less than the stated redemption price at
maturity), however, the daily portion for any day is reduced by the amount that
would be the daily portion for such day (computed in accordance with the rules
set forth above) multiplied by a fraction, the numerator of which is the amount,
if any, by which the price paid by such purchaser for the Regular Certificate
exceeds the excess of (i) the sum of its issue price and the aggregate amount of
original issue discount that would have been includible in the gross income of
an original holder of the Regular Certificate who purchased the Regular
Certificate at its issue price, over (ii) the amount of any prior distributions
included in the stated redemption price at maturity, and the denominator of
which is the sum of the daily portions for such Regular Certificate (computed in
accordance with the rules set forth above) for all days beginning on the date
after the date of purchase and ending on the date on which the remaining
principal amount of such Regular Certificate is expected to be reduced to zero
under the Prepayment Assumption. Alternatively, such a subsequent holder may
accrue original issue discount by treating the purchase as a purchase at
original issuance and applying the constant yield to maturity method.
The OID Regulations provide that a holder that acquires a Regular
Certificate may elect to include in gross income all stated interest, original
issue discount, de minimis original issue discount, market discount (as
described below under "--Market Discount"), de minimis market discount and
unstated interest (as adjusted for any amortizable bond premium or acquisition
premium) currently as it accrues using the constant yield to maturity method. If
such an election were made with respect to a Regular Certificate with market
discount, the Regular Certificateholder would be deemed to have made an election
to include in income currently market discount with respect to all other debt
instruments having market discount that such Regular Certificateholder acquires
during the year of the election or thereafter. Similarly, a Regular
Certificateholder that makes this election for a Regular Certificate that is
acquired at a premium will be deemed to have made an election to amortize bond
premium with respect to all debt instruments having amortizable bond premium
that such Regular Certificateholder owns or acquires. The election to accrue
interest, discount and premium on a constant yield method with respect to a
Regular Certificate can not be revoked without the consent of the IRS.
Regular Certificates may provide for interest based on a variable
rate. The OID Regulations provide special rules for variable rate instruments
that meet four requirements. First, the issue price must not exceed the
noncontingent principal payments by more than the lesser of (i) 1.5% of the
product of the noncontingent principal payments and the weighted average
maturity or (ii) 15% of the noncontingent principal payments. Second, the
instrument must provide for stated interest (compounded or paid at least
annually) at (i) one or more qualified floating rates, (ii) a single fixed rate
and a single objective rate that is a qualified inverse floating rate, (iii) a
single fixed rate and one or more qualified floating rates; or (iv) a single
objective rate. Third, the instrument must provide that each qualified floating
rate or objective rate in effect during the term of the Regular Certificate is
set at a current value of that rate (one occurring in the interval beginning
three months before and ending one year after the rate is first in effect on the
Regular Certificate). Fourth, the debt instrument must not provide for
contingent principal payments. If interest on a Regular Certificate is stated at
a fixed rate for an initial period of less than 1 year followed by a variable
rate that is either a qualified floating rate or an objective rate and the value
of the variable rate on the issue date is intended to approximate the fixed
rate, the fixed rate and the variable rate together constitute a single
qualified floating rate or objective rate. A rate is a qualified floating rate
if variations in the rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the Regular Certificate's
currency denomination. A multiple of a qualified floating rate is not a
qualified floating rate unless it is a rate equal to (i) the product of a
qualified floating rate as described in the previous sentence and a positive
number not greater than 1.35 (but greater than 0.65 for instruments issued on or
after August 13, 1996), or (ii) a product described in (i) increased or
decreased by a fixed rate. A variable rate is not a qualified floating rate if
it is subject to a cap, floor or a restriction on the amount of increase or
decrease in stated interest rate (governor) unless: (i) the cap, floor or
governor is fixed throughout the Regular Certificate's term, (ii) the cap or
floor is not reasonably expected to cause the yield on the Regular Certificate
to be significantly less or more, respectively, than the expected yield without
the cap or floor, or (iii) the governor is not reasonably expected to cause the
yield to be significantly more or less than the expected yield without the
governor. Before August 13,1996, an objective rate is a rate that is determined
using a single fixed formula and is based on (i) the yield or changes in price
of actively traded personal property, (ii) one or more qualified floating rates,
(iii) a rate that would be a qualified rate if the Regular Certificate were
denominated in another currency or (iv) a combination of such rates. For
instruments issued on or after August 13, 1996, an objective rate is a rate
(other than a qualified floating rate) that is determined using a single fixed
formula and that is based on objective financial or economic information. An
objective rate is a qualified inverse floating rate if the rate is equal to a
fixed rate minus a qualified floating rate in which the variations of such rate
can reasonably be expected to inversely reflect contemporaneous variations in
the qualified floating rate. However, a variable rate is not an objective rate
if it is reasonably expected that the average value of the rate during the first
half of the Regular Certificate's term will be significantly less or greater
than the average value of the rate during the final half of the Regular
Certificate's term.
If a variable rate Regular Certificate provides for stated interest at
a single qualified floating rate or objective rate that is unconditionally
payable in cash or property at least annually (i) all stated interest is
qualified stated interest, (ii) the amount of qualified stated interest and
original issue discount, if any, that accrues is determined as if the Regular
Certificate had a fixed rate equal to (A) in the case of a qualified floating
rate or qualified inverse floating rate, the value on the issue date of the
qualified floating rate or qualified inverse floating rate or (B) in the case of
any other objective rate, a fixed rate that reflects the yield that is
reasonably expected for the Regular Certificate and (iii) the qualified stated
interest that accrues is adjusted for the interest actually paid. If a variable
rate Regular Certificate is not described in the previous sentence, the Regular
Certificate is treated as a fixed rate Regular Certificate with a fixed rate
substitute or substitutes equal to the value of the qualified floating rates or
qualified inverse floating rate at the date of issue or, in the case of a
Regular Certificate having an objective rate at a fixed rate that reflects the
yield reasonably expected for the Regular Certificate. Qualified stated interest
or original issue discount allocable to an accrual period is adjusted to reflect
differences in the interest actually accrued or paid compared to the interest
accrued or paid at the fixed rate substitute. If a variable rate Regular
Certificate provides for stated interest either at one or more qualified
floating rates or at a qualified inverse floating rate and also provides for
interest at an initial fixed rate that is not intended to approximate the
related floating rate or is fixed for a period of one year or more, original
issue discount is determined as described in the previous two sentences except
that the Regular Certificate is treated as if it provided for a qualified
floating rate or qualified inverse floating rate, as applicable, rather than a
fixed rate. The substitute rate must be one such that the fair market value of
the Regular Certificate would be approximately the same as the fair market value
of the hypothetical certificate.
Although unclear at present, the Depositor intends to treat
Certificates bearing an interest rate that is a weighted average of the net
interest rates on the Mortgage Loans or the mortgage loans underlying the
Mortgage Assets as having qualified stated interest if the Mortgage Loans or the
underlying mortgage loans are adjustable rate mortgage loans. In such case, the
applicable index used to compute interest on the Mortgage Loans in effect on the
issue date (or possibly the pricing date) will be deemed to be in effect
beginning with the period in which the first weighted average adjustment date
occurring after the issue date occurs. If the Certificate interest rate for one
or more periods is less than it would be based upon the fully indexed rate, the
excess of the interest payments projected at the assumed index over interest
projected at such initial rate will be tested under the de minimis rules as
described above. Adjustments will be made in each accrual period increasing or
decreasing the amount of ordinary income reportable to reflect the actual
interest rate on the Certificates. It is possible, however, that the IRS may
treat some or all of the interest on Certificates with a weighted average rate
as OID.
It is not clear how income should be accrued with respect to Regular
Certificates issued at a significant premium and with respect to REMIC
Certificates, the payments on which consist primarily of a specified portion of
the interest payments on qualified mortgages held by the REMIC ("Premium REMIC
Regular Certificates"). One method of income accrual would be to treat the
Premium REMIC Regular Certificate as a Certificate having qualified stated
interest purchased at a premium equal to the excess of the price paid by such
holder for the Premium REMIC Regular Certificate over its stated principal
amount. Under this approach, a holder would be entitled to amortize such premium
only if it has in effect an election under Section 171 of the Code with respect
to all bonds held by such holder, as described below. Alternatively, all of the
income derived from a Premium REMIC Regular Certificate could be reported as
original issue discount by treating all future payments under the Prepayment
Assumption as fixed payments, in which case the amount and rate of accrual of
original issue discount would be computed by treating the Premium REMIC Regular
Certificate as a Certificate which has no qualified stated interest, as
described above. Finally, the IRS could assert that the Premium REMIC Regular
Certificates should be taxable under the contingent payment rules governing
securities issued with contingent payments.
MARKET DISCOUNT. A purchaser of a Regular Certificate also may be
subject to the market discount rules of Code Sections 1276 through 1278. Under
these sections and the principles applied by the OID Regulations in the context
of original issue discount, "market discount" is the amount by which a
subsequent purchaser's initial basis in the Regular Certificate (i) is exceeded
by the stated redemption price at maturity of the Regular Certificate or (ii) in
the case of a Regular Certificate having original issue discount, is exceeded by
the sum of the issue price of such Regular Certificate plus any original issue
discount that would have previously accrued thereon if held by an original
Regular Certificateholder (who purchased the Regular Certificate at its issue
price), in either case less any prior distributions included in the stated
redemption price at maturity of such Regular Certificate. Such purchaser
generally will be required to recognize accrued market discount as ordinary
income as distributions includible in the stated redemption price at maturity of
such Regular Certificate are received, in an amount not exceeding any such
distribution. That recognition rule would apply regardless of whether the
purchaser is a cash-basis or accrual-basis taxpayer. Such market discount would
accrue in a manner to be provided in Treasury regulations and should take into
account the Prepayment Assumption. The Committee Report provides that until such
regulations are issued, such market discount would accrue either (i) on the
basis of a constant interest rate or (ii) in the ratio of stated interest
allocable to the relevant period to the sum of the interest for such period plus
the remaining interest as of the end of such period, or in the case of a Regular
Certificate issued with original issue discount, in the ratio of original issue
discount accrued for the relevant period to the sum of the original issue
discount accrued for such period plus the remaining original issue discount as
of the end of such period. Such purchaser also generally will be required to
treat a portion of any gain on a sale or exchange of the Regular Certificate as
ordinary income to the extent of the market discount accrued to the date of
disposition under one of the foregoing methods, less any accrued market discount
previously reported as ordinary income as partial distributions in reduction of
the stated redemption price at maturity were received. Such purchaser will be
required to defer the deduction of a portion of the excess of the interest paid
or accrued on indebtedness incurred to purchase or carry a Regular Certificate
over the interest distributable thereon. The deferred portion of such interest
expense in any taxable year generally will not exceed the accrued market
discount on the Regular Certificate for such year. Any such deferred interest
expense is, in general, allowed as a deduction not later than the year in which
the related market discount income is recognized or the Regular Certificate is
disposed of. As an alternative to the inclusion of market discount in income on
the foregoing basis, the Regular Certificateholder may elect to include market
discount in income currently as it accrues on all market discount instruments
acquired by such Regular Certificateholder in that taxable year or thereafter,
in which case the interest deferral rule will not apply. In Revenue Procedure
92-67, the IRS set forth procedures for taxpayers (1) electing under Section
1278(b) of the Code to include market discount in income currently, (2) electing
under rules of Section 1276(b) of the Code to use a constant interest rate to
determine accrued market discount on a security where the holder of the security
is required to determine the amount of accrued market discount at a time prior
to the holder's disposition of the security, and (3) requesting consent to
revoke an election under Section 1278(b) of the Code.
By analogy to the OID Regulations, market discount with respect to a
Regular Certificate will be considered to be zero if such market discount is
less than 0.25% of the remaining stated redemption price at maturity of such
Regular Certificate multiplied by the weighted average maturity of the Regular
Certificate (determined as described above under "--Original Issue Discount")
remaining after the date of purchase. Treasury regulations implementing the
market discount rules have not yet been issued, and therefore investors should
consult their own tax advisors regarding the application of these rules as well
as the advisability of making any of the elections with respect thereto.
PREMIUM. A Regular Certificate purchased at a cost greater than its
remaining stated redemption price at maturity generally is considered to be
purchased at a premium. If the Regular Certificateholder holds such Regular
Certificate as a "capital asset" within the meaning of Code Section 1221, the
Regular Certificateholder may elect under Code Section 171 to amortize such
premium under a constant yield method that reflects compounding based on the
interval between payments on the Regular Certificates. The Committee Report
indicates a Congressional intent that the same rules that apply to the accrual
of market discount on installment obligations will also apply to amortizing bond
premium under Code Section 171 on installment obligations such as the Regular
Certificates, although it is unclear whether the alternatives to the constant
interest method described above under "--Market Discount" are available. Except
as otherwise provided in Treasury regulations yet to be issued, such amortizable
bond premium will be treated as an offset to interest income on a Regular
Certificate rather than as a separate deduction item. This election, once made,
applies to all taxable obligations held by the taxpayer at the beginning of the
first taxable year to which such election applies and to all taxable debt
obligations thereafter acquired and is binding on such taxpayer in all
subsequent years. Purchasers who pay a premium for their Regular Certificates
should consult their tax advisors regarding the election to amortize premium and
the method to be employed.
SALE OR EXCHANGE OF REGULAR CERTIFICATES. If a Regular
Certificateholder sells or exchanges a Regular Certificate, the Regular
Certificateholder will recognize gain or loss equal to the difference, if any,
between the amount received and his adjusted basis in the Regular Certificate.
The adjusted basis of a Regular Certificate generally will equal the cost of the
Regular Certificate to the seller, increased by any original issue discount or
market discount previously included in the seller's gross income with respect to
the Regular Certificate and reduced by amounts included in the stated redemption
price at maturity of the Regular Certificate that were previously received by
the seller and by any amortized premium.
Except as described in this paragraph, under "Original Issue Discount"
and under "--Market Discount," any gain or loss on the sale or exchange of a
Regular Certificate realized by an investor who holds the Regular Certificate as
a capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Certificate has been held for the long-term
capital gain holding period (currently more than one year). Gain from the
disposition of a Regular Certificate that might otherwise be capital gain will
be treated as ordinary income (i) if a Regular Certificate is held as part of a
"conversion transaction" as defined in Code Section 1258(c), up to the amount of
interest that would have accrued on the Regular Certificateholder's net
investment in the conversion transaction at 120% of the appropriate applicable
Federal rate under Code Section 1274(d) in effect at the time the taxpayer
entered into the transaction minus any amount previously treated as ordinary
income with respect to any prior disposition of property that was held as part
of such transaction, (ii) in the case of a noncorporate taxpayer, to the extent
such taxpayer has made an election under Code Section 163(d)(4) to have net
capital gains taxed as investment income at ordinary income rates, or (iii) in
the case of a Regular Certificate (issued by a REMIC) to the extent that such
gain does not exceed the excess, if any, of (a) the amount that would have been
includible in the gross income of the holder if his yield on such Regular
Certificate were 110% of the applicable Federal rate under Code Section 1274(d)
as of the date of purchase, over (b) the amount of income actually includible in
the gross income of such holder with respect to the Regular Certificate.
Although the legislative history to the 1986 Act indicates that the portion of
the gain from disposition of a Regular Certificate that will be recharacterized
as ordinary income under clause (iii) is limited to the amount of original issue
discount (if any) on the Regular Certificate that was not previously includible
in income, the applicable Code provision contains no such limitation. In
addition, gain or loss recognized from the sale of a Regular Certificate by
certain banks or thrift institutions will be treated as ordinary income or loss
pursuant to Code Section 582(c).
TAXATION OF RESIDUAL CERTIFICATES
TAXATION OF REMIC INCOME. Generally, the "daily portions" of REMIC
taxable income or net loss will be includible as ordinary income or loss in
determining the federal taxable income of holders of Residual Certificates
("Residual Certificateholders"), and will not be taxed separately to the REMIC
Pool. The daily portions of REMIC taxable income or net loss of a Residual
Certificateholder are determined by allocating the REMIC Pool's taxable income
or net loss for each calendar quarter ratably to each day in such quarter and by
allocating such daily portion among the Residual Certificateholders in
proportion to their respective holdings of Residual Certificates in the REMIC
Pool on such day. REMIC taxable income is generally determined in the same
manner as the taxable income of an individual using a calendar year and the
accrual method of accounting, except that (i) the limitation on deductibility of
investment interest expense and expenses for the production of income do not
apply, (ii) all bad loans will be deductible as business bad debts and (iii) the
limitation on the deductibility of interest and expenses related to tax-exempt
income will apply. REMIC taxable income generally means the REMIC Pool's gross
income, including interest, original issue discount income and market discount
income, if any, on the Mortgage Loans, plus income on reinvestment of cash flows
and reserve assets, minus deductions, including interest and original issue
discount expense on the Regular Certificates, servicing fees on the Mortgage
Loans and other administrative expenses of the REMIC Pool, amortization of
premium, if any, with respect to the Mortgage Loans, and any tax imposed on the
REMIC's income from foreclosure property. The requirement that Residual
Certificateholders report their pro rata share of taxable income or net loss of
the REMIC Pool will continue until there are no Certificates of any Class of the
related Series outstanding.
The taxable income recognized by a Residual Certificateholder in any
taxable year will be affected by, among other factors, the relationship between
the timing of recognition of interest and original issue discount or market
discount income or amortization of premium with respect to the Mortgage Loans,
on the one hand, and the timing of deductions for interest (including original
issue discount) on the Regular Certificates, on the other hand. Because of the
way REMIC taxable income is calculated, a Residual Certificateholder may
recognize "phantom" income (i.e., income recognized for tax purposes in excess
of income as determined under financial accounting or economic principles) which
will be matched in later years by a corresponding tax loss or reduction in
taxable income, but which could lower the yield to Residual Certificateholders
due to the lower present value of such loss or reduction. For example, if an
interest in the Mortgage Loans is acquired by the REMIC Pool at a discount, and
one or more of such Mortgage Loans is prepaid, the Residual Certificateholder
may recognize taxable income without being entitled to receive a corresponding
amount of cash because (i) the prepayment may be used in whole or in part to
make distributions in reduction of principal on the Regular Certificates and
(ii) the discount income on the Mortgage Loans which is includible in the
REMIC's taxable income may exceed the interest and discount deduction allowed to
the REMIC upon such distributions on the Regular Certificates. When there is
more than one class of Regular Certificates that distribute principal
sequentially, this mismatching of income and deductions is particularly likely
to occur in the early years following issuance of the Regular Certificates when
distributions in reduction of principal are being made in respect of earlier
maturing classes of Regular Certificates to the extent that such classes are not
issued with substantial discount. If taxable income attributable to such a
mismatching is realized, in general, losses would be allowed in later years as
distributions on the later classes of Regular Certificates are made. Taxable
income may also be greater in earlier years than in later years as a result of
the fact that interest expense deductions, expressed as a percentage of the
outstanding principal amount of such a Series of Regular Certificates, may
increase over time as distributions in reduction of principal are made on the
lower yielding classes of Regular Certificates, whereas interest income with
respect to any given Mortgage Loan will remain constant over time as a
percentage of the outstanding principal amount of that loan. Consequently,
Residual Certificateholders must have sufficient other sources of cash to pay
any federal, state or local income taxes due as a result of such mismatching or
unrelated deductions against which to offset such income. Prospective investors
should be aware, however, that a portion of such income may be ineligible for
offset by such investor's unrelated deductions. See the discussion of "excess
inclusions" below under "--Treatment of Certain Items of REMIC Income and
Expense--Limitations on Offset or Exemption of REMIC Income; Excess Inclusions."
The timing of such mismatching of income and deductions described in this
paragraph, if present with respect to a Series of Certificates, may have a
significant adverse effect upon the Residual Certificateholder's after-tax rate
of return. In addition, a Residual Certificateholder's taxable income during
certain periods may exceed the income reflected by such Residual
Certificateholder for such periods in accordance with generally accepted
accounting principles. Investors should consult their own advisors concerning
the proper tax and accounting treatment of their investment in Residual
Certificates.
BASIS AND LOSSES. The amount of any net loss of the REMIC Pool that
may be taken into account by the Residual Certificateholder is limited to the
adjusted basis of the Residual Certificate as of the close of the quarter (or
time of disposition of the Residual Certificate if earlier), determined without
taking into account the net loss for the quarter. The initial adjusted basis of
a purchaser of a Residual Certificate is the amount paid for such Residual
Certificate. Such adjusted basis will be increased by the amount of taxable
income of the REMIC Pool reportable by the Residual Certificateholder and
decreased by the amount of loss of the REMIC Pool reportable by the Residual
Certificateholder. A cash distribution from the REMIC Pool also will reduce such
adjusted basis (but not below zero). Any loss that is disallowed on account of
this limitation may be carried over indefinitely with respect to the Residual
Certificateholder as to whom such loss was disallowed and may be used by such
Residual Certificateholder only to offset any income generated by the same REMIC
Pool. The ability of a Residual Certificateholder to deduct net losses with
respect to a Residual Certificate may be subject to additional limitations under
the Code, as to which Residual Certificateholders should consult their tax
advisors.
A Residual Certificateholder will not be permitted to amortize
directly the cost of its Residual Certificate as an offset to its share of the
taxable income of the related REMIC Pool. However, such taxable income will not
include cash received by the REMIC Pool that represents a recovery of the REMIC
Pool's basis in its assets. Such recovery of basis by the REMIC Pool will have
the effect of amortization of the issue price of the Residual Certificates over
their life. However, in view of the possible acceleration of the income of
Residual Certificateholders described above under "--Taxation of REMIC Income,"
the period of time over which such issue price is effectively amortized may be
longer than the economic life of the Residual Certificates.
If a Residual Certificate has a negative value, it is not clear
whether its issue price would be considered to be zero or such negative amount
for purposes of determining the REMIC Pool's basis in its assets. The Final
REMIC Regulations do not address whether residual interests could have a
negative basis and a negative issue price. The Depositor does not intend to
treat a Class of Residual Certificates as having a value of less than zero for
purposes of determining the bases of the related REMIC Pool in its assets.
Further, to the extent that the initial adjusted basis of a Residual
Certificateholder (other than an original holder) in the Residual Certificate is
greater that the corresponding portion of the REMIC Pool's basis in the Mortgage
Loans or the Mortgage Loans underlying the Agency Securities, the Residual
Certificateholder will not recover a portion of such basis until termination of
the REMIC Pool unless Treasury regulations yet to be issued provide for periodic
adjustments to the REMIC income otherwise reportable by such holder. The Final
REMIC Regulations do not so provide. See "--Treatment of Certain Items of REMIC
Income and Expense--Market Discount" below regarding the basis of Mortgage Loans
to the REMIC Pool and "--Sale or Exchange of a Residual Certificate" below
regarding possible treatment of a loss upon termination of the REMIC Pool as a
capital loss.
TREATMENT OF CERTAIN ITEMS OF REMIC INCOME AND EXPENSE
ORIGINAL ISSUE DISCOUNT. Generally, the REMIC Pool's deductions for
original issue discount will be determined in the same manner as original issue
discount income on Regular Certificates as described above under "--Taxation of
Regular Certificates--Original Issue Discount," without regard to the de minimis
rule described therein.
MARKET DISCOUNT. The REMIC Pool will have market discount income in
respect of Mortgage Loans if, in general, the basis of the REMIC Pool in such
Mortgage Loans is exceeded by their unpaid principal balances. The REMIC Pool's
basis in such Mortgage Loans is generally the fair market value of the Mortgage
Loans immediately after the transfer thereof to the REMIC Pool. The Final REMIC
Regulations provide that such basis is equal in the aggregate to the issue
prices of all regular and residual interests in the REMIC Pool. In respect of
Mortgage Loans that have market discount to which Code Section 1276 applies, the
accrued portion of such market discount would be recognized currently by the
REMIC as an item of ordinary income. Market discount income generally should
accrue in the manner described above under "--Taxation of Regular
Certificates--Market Discount."
PREMIUM. Generally, if the basis of the REMIC Pool in the Mortgage
Loans exceeds the unpaid principal balances thereof, the REMIC Pool will be
considered to have acquired such Mortgage Loans at a premium equal to the amount
of such excess. As stated above, the REMIC Pool's basis in Mortgage Loans is the
fair market value of the Mortgage Loans, based on the aggregate of the issue
prices of the regular and residual interests in the REMIC Pool immediately after
the transfer thereof to the REMIC Pool. In a manner analogous to the discussion
above under "--Taxation of Regular Certificates--Premium," a person that holds a
Mortgage Loan as a capital asset under Code Section 1221 may elect under Code
Section 171 to amortize premium on Mortgage Loans originated after September 27,
1985 under a constant yield method. Amortizable bond premium will be treated as
an offset to interest income on the Mortgage Loans, rather than as a separate
deduction item. Because substantially all of the borrowers with respect to the
Mortgage Loans are expected to be individuals, Code Section 171 will not be
available for premium on Mortgage Loans originated on or prior to September 27,
1985. Premium with respect to such Mortgage Loans may be deductible in
accordance with a reasonable method regularly employed by the holder thereof.
The allocation of such premium pro rata among principal payments should be
considered a reasonable method; however, the IRS may argue that such premium
should be allocated in a different manner, such as allocating such premium
entirely to the final payment of principal.
LIMITATIONS ON OFFSET OR EXEMPTION OF REMIC INCOME; EXCESS INCLUSIONS.
A portion of the income allocable to a Residual Certificate (referred to in the
Code as an "excess inclusion") for any calendar quarter will be subject to
federal income tax in all events. Thus, for example, an excess inclusion (i)
cannot be offset by any unrelated losses or loss carryovers of a Residual
Certificateholder, (ii) will be treated as "unrelated business taxable income"
within the meaning of Code Section 512 if the Residual Certificateholder is a
pension fund or any other organization that is subject to tax only on its
unrelated business taxable income and (iii) is not eligible for any reduction in
the rate of withholding tax in the case of a Residual Certificateholder that is
a foreign investor, as further discussed in "Taxation of Certain Foreign
Investors--Residual Certificates" below. Members of an affiliated group are
treated as one corporation for purposes of applying the limitations on offset of
excess inclusion income.
Except as discussed in the following paragraph, with respect to excess
inclusions from Residual Certificates without "significant value," for any
Residual Certificateholder, the excess inclusion for any calendar quarter is the
excess, if any, of (i) the income of such Residual Certificateholder for that
calendar quarter from its Residual Certificate, over (ii) the sum of the "daily
accruals" (as defined below) for all days during the calendar quarter on which
the Residual Certificateholder holds such Residual Certificate. For this
purpose, the daily accruals with respect to a Residual Certificate are
determined by allocating to each day in the calendar quarter its ratable portion
of the product of the "adjusted issue price" (as defined below) of the Residual
Certificate at the beginning of the calendar quarter and 120 percent of the
"Federal long-term rate" in effect at the time the Residual Certificate is
issued. For this purpose, the "adjusted issue price" of a Residual Certificate
at the beginning of any calendar quarter equals the issue price of the Residual
Certificate (adjusted for contributions), increased by the amount of daily
accruals for all prior quarters, and decreased (but not below zero) by the
aggregate amount of payments made on the Residual Certificate before the
beginning of such quarter. The Federal long-term rate is an average of current
yields on Treasury securities with a remaining term of greater than nine years,
computed and published monthly by the IRS.
The Small Business Job Protection Act ("SBJPA") of 1996 has eliminated
the special rule permitting Section 593 institutions ("thrift institutions") to
use net operating losses and other allowable deductions to offset their excess
inclusion income from Residual Certificates that have "significant value" within
the meaning of the Final REMIC Regulations, effective for taxable years
beginning after December 31, 1995, except with respect to Residual Certificates
continuously held by thrift institutions since November 1, 1995.
In addition, the SBJPA of 1996 provides three rules for determining
the effect of excess inclusions on the alternative minimum taxable income of a
Residual Certificateholder. First, alternative minimum taxable income for a
Residual Certificateholder is determined without regard to the special rule,
discussed above, that taxable income cannot be less than excess inclusions.
Second, a Residual Certificateholder's alternative minimum taxable income for a
taxable year cannot be less than the excess inclusions for the year. Third, the
amount of any alternative minimum tax net operating loss deduction must be
computed without regard to any excess inclusions. These rules are effective for
taxable years beginning after December 31, 1986, unless a Residual
Certificateholder elects to have such rules apply only to taxable years
beginning after August 20, 1996.
Under Treasury regulations to be promulgated, a portion of the
dividends paid by a REIT which owns a Residual Certificate are to be designated
as excess inclusions in an amount corresponding to the Residual Certificate's
allocable share of the excess inclusions. Similar rules apply in the case of
regulated investment companies, common trust funds and cooperatives. Thus,
investors in such entities which own a Residual Certificate will be subject to
the limitations on excess inclusions described above. The Final REMIC
Regulations do not provide guidance on this issue.
MARK TO MARKET RULES. A Residual Certificate acquired after January 3,
1995 cannot be marked-to-market.
TAX-RELATED RESTRICTIONS ON TRANSFER OF RESIDUAL CERTIFICATES
DISQUALIFIED ORGANIZATIONS. If legal title or beneficial interest in a
Residual Certificate is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (i) the
present value of the total anticipated excess inclusions with respect to such
Residual Certificate for periods after the transfer and (ii) the highest
marginal federal income tax rate applicable to corporations. The Final REMIC
Regulations provide that the anticipated excess inclusions are based on actual
prepayment experience to the date of the transfer and projected payments based
on the Prepayment Assumption. The present value discount rate equals the
applicable Federal rate under Code Section 1274(d) that would apply to a debt
instrument that was issued on the date the Disqualified Organization acquired
the Residual Certificate and whose term ended on the close of the last quarter
in which excess inclusions were expected to accrue with respect to the Residual
Certificate. Such a tax generally would be imposed on the transferor of the
Residual Certificate, except that where such transfer is through an agent
(including a broker, nominee, or other middleman) for a Disqualified
Organization, the tax would instead be imposed on such agent. However, a
transferor of a Residual Certificate would in no event be liable for such tax
with respect to a transfer if the transferee furnishes to the transferor an
affidavit that the transferee is not a Disqualified Organization and, as of the
time of the transfer, the transferor does not have actual knowledge that such
affidavit is false. The tax also may be waived by the Treasury Department if the
Disqualified Organization promptly disposes of the Residual Certificate and the
transferor pays income tax at the highest corporate rate on the excess
inclusions for the period the Residual Certificate is actually held by the
Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions that are allocable to the interest in the
PassThrough Entity during the period such interest is held by such Disqualified
Organization, and (ii) the highest marginal federal corporate income tax rate.
Such tax would be deductible from the ordinary gross income of the Pass-Through
Entity for the taxable year. The Pass-Through Entity would not be liable for
such tax if it has received an affidavit from such record holder that (i) states
under penalty of perjury that it is not a Disqualified Organization or (ii)
furnishes a social security number and states under penalties of perjury that
the social security number is that of the transferee, provided that during the
period such person is the record holder of the Residual Certificate, the
Pass-Through Entity does not have actual knowledge that such affidavit is false.
For these purposes, (i) "Disqualified Organization" means the United
States, any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
of its activities are subject to tax and a majority of its board of directors is
not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 521) that is exempt from
taxation under the Code unless such organization is subject to the tax on
unrelated business income imposed by Code Section 511, and (ii) "Pass-Through
Entity" means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust or estate and certain corporations
operating on a cooperative basis. Except as may be provided in Treasury
regulations yet to be issued, any person holding an interest in a Pass-Through
Entity as a nominee for another will, with respect to such interest, be treated
as a Pass-Through Entity.
The Pooling and Servicing Agreement with respect to a Series of
Certificates will provide that neither legal title nor beneficial interest in a
Residual Certificate may be transferred or registered unless (i) the proposed
transferee provides to the Depositor and the Trustee an affidavit to the effect
that such transferee is not a Disqualified Organization, is not purchasing such
Residual Certificates on behalf of a Disqualified Organization (i.e., as a
broker, nominee or middleman thereof) and is not an entity that holds REMIC
residual securities as nominee to facilitate the clearance and settlement of
such securities through electronic book-entry changes in accounts of
participating organizations and (ii) the transferor provides a statement in
writing to the Depositor and the Trustee that it has no actual knowledge that
such affidavit is false. Moreover, the Pooling and Servicing Agreement will
provide that any attempted or purported transfer in violation of these transfer
restrictions will be null and void and will vest no rights in any purported
transferee. Each Residual Certificate with respect to a Series will bear a
legend referring to such restrictions on transfer, and each Residual
Certificateholder will be deemed to have agreed, as a condition of ownership
thereof, to any amendments to the related Pooling and Servicing Agreement
required under the Code or applicable Treasury regulations to effectuate the
foregoing restrictions. Information necessary to compute an applicable excise
tax must be furnished to the IRS and to the requesting party within 60 days of
the request, and the Depositor or the Trustee may charge a fee for computing and
providing such information.
NONECONOMIC RESIDUAL INTERESTS. The Final REMIC Regulations would
disregard certain transfers of Residual Certificates, in which case the
transferor would continue to be treated as the owner of the Residual
Certificates and thus would continue to be subject to tax on its allocable
portion of the net income of the REMIC Pool. Under the Final REMIC Regulations,
a transfer of a "noneconomic residual interest" (defined below) to a Residual
Certificateholder (other than a Residual Certificateholder who is not a United
States Person, as defined below under "--Foreign Investors") is disregarded for
all federal income tax purposes unless no significant purpose of the transfer is
to enable the transferor to impede the assessment or collection of tax. A
residual interest in a REMIC (including a residual interest with a positive
value at issuance) is a "noneconomic residual interest" unless, at the time of
the transfer, (i) the present value of the expected future distributions on the
residual interest at least equals the product of the present value of the
anticipated excess inclusions and the highest corporate income tax rate in
effect for the year in which the transfer occurs, and (ii) the transferor
reasonably expects that the transferee will receive distributions from the REMIC
at or after the time at which taxes accrue on the anticipated excess inclusions
in an amount sufficient to satisfy the accrued taxes. The anticipated excess
inclusions and the present value rate are determined in the same manner as set
forth above under "--Disqualified Organizations." A significant purpose to
impede the assessment or collection of tax exists if the transferor, at the time
of the transfer, either knew or should have known (had "improper knowledge")
that the transferee would be unwilling or unable to pay taxes due on its share
of the taxable income of the REMIC. Under the Final REMIC Regulations, a
transferor is presumed not to have improper knowledge if (i) the transferor
conducted, at the time of the transfer, a reasonable investigation of the
financial condition of the transferee and, as a result of the investigation, the
transferor found that the transferee had historically paid its debts as they
came due and found no significant evidence to indicate that the transferee will
not continue to pay its debts as they come due in the future; and (ii) the
transferee represents to the transferor that it understands that, as the holder
of the noneconomic residual interest, the transferee may incur tax liabilities
in excess of any cash flows generated by the residual interest and that the
transferee intends to pay taxes associated with holding of residual interest as
they become due. The Pooling and Servicing Agreement will require the transferee
of a Residual Certificate to state as part of the affidavit described above
under the heading "Disqualified Organizations" that such transferee (i) has
historically paid its debts as they come due, (ii) intends to continue to pay
its debts as they come due in the future, (iii) understands that, as the holder
of a noneconomic Residual Certificate, it may incur tax liabilities in excess of
any cash flows generated by the Residual Certificate, and (iv) intends to pay
any and all taxes associated with holding the Residual Certificate as they
become due. The transferor must have no reason to believe that such statement is
untrue.
FOREIGN INVESTORS. The Final REMIC Regulations provide that the
transfer of a Residual Certificate that has "tax avoidance potential" to a
"foreign person" will be disregarded for all federal tax purposes. This rule
appears intended to apply to a transferee who is not a "United States Person"
(as defined below), unless such transferee's income is effectively connected
with the conduct of a trade or business within the United States. A Residual
Certificate is deemed to have tax avoidance potential unless, at the time of the
transfer, the transferor reasonably expects that, for each excess inclusion, (i)
the REMIC Pool will distribute to the transferee residual interest holder an
amount that will equal at least 30% of the excess inclusions and (ii) that each
such amount will be distributed at or after the time at which the excess
inclusion accrues and not later than the close of the calendar year following
the calendar year of accrual. If the Non-United States Person transfers the
Residual Certificate back to a United States Person, the transfer will be
disregarded and the foreign transferor will continue to be treated as the owner
unless arrangements are made so that the transfer does not have the effect of
allowing the transferor to avoid tax on accrued excess inclusions.
The Prospectus Supplement relating to a Series of Certificates may
provide that a Residual Certificate may not be purchased by or transferred to
any person that is not a United States Person or may describe the circumstances
and restrictions pursuant to which such a transfer may be made. For purposes of
the foregoing discussion, the term "Non-U.S. Person" means any person other than
(i) a citizen or resident of the United States; (ii) a corporation (or entity
treated as a corporation for tax purposes) created or organized in the United
States or under the laws of the United States or of any state thereof,
including, for this purpose, the District of Columbia; (iii) a partnership (or
entity treated as a partnership for tax purposes) organized in the United States
or under the laws of the United States or of any state thereof, including, for
this purpose, the District of Columbia (unless provided otherwise by future
Treasury regulations); (iv) a trust, if a court within the United States is able
to exercise primary supervision over the administration of the trust and one or
more U.S. Persons have authority to control all substantial decisions of the
trust. Notwithstanding the last clause of the preceding sentence, to the extent
provided in Treasury regulations, certain trusts in existence on August 20,
1996, and treated as U.S. Persons prior to such date, may elect to continue to
be U.S. Persons.
SALE OR EXCHANGE OF A RESIDUAL CERTIFICATE. Upon the sale or exchange
of a Residual Certificate, the Residual Certificateholder will recognize gain or
loss equal to the excess, if any, of the amount realized over the adjusted basis
(as described above under "Basis and Losses") of such Residual Certificateholder
in such Residual Certificate at the time of the sale or exchange. In addition to
reporting the taxable income of the REMIC Pool, a Residual Certificateholder
will have taxable income to the extent that any cash distribution to him from
the REMIC Pool exceeds such adjusted basis on that Distribution Date or Payment
Date. Such income will be treated as gain from the sale or exchange of the
Residual Certificate. It is possible that the termination of the REMIC Pool may
be treated as a sale or exchange of a Residual Certificateholder's Residual
Certificate, in which case, if the Residual Certificateholder has an adjusted
basis in his Residual Certificate remaining when his interest in the REMIC Pool
terminates, and if he holds such Residual Certificate as a capital asset under
Code Section 1221, then he will recognize a capital loss at that time in the
amount of such remaining adjusted basis.
The Committee Report provides that, except as provided in Treasury
regulations yet to be issued, the wash sale rules of Code Section 1091 will
apply to dispositions of Residual Certificates. Consequently, losses on
dispositions of Residual Certificates will be disallowed where the seller of the
Residual Certificate, during the period beginning six months before the sale or
disposition of the Residual Certificate and ending six months after such sale or
disposition, acquires (or enters into any other transaction that results in the
application of Code Section 1091) any residual interest in any REMIC or any
interest in a "taxable mortgage pool" (such as a non-REMIC owner trust) that is
economically comparable to a Residual Certificate. In any event, any loss
realized by a Residual Certificateholder on the sale will not be deductible,
but, instead, will increase such Residual Certificateholder's adjusted basis in
the newly acquired assets.
TAXES THAT MAY BE IMPOSED ON THE REMIC POOL
PROHIBITED TRANSACTIONS. Net income from certain transactions by the
REMIC Pool, called prohibited transactions, will not be part of the calculation
of income or loss includible in the federal income tax returns of Residual
Certificateholders, but rather will be taxed directly to the REMIC Pool at a
100% rate. Prohibited transactions generally include (i) the disposition of a
qualified mortgage other than for (a) substitution within two years of the
Startup Day for a defective (including a defaulted) obligation (or repurchase in
lieu of substitution of a defective (including a defaulted) obligation at any
time) or for any qualified mortgage within three months of the Startup Day, (b)
foreclosure, default or imminent default of a qualified mortgage, (c) bankruptcy
or insolvency of the REMIC Pool or (d) a qualified (complete) liquidation, (ii)
the receipt of income from assets that are not the type of mortgages or
investments that the REMIC Pool is permitted to hold, (iii) the receipt of
compensation for services or (iv) the receipt of gain from disposition of cash
flow investments other than pursuant to a qualified liquidation. Notwithstanding
(i) and (iv), it is not a prohibited transaction to sell REMIC Pool property to
prevent a default on Regular Certificates as a result of a default on qualified
mortgages or to facilitate a clean-up call (generally, an optional termination
to save administrative costs when no more than a small percentage of the
Certificates is outstanding). The Final REMIC Regulations indicate that the
modification of a Mortgage Loan generally will not be treated as a disposition
if it is occasioned by a default or reasonably foreseeable default, an
assumption of the Mortgage Loan, the waiver of a due-on-sale or encumbrance
clause or the conversion of an interest rate by a borrower pursuant to the terms
of a convertible adjustable rate Mortgage Loan. Final REMIC Regulations also
provide that the modification of mortgage loans underlying pass-through
certificates will not be treated as a modification of the Agency Securities,
provided that the trust issuing the pass-through certificates was not created to
avoid prohibited transaction rules.
CONTRIBUTIONS TO THE REMIC POOL AFTER THE STARTUP DAY. In general, the
REMIC Pool will be subject to a tax at a 100% rate on the value of any property
contributed to the REMIC Pool after the Startup Day. Exceptions are provided for
cash contributions to the REMIC Pool (i) during the three months following the
Startup Day, (ii) made to a qualified reserve fund by a Residual
Certificateholder, (iii) in the nature of a guarantee, (iv) made to facilitate a
qualified liquidation or clean-up call and (v) as otherwise permitted in
Treasury regulations yet to be issued.
NET INCOME FROM FORECLOSURE PROPERTY. The REMIC Pool will be subject
to federal income tax at the highest corporate rate on "net income from
foreclosure property," determined by reference to the rules applicable to real
estate investment trusts. Generally, property acquired by the REMIC Pool through
foreclosure or deed in lieu of foreclosure would be treated as "foreclosure
property" for a period of two years, with possible extensions. Net income from
foreclosure property generally means (i) gain from the sale of a foreclosure
property that is inventory property and (ii) gross income from foreclosure
property other than qualifying rents and other qualifying income for a real
estate investment trust.
LIQUIDATION OF THE REMIC POOL. If a REMIC Pool and the Trustee adopt a
plan of complete liquidation, within the meaning of Code Section
860F(a)(4)(A)(i) and sell all of the REMIC Pool's assets (other than cash)
within a 90-day period beginning on the date of the adoption of the plan of
liquidation, any gain on the sale of its assets will not result in a prohibited
transaction tax, provided that the REMIC Pool credits or distributes in
liquidation all of the sale proceeds plus its cash (other than amounts retained
to meet claims against the REMIC Pool) to holders of Regular Certificates and
Residual Certificateholders within the 90-day period.
ADMINISTRATIVE MATTERS. The REMIC Pool will be required to maintain
its books on a calendar year basis and to file federal income tax returns for
federal income tax purposes in a manner similar to a partnership. The form for
such income tax return is Form 1066, U.S. Real Estate Mortgage Investment
Conduit Income Tax Return. Treasury regulations provide that, except where there
is a single Residual Certificateholder for an entire taxable year, the REMIC
Pool generally will be subject to the procedural and administrative rules of the
Code applicable to partnerships, including the determination by the IRS of any
adjustments to, among other things, items of REMIC income, gain, loss, deduction
or credit in a unified administrative proceeding. Generally, the Depositor or
the Trustee will be obligated to act as "tax matters person," as defined in
applicable Treasury regulations, with respect to the REMIC Pool, in its capacity
as either Residual Certificateholder or agent of the Residual
Certificateholders. If the Code or applicable Treasury regulations do not permit
the Depositor or the Trustee to act as tax matters person in its capacity as
agent of the Residual Certificateholders, the Residual Certificateholder chosen
by the Residual Certificateholders or such other person specified pursuant to
Treasury regulations will be required to act as tax matters person.
Treasury regulations provide that a holder of a Residual Certificate
is not required to treat items on its return consistently with their treatment
on the REMIC Pool's return if a holder owns 100% of the Residual Certificates
for the entire calendar year. Otherwise, each holder of a Residual Certificate
is required to treat items on its return consistently with their treatment on
the REMIC Pool's return, unless the holder of a Residual Certificate either
files a statement identifying the inconsistency or establishes that the
inconsistency resulted from incorrect information received from the REMIC Pool.
The IRS may assess a deficiency resulting from a failure to comply with the
consistency requirement without instituting an administrative proceeding at the
REMIC Pool level.
LIMITATIONS ON DEDUCTION OF CERTAIN EXPENSES
An investor who is an individual, estate or trust will be subject to
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that such itemized deductions, in the aggregate, do not exceed
2% of the investor's adjusted gross income. In addition, Code Section 68
provides that itemized deductions otherwise allowable for a taxable year of an
individual taxpayer will be reduced by the lesser of (i) 3% of the excess, if
any, of adjusted gross income over a specified amount and adjusted yearly for
inflation, or (ii) 80% of the amount of itemized deductions otherwise allowable
for such year. In the case of a REMIC Pool, such deductions may include
deductions under Code Section 212 for servicing fees and all administrative and
other expenses relating to the REMIC Pool or any similar expenses allocated to
the REMIC Pool with respect to a regular interest it holds in another REMIC.
Such investors who hold REMIC Certificates either directly or indirectly through
certain pass-through entities may have their pro rata share of such expenses
allocated to them as additional gross income, but may be subject to such
limitation on deductions. In addition, such expenses are not deductible at all
for purposes of computing the alternative minimum tax, and may cause such
investors to be subject to significant additional tax liability. Treasury
regulations provide that the additional gross income and corresponding amount of
expenses generally are to be allocated entirely to the holders of Residual
Certificates in the case of a REMIC Pool that would not qualify as a fixed
investment trust in the absence of a REMIC election. However, such additional
gross income and limitation on deductions will apply to the allocable portion of
such expenses to holders of Regular Certificates, as well as holders of Residual
Certificates, where such Regular Certificates are issued in a manner that is
similar to pass-through certificates in a fixed investment trust. In general,
such allocable portion will be determined based on the ratio that a REMIC
Certificateholder's income, determined on a daily basis, bears to the income of
all holders of Regular Certificates and Residual Certificates with respect to a
REMIC Pool. As a result, individuals, estates or trusts holding REMIC
Certificates (either directly or indirectly through a grantor trust,
partnership, S corporation, REMIC, or certain other pass-through entities
described in the foregoing Treasury regulations) may have taxable income in
excess of the interest income at the pass-through rate or Bond interest rate on
Regular Certificates that are issued in a single class or otherwise consistently
with fixed investment trust status or in excess of cash distributions for the
related period on Residual Certificates.
TAXATION OF CERTAIN FOREIGN INVESTORS
REGULAR CERTIFICATES. Interest, including original issue discount,
distributable to Regular Certificateholders who are nonresident aliens, foreign
corporations, or other Non-United States Persons (as defined below), will be
considered "portfolio interest" and therefore, generally will not be subject to
30% United States withholding tax, provided that such Non-United States Person
(i) is not a "10-percent shareholders" within the meaning of Code Section
871(h)(3)(B) or a controlled foreign corporation described in Code Section
881(c)(3)(C) and (ii) provides the Trustee, or the person who would otherwise be
required to withhold tax from such distributions under Code Section 1441 or
1442, with an appropriate statement, signed under penalties of perjury,
identifying the beneficial owner and stating, among other things, that the
beneficial owner of the Regular Certificate is a Non-United States Person. If
such statement, or any other required statement, is not provided, 30%
withholding will apply unless reduced or eliminated pursuant to an applicable
tax treaty or unless the interest on the Regular Certificate is effectively
connected with the conduct of a trade or business within the United States by
such Non-United States Person. In the latter case, such Non-United States Person
will be subject to United States federal income tax at regular rates. Investors
who are Non-United States Persons should consult their own tax advisors
regarding the specific tax consequences to them of owning a Regular Certificate.
The term "Non-United States Person" means any person who is not a United States
Person as defined below under Foreign Investors. Payments on Regular
Certificates may subject a Non-United States Person to United States federal
income and withholding tax where such foreign person also owns, actually or
constructively, Residual Certificates issued by the same REMIC, notwithstanding
compliance with the certification requirements discussed above.
RESIDUAL CERTIFICATES. The Committee Report indicates that amounts
paid to Residual Certificateholders who are Non-United States Persons are
treated as interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amounts distributed to
Residual Certificateholders qualify as "portfolio interest," subject to the
conditions described in "--Regular Certificates" above, but only to the extent
that (i) the Mortgage Loans were issued after July 18, 1984 and (ii) the Trust
Fund or segregated pool of assets therein (as to which a separate REMIC election
will be made), to which the Residual Certificate relates, consists of
obligations issued in "registered form" within the meaning of Code Section
163(f)(1). Generally, Mortgage Loans will not be, but certificated regular
interests in another REMIC Pool will be, considered obligations issued in
registered form. Furthermore, a Residual Certificateholder will not be entitled
to any exemption from the 30% withholding tax (or lower treaty rate) to the
extent of that portion of REMIC taxable income that constitutes an "excess
inclusion." See "--Treatment of Certain Items of REMIC Income and
Expense--Limitations on Offset or Exemption of REMIC Income; Excess Inclusions."
If the amounts paid to Residual Certificateholders who are Non-United States
Persons are effectively connected with the conduct of a trade or business within
the United States by such Non-United States Persons, 30% (or lower treaty rate)
withholding will not apply. Instead, the amounts paid to such Non-United States
Persons will be subject to United States federal income tax at regular rates. If
30% (or lower treaty rate) withholding is applicable, such amounts generally
will be taken into account for purposes of withholding only when paid or
otherwise distributed (or when the Residual Certificate is disposed of) under
rules similar to withholding upon disposition of debt instruments that have
original issue discount. See "--Tax-Related Restrictions on Transfer of Residual
Certificates--Foreign Investors" above concerning the disregard of certain
transfers having "tax avoidance potential." Investors who are Non-United States
Persons should consult their own tax advisors regarding the specific tax
consequences to them of owning Residual Certificates.
BACKUP WITHHOLDING
Distributions made on the Regular Certificates, and proceeds from the
sale of the Regular Certificates to or through certain brokers, may be subject
to a "backup" withholding tax under Code Section 3406 of 31% on "reportable
payments" (including interest distributions, original issue discount, and, under
certain circumstances, principal distributions) unless the Regular
Certificateholder complies with certain reporting and/or certification
procedures, including the provision of its taxpayer identification number to the
Trustee, its agent or the broker who effected the sale of the Regular
Certificate, or such Certificateholder is otherwise an exempt recipient under
applicable provisions of the Code. Any amounts to be withheld from distribution
on the Regular Certificates would be refunded by the IRS or allowed as a credit
against the Regular Certificateholder's federal income tax liability.
REPORTING REQUIREMENTS
Reports of accrued interest and original issue discount will be made
annually to the IRS and to individuals, estates, nonexempt and non-charitable
trusts, and partnerships who are either holders of record of Regular
Certificates or beneficial owners who own Regular Certificates through a broker
or middleman as nominee. All brokers, nominees and all other non-exempt holders
of record of Regular Certificates (including corporations, noncalendar year
taxpayers, securities or commodities dealers, real estate investment trusts,
investment companies, common trust funds, thrift institutions and charitable
trusts) may request such information for any calendar quarter by telephone or in
writing by contacting the person designated in IRS Publication 938 with respect
to a particular Series of Regular Certificates. Holders through nominees must
request such information from the nominee. Treasury regulations provide that
information necessary to compute the accrual of any market discount on the
Regular Certificates must also be furnished.
The IRS's Form 1066 has an accompanying Schedule Q, Quarterly Notice
to Residual Interest Holders of REMIC Taxable Income or Net Loss Allocation.
Treasury regulations require that Schedule Q be furnished by the REMIC Pool to
each Residual Certificateholder by the end of the month following the close of
each calendar quarter (41 days after the end of a quarter under proposed
Treasury regulations) in which the REMIC Pool is in existence.
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual
Certificateholders, furnished annually, if applicable, to holders of Regular
Certificates, and filed annually with the IRS concerning Code Section 67
expenses (See "--Limitations on Deduction of Certain Expenses" above) allocable
to such holders. Furthermore, under such regulations, information must be
furnished quarterly to Residual Certificateholders, furnished annually to
holders of Regular Certificates, and filed annually with the IRS concerning the
percentage of the REMIC Pool's assets meeting the qualified asset tests
described above under "--Status of REMIC Certificates."
FEDERAL INCOME TAX CONSEQUENCES FOR FASIT CERTIFICATES
GENERAL
If a FASIT election is made with respect to a Series of Certificates,
then the arrangement by which the Certificates of that Series are issued will be
treated as a FASIT so long as all of the provisions of the relevant Agreement
are complied with and the statutory and regulatory requirements are satisfied.
The Small Business and Job Protection Act of 1996 added Sections 860H
through 860L to the Code (the "FASIT Provisions"), which provide for a new type
of entity for federal income tax purposes known as a "financial asset
securitization investment trust" (a "FASIT"). Although the FASIT provisions of
the Code became effective on September 1, 1997, no Treasury regulations or other
administrative guidance have been issued with respect to those provisions.
Accordingly, definitive guidance cannot be provided with respect to many aspects
of the tax treatment of FASIT regular interest holders. Investors should also
note that the FASIT discussion contained herein constitutes only a summary of
the U.S. federal income tax consequences to the holders of FASIT interests. With
respect to each Series of FASIT regular interests, the related Prospectus
Supplement will provide a detailed discussion regarding the federal income tax
consequences associated with the particular transaction.
FASIT interests will be classified as either FASIT regular interests,
which generally will be treated as debt for federal income tax purposes, or
FASIT ownership interests, which generally are not treated as debt for such
purposes, but rather as representing rights and responsibilities with respect to
the taxable income or loss of the related FASIT. The Prospectus Supplement for
each Series of Securities will indicate which Securities of such Series will be
designated as regular interests, and which, if any, will be designated as
ownership interests.
QUALIFICATION AS A FASIT
A Trust Fund will qualify as a FASIT if (i) a FASIT election is in
effect, (ii) certain tests concerning (A) the composition of the FASIT's assets
and (B) the nature of the investors' interests in the FASIT are met on a
continuing basis, and (iii) the Trust Fund is not a regulated investment company
as defined in section 851(a) of the Code. A segregated pool of assets may also
qualify as a FASIT.
ASSET COMPOSITION
For a Trust Fund to be eligible for FASIT status, substantially all of
the Trust Fund Assets must consist of "permitted assets" as of the close of the
third month beginning after the closing date and at all times thereafter (the
"FASIT Qualification Test"). Permitted assets include (i) cash or cash
equivalents, (ii) debt instruments with fixed terms that would qualify as
regular interests if issued by a REMIC (generally, instruments that provide for
interest at a fixed rate, a qualifying variable rate, or a qualifying
interest-only ("IO") type rate), (iii) foreclosure property, (iv) certain
hedging instruments (generally, interest and currency rate swaps and credit
enhancement contracts) that are reasonably required to guarantee or hedge
against the FASIT's risks associated with being the obligor on FASIT interests,
(v) contract rights to acquire qualifying debt instruments or qualifying hedging
instruments, (vi) FASIT regular interest, and (vii) REMIC regular interests.
Permitted assets do not include any debt instruments issued by the
holder of the FASIT's ownership interest or by any person related to such
holder. A debt instrument is a permitted asset only if the instrument is
indebtedness for Federal income tax purposes including regular interests in a
REMIC or regular interests issued by another FASIT and it bears (1) fixed
interest or (2) variable interest of a type that relates to qualified variable
rate debt (as defined in Treasury regulations prescribed under section
860G(a)(1)(B)).
INTERESTS IN A FASIT
In addition to the foregoing asset qualification requirements, the
interests in a FASIT also must meet certain requirements. All of the interests
in a FASIT must belong to either of the following: (i) one or more classes of
regular interests or (ii) a single class of ownership interest that is held by a
fully taxable domestic C Corporation.
A FASIT interest generally qualifies as a regular interest if (i) it
is designated as a regular interest, (ii) it has a stated maturity no greater
than thirty years, (iii) it entitles its holder to a specified principal amount,
(iv) the issue price of the interest does not exceed 125% of its stated
principal amount, (v) the yield to maturity of the interest is less than the
applicable Treasury rate published by the IRS plus 5%, and (vi) if it pays
interest, such interest is payable at either (a) a fixed rate with respect to
the principal amount of the regular interest or (b) a permissible variable rate
with respect to such principal amount. Permissible variable rates for FASIT
regular interests are the same as those for REMIC regular interests (i.e.,
certain qualified floating rates and weighted average rates). Interest will be
considered to be based on a permissible variable rate if generally, (i) such
interest is unconditionally payable at least annually, (ii) the issue price of
the debt instrument does not exceed the total noncontingent principal payments
and (iii) interest is based on a "qualified floating rate," an "objective rate,"
a combination of a single fixed rate and one or more "qualified floating rate,"
one "qualified inverse floating rate," or a combination of "qualified floating
rates" that do not operate in a manner that significantly accelerates or defers
interest payments on such FASIT regular interest.
If an interest in a FASIT fails to meet one or more of the
requirements set out in clauses (iii), (iv), or (v) in the immediately preceding
paragraph, but otherwise meets all requirements to be treated as a FASIT, it may
still qualify as a type of regular interest known as a "High-Yield Interest." In
addition, if an interest in a FASIT fails to meet the requirement of clause
(vi), but the interest payable on the interest consists of a specified portion
of the interest payments on permitted assets and that portion does not vary over
the life of the security, the interest will also qualify as a High-Yield
Interest. A High-Yield Interest may be held only by domestic C corporations that
are fully subject to corporate income tax ("Eligible Corporations"), other
FASITs, and dealers in securities who acquire such interests as inventory,
rather than for investment. In addition, holders of High-Yield Interests are
subject to limitations on offset of income derived from such interest.
CONSEQUENCES OF DISQUALIFICATION AS A FASIT
If a Trust Fund fails to comply with one or more of ongoing
requirements for FASIT status during any taxable year, the Code provides that
its FASIT status may be lost for that year and thereafter. If FASIT status is
lost, the treatment of the former FASIT and interests therein for federal income
tax purposes is uncertain. Although the Code authorizes the Treasury to issue
regulations that address situations where a failure to meet the requirements for
FASIT status occurs inadvertently and in good faith, such regulations have not
yet been issued. It is possible that disqualification relief might be
accompanied by sanctions, such as the imposition of a corporate tax on all or a
portion of the FASIT's income for the period of time in which the requirements
for FASIT status are not satisfied.
TAXATION OF FASIT REGULAR INTERESTS
Payments received by holders of FASIT regular interests generally will
be accorded the same tax treatment under the Code as payments received on other
taxable debt instruments. Holders of FASIT regular interests must report income
from such Securities under an accrual method of accounting, even if they
otherwise would have used the cash receipts and disbursements method. If the
FASIT regular interests is sold, the Holder generally will recognize gain or
loss upon the sale.
Certificates representing regular interests in a FASIT are treated as
debt instruments. Stated interest on regular interests in FASITs will be taxable
as ordinary income and taken into account using the accrual method of
accounting, regardless of the Holder's normal accounting method.
For discussion on Original Issue Discount, Market Discount, Premium
and Sale or Exchange of a FASIT Regular Interest, see FEDERAL INCOME TAX
CONSEQUENCES FOR REMIC CERTIFICATES--Taxation of Regular Certificates above.
TAXATION OF HIGH-YIELD INTEREST
High-Yield Interests are subject to special rules regarding the
eligibility of holders of such interest, and the ability of such holders to
offset income derived from those interests with losses. High-Yield Interests
only may be held by Eligible Corporations (i.e., Domestic Corporations), other
than FASITs, and dealers in securities who acquire such interests as inventory.
If a securities dealer (other than an Eligible Corporation) initially acquires a
High-Yield Interest as inventory, but later begins to hold it for investment,
the dealer will be subject to an excise tax equal to the income from the
High-Yield Interest multiplied by the highest corporate income tax rate. In
addition, transfers of High-Yield Interests to disqualified holders will be
disregarded for federal income tax purposes, and the transferor will continue to
be treated as the holder of the High-Yield Interest.
The Holder of a High-Yield Interest may not use non-FASIT current
losses or net operating loss carryforwards or carrybacks to offset any income
derived from the High-Yield Interest, for either regular federal income tax
purposes or for alternative minimum tax purposes. In addition, the FASIT
provisions contain an anti-abuse rule that imposes corporate income tax on
income derived from a FASIT regular interest that is held by a pass-through
entity (other than another FASIT) that issues debt or equity securities backed
by the FASIT regular interest and that have the same features as High-Yield
Interests.
TAXATION OF FASIT OWNERSHIP INTEREST
A FASIT ownership interest represents the residual equity interest in
a FASIT. As such, the holder of a FASIT ownership interest determines its
taxable income by taking into account all assets, liabilities, and items of
income, gain, deduction, loss, and credit of a FASIT. In general, the character
of the income to the holder of a FASIT ownership interest will be the same as
the character of such income to the FASIT, except that any tax-exempt interest
income taken into account by the holder of a FASIT ownership interest is treated
as ordinary income. In determining that taxable income, the holder of a FASIT
ownership interest must determine the amount of interest, original issue
discount, market discount, and premium recognized with respect to the FASIT's
assets and the FASIT regular interests issued by the FASIT according to a
constant yield methodology and under an accrual method of accounting. In
addition, holders of FASIT Ownership Securities are subject to the same
limitations on their ability to use losses to offset income from their FASIT
regular interests as are holders of High-Yield Interest.
Rules similar to the wash sale rules applicable to REMIC residual
interests also will apply to FASIT ownership interests. Accordingly, losses on
dispositions of a FASIT ownership interest generally will be disallowed where
within six months before or after the disposition, the seller of such interest
acquires any other FASIT ownership interest that is economically comparable to a
FASIT ownership interest. In addition, if any security that is sold or
contributed to a FASIT by the holders of the related FASIT ownership interest
was required to be marked-to-market under section 475 of the Code by such
holder, then section 475 of the Code will continue to apply to such securities,
except that the amount realized under the mark-to-market rules or the
securities' value after applying special valuation rules contained in the FASIT
provisions. Those special valuation rules generally require that the value of
debt instruments that are not traded on an established securities market be
determined by calculating the present value of the reasonably expected payments
under the instrument using a discount rate of 120% of the applicable Federal
rate, compounded semi-annually.
RESTRICTIONS ON HOLDERS
If a FASIT issues high-yield debt interests, such interests cannot be
held by a disqualified holder. A "disqualified holder" generally is any holder
other than (1) a domestic C corporation that does not qualify as RIC, REIT,
REMIC or a cooperative O (2) a dealer who acquires FASIT debt for resale to
customers in the ordinary course of business. A permitted holder of the
ownership interest in a FASIT generally is a non-exempt domestic C corporation,
other than a corporation that qualifies as a RIC, REIT, REMIC or cooperative.
PROHIBITED TRANSACTION
The holder of a FASIT ownership interest is required to pay a penalty
excise tax equal to 100 percent of net income derived from (1) an asset that is
not a permitted asset, (2) any disposition of an asset other than a permitted
disposition, (3) any income attributable to loans originated by the FASIT, and
(4) compensation for services (other than fees for a waiver, amendment, or
consent under permitted assets not acquired through foreclosure). A permitted
disposition is any disposition of any permitted asset (1) arising from complete
liquidation of a class of regular interest (i.e., a qualified liquidation); (2)
incident to the foreclosure, default (or imminent default) on an asset of the
asset; (3) incident to the bankruptcy or insolvency of the FASIT; (4) necessary
to avoid a default on any indebtedness of the a FASIT attributable to a default
(or imminent default) on an asset of the FASIT; (5) to facilitate a clean-up
call; (6) to substitute a permitted debt instrument for another such instrument;
or (7) in order to reduce over-collateralization where a principal purposes of
the disposition was not to avoid recognition of gain arising from an increase in
its market value after its acquisition by the FASIT. Notwithstanding this rule,
the holder of an ownership interest in a FASIT may currently deduct its losses
incurred in prohibited transactions in computing its taxable income for the year
of the loss. A Series of Certificates for which a FASIT election is made
generally will be structured in order to avoid application of the prohibited
transactions tax.
FEDERAL INCOME TAX CONSEQUENCES FOR CERTIFICATES AS TO
WHICH NO REMIC OR FASIT ELECTION IS MADE
STANDARD CERTIFICATES
GENERAL. With respect a Series of Certificates issued under an
Agreement for which no election is made to treat the related Trust Fund (or a
segregated pool of assets therein) as a REMIC or as a FASIT, Counsel to the
Depositor will deliver its opinion to the effect that, assuming compliance with
all provisions of the related Pooling and Servicing Agreement, the related Trust
Fund will be classified as a grantor trust under subpart E, Part 1 of subchapter
J of Chapter 1 of Subtitle A of the Code and not as an association taxable as a
corporation. The following general discussion of the anticipated federal income
tax consequences of the purchase, ownership and disposition of Standard
Certificates, to the extent it relates to matters of law or legal conclusions
with respect thereto, represents the opinion of Counsel to the Depositor,
subject to any qualifications set forth herein. In addition, Counsel to the
Depositor has prepared or reviewed the statements in this Prospectus under the
heading "Certain Federal Income Tax Consequences--Federal Income Tax
Consequences for Certificates as to Which No REMIC or FASIT Election is
Made--Standard Certificates," and is of the opinion that such statements are
correct in all material respects. Such statements are intended as an explanatory
discussion of the possible effects of the classification of any Trust Fund as a
grantor trust for federal income tax purposes on investors generally and of
related tax matters affecting investors generally, but do not purport to furnish
information in the level of detail or with the attention to an investor's
specific tax circumstances that would be provided by an investor's own tax
advisor. Accordingly, each investor is advised to consult its own tax advisors
with regard to the tax consequences to it of investing in Standard Certificates.
Where there is no fixed retained yield with respect to the Mortgage
Loans underlying the Certificates of such a Series, and where such Certificates
are not designated as "Stripped Certificates," the holder of each such
Certificates in such Series will be treated as the owner of a pro rata undivided
interest in the ordinary income and corpus portions of the Trust Fund
represented by his Certificate and will be considered the beneficial owner of a
pro rata undivided interest in each of the Mortgage Loans, subject to the
discussion below under "--Premium and Discount--Recharacterization of Servicing
Fees." Accordingly, the holder of a Certificate of a particular Series will be
required to report on its federal income tax return its pro rata share of the
entire income from the Mortgage Loans represented by its Certificate, including
interest at the coupon rate on such Mortgage Loans, original issue discount (if
any), prepayment fees, assumption fees, and late payment charges received by the
Depositor or another service provider, in accordance with such
Certificateholder's method of accounting.
A Certificateholder generally will be able to deduct its share of
servicing fees and all administrative and other expenses of the Trust Fund in
accordance with his method of accounting, provided that such amounts are
reasonable compensation for services rendered to that Trust Fund. However,
investors who are individuals, estates or trusts who own Certificates, either
directly or indirectly through certain pass-through entities, will be subject to
limitation with respect to certain itemized deductions described in Code Section
67, including deductions under Code Section 212 for servicing fees and all such
administrative and other expenses of the Trust Fund, to the extent that such
deductions, in the aggregate, do not exceed two percent of an investor's
adjusted gross income. In addition, Code Section 68 provides that itemized
deductions otherwise allowable for a taxable year of an individual taxpayer will
be reduced by the lesser of (i) 3% of the excess, if any, of adjusted gross
income over a specified amount, or (ii) 80% of the amount of itemized deductions
otherwise allowable for such year. As a result such investors holding
Certificates, directly or indirectly through a pass-through entity, may have
aggregate taxable income in excess of the aggregate amount of cash received on
such Certificates with respect to interest at the pass-through rate on such
Certificates or discount thereon. In addition, such expenses are not deductible
at all for purposes of computing the alternative minimum tax, and may cause such
investors to be subject to significant additional tax liability. Moreover, where
there is fixed retained yield with respect to the Mortgage Loans underlying a
Series of Certificates or where the servicing fees are in excess of reasonable
servicing compensation, the transaction will be subject to the application of
the "stripped bond" and "stripped coupon" rules of the Code, as described below
under "--Stripped Certificates" and "--Premium and Discount--Recharacterization
of Servicing Fees," respectively.
TAX STATUS. To the extent disclosed in the related Prospectus
Supplement, Counsel for the Depositor will deliver its opinion with respect to
Certificates described under this subsection "Standard Certificates" that:
1. A Certificate owned by a "domestic building and loan
association" within the meaning of Code Section 7701(a)(19) will be considered
to represent "loans secured by an interest in real property" within the meaning
of Code Section 7701(a)(19)(C)(v), provided that the real property securing the
Mortgage Loans represented by that Certificate is of the type described in such
section of the Code.
2. A Certificate owned by a real estate investment trust will be
considered to represent "real estate assets" within the meaning of Code Section
856(c)(5)(B) to the extent that the assets of the related Trust Fund consist of
qualified assets, and interest income on such assets will be considered
"interest on obligations secured by mortgages on real property" within the
meaning of Code Section 856(c)(3)(B).
3. A Certificate owned by a REMIC will be considered to
represent an " obligation (including any participation or certificate of
beneficial ownership therein) which is principally secured by an interest in
real property" within the meaning of Code Section 860G(a)(3)(A) to the extent
that the assets of the related Trust Fund consist of "qualified mortgages"
within the meaning of Code Section 860G(a)(3).
An issue arises as to whether buy-down Mortgage Loans may be
characterized in their entirety under the Code provisions cited in the
immediately preceding paragraph. Code Section 593(d)(1)(C) provides that the
term " qualifying real property loan" does not include a loan "to the extent
secured by a deposit in or share of the taxpayer." The application of this
provision to a buy-down fund with respect to a buy-down Mortgage Loan is
uncertain, but may require that a taxpayer's investment in a buy-down Mortgage
Loan be reduced by the buy-down fund. As to the treatment of buydown Mortgage
Loans as "loans . . . secured by an interest in real property" under Code
Section 7701(a)(19)(C)(v), as "real estate assets" under Code Section
856(c)(5)(B), and as " obligations . . . principally secured by an interest in
real property" under Code Section 860G(a)(3)(A), there is indirect authority
supporting treatment of an investment in a buy-down Mortgage Loan as entirely
secured by real property if the fair market value of the real property securing
the loan exceeds the principal amount of the loan at the time of issuance or
acquisition, as the case may be. There is no assurance that the treatment
described above is proper. Accordingly, Certificateholders are urged to consult
their own tax advisors concerning the effects of such arrangements on the
characterization of such Certificateholder's investment for federal income tax
purposes.
PREMIUM AND DISCOUNT
Certificateholders are advised to consult with their tax advisors as
to the federal income tax treatment of premium and discount arising either upon
initial acquisition of Certificates or thereafter.
PREMIUM. The treatment of premium incurred upon the purchase of a
Certificate will be determined generally as described above under "--Federal
Income Tax Consequences for REMIC Certificates--Treatment of Certain Items of
REMIC Income and Expense--Premium."
ORIGINAL ISSUE DISCOUNT. The IRS has stated in published rulings that,
in circumstances similar to those described herein, the original issue discount
rules will be applicable to a Certificateholder's interest in those Mortgage
Loans as to which the conditions for the application of those sections are met.
Rules regarding periodic inclusion of original issue discount income are
applicable to mortgages of corporations originated after May 27, 1969, mortgages
of noncorporate borrowers (other than individuals) originated after July 1,
1982, and mortgages of individuals originated after March 2, 1984. Such original
issue discount could arise by the charging of points by the originator of the
mortgages in an amount greater than a statutory de minimis exception, to the
extent that the points are not for services provided by the lender. It is
generally not anticipated that adjustable rate Mortgage Loans will be treated as
issued with original issue discount. However, the application of the OID
Regulations to adjustable rate mortgage loans with incentive interest rates or
annual or lifetime interest rate caps may result in original issue discount.
Original issue discount must generally be reported as ordinary gross
income as it accrues under a constant yield method that takes into account the
compounding of interest, in advance of the cash attributable to such income.
However, Code Section 1272 provides for a reduction in the amount of original
issue discount includible in the income of a holder of an obligation that
acquires the obligation after its initial issuance at a price greater than the
sum of the original issue price and the previously accrued original issue
discount, less prior payments of principal. Accordingly, if such Mortgage Loans
acquired by a Certificateholder are purchased at a price equal to the then
unpaid principal amount of such Mortgage Loans, no original issue discount
attributable to the difference between the issue price and the original
principal amount of such Mortgage Loans (i.e., points) will be includible by
such holder.
MARKET DISCOUNT. Certificateholders also will be subject to the market
discount rules to the extent that the conditions for application of those
sections are met. Market discount on the Mortgage Loans will be determined and
will be reported as ordinary income generally in the manner described above
under "--Federal Income Tax Consequences for REMIC Certificates--Treatment of
Certain Items of REMIC Income and Expense--Market Discount."
RECHARACTERIZATION OF SERVICING FEES. If the servicing fees paid to
Servicers were deemed to exceed reasonable servicing compensation, the amount of
such excess would be nondeductible under Code Section 162 or 212. In this
regard, there are no authoritative guidelines for federal income tax purposes as
to either the maximum amount of servicing compensation that may be considered
reasonable in the context of this or similar transactions or whether, in the
case of the Certificates, the reasonableness of servicing compensation should be
determined on a weighted average or loan-by-loan basis. If a loan-by-loan basis
is appropriate, the likelihood that such amount would exceed reasonable
servicing compensation as to some of the Mortgage Loans would be increased.
Recently issued IRS guidance indicates that a servicing fee in excess of
reasonable compensation ("excess servicing") will cause the Mortgage Loans to be
treated under the "stripped bond" rules. Such guidance provides safe harbors for
servicing deemed to be reasonable and requires taxpayers to demonstrate that the
value of servicing fees in excess of such amounts is not greater than the value
of the services provided.
Accordingly, if the IRS's approach is upheld, a servicer that receives
a servicing fee in excess of such amounts would be viewed as retaining an
ownership interest in a portion of the interest payments on the Mortgage Loans.
Under the rules of Code Section 1286, the separation of ownership of the right
to receive some or all of the interest payments on an obligation from the right
to receive some or all of the principal payments on the obligation would result
in treatment of such Mortgage Loans as "stripped coupons" and "stripped bonds."
While Certificateholders would still be treated as owners of beneficial
interests in a grantor trust for federal income tax purposes, the corpus of such
trust could be viewed as excluding the portion of the Mortgage Loans the
ownership of which is attributed to a servicer, or as including such portion as
a second class of equitable interest. Applicable Treasury regulations treat such
an arrangement as a fixed investment trust, since the multiple classes of trust
interests should be treated as merely facilitating direct investments in the
trust assets and the existence of multiple classes of ownership interests is
incidental to that purpose. In general, such a recharacterization should not
have any significant effect upon the timing or amount of income reported by a
Certificateholder, except that the income reported by a cash method holder may
be slightly accelerated. See "--Stripped Certificates" below for a further
description of the federal income tax treatment of stripped bonds and stripped
coupons.
In the alternative, the amount, if any, by which the servicing fees
paid to the servicers are deemed to exceed reasonable compensation for servicing
could be treated as deferred payments of purchase price by the
Certificateholders to purchase an undivided interest in the Mortgage Loans. In
such event, the present value of such additional payments might be included in
the Certificateholder's basis in such undivided interests for purposes of
determining whether the Certificate was acquired at a discount, at par, or at a
premium. Under this alternative, Certificateholders may also be entitled to a
deduction for unstated interest with respect to each deferred payment. The
Internal Revenue Service may take the position that the specific statutory
provisions of Code Section 1286 described above override the alternative
described in this paragraph. Certificateholders are advised to consult their tax
advisors as to the proper treatment of the amounts paid to the servicers as set
forth herein as servicing compensation or under either of the alternatives set
forth above.
SALE OR EXCHANGE OF CERTIFICATES
Upon sale or exchange of a Certificate, a Certificateholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its aggregate adjusted basis in the Mortgage Loans and other assets
represented by the Certificate. In general, the aggregate adjusted basis will
equal the Certificateholder's cost for the Certificate, increased by the amount
of any income previously reported with respect to the Certificate and decreased
by the amount of any losses previously reported with respect to the Certificate
and the amount of any distributions received thereon. Except as provided above
with respect to market discount on any Mortgage Loans, and except for certain
financial institutions subject to the provisions of Code Section 582(c), any
such gain or loss would be capital gain or loss if the Certificate was held as a
capital asset.
STRIPPED CERTIFICATES
GENERAL. The following general discussion of the anticipated federal
income tax consequences of the purchase, ownership and disposition of Stripped
Certificates, to the extent it relates to matters of law or legal conclusions
with respect thereto, represents the opinion of Counsel to the Depositor,
subject to any qualifications set forth herein. In addition, Counsel to the
Depositor has prepared or reviewed the statements in this Prospectus under the
heading "Certain Federal Income Tax Consequences--Federal Income Tax
Consequences for Certificates as to Which No REMIC Election is Made--Stripped
Certificates," and is of the opinion that such statements are correct in all
material respects. Such statements are intended as an explanatory discussion of
the possible effects of the classification of any Trust Fund as a grantor trust
for federal income tax purposes on investors generally and of related tax
matters affecting investors generally, but do not purport to furnish information
in the level of detail or with the attention to an investor's specific tax
circumstances that would be provided by an investor's own tax advisor.
Accordingly, each investor is advised to consult its own tax advisors with
regard to the tax consequences to it of investing in Stripped Certificates.
Pursuant to Code Section 1286, the separation of ownership of the
right to receive some or all of the principal payments on an obligation from
ownership of the right to receive some or all of the interest payments results
in the creation of "stripped bonds" with respect to principal payments and
"stripped coupons" with respect to interest payments. For purposes of this
discussion, Certificates for which no REMIC election is made and that are
subject to those rules will be referred to as "Stripped Certificates." The
Certificates will be subject to those rules if (i) the Depositor or any of its
affiliates retains (for its own account or for purposes of resale), in the form
of fixed retained yield or otherwise, an ownership interest in a portion of the
payments on the Mortgage Loans, (ii) the Depositor, any of its affiliates or a
servicer is treated as having an ownership interest in the Mortgage Loans to the
extent it is paid (or retains) servicing compensation in an amount greater than
reasonable consideration for servicing the Mortgage Loans (See "--Premium and
Discount--Recharacterization of the Servicing Fees" above) or (iii) Classes of
Certificates are issued in two or more Classes or subclasses representing the
right to non-pro-rata percentages of the interest and principal payments on the
Mortgage Loans.
In general, a holder of a Stripped Certificate will be considered to
own "stripped bonds" with respect to its pro rata share of all or a portion of
the principal payments on each Mortgage Loan and/or "stripped coupons" with
respect to its pro rata share of all or a portion of the interest payments on
each Mortgage Loan, including the Stripped Certificate's allocable share of the
servicing fees paid, to the extent that such fees represent reasonable
compensation for services rendered. See discussion above under "--Premium and
Discount--Recharacterization of Servicing Fees." For this purpose the servicing
fees will be allocated to the Stripped Certificates in proportion to the
respective offering price of each class (or subclass) of Stripped Certificates.
The holder of a Stripped Certificate generally will be entitled to a deduction
each year in respect of the servicing fees, as described above under "Standard
Certificates--General," subject to the limitation described therein.
Code Section 1286 treats a stripped bond or a stripped coupon
generally as a new obligation issued (i) on the date that the stripped interest
is purchased and (ii) at a price equal to its purchase price or, if more than
one stripped interest is purchased, the share of the purchase price allocable to
such stripped interest. Each stripped interest generally will have original
issue discount equal to the excess of its stated redemption price at maturity
(or, in the case of a stripped coupon, the amount payable on the due date of
such coupon) over its issue price. Although the treatment of Stripped
Certificates for federal income tax purposes is not clear in certain respects at
this time, particularly where such Stripped Certificates are issued with respect
to a Trust Fund containing variable-rate Mortgage Loans, the Depositor has been
advised by counsel that (i) the Trust Fund will be treated as a grantor trust
under subpart E, Part 1 of subchapter J of Chapter 1 of Subtitle A of the Code
and not as an association taxable as a corporation, and (ii) each Stripped
Certificate should be treated as a single installment obligation for purposes of
calculating original issue discount and gain or loss on disposition. This
treatment is based on the interrelationship of Code Section 1286 and the
regulations thereunder, Code Sections 1272 through 1275, and the OID
Regulations. While under Code Section 1286 computations with respect to Stripped
Certificates arguably should be made in one of the ways described below under
"Taxation of Stripped Certificates--Possible Alternative Characterizations," the
OID Regulations state, in general, that all debt instruments issued in
connection with the same transaction must be treated as a single debt
instrument. The Trustee will make and report all computations described below
using this aggregate approach, unless substantial legal authority requires
otherwise.
Furthermore, final Treasury regulations issued December 28, 1992
support the treatment of a Stripped Certificate as a single debt instrument
issued on the date it is originated for purposes of calculating any original
issue discount. The preamble to such regulations states that such regulations
are premised on the assumption that an aggregation approach is appropriate in
determining whether original issue discount on a stripped bond or stripped
coupon is de minimis. In addition, under these regulations, a Stripped
Certificate that represents a right to payments of both interest and principal
may be viewed either as issued with original issue discount or market discount
(as described below), at a de minimis original issue discount, or, presumably,
at a premium. The preamble to such regulations also provide that such
regulations are premised on the assumption that generally the interest component
of such a Stripped Certificate would be treated as stated interest under the OID
Regulations. Further, the regulations provide that the purchaser of such a
Stripped Certificate may be required to account for any discount as market
discount rather than original issue discount if either (i) the initial discount
with respect to the Stripped Certificate was treated as zero under the de
minimis rule or (ii) no more than 100 basis points in excess of reasonable
servicing is stripped off the related Mortgage Loans. Any such market discount
would be reportable as described above under "--Federal Income Tax Consequences
for REMIC Certificates--Taxation of Regular Certificates--Market Discount,"
without regard to the de minimis rule therein.
STATUS OF STRIPPED CERTIFICATES. Even if Strip Certificates evidence
an interest in a Trust Fund consisting of Mortgage Loans that are "real estate
assets" within the meaning of Code Section 856(c)(5)(B), and "loans . . .
secured by an interest in real property" within the meaning of Code Section
7701(a)(19)(C)(v), and the interest (including original issue discount) income
on which is an "interest on obligations secured by mortgages on real property"
within the meaning of Code Section 856(c)(3)(B), it is unclear whether the Strip
Certificates, and the income therefrom, will be so characterized. However, the
policies underlying such sections (namely, to encourage or require investments
in mortgage loans by thrift institutions and real estate investment trusts) may
suggest that such characterization is appropriate. Counsel to the Depositor will
not deliver any opinion on these questions. Prospective purchasers to which such
characterization of an investment in Strip Certificates in material should
consult their tax advisors regarding whether the Strip Certificates, and the
income therefrom, will be so characterized.
The Strip Certificates will be "obligation[s] (including any
participation or Certificate of beneficial ownership therein) which . . . [are]
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3)(A) of the Code.
TAXATION OF STRIPPED CERTIFICATES
ORIGINAL ISSUE DISCOUNT. Except as described above under "--General,"
each Stripped Certificate will be considered to have been issued (i) on the date
that the stripped interest is purchased and (ii) at a price equal to its
purchase price or, if more than one stripped interest is purchased, the share of
the purchase price allocable to such stripped interest. Each stripped interest
generally will have original issue discount equal to the excess of its stated
redemption price at maturity (or, in the case of a stripped coupon, the amount
payable on the due date of such coupon) over its issue price. Original issue
discount with respect to a Stripped Certificate must be included in ordinary
income as it accrues, in accordance with a constant yield method that takes into
account the compounding of interest, which may be prior to the receipt of the
cash attributable to such income. Based in part on the OID Regulations and the
amendments to the original issue discount sections of the Code made by the 1986
Act, counsel has advised the Depositor that the amount of original issue
discount required to be included in the income of a holder of a Stripped
Certificate (referred to in this discussion as a "Stripped Certificateholder")
in any taxable year likely will be computed generally as described above under
"--Federal Income Tax Consequences for REMIC Certificates--Taxation of Regular
Certificates--Original Issue Discount." However, with the apparent exception of
a Stripped Certificate issued with de minimis original issue discount, as
described above under "--General," the issue price of a Stripped Certificate
will be the purchase price paid by each holder thereof, and the stated
redemption price at maturity will include the aggregate amount of the payments
to be made on the Stripped Certificate to such Stripped Certificateholder,
presumable under the Prepayment Assumption, other than amounts treated as
qualified stated interest.
If the Mortgage Loans prepay at a rate either faster or slower than
that under the Prepayment Assumption, a Stripped Certificateholder's recognition
of original issue discount will be either accelerated or decelerated and the
amount of such original issue discount will be either increased or decreased
depending on the relative interests in principal and interest on each Mortgage
Loan represented by such Stripped Certificateholder's Stripped Certificate.
While the matter is not free from doubt, the holder of a Stripped Certificate
should be entitled in the year that it becomes certain (assuming no further
prepayments) that the holder will not recover a portion of its adjusted basis in
such Stripped Certificate to recognize an ordinary loss equal to such portion of
unrecoverable basis.
POSSIBLE ALTERNATIVE CHARACTERIZATIONS. As an alternative to the
method described above, the fact that some or all of the interest payments with
respect to the Stripped Certificates will not be made if the Mortgage Loans are
prepaid could lead to the interpretation that such interest payments are
"contingent" within the meaning of the OID Regulations. Under the rules of the
OID Regulations relating to contingent payments, a projected payment schedule
for the Stripped Certificates would be constructed by the Depositor. Interest
accrual and adjustments relating to the Stripped Certificates would be
determined under the general rules of the noncontingent bond method described
above. While not free from doubt, counsel for the Depositor believes that
uncertainty as to the payment of interest arising as a result of the possibility
of prepayment of the Mortgage Loans should not cause the contingent payment
rules under the OID Regulations to apply to interest with respect to the
Stripped Certificates.
SALE OR EXCHANGE OF STRIPPED CERTIFICATES. Sale or exchange of a
Stripped Certificate prior to its maturity will result in gain or loss equal to
the difference, if any, between the amount received and the Stripped
Certificateholder's adjusted basis in such Stripped Certificate, as described
above under "Federal Income Tax Consequences for REMIC Certificates--Taxation of
Regular Certificates--Sale or Exchange of Regular Certificates." To the extent
that a subsequent purchaser's purchase price is exceeded by the remaining
payments on the Stripped Certificates, such subsequent purchaser will be
required for federal income tax purposes to accrue and report such excess as if
it were original issue discount in the manner described above. It is not clear
for this purpose whether the assumed prepayment rate that is to be used in the
case of a Stripped Certificateholder other than original Stripped
Certificateholder should be the Prepayment Assumption or a new rate based on the
circumstances at the date of subsequent purchase.
PURCHASE OF MORE THAN ONE CLASS OF STRIPPED CERTIFICATES. Where an
investor purchases more than one class of Stripped Certificates, it is currently
unclear whether for federal income tax purposes such classes of Stripped
Certificates should be treated separately or aggregated for purposes of the
rules described above.
Because of these possible varying characterizations of Stripped
Certificates and the resultant differing treatment of income recognition,
Stripped Certificateholders are urged to consult their own tax advisors
regarding the proper treatment of Stripped Certificates for federal income tax
purposes.
REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Trustee will furnish, within a reasonable time after the end of
each calendar year, to each Certificateholder or Stripped Certificateholder at
any time during such year, such information (prepared on the basis described
above) as the Trustee deems to be necessary or desirable to enable such
Certificateholders to prepare their federal income tax returns. Such information
will include the amount of original issue discount accrued on Certificates held
by persons other than Certificateholders exempted from the reporting
requirements. The amounts required to be reported by the Trustee may not be
equal to the proper amount of original issue discount required to be reported as
taxable income by a Certificateholder, other than an original Certificateholder.
The Trustee will also file such original issue discount information with the
IRS. If a Certificateholder fails to supply an accurate taxpayer identification
number or if the Secretary of the Treasury determines that a Certificateholder
has not reported all interest and dividend income required to be shown on his
federal income tax return, 31% backup withholding may be required in respect of
any reportable payments, as described above under "--Federal Income Tax
Consequences for REMIC Certificates--Backup Withholding."
TAXATION OF CERTAIN FOREIGN INVESTORS
To the extent that a Certificate evidences ownership in Mortgage Loans
that are issued on or before July 18, 1984, interest or original issue discount
paid by the person required to withhold tax under Code Section 1441 or 1442 to
nonresident aliens, foreign corporations, or other Non-United States Persons
generally will be subject to 30% United States withholding tax, or such lower
rate as may be provided for interest by an applicable tax treaty. Accrued
original issue discount recognized by the Certificateholder on the sale or
exchange of such a Certificate also will be subject to federal income tax at the
same rate.
Treasury regulations provide that interest or original issue discount
paid by the Trustee or other withholding agent to a Non-United States Person
evidencing ownership interest in Mortgage Loans issued after July 18, 1984 will
be "portfolio interest" and will be treated in the manner, and such persons will
be subject to the same certification requirements described above under
"--Federal Income Tax Consequences for REMIC Certificates--Taxation of Certain
Foreign Investors--Regular Certificates."
STATE TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"Certain Federal Income Tax Consequences" herein, potential investors should
consider the state income tax consequences of the acquisition, ownership, and
disposition of the Offered Certificates. State income tax law may differ
substantially from the corresponding federal tax law, and this discussion does
not purport to describe any aspect of the income tax laws of any state.
Therefore, potential investors should consult their own tax advisors with
respect to the various tax consequences of investment in the Offered
Certificates.
PLAN OF DISTRIBUTION
Certificates are being offered hereby in series through one or more
underwriters or groups of underwriters (the "Underwriters"). The related
Prospectus Supplement will set forth the terms of offering of a Series of
Certificates, including the public offering or purchase price of each Class of
Certificates of such Series being offered thereby or the method by which such
price will be determined and the net proceeds to the Depositor from the sale of
each such Class. Such Certificates will be acquired by the Underwriters for
their own account and may be resold from time to time in one or more
transactions including negotiated transactions, at fixed public offering prices
or at varying prices to be determined at the time of sale or at the time of
commitment therefor. The managing Underwriter or Underwriters with respect to
the offer and sale of a particular Series of Certificates will be set forth on
the cover of the Prospectus Supplement relating to such Series and the members
of the underwriting syndicate, if any, will be named in such Prospectus
Supplement.
In connection with the Sale of the Certificates, Underwriters may
receive compensation from the related Transferor or the Depositor or from
purchasers of the Certificates in the form of discounts, concessions or
commissions. Underwriters and dealers participating in the distribution of the
Certificates may be deemed to be Underwriters in connection with such
Certificates, and any discounts or commissions received by them from the related
Transferor or the Depositor and any profit on the resale of Certificates by them
may be deemed to be underwriting discounts and commissions under the Securities
Act. The Prospectus Supplement will describe any such compensation paid by the
related Transferor or the Depositor.
It is anticipated that the underwriting agreement pertaining to the
sale of any Series of Certificates will provide that the obligations of the
Underwriters will be subject to certain conditions precedent, that the
Underwriters will be obligated to purchase all such Certificates if any are
purchased and that the related Transferor or the Depositor will indemnify the
underwriters against certain civil liabilities, including liabilities under the
Securities Act, as amended.
LEGAL MATTERS
The legality of the Certificates and certain federal income tax
matters will be passed upon for the Depositor by Brown & Wood LLP.
FINANCIAL INFORMATION AND ADDITIONAL INFORMATION
A new Trust Fund will be formed with respect to each Series of
Certificates. No Trust Fund will engage in any business activities or have any
assets or obligations prior to the issuance of the related Series of
Certificates. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement.
Copies of the Registration Statement to which this Prospectus forms a
part and the exhibits thereto are on file at the offices of the Securities and
Exchange Commission in Washington, D.C., and may be obtained at rates prescribed
by the Commission upon request to the Commission and inspected, without charge,
at the offices of the Commission.
Copies of FHLMC's most recent Offering Circular for FHLMC
Certificates, FHLMC's Information Statement and most recent Supplement thereto
and any quarterly report made available by FHLMC can be obtained in writing or
calling FHLMC's Investor Relations Department at 8200 Jones Branch Drive,
McLean, Virginia 22102 (800-336-FMPC). The Depositor did not participate in the
preparation of FHLMC's Offering Circular, Information Statement or any
Supplement thereto or any such quarterly report.
Copies of FNMA's most recent Prospectus for FNMA Certificates and
FNMA's annual report and quarterly financial statements as well as other
financial information are available from the Vice President for Investor
Relations of FNMA, 3900 Wisconsin Avenue, N.W., Washington, D.C. 20016
(202-752-7585). The Depositor did not participate in the preparation of FNMA's
Prospectus or any such report, financial statement or other financial
information.
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL TERMS
PAGE
----
"1986 Act"..................................................................105
"Act"........................................................................91
"Administrator".............................................................iii
"Agency Securities"...........................................................i
"Annual Reduction"...........................................................93
"Applicable Accounting Standards"............................................69
"APR"........................................................................51
"Assets"......................................................................i
"Beneficial Owners"..........................................................12
"BIF"........................................................................70
"Book Entry Certificates"....................................................12
"Call Risk"..................................................................21
"Certificate Account"........................................................36
"Certificate Guaranty Policy"................................................57
"Certificate Interest Rate"...................................................4
"Certificateholders".........................................................12
"Certificates"................................................................i
"Charter Act"................................................................46
"Class".......................................................................i
"Clearing Agency Participants"...............................................12
"Clearing Agency"............................................................12
"Code".......................................................................13
"Collateral Value"...........................................................51
"Commission".................................................................iv
"Committee Report"..........................................................108
"Companion Certificates".......................................................
"Compound Interest Certificates".............................................35
"Contract Loan Schedule".....................................................67
"Contract Pool"...............................................................8
"Contracts"...................................................................i
"Conventional Contracts".....................................................10
"Conventional Mortgage Loans".................................................9
"Cooperative Loans"..........................................................42
"Cooperatives"................................................................9
"Counsel to the Depositor"..................................................105
"Credit Enhancement"..........................................................8
"Defaulted Loan".............................................................52
"Depositor"...................................................................i
"Disqualified Organization".................................................122
"Distribution Date"...........................................................3
"DOL"........................................................................81
"Due Period"..................................................................3
"Eligible Corporation".........................................................
"ERISA"..................................................................12, 81
"excess servicing"..........................................................107
"Excess Spread"..............................................................44
"Exchange Act"..............................................................iii
"Extension Risk".............................................................17
"FASIT"........................................................................
"FASIT Provisions".............................................................
"FASIT Qualification Test".....................................................
"FDIC"...................................................................54, 81
"FFI"........................................................................58
"FHA"..........................................................................
"FHA Claims Administration Agreement"..........................................
"FHA Claims Administrator"...................................................19
"FHA Loans"..................................................................34
"FHA Reserve"................................................................72
"FHLMC Act"..................................................................37
"FHLMC Certificate Group"....................................................37
"FHLMC Certificates"..........................................................9
"FHLMC"....................................................................i, 7
"Final REMIC Regulations"....................................................83
"FmHA Loans".................................................................34
"FNMA Certificates"........................................................9, 9
"FNMA".....................................................................i, 7
"Garn-St. Germain Act".........................................................
"GNMA Certificates"........................................................9, 9
"GNMA Issuer"................................................................34
"GNMA".....................................................................i, 7
"Guaranty Agreement".........................................................35
"Holders".................................................................1, 10
"Housing Act"................................................................34
"Imminent Prepayment"..........................................................
"improper knowledge".........................................................99
"Interest Only Certificates"..............................................1, 27
"IO"...........................................................................
"IRS"........................................................................86
"Issuer"...............................................................i, 2, 25
"Manufacturer's Invoice Price"...............................................41
"Market Discount"............................................................91
"Master Servicer".............................................................3
"Maximum Variable Interest Rate"..............................................4
"Minimum Variable Interest Rate"..............................................4
"Mortgage Asset Pool".........................................................i
"Mortgage Assets".............................................................i
"Mortgage Loans"....................................................i, 6, 7, 84
"Mortgage Notes".............................................................33
"Mortgage Pool Insurance Policy".............................................45
"Mortgage Pool"...............................................................6
"Mortgage Rates".............................................................34
"Mortgaged Properties".......................................................33
"Mortgages"..................................................................33
"NCUA".......................................................................81
"Non-Priority Certificates"....................................................
"Non-U.S. Person"..............................................................
"noneconomic residual interest"..............................................99
"Notional Principal Balance".................................................25
"Offered Certificates"........................................................i
"OID Regulations"............................................................86
"Original Issue Discount"................................................86, 93
"OTS"....................................................................68, 81
"Parties in Interest"........................................................81
"Pass-Through Entity"..........................................................
"Permitted Investments"......................................................42
"Plan Asset Regulations".....................................................81
"Plans"......................................................................81
"Policy Statement"...........................................................81
"Pool Insurer"...............................................................45
"Pooling and Servicing Agreement"..............................................
"Pre-Funding Account"..........................................................
"Pre-Funding Arrangement"......................................................
"Premium REMIC Regular Certificates"...........................................
"Prepayment Assumption"......................................................86
"Principal Only Certificates".............................................1, 27
"Principal Prepayments"......................................................30
"Priority Certificates"......................................................28
"Prohibited Transactions"................................................26, 81
"Prospectus Supplement".......................................................i
"PTC"........................................................................35
"PTCE 83-1"....................................................................
"Rating Agency"..............................................................13
"Record Date"................................................................28
"Registrar"..................................................................25
"Regular Certificateholders"...................................................
"Regular Certificates"...................................................11, 83
"Reigle Act".................................................................70
"REIT".......................................................................84
"Relief Act".........................................................22, 61, 71
"REMIC Pool".................................................................84
"REMIC"..............................................................ii, 10, 84
"Reports"...................................................................iii
"Reserve Fund"...............................................................46
"Residual Certificateholders"..................................................
"Residual Certificates"..............................................11, 20, 83
"Residual Holders"...........................................................20
"Retail Class Certificate"...................................................86
"SAIF".......................................................................54
"SBJPA"........................................................................
"Scheduled Amortization Certificates"........................................27
"Scheduled Principal"........................................................38
"Seared Contracts".............................................................
"Secured Property"...........................................................75
"Securities Act"............................................................iii
"Senior Certificates"........................................................43
"Series"......................................................................i
"Servicer"....................................................................2
"SMMEA"..................................................................12, 80
"Special Allocation Certificates"............................................27
"Special Hazard Insurance Policy"............................................45
"Startup Day"................................................................85
"Subordinated Certificates"..................................................43
"Subsequent Mortgage Assets"..............................................9, 41
"Subsequent Transfer Agreement"................................................
"Subservicing Agreement".....................................................47
"TAMRA"......................................................................83
"Thrift Institution".........................................................84
"TILA".......................................................................70
"Title I Contracts".......................................................8, 40
"Title I Mortgage Loans"..................................................8, 33
"Title V"....................................................................71
"TMP"........................................................................85
"Transfer Report"............................................................73
"Transferor".................................................................32
"Trust Fund"...............................................................i, 1
"Trustee".....................................................................3
"UCC"........................................................................65
"Underlying Loans"...........................................................16
"Underwriters"..............................................................112
"United States Person"..................................................99, 100
"Unsecured Contracts"...............................................i, 7, 8, 40
"VA Loans"...................................................................34
"Variable Interest Rate Certificates".........................................2
"Window Period Loans"........................................................68
NO DEALER, SALESMAN, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IN CONNECTION WITH
THE OFFER CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE DEPOSITOR, ANY AFFILIATE OF THE
DEPOSITOR OR ANY UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY STATE TO ANY PERSON TO WHO IT
IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH STATE. THE DELIVERY OF
THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DOES NOT IMPLY THAT
THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
-----------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT PAGE
Summary of Prospectus Supplement...............................................
Risk Factors...................................................................
Use of Proceeds................................................................
The Mortgage Loan Pool.........................................................
Description of the Certificates................................................
The Guaranty Policy............................................................
FHA Insurance for Title I Mortgage Loans.......................................
The Depositor..................................................................
The Transferor and Servicer....................................................
Prepayment and Yield Considerations............................................
Description of Book Entry Procedures...........................................
Certain Federal Income Tax Consequences........................................
ERISA Considerations...........................................................
Legal Investment...............................................................
Ratings........................................................................
Experts........................................................................
Legal Matters..................................................................
Underwriting...................................................................
Appendix A.....................................................................
PROSPECTUS
Prospectus Supplement.......................................................iii
Available Information........................................................iv
Incorporation of Certain Documents by Reference..............................iv
Table of Contents.............................................................v
Summary of Prospectus.........................................................1
Risk Factors.................................................................17
Description of the Certificates..............................................31
Assets Securing or Underlying the Certificates...............................40
Credit Enhancement...........................................................54
Servicing of the Mortgage Loans and Contracts................................59
The Pooling and Servicing Agreement..........................................65
Use of Proceeds..............................................................73
The Depositor................................................................73
The Servicer and the Transferor..............................................74
The Trustee..................................................................77
Certain Legal Aspects of the Mortgage Assets.................................78
Legal Investment Matters....................................................102
ERISA Considerations........................................................103
Certain Federal Income Tax Consequences.....................................105
State Tax Consequences......................................................142
Plan of Distribution........................................................142
Legal Matters...............................................................143
Financial Information and Additional Information............................143
Appendix A..................................................................145
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Until 90 days after the date of this Prospectus Supplement, all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus
Supplement and Prospectus. This obligation is in addition to the obligation of
dealers to deliver a Prospectus Supplement and Prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
$-----------------
FIRSTPLUS
INVESTMENT CORPORATION
FIRSTPLUS FINANCIAL, INC.
(TRANSFEROR AND SERVICER)
-----------
PROSPECTUS SUPPLEMENT
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[UNDERWRITER]
____________, 199__
BROWN & WOOD LLP
815 Connecticut Avenue, N.W.
Washington, D.C. 20006-4004
Telephone: (202) 973-0600
Facsimile: (202) 223-0485
June 29, 1998
VIA EDGAR
- ---------
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: FIRSTPLUS Investment Corporation
Registration Statement on Form S-3
----------------------------------
Ladies and Gentlemen:
On behalf of FIRSTPLUS Investment Corporation (the "Registrant"), we have
filed today a registration statement on Form S-3. Pursuant to Rule 429 under the
Securities Act of 1933, as amended, the prospectuses that are part of this
Registration Statement are combined prospectuses and include all the information
currently required in a prospectus relating to the securities covered by
Registration Statement No. 333-26527 previously filed by the Registrant.
If you have any questions or require any additional information with
respect to the Registration Statement or any matters related to this filing,
please telephone either Edward E. Gainor at (202) 973-0626 or John Arnholz at
(202) 973-0634.
Very truly yours,
Edward E. Gainor
