<PAGE>
Filed Pursuant to Rule 424(b)(2)
File Number 333-00282
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED NOVEMBER 23, 1998
METROPOLITAN MORTGAGE COMPANY
MASTER SERVICER
TFC HOME EQUITY LOAN TRUST 1998-1
TFC HOME EQUITY LOAN ASSET-BACKED CERTIFICATES, SERIES 1998-1
$93,860,000
CONSIDER CAREFULLY THE CERTIFICATES WILL BE ISSUED BY THE TFC HOME
THE RISK FACTORS EQUITY LOAN TRUST 1998-1 PURSUANT TO A POOLING AND
BEGINNING ON PAGE SERVICING AGREEMENT TO BE ENTERED INTO AMONG
S-11 IN THIS METROPOLITAN MORTGAGE COMPANY, AS MASTER SERVICER,
PROSPECTUS SUPPLEMENT TRANSAMERICA CONSUMER MORTGAGE RECEIVABLES
AND PAGE 13 IN THE CORPORATION, AS SELLER, AND THE FIRST NATIONAL
ACCOMPANYING BANK OF CHICAGO, AS TRUSTEE.
PROSPECTUS.
<TABLE>
<CAPTION>
Initial Pass-
Certificate Through Price to Underwriting Proceeds to
Class Balance Rate Public Discount Seller (1)
<S> <C> <C> <C> <C> <C>
A-1 $78,066,000 6.60%(2) 100.000%(3) 0.375% 99.625%
A-2 $15,794,000 Variable(4) 100.000% 0.375% 99.625%
</TABLE>
The certificates will
represent interests
only in the trust
created for Series
1998-1 and will not
represent interests
in or obligations of
Transamerica Consumer
Mortgage Receivables
Corporation,
Metropolitan Mortgage
Company or any of
their affiliates.
(1) Before deducting expenses payable by
Transamerica Consumer Mortgage Receivables
Corporation, estimated to be $250,000.
(2) On any payment date that occurs after the
Optional Termination Date (as defined in this
prospectus supplement), the pass-through rate
shall be 7.10%.
(3) Plus accrued interest at the pass-through rate
from November 1, 1998.
This prospectus (4) The lesser of (a) (i) One-Month LIBOR (as
supplement may be defined in this prospectus supplement) plus
used to offer and 0.54% with respect to any payment date that
sell the Class A occurs on or prior to the Optional Termination
Certificates only if Date (as defined in this prospectus
accompanied by the supplement) or (ii) One-Month LIBOR plus 1.08%
prospectus. with respect to any payment date that occurs
after the Optional Termination Date and (b)
the Group 2 Net WAC Cap (as defined in this
prospectus supplement).
The Trust will also issue the Class R Certificate
which will not be sold to the public. The Class R
Certificate is not being offered by this
prospectus supplement and will be subordinated to
the Class A Certificates.
Certain distributions on the Class A Certificates will be unconditionally
guaranteed pursuant to the terms of a certificate insurance policy to be
issued by
[AMBAC LOGO GOES HERE]
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED THAT THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PRUDENTIAL SECURITIES INCORPORATED
NOVEMBER 23, 1998
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS
You should rely only on the information contained in this prospectus
supplement and the accompanying prospectus or to which we have referred you in
the prospectus supplement or prospectus. We have not authorized anyone to
provide you with information that is different. This prospectus supplement and
the accompanying prospectus may only be used where it is legal to sell the
certificates. The information in this prospectus supplement and the
accompanying prospectus may only be accurate on the respective dates of these
documents.
We provide information to you about the Class A Certificates in two separate
documents that progressively provide more detail: (a) the accompanying
prospectus, which provides general information, some of which may not apply to
your series of certificates, and (b) this prospectus supplement, which
describes the specific terms of your series of certificates. IF THE TERMS OF
YOUR CERTIFICATES VARY BETWEEN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT.
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following table of contents provides the pages
on which these captions are located.
You can find a listing of the pages where capitalized terms used in this
prospectus supplement and the accompanying prospectus are defined under the
caption "Index of Principal Definitions" on page S-74 in this document and at
the end of the accompanying prospectus.
S-2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PROSPECTUS SUPPLEMENT
SUMMARY INFORMATION....................................................... S-5
What You Own............................................................. S-5
Information about the Mortgage Pool...................................... S-5
The Class A Certificates................................................. S-5
Initial Certificate Balance of the Certificates.......................... S-6
Denominations............................................................ S-6
Distributions on the Certificates........................................ S-6
General.................................................................. S-6
Distributions of Interest................................................ S-7
Distributions of Principal............................................... S-7
Credit Enhancement....................................................... S-8
Advances................................................................. S-9
Optional Termination and Termination Auction............................. S-9
Yield and Prepayment Considerations...................................... S-9
Book-Entry Registration.................................................. S-10
Ratings.................................................................. S-10
Legal Investment......................................................... S-10
Erisa Considerations..................................................... S-10
Tax Status............................................................... S-10
RISK FACTORS.............................................................. S-11
DESCRIPTION OF THE MORTGAGE POOL.......................................... S-19
General.................................................................. S-19
Group 1.................................................................. S-19
Group 2.................................................................. S-26
Conveyance of Subsequent Loans and
Pre-Funding Account..................................................... S-32
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS............................... S-34
Special Yield and Prepayment Considerations Applicable to the Class A-2
Certificates............................................................ S-36
Prepayment Model......................................................... S-37
Class A-1 Certificates................................................... S-40
Class A-2 Certificates................................................... S-41
THE MASTER SERVICER--ORIGINATION AND SERVICING EXPERIENCE................. S-42
General.................................................................. S-42
Metropolitan Mortgage Company............................................ S-42
LOSS AND DELINQUENCY EXPERIENCE........................................... S-46
DESCRIPTION OF THE CERTIFICATES........................................... S-47
General.................................................................. S-47
Final Scheduled Payment Dates............................................ S-48
Representations and Warranties of the Seller and the Master Servicer..... S-49
Distributions............................................................ S-49
Credit Enhancement....................................................... S-55
Advances; Compensating Interest.......................................... S-57
Servicing Compensation................................................... S-58
Certain Matters Regarding the Master Servicer............................ S-58
Master Servicer Termination Events....................................... S-59
Rights Upon the Occurrence of a Master Servicer Termination Event........ S-60
</TABLE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
Termination; Purchase of Home Equity Loans.............................. S-60
Amendment of Pooling and Servicing Agreement............................ S-61
Assignment of Home Equity Loans......................................... S-62
THE CERTIFICATE INSURANCE POLICY AND THE INSURER......................... S-63
The Insurer............................................................. S-63
The Certificate Insurance Policy........................................ S-65
THE TRUSTEE.............................................................. S-67
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................. S-67
ERISA CONSIDERATIONS..................................................... S-69
LEGAL INVESTMENT......................................................... S-71
USE OF PROCEEDS.......................................................... S-71
UNDERWRITING............................................................. S-72
EXPERTS.................................................................. S-72
RATINGS.................................................................. S-73
LEGAL MATTERS............................................................ S-73
INDEX OF DEFINITIONS..................................................... S-74
APPENDIX A--Global Clearance, Settlement and Tax Documentation
Procedures.............................................................. A-1
APPENDIX B--The Master Servicer Underwriting Criteria.................... B-1
PROSPECTUS
AVAILABLE INFORMATION.................................................... 2
REPORTS TO HOLDERS....................................................... 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.......................... 3
SUMMARY OF PROSPECTUS.................................................... 4
Seller.................................................................. 4
Issuer.................................................................. 4
Master Servicer......................................................... 4
Trustee................................................................. 4
Cut-off Date............................................................ 4
Closing Date............................................................ 4
Description of Certificates............................................. 4
Payment Date............................................................ 5
Record Date............................................................. 5
Determination Date...................................................... 5
Interest................................................................ 5
Principal............................................................... 6
Denominations........................................................... 7
Registration of the Certificates........................................ 7
The Trust Property...................................................... 8
Optional Termination.................................................... 9
Mandatory Termination................................................... 9
Yield and Prepayment Considerations..................................... 9
Credit Enhancement...................................................... 10
Advances................................................................ 10
Servicing Fee........................................................... 11
</TABLE>
S-3
<PAGE>
PAGE PAGE
<TABLE>
<S> <C>
Ratings.................................................................... 11
Certain Legal Aspects of the Home Equity Loans............................. 11
Tax Status of the Certificates............................................. 12
ERISA Considerations....................................................... 12
Legal Investment........................................................... 12
Use of Proceeds............................................................ 12
RISK FACTORS................................................................ 13
Risks of the Home Equity Loans............................................. 13
Limited Operating History of TransAmerica Mortgage Company................. 15
Certificates............................................................... 15
Creditors' Rights and Bankruptcy Considerations............................ 16
Yield and Prepayment Considerations........................................ 17
Original Issue Discount.................................................... 17
DESCRIPTION OF THE MORTGAGE POOLS........................................... 18
General.................................................................... 18
Payments on the Home Equity Loans.......................................... 19
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS................................. 20
THE TRUSTS.................................................................. 21
TRANSAMERICA FINANCE CORPORATION............................................ 22
THE MASTER SERVICER AND ITS AFFILIATES...................................... 22
THE SELLER.................................................................. 23
THE CONSUMER MORTGAGE LOAN PROGRAM.......................................... 23
Lending.................................................................... 23
Credit Policy and Procedures Relating to Consumer Loans.................... 24
Servicing of Consumer Mortgage Loans....................................... 25
Delinquency and Loss Experience............................................ 25
DESCRIPTION OF THE CERTIFICATES............................................. 26
General.................................................................... 26
Interest................................................................... 27
Principal.................................................................. 27
Assignment of the Home Equity Loans........................................ 28
Representations and Warranties of the Seller............................... 29
Payments on the Home Equity Loans.......................................... 30
Advances; Servicing Advances............................................... 31
Distributions.............................................................. 31
Optional Disposition of Home Equity Loans.................................. 33
Mandatory Disposition of Home Equity Loans................................. 33
Reports to Holders......................................................... 33
Description of Credit Enhancement.......................................... 34
Payment of Certain Expenses................................................ 37
Servicing Compensation..................................................... 37
Servicing Standards........................................................ 38
Use of Subservicers........................................................ 39
Servicing Certificates and Audits.......................................... 40
</TABLE>
<TABLE>
<S> <C>
Limitations on Liability of the Master Servicer and Its Agents............ 40
Removal and Resignation of Master Servicer................................ 40
Registration and Transfer of the Certificates............................. 41
CERTAIN LEGAL ASPECTS OF THE HOME EQUITY LOANS............................. 44
General................................................................... 45
Foreclosure in General.................................................... 45
Junior Mortgages.......................................................... 46
Rights of Redemption...................................................... 47
Anti-Deficiency Legislation and Other Limitations on Lenders.............. 47
Enforceability of Certain Provisions...................................... 48
Relief Act Limitations on Interest Payments and Foreclosures.............. 49
Environmental Legislation................................................. 49
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................... 49
General................................................................... 49
REMICS.................................................................... 50
Taxation of Owners of REMIC Regular Certificates.......................... 51
Taxation of Owners of REMIC Residual Certificates......................... 56
Mark-to-Market Rules...................................................... 61
Possible Pass-Through of Miscellaneous Itemized Deductions................ 61
Sales of REMIC Certificates............................................... 61
Prohibited Transactions and Other Possible REMIC Taxes.................... 62
Tax and Restrictions on Transfers of REMIC Residual Certificates to
Certain Organizations.................................................... 63
Termination............................................................... 64
Reporting and Other Administrative Matters................................ 64
Backup Withholding With Respect to REMIC Certificates..................... 65
Foreign Investors in REMIC Certificates................................... 65
STATE AND OTHER TAX CONSEQUENCES........................................... 66
ERISA CONSIDERATIONS....................................................... 66
Plan Asset Regulation..................................................... 67
Prohibited Transaction Exemptions......................................... 67
Insurance Company General Accounts........................................ 69
Representation from Investing Plans....................................... 70
Tax Exempt Investors...................................................... 70
Consultation With Counsel................................................. 70
LEGAL INVESTMENT........................................................... 71
USE OF PROCEEDS............................................................ 71
PLAN OF DISTRIBUTION....................................................... 71
RATINGS.................................................................... 71
LEGAL MATTERS.............................................................. 72
INDEX OF PRINCIPAL DEFINITIONS............................................. I-1
</TABLE>
S-4
<PAGE>
SUMMARY INFORMATION
The following summary highlights selected information from this prospectus
supplement. It does not contain all of the information that you need to
consider in making your investment decision. To understand the terms of the
Class A Certificates, read carefully this entire prospectus supplement and the
accompanying prospectus.
This summary provides an overview of certain calculations, cash flows and other
information to aid your understanding and is qualified by the full description
of these calculations, cash flows and other information in this prospectus
supplement and the accompanying prospectus.
Capitalized terms used in this prospectus supplement and not otherwise defined
herein have the meanings assigned in the prospectus.
WHAT YOU OWN
Your certificates represent ownership of a portion of the Trust. The Trust
contains a pool of home equity loans and certain other assets, as described
under "Description of the Certificates--General" in this prospectus supplement.
THE CLASS A CERTIFICATES ONLY REPRESENT INTERESTS IN THE ASSETS OF THE TRUST.
ALL PAYMENTS TO YOU WILL COME ONLY FROM THE AMOUNTS RECEIVED IN CONNECTION WITH
THOSE ASSETS.
INFORMATION ABOUT THE MORTGAGE POOL
The mortgage pool consists of approximately 3,076 fixed or floating rate home
equity loans with an aggregate principal balance as of October 31, 1998 of
approximately $81,519,179. All of the home equity loans are secured by
residential properties and each is set to mature within 30 years of the date it
was originated.
The mortgage pool consists of two loan groups, one consisting only of fixed
rate home equity loans and the other consisting primarily of floating rate home
equity loans. As of October 31, 1998, the fixed rate group consists of
approximately 2,971 fixed rate home equity loans with an aggregate principal
balance of approximately $68,316,803 and the other loan group consists of
approximately 103 floating rate and two fixed rate home equity loans with an
aggregate principal balance of approximately $13,202,376.
Transamerica Consumer Mortgage Receivables Corporation will deposit a portion
of the proceeds from the issuance of the certificates into a pre-funding
account, which the Trust will use to purchase additional home equity loans for
inclusion in the mortgage pool after the date of issuance of the certificates.
See "Description of the Mortgage Pool--Conveyance of Subsequent Loans and Pre-
Funding Account" in this prospectus supplement.
For a further description of the home equity loans in each loan group, see
"Description of the Mortgage Pool" in this prospectus supplement.
THE CLASS A CERTIFICATES
Transamerica Consumer Mortgage Receivables Corporation will deposit the home
equity loans into the Trust. The Trust has been created for the purpose of
issuing the TFC Home Equity Loan Asset-Backed Certificates, Series 1998-1.
S-5
<PAGE>
The approximate initial certificate balance, pass-through rate and last
scheduled payment date of each class of the Class A Certificates will be as
follows:
<TABLE>
<CAPTION>
Pass-
Initial Certificate Through Last Scheduled
Class Balance Rate Payment Date
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
A-1 $78,066,000 6.60%(1) March 25, 2030
A-2 $15,794,000 Variable(2) March 25, 2030
</TABLE>
(1) On any payment date that occurs after the Optional Termination Date (as
defined in "Description of the Certificates--Distributions--Interest" in
this prospectus supplement), the Pass-Through Rate shall be 7.10%.
(2) The lesser of (a) (i) One-Month LIBOR (as defined in "Description of the
Certificates--Distributions--Interest" in this prospectus supplement) plus
0.54% with respect to any payment date that occurs on or prior to the
Optional Termination Date (as defined in "Description of the Certificates--
Termination; Purchase of Home Equity Loans" in this prospectus supplement)
or (ii) One-Month LIBOR plus 1.08% with respect to any payment date that
occurs after the Optional Termination Date and (b) the Group 2 Net WAC Cap
for such payment date. The "Group 2 Net WAC Cap" for any payment date will
equal the average of the Net Mortgage Rates (as defined below) for the home
equity loans in such loan group as of the first day of the preceding
calendar month less the premium payable to the certificate insurer with
respect to such loan group (calculated as a per annum rate) and, if such
payment date occurs after the date that is six months after the date of
issuance of the certificates, less 0.75%, with such average weighted by the
respective principal balances of each such home equity loan as of such
first day. The "Net Mortgage Rate" for any home equity loan is the interest
rate for such loan less the per annum rate used to determine the master
servicing fee.
The Class A-1 Certificates correspond to the group of fixed rate loans ("Loan
Group 1") and the Class A-2 Certificates correspond to the other group of fixed
and floating rate loans ("Loan Group 2"). Each class of certificates generally
will receive distributions based only on principal and interest collected from
the home equity loans in the corresponding loan group. However, under certain
circumstances the certificates may receive distributions based on payments
collected from the other loan group, as described in "Description of the
Certificates--Distributions--Payment Priority" and "--Credit Enhancement--
Cross-Collateralization" in this prospectus supplement.
The Trust will also issue the Class R Certificate which will not be sold to the
public. The Class R Certificate is not being offered by this prospectus
supplement and will be subordinated to the Class A Certificates.
DENOMINATIONS
The Class A Certificates are offered in minimum denominations of $100,000 each
and multiples of $1,000 in excess thereof.
DISTRIBUTIONS ON THE CERTIFICATES
GENERAL
Each month, the Trustee, The First National Bank of Chicago, will make
distributions of interest and principal to the holders of the certificates. The
first payment date will be December 28, 1998. Thereafter, distributions will be
made on the 25th day of each month, or if such 25th day is not a business day,
on the next business day.
The mortgagors will pay interest and principal on the home equity loans during
the month to the Master Servicer. On the payment date in the next month, the
Trustee will distribute the
S-6
<PAGE>
amount collected by the Master Servicer from each loan group, net of the master
servicing fee, reimbursements for certain advances made and expenses incurred
by the Master Servicer and the premium under the certificate insurance policy,
to the holders of the certificates related to that loan group. See "Description
of the Certificates--Distributions" in this prospectus supplement.
DISTRIBUTIONS OF INTEREST
The Class A-1 Certificates will accrue interest for each payment date in an
amount equal to 1/12th of the annual pass-through rate for that class of
certificates multiplied by the related certificate balance immediately prior
such payment date. The Class A-2 Certificates will accrue interest for each
payment date in an amount determined on the basis of the actual number of days
elapsed over 360 at the annual pass-through rate for that class of certificates
multiplied by the related certificate balance immediately prior to such payment
date.
The annual pass-through rate for each class of Class A Certificates is set
forth on the cover page of this prospectus supplement. The interest period for
the Class A-1 Certificates for each payment date is the calendar month
preceding such payment date. The interest period for the Class A-2 Certificates
is the period from the preceding payment date (or from the date of issuance of
the certificates with respect to the first payment date) through the day prior
to the payment date. See "Description of the Certificates--Distributions--
Interest" in this prospectus supplement.
It is possible that, on any given payment date, there will be insufficient
payments from the home equity loans to cover interest accrued on the
certificates. If there are insufficient payments on the home equity loans, the
Master Servicer does not advance its own funds to cover that interest
shortfall, and there is a default by Ambac Assurance Corporation under the
certificate insurance policy, such interest shortfall will be borne by the
related Class of Certificates. See "Description of the Certificates--Advances;
Compensating Interest" and "The Certificate Insurance Policy and the Insurer--
The Certificate Insurance Policy" in this prospectus supplement.
LIBOR. The pass-through rate for the Class A-2 Certificates will be adjusted
each month based on changes in the London Interbank Offered Rate for one-month
U.S. dollar deposits, as described in "Description of the Certificates--
Distributions--Interest" in this prospectus supplement.
Compensating Interest. When mortgagors make prepayments in full, they need not
pay a full month's interest on the prepayment amount. Instead, they are
required to pay interest only to the date of such prepayment. To compensate
certificateholders for the shortfall in interest this causes, the Master
Servicer will pay compensating interest to the certificateholders out of the
master servicing fee it collects. The Master Servicer will not pay any
compensating interest when mortgagors make partial prepayments. See
"Description of the Certificates--Advances; Compensating Interest" and "Yield
and Prepayment Considerations" in this prospectus supplement.
DISTRIBUTIONS OF PRINCIPAL
On each payment date, a certain portion of the payments collected by the Master
Servicer on all of the home equity loans in each loan group will be distributed
to the certificates related to
S-7
<PAGE>
such loan group as principal. See "Description of the Certificates--
Distributions--Payment Priority" in this prospectus supplement.
It is possible that there will be insufficient payments from the home equity
loans to cover all principal payments on the Class A Certificates. The
certificate insurance policy unconditionally guarantees the ultimate payment of
principal on the Class A Certificates. In the event of a default by Ambac
Assurance Corporation under the certificate insurance policy, however, you may
not recover the full principal amount your certificates. See "Description of
the Certificates--Credit Enhancement" and "The Certificate Insurance Policy and
the Insurer--The Certificate Insurance Policy" in this prospectus supplement.
CREDIT ENHANCEMENT
Overcollateralization. Interest collected each month on the home equity loans
in each loan group generally will exceed the amount of interest accrued on the
related certificates. A portion of such excess interest, net of the fees and
reimbursements paid to the Master Servicer and the premium paid under the
certificate insurance policy, will initially be distributed as principal to the
Class A Certificates. As a result of such principal distributions (to the
extent not offset by losses on the home equity loans), the Class A Certificates
will become "overcollateralized"; i.e., the aggregate principal balance of the
home equity loans in each loan group will become greater than the aggregate
certificate balance of the related certificates. The Pooling and Servicing
Agreement requires that a certain level of overcollateralization be maintained
for the certificates related to each loan group. Once a required level has been
reached, excess interest will no longer be used to accelerate the amortization
of the related certificates. Whenever the level of overcollateralization falls
below the required level, excess interest will again be paid as principal to
the related certificates until the required level has been reached. Excess
interest that is not paid to the Class A Certificates in order to create or
maintain the required overcollateralization level, or used to make certain
other payments as described in this prospectus supplement, will be passed
through to the Class R Certificate. See "Description of the Certificates--
Credit Enhancement--Overcollateralization Resulting from Cash Flow Structure"
in this prospectus supplement.
Cross-Collateralization. The Pooling and Servicing Agreement provides for
cross-collateralization through the application of excess interest and certain
other excess amounts generated by one loan group to fund shortfalls with
respect to the other loan group and to meet the required level of
overcollateralization for the other loan group. See "Description of the
Certificates--Distributions" in this prospectus supplement.
The Certificate Insurance Policy. A certificate insurance policy will be issued
by Ambac Assurance Corporation in favor of the Trustee for the benefit of the
holders of the Class A Certificates. The certificate insurance policy will
unconditionally guarantee payment of the interest accrued on each Class A
Certificate on each payment date and the ultimate payment of principal on the
Class A Certificates. The certificate insurance policy will not guarantee any
rate of principal payments on the Class A Certificates and will not guarantee
payments of any LIBOR carryover amount with respect to the Class A-2
Certificates. In the event of a default by Ambac Assurance Corporation under
S-8
<PAGE>
the certificate insurance policy, the certificateholders will directly bear the
credit and other risks associated with their interests in the Trust. See "The
Certificate Insurance Policy and the Insurer--The Certificate Insurance Policy"
in this prospectus supplement.
ADVANCES
For any month, if the Master Servicer receives an interest payment on a home
equity loan that is less than the full scheduled interest payment or receives
no payment, the Master Servicer will advance its own funds to cover that
interest shortfall. The Master Servicer will also advance its own funds to pay
certain fees and expenses relating to the home equity loans and to keep current
any mortgage loan senior to any home equity loan in the pool. However, the
Master Servicer will make advances with respect to a home equity loan only so
long as it determines that such advance will be recoverable from future
payments or collections on that home equity loan. See "Description of the
Certificates--Advances; Compensating Interest" in this prospectus supplement.
OPTIONAL TERMINATION AND TERMINATION AUCTION
Once the aggregate principal balance of the home equity loans has been reduced
to less than 10% of the aggregate principal balance of the original home equity
loans on October 31, 1998 and of the additional home equity loans on their
respective dates of purchase, the Master Servicer has an option to purchase the
home equity loans and the other assets remaining in the Trust or, if the Master
Servicer does not exercise such option, the Trustee may sell such remaining
assets at a termination auction. See "Description of the Certificates--
Termination; Purchase of Home Equity Loans" in this prospectus supplement. Any
early retirement of the certificates that results from the Master Servicer's
exercise of its purchase option or the Trustee's sale at a termination auction
may have an effect on the yield on the certificates. See "Certain Yield and
Prepayment Considerations" in this prospectus supplement and in the
accompanying prospectus.
YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of each class of certificates will depend upon, among
other things:
. the price at which the certificates are purchased;
. the applicable pass-through rate; and
. the rate of prepayments on the related home equity loans.
A higher than anticipated rate of prepayments would reduce the aggregate
principal balance of the certificates more quickly than expected, thereby
reducing the aggregate interest payments with respect to such certificates.
Therefore, a higher rate of principal prepayments could result in a lower than
expected yield to maturity on classes of certificates purchased at a premium.
Conversely, a lower than anticipated rate of principal prepayments could result
in a lower than expected yield to maturity on classes of certificates purchased
at a discount since payments of principal with respect to the home equity loans
would occur later than anticipated. See "Risk Factors" and "Certain Yield and
Prepayment Considerations" in this prospectus supplement.
S-9
<PAGE>
BOOK-ENTRY REGISTRATION
In general, the Class A Certificates will be available only in book-entry form
through the facilities of The Depository Trust Company, the Euroclear System or
Cedel Bank, societe anonyme. See "Description of the Certificates--General" in
this prospectus supplement.
RATINGS
The Class A Certificates are required to receive a rating of "AAA" from
Standard & Poor's Ratings Services and a rating of "Aaa" from Moody's Investors
Service, Inc. The ratings on the Class A Certificates address the likelihood of
the receipt by holders of Class A Certificates of all distributions on the
underlying home equity loans to which they are entitled. They do not address
the likely actual rate of prepayments. Such rate of prepayments, if different
than originally anticipated, could reduce the yield realized by holders of the
Class A Certificates. The ratings also do not address the likelihood of the
payment of any LIBOR carryover amount with respect to the Class A-2
Certificates. See "Ratings" in this prospectus supplement.
LEGAL INVESTMENT
The Class A Certificates will not be "mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement Act of 1984. See "Legal
Investment" in this prospectus supplement. You should consult your own legal
advisors in determining whether and to what extent the Class A Certificates
constitute legal investments for you.
ERISA CONSIDERATIONS
Subject to important considerations described under "ERISA Considerations" in
this prospectus supplement and in the accompanying prospectus, the Class A
Certificates will be eligible for purchase by persons investing assets of
employee benefit plans or individual retirement accounts.
TAX STATUS
An election will be made to treat the Trust as a real estate mortgage
investment conduit for federal income tax purposes. The Class A Certificates
will represent ownership of regular interests and the Class R Certificate will
represent ownership of residual interests. The Class A Certificates will
generally be treated as representing ownership of debt for federal income tax
purposes.
For further information regarding the federal income tax consequences of
investing in the Class A Certificates, see "Certain Federal Income Tax
Consequences" in this prospectus supplement and in the accompanying prospectus.
S-10
<PAGE>
RISK FACTORS
You should carefully consider the matters discussed under "Risk Factors" in
the prospectus and the following risk factors prior to any decision to invest
in the Class A Certificates. The following discussion supplements, and does not
replace or supersede, the discussion under "Risk Factors" in the prospectus.
THE CLASS A CERTIFICATES ARE NOT SUITABLE INVESTMENTS FOR ALL INVESTORS. IN
PARTICULAR, YOU SHOULD NOT PURCHASE ANY CLASS OF CLASS A CERTIFICATES UNLESS
YOU UNDERSTAND AND ARE ABLE TO BEAR THE PREPAYMENT, CREDIT, LIQUIDITY AND
MARKET RISKS ASSOCIATED WITH THAT CLASS.
THE CLASS A CERTIFICATES ARE COMPLEX SECURITIES AND IT IS IMPORTANT THAT YOU
POSSESS, EITHER ALONE OR TOGETHER WITH AN INVESTMENT ADVISOR, THE EXPERTISE
NECESSARY TO EVALUATE THE INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS IN THE CONTEXT OF YOUR FINANCIAL SITUATION.
RISKS OF THE HOME EQUITY LOANS
GENERAL Defaults by the mortgagors on the home equity loans may
affect the yield on your certificates in two ways. First, if
such defaults in any month reduce the aggregate principal
balance of the home equity loans in a loan group below the
certificate balance of the certificates related to such loan
group, the insurer may be required to pay the amount of such
principal shortfall under the certificate insurance policy.
Such a payment under the certificate insurance policy, as
well as payment of principal recovered after liquidating
defaulted properties, will affect the yield on your
certificates in the same way as prepayments by the
mortgagors. See "--Yield and Prepayment Considerations--The
Yield on Your Certificates Is Directly Related to the Rate
of Prepayments on the Home Equity Loans" below. Second, if
the insurer defaults on its obligations under the
certificate insurance policy, payments collected on the
remaining home equity loans in the loan group may be
insufficient to support payments of principal on the related
certificates, so that certificateholders will never recover
the full certificate balance of their certificates. The
following is a discussion of different types of risks of
default associated with the home equity loans.
THE HOME EQUITY Certain geographic regions of the United States from time to
LOANS ARE time will experience weaker regional economic conditions and
CONCENTRATED IN housing markets, and, consequently, will experience higher
CERTAIN rates of loss and delinquency on mortgage loans than other
GEOGRAPHIC geographic regions. Similarly, any geographic concentration
REGIONS of mortgaged properties may increase the risk of loss due to
natural disasters such as hurricanes, tornadoes and floods.
As of October 31, 1998 approximately 96.7% and 3.2% by
principal balance of the home equity loans in Loan Group 1
are secured by mortgaged properties located in the states of
Florida and Georgia, respectively. As of October 31, 1998
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<PAGE>
approximately 90.1% and 9.9% by principal balance of the
home equity loans in Loan Group 2 are secured by mortgaged
properties located in the states of Florida and Georgia,
respectively. See "Description of the Mortgage Pool" in this
prospectus supplement for further information regarding the
geographic concentration of the home equity loans.
MANY OF THE As of the Cut-off Date, approximately 34.7% and 3.3% by
HOME EQUITY principal balance of the home equity loans in Loan Group 1
LOANS ARE and Loan Group 2, respectively, are secured by second or
SECURED BY more junior mortgages. Although little data is available,
JUNIOR LIENS the rate of default of junior mortgage loans may be greater
than that of mortgage loans secured by first liens on
comparable properties. See "Risk Factors--Risks of the Home
Equity Loans--Junior Liens" in the accompanying prospectus.
RECENTLY Many of the home equity loans were originated within the
ORIGINATED HOME past 12 months. As of October 31, 1998, the weighted average
EQUITY LOANS number of months elapsed since origination (with such
MAY BE SUBJECT average weighted by the respective principal balances of the
TO GREATER RISK home equity loans) of the home equity loans in Loan Group 1
OF EARLY is 6.7 months and in Loan Group 2 is 7.2 months. Although
DEFAULTS little data is available, defaults on mortgage loans are
generally expected to occur more frequently in their early
years.
THE MASTER As described under "The Master Servicer--Origination and
SERVICER'S Servicing Experience" in this prospectus supplement, the
UNDERWRITING underwriting standards of the Master Servicer generally are
STANDARDS ARE less stringent than those of Fannie Mae or Freddie Mac with
LESS STRINGENT respect to a borrower's credit history and in certain other
respects. As a result of the Master Servicer's approach to
underwriting, the home equity loans in the pool may
experience higher rates of delinquencies, defaults and
foreclosures than mortgage loans underwritten in a more
traditional manner.
OTHER LEGAL In addition to losses due to default by the mortgagors,
CONSIDERATIONS losses may occur on the home equity loans in the event that
the loans violate applicable laws. The home equity loans are
subject to state laws that regulate interest rates and other
charges, require certain disclosures and require licensing
of a person originating or acquiring mortgage loans. In
addition, other state laws, public policy and general
principles of equity relating to the protection of
consumers, unfair and deceptive practices and debt
collection practices may apply to the origination, servicing
and collection of the home equity loans. The home equity
loans are also subject to federal laws, including:
. The Federal Truth-in-Lending Act and Regulation Z
promulgated thereunder, which require certain disclosures
to the borrowers regarding the terms of the home equity
loans;
. The Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination on
the basis of age, race, color,
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<PAGE>
sex, religion, marital status, national origin, receipt of
public assistance or the exercise of any right under the
Consumer Credit Protection Act in the extension of credit;
and
. The Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit
experience.
Some of the home equity loans are also subject to the Riegle
Community Development and Regulatory Improvement Act of 1994
(the "Riegle Act"), which incorporates the Home Ownership
and Equity Protection Act of 1994 and adds certain
provisions to Regulation Z under the Truth-in-Lending Act.
The Riegle Act imposes additional disclosure and other
requirements on creditors with respect to non-purchase money
home equity loans with high interest rates or high upfront
fees and charges. The Riegle Act applies on a mandatory
basis to all home equity loans originated on or after
October 1, 1995. Creditors who fail to comply with the
provisions of the Riegle Act may be subject to statutory
liabilities, and the Riegle Act may affect the
enforceability of some of the home equity loans.
Violations of any of these state or federal laws, policies
or principles may prevent the Master Servicer from
collecting all or a portion of the principal and interest on
the home equity loans, may entitle the borrower to a refund
of amounts previously paid and, in addition, could subject
the Seller to damages and administrative enforcement.
However, the Seller and the Master Servicer will each
represent and warrant that the home equity loans were
originated in compliance with all applicable laws. In
addition, the Seller will be required to repurchase from the
Trust, and the Master Servicer will be required to
repurchase from the Seller, any home equity loans that did
not comply with such state and federal laws and regulations
at the time of origination.
CREDITORS' RIGHTS AND BANKRUPTCY CONSIDERATIONS
GENERAL In addition to losses that arise due to default by the
mortgagors or because the home equity loans violate
applicable laws, losses may occur because assignments of the
mortgages to the Trustee have not been recorded, a court
orders the assets and liabilities of the Seller consolidated
with those of a prior owner of the home equity loans, or the
transaction between a prior owner and the Seller is
characterized as a secured borrowing rather than a true
sale.
ASSIGNMENTS OF So long as certain conditions specified by Ambac Assurance
THE MORTGAGES Corporation under the certificate insurance policy are met,
MAY NOT BE assignments of the mortgages to the Trustee under the
RECORDED Pooling and Servicing Agreement will not be required to be
recorded. The failure to record assignments of the mortgages
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<PAGE>
to the Seller and to the Trustee in some states in which the
mortgaged properties are located may have the result of
making the sale thereof ineffective against (i) creditors of
a prior owner or the Seller, (ii) a purchaser to whom a
prior owner or the Seller fraudulently, negligently, or
inadvertently sells a home equity loan, or (iii) any
bankruptcy trustee or similar official appointed for a prior
owner or the Seller.
If the conditions specified by Ambac Assurance Corporation
are not met, assignments of the mortgages in favor of the
Trustee will be required to be recorded (or opinions of
counsel acceptable to Ambac Assurance Corporation and the
rating agencies of the Class A Certificates will be obtained
to the effect that recording is not required to protect the
Trust's interest in the related home equity loans). See
"Description of the Certificates--Assignment of the Home
Equity Loans" in the accompanying prospectus.
THE ASSETS OF The transactions described in this prospectus supplement
THE SELLER MAY will be structured such that the Seller is unlikely to
BECOME become the debtor in a case under the United States
AVAILABLE TO Bankruptcy Code and so that, even if such a filing should
CREDITORS OF occur, it should not result in consolidation of the assets
PRIOR OWNERS OF and liabilities of the Seller with those of any prior owner
THE HOME EQUITY of the home equity loans. These steps include the creation
LOANS of the Seller as a separate, limited purpose corporation,
the certificate of incorporation of which contains
limitations on the nature of its business and restrictions
on the ability of the Seller to commence voluntary or
involuntary cases or proceedings under the Bankruptcy Code
without the prior unanimous affirmative vote of all its
directors. The Seller does not and will not engage in any
activities other than the transactions described herein and
other similar transactions and activities incidental to the
foregoing. The Seller does not intend to file a voluntary
petition under the Bankruptcy Code. However, the Seller or a
prior owner of the home equity loans may become a debtor in
a case under the Bankruptcy Code, or the activities of the
Seller may result in a court concluding that the assets and
liabilities of the Seller should be consolidated with those
of such prior owners.
The Master Servicer will represent and warrant that the
transfer of the home equity loans to the Seller will
constitute a sale to the Seller, and that all actions that
are required to perfect the Seller's ownership interests in
the home equity loans have been taken. Accordingly, it is
intended that the home equity loans will not be part of the
bankruptcy estate of any prior owner and will not be
available to the creditors of any prior owner. However, if
any prior owner becomes bankrupt, such prior owner, a
bankruptcy trustee for such prior owner or a creditor of
such prior owner may attempt to recharacterize the
transaction between the prior owner and the Seller as a
pledge of the home equity loans in connection with a
borrowing by such
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<PAGE>
prior owner rather than a true sale. If this argument is
made, it could prevent timely payments of amounts due on the
certificates. If such an attempt were successful, or if the
assets and liabilities of the Seller are consolidated with
those of prior owners of the home equity loans, reductions
in distributions of principal and interest on the
certificates could result, or a trustee in bankruptcy could
elect to accelerate payment of the obligation to the Seller
and liquidate the home equity loans.
YIELD AND PREPAYMENT CONSIDERATIONS
THE YIELD ON Your certificates represent an interest in the Trust
YOUR containing the home equity loans. As the mortgagors make
CERTIFICATES IS payments of interest and principal on the home equity loans,
DIRECTLY you will receive payments. Because the mortgagors may make
RELATED TO THE those payments faster than scheduled, you may receive
RATE OF distributions of principal faster than you expected. None of
PREPAYMENTS ON the loans in Loan Group 1 have any prepayment penalties,
THE HOME EQUITY while 41.59% by principal balance of the loans in Loan Group
LOANS 2 have prepayment penalties of varying amounts if the loans
are prepaid during the first five years following
origination. There is no guarantee that you will receive
principal payments on your certificates at any specific rate
or on specific dates.
The yield to maturity on your certificates is directly
related to the rate at which the mortgagors pay principal on
the home equity loans in the related loan group or principal
is otherwise paid on those home equity loans. Payment of
principal on the home equity loans may be in the following
forms:
. Scheduled payments of principal; and
. Principal prepayments which consist of:
. Prepayments in full on a home equity loan;
. Partial prepayments on a home equity loan;
. Liquidation principal, which is the principal recovered
after foreclosing on or otherwise liquidating a
defaulted home equity loan;
. Repurchases by the Seller of any home equity loans with
defective documentation or that violate representations
and warranties in the Pooling and Servicing Agreement;
. Principal payments under the certificate insurance
policy; and
. Payment of any amounts remaining in the pre-funding
account at the end of the period during which the Trust
may purchase additional home equity loans.
In general, as prevailing mortgage interest rates decline
significantly below the interest rates on the home equity
loans in the pool, the rate of prepayments increases.
General economic conditions and homeowner
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<PAGE>
mobility will also affect the rate of prepayments. In
addition, the sale of any mortgaged property may cause a
prepayment in full on the related home equity loan.
Furthermore, the home equity loans in the pool may prepay at
a higher rate than traditional mortgage loans because the
borrowers may not view home equity loans as permanent
financing. See "Certain Yield and Prepayment Considerations"
in this prospectus supplement and in the prospectus.
The Master Servicer is required to substitute other home
equity loans for, or repurchase, certain delinquent home
equity loans. To the extent the Master Servicer is unable to
substitute for delinquent home equity loans and instead
repurchases the loans, you may receive a principal
prepayment that could be significant.
Transamerica Consumer Mortgage Receivables Corporation will
deposit a portion of the proceeds from the issuance of the
certificates into a pre-funding account, which the Trust
will use to purchase additional home equity loans after the
date of issuance of the certificates. Any amount remaining
in the pre-funding account at the end of the period during
which such additional purchases may be made will be paid to
the holders of the Class A Certificates as a principal
prepayment, which could be significant. See "Description of
the Mortgage Pool--Conveyance of Subsequent Loans and the
Pre-Funding Account" in this prospectus supplement.
CLASS A If you purchase a certificate at a discount from its
CERTIFICATES original principal balance and the rate of principal
BOUGHT AT payments is slower than you expected, you may receive a
PREMIUMS AND lower yield than you expected. If you purchase a certificate
DISCOUNTS MAY at a premium over its original principal balance and the
RECEIVE A LOWER rate of principal payments is faster than you expected, you
YIELD THAN may receive a lower yield than you expected.
EXPECTED
INTEREST RISKS Although all of the floating rate home equity loans provide
OF THE CLASS A- for periodic adjustments to the interest rates thereof, some
2 CERTIFICATES of those loans will not have their first interest adjustment
dates for a period of time that is longer than would
otherwise be indicated by the applicable index under which
those loans are adjusted. Until their respective first
adjustment dates, each such floating rate home equity loan
with a delayed first adjustment date will bear interest at a
fixed rate set at the origination of such loan. Even after
the first adjustment dates, the interest rates on a
substantial majority of the floating rate home equity loans
will only adjust every 6 or 12 months thereafter. The pass-
through rate on the Class A-2 Certificates may adjust
monthly based on the LIBOR index which is a different index
than the indices with which the floating rate home equity
loans adjust. LIBOR may move differently than the indices
with which the floating rate home equity loans are adjusted.
Further, since the Group 2 Net WAC Cap (the cap on the pass-
through rate of the
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<PAGE>
Class A-2 Certificates, as defined in "Summary Information--
The Class A Certificates" and "Description of the
Certificates--Distributions--Interest" in this prospectus
supplement) is largely a function of the weighted average of
the interest rates on the floating rate home equity loans,
any delay in the adjustment of such interest rates may make
it more likely that the Class A-2 pass-through rate will be
limited by the Group 2 Net WAC Cap. Although holders of the
Class A-2 Certificates will be entitled to any related
carryover amount from and to the limited extent of funds
available therefor as provided herein, sufficient funds for
such purposes may not be available. In addition, the
certificate insurance policy does not cover, and the ratings
of the Class A-2 Certificates do not address the likelihood
of, payment of any carryover amount.
OTHER RISKS FACTORS
LACK OF A secondary market for the Class A Certificates may not
SECONDARY develop. If a secondary market does develop, it might not
MARKET MAY MAKE continue or it might not be sufficiently liquid to allow you
IT DIFFICULT to resell any of your certificates. The Class A Certificates
FOR YOU TO will not be listed on any securities exchange
RESELL YOUR
CERTIFICATES
LACK OF Your certificates will not be issued in physical form but in
PHYSICAL book-entry form. As a result, you will be able to transfer
CERTIFICATES your certificates only through the Depository Trust Company,
MAY CAUSE Cedel Bank, societe anonyme, the Euroclear System,
DELAYS IN participating organizations, indirect participants and
PAYMENT AND certain banks. The ability to pledge a certificate to a
CAUSE person that does not participate in the Depository Trust
DIFFICULTIES IN Company, Cedel Bank, societe anonyme, or the Euroclear
PLEDGING OR System may be limited because of the lack of a physical
SELLING YOUR certificate. In addition, you may experience some delay in
CERTIFICATES receiving distributions because the Trustee will not send
distributions directly to you. Instead, the Trustee will
send all distributions to Depository Trust Company, which
will then credit those distributions to the participating
organizations. Those organizations will in turn credit
accounts you have either directly or indirectly though
indirect participants. Also, because investors may be
unwilling to purchase securities without delivery of a
physical certificate, the Class A Certificates may be less
liquid in any secondary market that may develop. See
"Description of the Certificates--General" in this
prospectus supplement.
REDUCTION OF The rating of the Class A Certificates will depend primarily
RATING MAY on an assessment by Standard & Poor's Ratings Services and
AFFECT Moody's Investors Service, Inc. (the "Rating Agencies") of
LIQUIDITY AND the likelihood of receipt by the holders of the Class A
PRICE Certificates of all distributions with respect to the home
equity loans to which they are entitled and upon the claims-
paying ability of Ambac Assurance Corporation, the insurer
under the certificate insurance policy. Any reduction in a
rating assigned to the claims-paying ability of Ambac
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Assurance Corporation below the rating initially given to
the Class A Certificates would likely result in a withdrawal
or reduction in the rating of the Class A Certificates. Any
such withdrawal or downgrading in the rating may adversely
affect the liquidity of and the prices purchasers may be
willing to pay for the certificates. The rating by the
Rating Agencies of the Class A Certificates is not a
recommendation to purchase, hold or sell the Class A
Certificates. The Rating Agencies may lower or withdraw the
ratings at any time after the issuance of the certificates
if the Rating Agencies determine that action is warranted.
In general, the ratings address credit risk and do not
address the likelihood of prepayments. See "Ratings" in this
prospectus supplement.
RISKS Some computer programs use two digits to define the
ASSOCIATED WITH applicable year. In performing date calculations, a two-
COMPUTER digit program could recognize a date ending in "00" as the
PROGRAMS AND year 1900, rather than the year 2000. This could result in a
THE YEAR 2000 failure to properly calculate dates before and after
December 31, 1999, including dates such as February 29,
2000, and this could also cause the computer running the
programs to stop operating properly. The Master Servicer is
testing for potential problems from two-digit programs, and
it plans to correct or replace its affected computer
programs and systems on a timely basis.
If the Master Servicer or any of its suppliers, customers or
agents do not timely implement effective procedures to deal
with computer programs that rely on two-digit year
calculations, the Master Servicer's performance of its
obligations for the Trust could be adversely affected. This
could result in delays in processing payments on the home
equity loans, which could cause a delay in distributions to
you.
S-18
<PAGE>
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The description herein of the Home Equity Loans comprising part of the Trust
(the "Mortgage Pool") and of the Mortgaged Properties describes the Mortgage
Pool as it was constituted on the close of business on October 31, 1998 (the
"Cut-off Date"). The Mortgage Pool consists of 3,076 Home Equity Loans (the
"Initial Loans") and had an aggregate principal balance outstanding as of the
Cut-off Date of $81,519,179 (the "Original Pool Principal Balance"). The
promissory notes (the "Mortgage Notes") evidencing the Home Equity Loans are
secured by mortgages primarily on one- to four-family dwellings, condominiums,
units in planned unit developments and manufactured homes. None of the Home
Equity Loans is insured or guaranteed by any governmental agency. As of the
Cut-off Date, no Home Equity Loan had a scheduled maturity later than December
1, 2028. The Home Equity Loans were, and the Subsequent Loans will be,
originated or acquired by the Master Servicer as described under "The Consumer
Mortgage Loan Program" in the Prospectus and "The Master Servicer--Origination
and Servicing Experience" herein.
Home Equity Loans bearing fixed interest rates ("Fixed Rate Loans") and Home
Equity Loan bearing adjustable interest rates ("ARM Loans") in the Trust will
be assigned to one of two mortgage loan groups ("Loan Group 1" and "Loan Group
2", respectively, and each a "Home Equity Loan Group"). Loan Group 1 is
comprised of Fixed Rate Loans only, and Loan Group 2 is comprised of ARM Loans
and two Fixed Rate Loans. Distributions on the Class A-2 Certificates will be
calculated by reference to amounts available for distribution in respect of
Home Equity Loans in Loan Group 2. Distributions on the Class A-1 Certificates
will be calculated by reference to amounts available for distribution in
respect of the Home Equity Loans in Loan Group 1.
Each Home Equity Loan was selected for inclusion in the Mortgage Pool from
among those home equity loans in the portfolio of loans owned by the Master
Servicer (the "Portfolio") that satisfied, among other things, the following
criteria as of the Cut-off Date: were not 30 or more days past due, had a
remaining principal balance of not less than $100, had Mortgage Interest Rates
greater than or equal to 7%, had a Combined Loan-to-Value Ratio of less than or
equal to 100% and were not in foreclosure.
The Pooling and Servicing Agreement provides that Home Equity Loans
representing no more than 13.85% of the aggregate Mortgage Pool (the
"Subsequent Loans") will be purchased by the Trust no later than January 24,
1999. Although the Subsequent Loans sold to the Trust will have characteristics
that differ somewhat from the Initial Loans described herein, the Seller does
not expect that the characteristics of the Subsequent Loans will vary
materially from the Initial Loans since the Subsequent Loans will conform to
the representations and warranties set forth in the Pooling and Servicing
Agreement as they relate to such Subsequent Loans. See "--Conveyance of
Subsequent Loans and Pre-Funding Account" herein.
LOAN GROUP 1
Loan Group 1 consists of 2,971 Fixed Rate Loans representing 83.8% of the
Original Pool Principal Balance. The Fixed Rate Loans provide for level monthly
installments consisting of interest equal to one-twelfth of the applicable
Mortgage Interest Rate times the unpaid principal balance, with
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the remainder of such payment applied to principal. No adjustment is made if a
payment is made earlier or later than the due date, although the Mortgagor may
be subject to a late payment penalty. If such Home Equity Loan is prepaid, the
borrower is required to pay interest only to the date of prepayment with no
prepayment penalty.
As of the Cut-off Date, the unpaid principal balance of Loan Group 1 loans
averaged $22,995 and the highest and lowest remaining principal balance of the
Loan Group 1 loans was $178,353 and $135, respectively. The Mortgage Interest
Rates on Loan Group 1 loans ranged from 7.000% to 15.950% per annum, the
weighted average Mortgage Interest Rate of Loan Group 1 loans was 11.672% per
annum, the weighted average original term to scheduled maturity of Loan Group 1
loans was 191.4 months and the weighted average remaining term to scheduled
maturity of Loan Group 1 loans was 184.7 months. The original term to scheduled
maturity of Loan Group 1 loans ranged from 22 months to 360 months. As of the
dates of origination of Loan Group 1 loans, the Combined Loan-to-Value Ratios
ranged from 1% to 100% and the weighted average Combined Loan-to-Value Ratio of
Loan Group 1 loans was approximately 52.6%. See also "Description of the
Mortgage Pools--General" in the Prospectus.
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<PAGE>
Set forth below is a description of certain additional characteristics of
Loan Group 1 as of the Cut-off Date.
MORTGAGE POOL STATISTICS
LOAN GROUP 1
DISTRIBUTION OF REMAINING MONTHS TO STATED MATURITY -- LOAN GROUP 1
The following table sets forth the range of remaining months to stated
maturity with respect to the Fixed Rate Loans in Loan Group 1 as of the Cut-off
Date.
<TABLE>
<CAPTION>
RANGE OF REMAINING
MONTHS TO STATED NUMBER OF PERCENT OF
MATURITY FIXED RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------------ ---------------- ----------------- -----------------
<S> <C> <C> <C>
1 - 12..................... 12 $ 15,105.27 0.02%
13 - 24.................... 34 101,058.25 0.15
25 - 36.................... 83 411,034.72 0.60
37 - 48.................... 429 3,284,353.58 4.81
49 - 60.................... 74 797,478.22 1.17
61 - 72.................... 73 882,687.20 1.29
73 - 84.................... 416 5,424,197.24 7.94
85 - 96.................... 20 268,384.99 0.39
97 - 108................... 50 935,805.85 1.37
109 - 120.................. 343 6,801,072.21 9.96
121 - 132.................. 17 343,399.47 0.50
133 - 144.................. 34 813,625.14 1.19
145 - 156.................. 39 1,914,468.45 2.80
157 - 168.................. 88 2,427,656.25 3.55
169 - 180.................. 832 23,203,961.11 33.97
181 - 192.................. 4 98,712.09 0.14
193 - 204.................. 3 208,329.29 0.30
205 - 216.................. 1 32,055.61 0.05
217 - 228.................. 16 604,143.55 0.88
229 - 240.................. 154 6,327,700.73 9.26
241 - 252.................. 3 132,870.46 0.19
253 - 264.................. 1 32,733.04 0.05
277 - 288.................. 12 463,736.92 0.68
289 - 300.................. 108 5,249,045.61 7.68
301 - 312.................. 1 77,250.00 0.11
325 - 336.................. 1 36,833.51 0.05
337 - 348.................. 7 356,771.52 0.52
349 - 360.................. 116 7,072,333.16 10.35
----- -------------- ------
Total...................... 2,971 $68,316,803.44 100.00%
===== ============== ======
</TABLE>
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<PAGE>
DISTRIBUTION OF MORTGAGE INTEREST RATES -- LOAN GROUP 1
The following table sets forth the range of Mortgage Interest Rates with
respect to the Fixed Rate Loans in Loan Group 1 as of the Cut-off Date.
<TABLE>
<CAPTION>
MORTGAGE INTEREST NUMBER OF PERCENT OF
RATE RANGE FIXED RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C>
6.51% - 7.00%.............. 1 $ 71,597.79 0.10%
7.76% - 8.00%.............. 245 2,079,263.05 3.04
8.26% - 8.50%.............. 1 22,466.88 0.03
8.76% - 9.00%.............. 162 1,103,958.62 1.62
9.01% - 9.25%.............. 1 36,814.17 0.05
9.26% - 9.50%.............. 3 127,541.59 0.19
9.51% - 9.75%.............. 2 126,730.21 0.19
9.76% - 10.00%............. 373 4,786,213.19 7.01
10.01% - 10.25%............ 31 1,279,006.06 1.87
10.26% - 10.50%............ 174 3,248,663.32 4.76
10.51% - 10.75%............ 33 1,690,048.26 2.47
10.76% - 11.00%............ 485 11,123,199.08 16.28
11.01% - 11.25%............ 67 1,778,267.82 2.60
11.26% - 11.50%............ 314 7,590,086.55 11.11
11.51% - 11.75%............ 127 3,646,399.02 5.34
11.76% - 12.00%............ 241 7,861,555.02 11.51
12.01% - 12.25%............ 93 2,884,515.36 4.22
12.26% - 12.50%............ 75 2,670,002.56 3.91
12.51% - 12.75%............ 18 707,000.82 1.03
12.76% - 13.00%............ 86 2,171,845.40 3.18
13.01% - 13.25%............ 5 233,841.32 0.34
13.26% - 13.50%............ 73 2,453,968.74 3.59
13.51% - 13.75%............ 78 2,474,814.96 3.62
13.76% - 14.00%............ 259 7,801,227.09 11.42
14.01% - 14.25%............ 1 31,994.50 0.05
14.26% - 14.50%............ 2 39,345.74 0.06
14.76% - 15.00%............ 17 213,140.46 0.31
15.76% - 16.00%............ 4 63,295.86 0.09
----- -------------- ------
Total...................... 2,971 $68,316,803.44 100.00%
===== ============== ======
</TABLE>
DISTRIBUTION OF PRINCIPAL BALANCES -- LOAN GROUP 1
The following table sets forth the range of principal balances with respect
to the Fixed Rate Loans in Loan Group 1 as of the Cut-off Date.
<TABLE>
<CAPTION>
RANGE OF PRINCIPAL NUMBER OF PERCENT OF
BALANCES FIXED RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------------ ---------------- ----------------- -----------------
<S> <C> <C> <C>
1 - 25,000................. 1,991 $24,807,912.14 36.31%
25,001 - 50,000............ 712 24,625,388.82 36.05
50,001 - 75,000............ 189 11,318,082.50 16.57
75,001 - 100,000........... 54 4,624,192.08 6.77
100,001 - 150,000.......... 24 2,762,875.07 4.04
175,001 - 200,000.......... 1 178,352.83 0.26
----- -------------- ------
Total...................... 2,971 $68,316,803.44 100.00%
===== ============== ======
</TABLE>
S-22
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES BY STATE -- LOAN GROUP 1
The following table sets forth the geographic distribution by state of the
Mortgaged Properties relating to the Fixed Rate Loans in Loan Group 1 as of the
Cut-off Date.
<TABLE>
<CAPTION>
MORTGAGED PROPERTY NUMBER OF FIXED PERCENT OF PRINCIPAL
STATE RATE LOANS PRINCIPAL BALANCE BALANCE
------------------ --------------- ----------------- --------------------
<S> <C> <C> <C>
Florida.................. 2,889 $66,057,943.24 96.69%
Georgia.................. 81 2,223,360.20 3.25
North Carolina........... 1 35,500.00 0.05
----- -------------- ------
Total.................... 2,971 $68,316,803.44 100.00%
===== ============== ======
</TABLE>
OCCUPANCY TYPE -- LOAN GROUP 1
The following table sets forth the occupancy types (as represented by the
Mortgagor) with respect to the Fixed Rate Loans in Loan Group 1 as of the Cut-
off Date.
<TABLE>
<CAPTION>
NUMBER OF FIXED PERCENT OF PRINCIPAL
OCCUPANCY TYPE RATE LOANS PRINCIPAL BALANCE BALANCE
-------------- --------------- ----------------- --------------------
<S> <C> <C> <C>
Owner-occupied........... 2,899 $65,965,642.22 96.56%
Investment property...... 72 2,351,161.22 3.44
----- -------------- ------
Total.................... 2,971 $68,316,803.44 100.00%
===== ============== ======
</TABLE>
MORTGAGE LOAN-TO-VALUE RATIOS(1) -- LOAN GROUP 1
The following table sets forth the range of Loan-to-Value Ratios at
origination with respect to the Fixed Rate Loans in Loan Group 1.
<TABLE>
<CAPTION>
RANGE OF NUMBER OF FIXED PERCENT OF
MORTGAGE LTV RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------ --------------- ----------------- -----------------
<S> <C> <C> <C>
0.01% - 5.00%............... 64 $ 280,873.48 0.41%
5.01% - 10.00%.............. 299 2,090,341.99 3.06
10.01% - 15.00%............. 407 4,300,321.71 6.29
15.01% - 20.00%............. 337 4,884,448.65 7.15
20.01% - 25.00%............. 294 5,303,224.04 7.76
25.01% - 30.00%............. 223 4,264,212.76 6.24
30.01% - 35.00%............. 199 4,003,589.25 5.86
35.01% - 40.00%............. 174 4,501,908.21 6.59
40.01% - 45.00%............. 156 4,487,301.96 6.57
45.01% - 50.00%............. 180 6,231,263.20 9.12
50.01% - 55.00%............. 144 5,072,153.29 7.42
55.01% - 60.00%............. 142 5,390,019.42 7.89
60.01% - 65.00%............. 112 4,606,101.33 6.74
65.01% - 70.00%............. 87 4,303,879.60 6.30
70.01% - 75.00%............. 62 3,787,153.94 5.54
75.01% - 80.00%............. 28 1,472,564.49 2.16
80.01% - 85.00%............. 29 1,724,725.52 2.52
85.01% - 90.00%............. 17 907,435.43 1.33
90.01% - 95.00%............. 10 491,557.79 0.72
95.01% - 100.00%............ 7 213,727.38 0.31
----- -------------- ------
Total....................... 2,971 $68,316,803.44 100.00%
===== ============== ======
</TABLE>
- --------
(1) The "Loan-to-Value Ratio" of a Home Equity Loan is equal to (a) the
principal balance of such Home Equity Loan on the date of origination,
divided by (b) the value of the related Mortgaged Property.
S-23
<PAGE>
COMBINED LOAN-TO-VALUE RATIOS(1) -- LOAN GROUP 1
The following table sets forth the range of Combined Loan-to-Value Ratios at
origination with respect to the Fixed Rate Loans in Loan Group 1.
<TABLE>
<CAPTION>
RANGE OF COMBINED NUMBER OF PERCENT OF
LTV RATIOS FIXED RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C>
0.001% - 5.00%............. 12 $ 47,725.12 0.07%
5.001% - 10.00%............ 47 454,009.85 0.66
10.001% - 15.00%........... 151 1,720,454.71 2.52
15.001% - 20.00%........... 160 2,320,616.17 3.40
20.001% - 25.00%........... 175 2,751,730.09 4.03
25.001% - 30.00%........... 186 3,060,034.20 4.48
30.001% - 35.00%........... 213 3,362,601.75 4.92
35.001% - 40.00%........... 206 3,874,361.06 5.67
40.001% - 45.00%........... 219 4,899,033.46 7.17
45.001% - 50.00%........... 267 6,664,640.39 9.76
50.001% - 55.00%........... 237 6,078,719.50 8.90
55.001% - 60.00%........... 267 7,145,641.12 10.46
60.001% - 65.00%........... 264 7,089,274.95 10.38
65.001% - 70.00%........... 261 7,560,830.83 11.07
70.001% - 75.00%........... 169 5,545,120.53 8.12
75.001% - 80.00%........... 68 2,303,979.72 3.37
80.001% - 85.00%........... 33 1,769,423.75 2.59
85.001% - 90.00%........... 19 963,321.07 1.41
90.001% - 95.00%........... 10 491,557.79 0.72
95.001% - 100.00%.......... 7 213,727.38 0.31
----- -------------- ------
Total...................... 2,971 $68,316,803.44 100.00%
===== ============== ======
</TABLE>
- --------
(1) The "Combined Loan-to-Value Ratio" of a Home Equity Loan is the ratio,
expressed as a percentage, of (i) the sum of (a) the original principal
balance of the Home Equity Loan and (b) the outstanding principal balance
on the date of origination of the Home Equity Loan of any senior mortgage
loan(s) or, in the case of any open-ended senior mortgage loan, the
maximum available line of credit with respect to such mortgage loan,
regardless of any lesser amount actually outstanding on the date of
origination of the Home Equity Loan, to (ii) the value of the related
Mortgaged Property.
PROPERTY TYPES -- LOAN GROUP 1
The following table sets forth the property types with respect to the Fixed
Rate Loans in Loan Group 1 as of the Cut-off Date.
<TABLE>
<CAPTION>
NUMBER OF FIXED PERCENT OF
PROPERTY TYPE RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------- --------------- ----------------- -----------------
<S> <C> <C> <C>
Condo Unit................ 5 $ 123,074.05 0.18%
Duplex.................... 2 55,986.45 0.08
Mobile Home............... 4 167,562.06 0.25
Unspecified
Residential(1)........... 2,501 53,674,835.49 78.57
Single Family Detached.... 439 13,459,505.00 19.70
Single Family Row......... 17 674,798.09 0.99
Single Family Townhouse... 3 161,042.30 0.24
----- -------------- ------
Total..................... 2,971 $68,316,803.44 100.00%
===== ============== ======
</TABLE>
- --------
(1) The property types of the Mortgaged Properties were previously not coded
in the Master Servicer's loan data system, although such property types
are described in the related loan file.
S-24
<PAGE>
DISTRIBUTION BY LIEN POSITION -- LOAN GROUP 1
The following table sets forth the lien position with respect to the Fixed
Rate Loans in Loan Group 1 as of the Cut-off Date.
<TABLE>
<CAPTION>
NUMBER OF FIXED PERCENT OF
LIEN POSITION RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------- --------------- ----------------- -----------------
<S> <C> <C> <C>
First....................... 1,488 $44,602,502.13 65.29%
Second...................... 1,420 23,247,588.53 34.03
Third....................... 63 466,712.78 0.68
----- -------------- ------
Total....................... 2,971 $68,316,803.44 100.00%
===== ============== ======
</TABLE>
DISTRIBUTION OF ORIGINAL MONTHS TO STATED MATURITY -- LOAN GROUP 1
The following table sets forth the range of original months to stated
maturity with respect to the Fixed Rate Loans in Loan Group 1.
<TABLE>
<CAPTION>
RANGE OF ORIGINAL
MONTHS TO STATED NUMBER OF FIXED PERCENT OF PRINCIPAL
MATURITY RATE LOANS PRINCIPAL BALANCE BALANCE
----------------- --------------- ----------------- --------------------
<S> <C> <C> <C>
13 - 24.................. 8 $ 17,960.32 0.03%
25 - 36.................. 27 120,657.88 0.18
37 - 48.................. 460 3,337,551.91 4.89
49 - 60.................. 64 747,302.98 1.09
61 - 72.................. 35 360,618.92 0.53
73 - 84.................. 467 5,845,881.96 8.56
85 - 96.................. 53 403,155.90 0.59
97 - 108................. 26 382,268.08 0.56
109 - 120................ 374 7,273,410.08 10.65
121 - 132................ 7 186,882.08 0.27
133 - 144................ 36 751,297.22 1.10
145 - 156................ 5 68,688.40 0.10
157 - 168................ 3 52,568.08 0.08
169 - 180................ 969 27,831,135.93 40.74
181 - 192................ 14 343,620.30 0.50
193 - 204................ 1 32,621.21 0.05
205 - 216................ 1 139,382.76 0.20
217 - 228................ 1 25,774.41 0.04
229 - 240................ 168 6,893,635.19 10.09
241 - 252................ 5 181,630.46 0.27
265 - 276................ 1 32,733.04 0.05
277 - 288................ 2 86,942.40 0.13
289 - 300................ 109 5,310,060.82 7.77
301 - 312................ 11 425,084.92 0.62
325 - 336................ 1 36,833.51 0.05
337 - 348................ 1 47,977.87 0.07
349 - 360................ 122 7,381,126.81 10.80
----- -------------- ------
Total.................... 2,971 $68,316,803.44 100.00%
===== ============== ======
</TABLE>
S-25
<PAGE>
LOAN GROUP 2
Loan Group 2 consists of 103 ARM Loans and two Fixed Rate Loans representing
16.2% of the Original Pool Principal Balance.
As of the Cut-off Date, the unpaid principal balance of Loan Group 2 loans
averaged $125,737, the current Mortgage Interest Rates on Loan Group 2 loans
ranged from 7.000% to 13.500% per annum, the current weighted average Mortgage
Interest Rate of Loan Group 2 loans was 9.598% per annum, the weighted average
original term to scheduled maturity of Loan Group 2 loans was 348.1 months and
the weighted average remaining term to scheduled maturity of Loan Group 2 loans
was 340.9 months. As of the Cut-off Date, the maximum principal balance of any
of Loan Group 2 loans was $616,933 and the minimum principal balance was
$5,375. The original term to scheduled maturity of Loan Group 2 loans ranged
from 180 months to 360 months. The remaining term to scheduled maturity as of
the Cut-off Date of Loan Group 2 loans ranged from 170 months to 360 months. No
Loan Group 2 loan had a scheduled maturity later than November 1, 2028. As of
the dates of origination of Loan Group 2 loans, the Combined Loan-to-Value
Ratios ranged from 5% to 79% and the weighted average Combined Loan-to-Value
Ratio of Loan Group 2 loans was approximately 62.6%. The weighted average
months to the next Adjustment Date of the ARM Loans in Loan Group 2 is 16.3. As
of the Cut-off Date, the Margins of the ARM Loans in Loan Group 2 ranged from
2.88% to 9.95%, the weighted average Margin was 7.34%, the Maximum Mortgage
Rates ranged from 13.000% per annum to 18.125% per annum, the weighted average
Maximum Mortgage Rate was 15.431% per annum, the Minimum Mortgage Rates ranged
from 2.875% per annum to 9.950% per annum and the weighted average Minimum
Mortgage Rate was 7.344% per annum.
The Indices with respect to the ARM Loans consist of per annum rates equal to
(i) the weekly average yield on U.S. Treasury Securities adjusted to a constant
maturity of one year ("1 Year CMT") or (ii) the average of interbank offered
rates for six-month U.S. dollar-denominated deposits in the London market ("6
Month LIBOR"). As of the Cut-off Date, approximately 86.3% by principal balance
of the ARM Loans had an Index determined with reference to 1 Year CMT and
approximately 13.7% by principal balance had an Index determined with reference
to 6 Month LIBOR.
On each Adjustment Date for an ARM Loan, the Mortgage Interest Rate thereon
will be subject to adjustment to equal the sum, rounded, if applicable, as set
forth in the related Mortgage Note of the applicable Index and the number of
basis points, if any (the "Margin"), set forth in the related Mortgage Note,
subject to the limitation set forth in such Mortgage Note with respect to
increases and decreases on any Adjustment Date (the "Periodic Cap") and the
maximum and minimum rates, if any, set forth therein (the "Maximum Mortgage
Rate" and the "Minimum Mortgage Rate", respectively).
The initial Mortgage Interest Rate in effect on an ARM Loan generally will be
lower, and may be significantly lower, than the Mortgage Interest Rate that
would have been in effect based on the related Index and Margin. Therefore,
unless the related Index declines after origination of an ARM Loan, the related
Mortgage Interest Rate will generally increase on the first Adjustment Date
following origination of such ARM Loan subject to the Periodic Cap and the
Maximum Mortgage
S-26
<PAGE>
Rate. In addition, a substantial majority of the ARM Loans ("Delayed First
Adjustment Loans") bear interest at a fixed initial rate for a period of two or
three years after the date of origination. The repayment of the ARM Loans will
be dependent on the ability of the Mortgagors to make larger monthly payments
following adjustments of the Mortgage Interest Rate. ARM Loans that have the
same initial Mortgage Interest Rate may not always bear interest at the same
Mortgage Interest Rate thereafter because such Home Equity Loans may have
different Adjustment Dates (and the Mortgage Rates therefore may reflect
different related Index values), Margins, Maximum Mortgage Rates and Minimum
Mortgage Rates.
Each of the ARM Loans is assumable to qualified assignees that meet certain
assumption criteria set forth in the originator's underwriting guidelines or in
the related Mortgage Note. Each of the ARM Loans includes a due-on-sale
provision with respect to assignees that do not meet such assumption criteria.
Furthermore, 41.59% by principal balance of the loans in Loan Group 2 have
prepayment penalties in varying amounts if the loans are prepaid during the
first five years following origination.
Set forth below is a description of certain additional characteristics of
Loan Group 2 as of the Cut-off Date.
MORTGAGE POOL STATISTICS
LOAN GROUP 2
DISTRIBUTION OF REMAINING MONTHS TO STATED MATURITY -- LOAN GROUP 2
The following table sets forth the range of remaining months to stated
maturity with respect to the Home Equity Loans in Loan Group 2 as of the Cut-
off Date.
<TABLE>
<CAPTION>
RANGE OF REMAINING
MONTHS TO STATED PERCENT OF
MATURITY NUMBER OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------------ --------------- ----------------- -----------------
<S> <C> <C> <C>
169 - 180................... 14 $ 705,436.18 5.34%
289 - 300................... 1 497,409.37 3.77
337 - 348................... 10 3,388,280.00 25.66
349 - 360................... 80 8,611,250.17 65.23
--- -------------- ------
Total....................... 105 $13,202,375.72 100.00%
=== ============== ======
</TABLE>
DISTRIBUTION BY LIEN POSITION -- LOAN GROUP 2
The following table sets forth the lien position of the Mortgages related to
the Home Equity Loans in Loan Group 2 as of the Cut-off Date.
<TABLE>
<CAPTION>
PERCENT OF
LIEN POSITION NUMBER OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------- --------------- ----------------- -----------------
<S> <C> <C> <C>
First....................... 96 $12,768,812.12 96.72%
Second...................... 9 433,563.60 3.28
--- -------------- ------
Total....................... 105 $13,202,375.72 100.00%
=== ============== ======
</TABLE>
S-27
<PAGE>
OCCUPANCY TYPE -- LOAN GROUP 2
The following table sets forth the occupancy type (as represented by the
Mortgagor) with respect to the Home Equity Loans in Loan Group 2 as of the Cut-
off Date.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF PRINCIPAL
OCCUPANCY LOANS PRINCIPAL BALANCE BALANCE
--------- --------- ----------------- --------------------
<S> <C> <C> <C>
Owner-occupied................. 83 $ 9,557,405.66 72.39%
Investment property............ 22 3,644,970.06 27.61
--- -------------- ------
Total.......................... 105 $13,202,375.72 100.00%
=== ============== ======
</TABLE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES BY STATE -- LOAN GROUP 2
The following table sets forth the geographic distribution by state of the
Mortgage Properties related to the Home Equity Loans in Loan Group 2 as of the
Cut-off Date.
<TABLE>
<CAPTION>
MORTGAGED NUMBER OF PERCENT OF PRINCIPAL
PROPERTY STATE LOANS PRINCIPAL BALANCE BALANCE
-------------- --------- ----------------- --------------------
<S> <C> <C> <C>
Florida........................ 90 $11,891,629.73 90.07%
Georgia........................ 15 1,310,745.99 9.93
--- -------------- ------
Total.......................... 105 $13,202,375.72 100.00%
=== ============== ======
</TABLE>
MORTGAGE LOAN-TO-VALUE RATIOS(1) -- LOAN GROUP 2
The following table sets forth the range of Loan-to-Value Ratios at
origination with respect to the Home Equity Loans in Loan Group 2.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF PRINCIPAL
RANGE OF MORTGAGE LTV LOANS PRINCIPAL BALANCE BALANCE
--------------------- --------- ----------------- --------------------
<S> <C> <C> <C>
0.01% - 5.00%.................. 1 $ 5,375.00 0.04%
5.01% - 10.00%................. 2 117,920.01 0.89
10.01% - 15.00%................ 5 252,105.08 1.91
15.01% - 20.00%................ 1 44,000.00 0.33
20.01% - 25.00%................ 2 139,423.12 1.06
45.01% - 50.00%................ 9 920,250.01 6.97
50.01% - 55.00%................ 6 843,494.76 6.39
55.01% - 60.00%................ 16 2,393,907.12 18.13
60.01% - 65.00%................ 19 2,943,583.90 22.30
65.01% - 70.00%................ 20 3,195,850.90 24.21
70.01% - 75.00%................ 23 2,253,536.11 17.07
75.01% - 80.00%................ 1 92,929.71 0.70
--- -------------- ------
Total.......................... 105 $13,202,375.72 100.00%
=== ============== ======
</TABLE>
- --------
(1) The "Loan-to-Value Ratio" of a Home Equity Loan is equal to (a) the
principal balance of such Home Equity Loan on the date of origination,
divided by (b) the value of the related Mortgaged Property.
S-28
<PAGE>
COMBINED LOAN-TO-VALUE RATIOS(1) -- LOAN GROUP 2
The following table sets forth the range of Combined Loan-to-Value Ratios at
origination with respect to the Home Equity Loans in Loan Group 2.
<TABLE>
<CAPTION>
RANGE OF COMBINED NUMBER OF PERCENT OF
LTV RATIOS LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------- --------- ----------------- -----------------
<S> <C> <C> <C>
0.001% - 5.00%.................... 1 $ 5,375.00 0.04%
5.001% - 10.00%................... 2 117,920.01 0.89
10.001% - 15.00%.................. 5 252,105.08 1.91
15.001% - 20.00%.................. 1 44,000.00 0.33
20.001% - 25.00%.................. 1 32,389.17 0.25
45.001% - 50.00%.................. 9 920,250.01 6.97
50.001% - 55.00%.................. 6 843,494.76 6.39
55.001% - 60.00%.................. 17 2,500,941.07 18.94
60.001% - 65.00%.................. 19 2,943,583.90 22.30
65.001% - 70.00%.................. 20 3,195,850.90 24.21
70.001% - 75.00%.................. 23 2,253,536.11 17.07
75.001% - 80.00%.................. 1 92,929.71 0.70
--- -------------- ------
Total............................. 105 $13,202,375.72 100.00%
=== ============== ======
</TABLE>
- --------
(1) The "Combined Loan-to-Value Ratio" of a Home Equity Loan is the ratio,
expressed as a percentage, of (i) sum of (a) the original principal
balance of the Home Equity Loan and (b) the outstanding principal balance
on the date of origination of the Home Equity Loan of any senior mortgage
loan(s) or, in the case of any open-ended senior mortgage loan, the
maximum available line of credit with respect to such mortgage loan,
regardless of any lesser amount actually outstanding on the date of
origination of the Home Equity Loan, to (ii) the value of the related
Mortgaged Property.
PROPERTY TYPES -- LOAN GROUP 2
The following table sets forth the property type of the Mortgage Properties
related to the Home Equity Loans in Loan Group 2 as of the Cut-off Date.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
PROPERTY TYPE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------- --------- ----------------- -----------------
<S> <C> <C> <C>
Condo Unit....................... 17 $ 3,765,299.41 28.52%
Duplex........................... 1 32,389.17 0.25
Unspecified Residential(1)....... 2 604,443.32 4.58
Single Family Detached........... 66 6,686,253.41 50.64
Single Family Row................ 19 2,113,990.41 16.01
--- -------------- ------
Total............................ 105 $13,202,375.72 100.00%
=== ============== ======
</TABLE>
- --------
(1) The property types of the Mortgaged Properties were previously not coded
in the Master Servicer's loan data system, although such property types
are described in the related loan file.
S-29
<PAGE>
DISTRIBUTION OF MORTGAGE INTEREST RATES--LOAN GROUP 2
The following table sets forth the range of Mortgage Interest Rates with
respect to the Home Equity Loans in Loan Group 2 as of the Cut-off Date.
<TABLE>
<CAPTION>
MORTGAGE INTEREST PERCENT OF
RATE RANGE NUMBER OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- --------------- ----------------- -----------------
<S> <C> <C> <C>
6.51% - 7.00%............... 1 $ 133,587.14 1.01%
7.51% - 7.75%............... 1 475,406.42 3.60
8.01% - 8.25%............... 2 126,242.21 0.96
8.26% - 8.50%............... 10 2,602,303.83 19.71
8.51% - 8.75%............... 1 92,929.71 0.70
8.76% - 9.00%............... 9 2,010,891.34 15.23
9.01% - 9.25%............... 9 962,723.22 7.29
9.26% - 9.50%............... 8 744,533.49 5.64
9.51% - 9.75%............... 12 954,052.61 7.23
9.76% - 10.00%.............. 15 1,619,584.23 12.27
10.01% - 10.25%............. 7 586,140.95 4.44
10.26% - 10.50%............. 7 569,240.04 4.31
10.51% - 10.75%............. 6 640,352.16 4.85
10.76% - 11.00%............. 3 190,255.42 1.44
11.01% - 11.25%............. 3 105,971.57 0.80
11.26% - 11.50%............. 3 193,699.97 1.47
11.51% - 11.75%............. 2 159,093.57 1.21
11.76% - 12.00%............. 3 399,222.54 3.02
12.01% - 12.25%............. 1 31,701.98 0.24
12.76% - 13.00%............. 1 497,409.37 3.77
13.26% - 13.50%............. 1 107,033.95 0.81
--- -------------- ------
Total....................... 105 $13,202,375.72 100.00%
=== ============== ======
</TABLE>
DISTRIBUTION OF PRINCIPAL BALANCES--LOAN GROUP 2
The following table sets forth the range of principal balances with respect to
the Home Equity Loans in Loan Group 2 as of the Cut-off Date.
<TABLE>
<CAPTION>
RANGE OF PRINCIPAL PERCENT OF
BALANCES NUMBER OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------ --------------- ----------------- -----------------
<S> <C> <C> <C>
1 - 25,000.................. 6 $ 106,998.90 0.81%
25,001 - 50,000............. 17 659,091.00 4.99
50,001 - 75,000............. 22 1,339,313.55 10.14
75,001 - 100,000............ 18 1,581,694.58 11.98
100,001 - 150,000........... 19 2,200,749.82 16.67
150,001 - 175,000........... 2 333,399.14 2.53
175,001 - 200,000........... 3 581,381.64 4.40
200,001 - 250,000........... 3 648,855.07 4.91
250,001 - 300,000........... 2 531,205.18 4.02
300,001 - 350,000........... 3 968,292.62 7.33
350,001 - 400,000........... 6 2,252,094.96 17.06
400,001 - 450,000........... 1 409,550.61 3.10
450,001 - 500,000........... 2 972,815.79 7.37
600,001 - 750,000........... 1 616,932.86 4.67
--- -------------- ------
Total....................... 105 $13,202,375.72 100.00%
=== ============== ======
</TABLE>
S-30
<PAGE>
DISTRIBUTION BY INDICES--LOAN GROUP 2
The following table sets forth the types of Indices with respect to the ARM
Loans in Loan Group 2 as of the Cut-off Date.
<TABLE>
<CAPTION>
PERCENT OF
INDEX NUMBER OF ARM LOANS CURRENT BALANCE PRINCIPAL BALANCE
----- ------------------- ----------------- --------------------
<S> <C> <C> <C>
1 Year CMT.......... 91 $10,868,378.99 86.271%
6 Month LIBOR....... 12 1,729,553.41 13.729
--- -------------- -------
Total............... 103 $12,597,932.40 100.000%
=== ============== =======
DISTRIBUTION BY LOAN TYPE--LOAN GROUP 2
The following table sets forth the types of Home Equity Loans with respect to
the ARM Loans in Loan Group 2 as of the Cut-off Date.
<CAPTION>
PERCENT OF
LOAN TYPE NUMBER OF ARM LOANS CURRENT BALANCE PRINCIPAL BALANCE
--------- ------------------- ----------------- --------------------
<S> <C> <C> <C>
1 Year CMT.......... 30 $ 2,896,145.90 22.99%
2/28 1 Year CMT..... 51 4,583,953.09 36.39
2/28 6 Month LIBOR.. 2 428,393.01 3.40
3/27 1 Year CMT..... 10 3,388,280.00 26.90
6 Month LIBOR....... 10 1,301,160.40 10.33
--- -------------- -------
Total............... 103 $12,597,932.40 100.00%
=== ============== =======
DISTRIBUTION OF MAXIMUM MORTGAGE RATES--LOAN GROUP 2
The following table sets forth the range of Maximum Mortgage Rates with
respect to the ARM Loans in Loan Group 2 as of the Cut-off Date.
<CAPTION>
RANGE OF MAXIMUM PERCENT OF PRINCIPAL
MORTGAGE RATES NUMBER OF ARM LOANS PRINCIPAL BALANCE BALANCE
---------------- ------------------- ----------------- --------------------
<S> <C> <C> <C>
12.501% - 13.00%.... 1 $ 133,587.14 1.06%
13.501% - 14.00%.... 1 475,406.42 3.77
14.001% - 14.50%.... 12 2,728,546.04 21.66
14.501% - 15.00%.... 10 2,103,821.05 16.70
15.001% - 15.50%.... 17 1,707,256.71 13.55
15.501% - 16.00%.... 27 2,573,636.84 20.43
16.001% - 16.50%.... 14 1,155,380.99 9.17
16.501% - 17.00%.... 9 830,607.58 6.59
17.001% - 17.50%.... 6 299,671.54 2.38
17.501% - 18.00%.... 5 558,316.11 4.43
18.001% - 18.50%.... 1 31,701.98 0.25
--- -------------- -------
Total............... 103 $12,597,932.40 100.00%
=== ============== =======
</TABLE>
S-31
<PAGE>
DISTRIBUTION OF MINIMUM MORTGAGE RATES -- LOAN GROUP 2
The following table sets forth the range of Minimum Mortgage Rates with
respect to the ARM Loans in Loan Group 2 as of the Cut-off Date.
<TABLE>
<CAPTION>
RANGE OF MINIMUM PERCENT OF
MORTGAGE RATES NUMBER OF ARM LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
---------------- ------------------- ----------------- -----------------
<S> <C> <C> <C>
2.501% - 3.00%.......... 10 $ 3,388,280.00 26.90%
5.001% - 5.50%.......... 1 133,587.14 1.06
6.501% - 7.00%.......... 5 405,351.90 3.22
7.001% - 7.50%.......... 6 638,959.49 5.07
7.501% - 8.00%.......... 9 685,677.41 5.44
8.001% - 8.50%.......... 7 556,750.48 4.42
8.501% - 9.00%.......... 10 902,230.89 7.16
9.001% - 9.50%.......... 17 2,140,714.19 16.99
9.501% - 10.00%......... 38 3,746,380.90 29.74
--- -------------- ------
Total................... 103 $12,597,932.40 100.00%
=== ============== ======
DISTRIBUTION OF MARGINS -- LOAN GROUP 2
The following table sets forth the range of Margins with respect to the ARM
Loans in Loan Group 2 as of the Cut-off Date.
<CAPTION>
PERCENT OF
RANGE OF MARGINS NUMBER OF ARM LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
---------------- ------------------- ----------------- -----------------
<S> <C> <C> <C>
2.001% - 3.00%.......... 10 $ 3,388,280.00 26.90%
5.001% - 6.00%.......... 1 133,587.14 1.06
6.001% - 7.00%.......... 5 405,351.90 3.22
7.001% - 8.00%.......... 15 1,324,636.90 10.51
8.001% - 9.00%.......... 17 1,458,981.37 11.58
9.001% - 10.00%......... 55 5,887,095.09 46.73
--- -------------- ------
Total................... 103 $12,597,932.40 100.00%
=== ============== ======
DISTRIBUTION OF ORIGINAL MONTHS TO STATED MATURITY -- LOAN GROUP 2
The following table sets forth the range of original months to stated
maturity with respect to the Home Equity Loans in Loan Group 2 as of the Cut-
off Date.
<CAPTION>
RANGE OF ORIGINAL
MONTHS TO PERCENT OF
STATED MATURITY NUMBER OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------- --------------- ----------------- -----------------
<S> <C> <C> <C>
169 - 180............... 14 $ 705,436.18 5.34%
289 - 300............... 1 497,409.37 3.77
349 - 360............... 90 11,999,530.17 90.89
--- -------------- ------
Total................... 105 $13,202,375.72 100.00%
=== ============== ======
</TABLE>
CONVEYANCE OF SUBSEQUENT LOANS AND PRE-FUNDING ACCOUNT
An account (the "Pre-Funding Account") will be established by the Trustee and
funded by the Seller on the Closing Date to provide the Trust with sufficient
funds to purchase Subsequent Loans.
S-32
<PAGE>
The amount deposited in the Pre-Funding Account (as reduced from time to time,
the "Pre-Funded Amount") will initially equal $9,750,00 with respect to Loan
Group 1 and $3,250,000 in the case of Loan Group 2. The Pre-Funding Account
will be used to purchase Subsequent Loans during the period from the Closing
Date until the earliest of (i) the date on which the amount on deposit in the
Pre-Funding Account is less than $100,000, (ii) January 24, 1999 or (iii) the
date on which a Master Servicer Termination Event occurs under the Pooling and
Servicing Agreement (the "Pre-Funding Period"). The Pre-Funded Amount will be
reduced during the Pre-Funding Period by the amount used to purchase Subsequent
Loans in accordance with the Pooling and Servicing Agreement. The Pre-Funding
Account will be part of the Trust. The amounts on deposit in the Pre-Funding
Account may be invested in Permitted Instruments (as defined in the
Prospectus). Any investment income earned on amounts on deposit in the Pre-
Funding Account will be for the account of and taxable to the Seller. Any
amounts remaining in the Pre-Funding Account upon expiration of the Pre-Funding
Period will be distributed on the following Payment Date as a principal
prepayment to the related Class of Certificates. The Pre-Funded Amount relating
to a given Class of Certificates may not be used to purchase Subsequent Loans
relating to the other Class of Certificates.
Under the Pooling and Servicing Agreement, following the initial issuance of
the Certificates, the Trust will be obligated to purchase Subsequent Loans from
the Seller during the Pre-Funding Period, subject to the availability thereof.
Each Subsequent Loan will have been underwritten in accordance with the
Seller's standard underwriting criteria. Subsequent Loans will be transferred
to the Trust pursuant to subsequent transfer instruments between the Seller and
the Trust. In connection with the purchase of Subsequent Loans on such dates of
transfer (the "Subsequent Transfer Dates"), the Trust will be required to pay
to the Seller from amounts on deposit in the Pre-Funding Account a cash
purchase price of 100% of the principal balance thereof. The Seller will
designate the Subsequent Transfer Date as the Cut-off Date with respect to the
related Subsequent Loans purchased on such date. The amount paid from the Pre-
Funding Account on each Subsequent Transfer Date will not include accrued
interest on the related Subsequent Loans. Following each Subsequent Transfer
Date, the aggregate principal balance of the Subsequent Loans in the Trust will
increase by an amount equal to the aggregate principal balance of the
Subsequent Loans so purchased and the amount in the Pre-Funding Account will
decrease accordingly.
Any conveyance of Subsequent Loans on a Subsequent Transfer Date is subject
to certain conditions including, but not limited to: (a) each Subsequent Loan
must satisfy the representations and warranties specified in the related
subsequent transfer instrument and the Pooling and Servicing Agreement; (b) the
Seller will not select Subsequent Loans in a manner that it believes is adverse
to the interests of the Certificateholders or the Insurer; (c) as of its
respective Cut-off Date, each Subsequent Loan must satisfy the following
criteria: (i) no Subsequent Loan may be more than 30 days contractually
delinquent; (ii) the remaining stated term to maturity of each Subsequent Loan
may not exceed 360 months; (iii) each Subsequent Loan must be underwritten in
accordance with MMC's standard underwriting criteria; and (iv) no Subsequent
Loan may have a Combined Loan-to-Value Ratio greater than 100%; (d) as a result
of the purchase of the Subsequent Loans, the Class A Certificates will not
receive from the Rating Agencies a lower credit rating than the rating assigned
at the initial issuance of such Class A Certificates without regard to the
Certificate Insurance Policy; and (e) an independent accountant will provide a
letter stating whether or not the characteristics of the Subsequent Loans
conform to the characteristics described herein. Furthermore, with respect to
S-33
<PAGE>
Loan Group 1, the Mortgage Interest Rate on any Subsequent Loan may not be less
than 7.32% and, following the addition of any Subsequent Loan, (i) the weighted
average Mortgage Interest Rate must not be less than 11.70% and (ii) the
weighted average Combined Loan-to-Value Ratio must not be greater than 53%.
With respect to Loan Group 2, any Subsequent Loan must be an ARM Loan, the
Mortgage Interest Rate on any Subsequent Loan may not be less than 7.00%, the
Margin on any Subsequent Loan may not be less than 2.75% and, following the
addition of any Subsequent Loan, (i) the weighted average Margin must not be
less than 7.70%, (ii) the weighted average Combined Loan-to-Value Ratio must
not be greater than 62% and (iii) the percentage, by principal balance, of
Delayed First Adjustment Loans must not exceed 54%.
CAPITALIZED INTEREST ACCOUNT
On the Closing Date, the Seller will deposit cash into an additional account
(the "Capitalized Interest Account") established in the name of and maintained
by the Trustee, which account will be part of the Trust. On each Payment Date
prior to the end of the Pre-Funding Period and the Payment Date immediately
following the end of the Pre-Funding Period, the Trustee will use amounts on
deposit in the Capitalized Interest Account, including investment income
thereon and amounts deposited thereto from the Pre-Funding Account constituting
investment income, to pay interest to the Class A Certificateholders at the
applicable Pass-Through Rate on the amounts on deposit in the Pre-Funding
Account allocable to the related Class of Certificates and the related premium
payable to the Insurer. Any amounts not used for this purpose that remain in
the Capitalized Interest Account following the end of the Pre-Funding Period
will be paid to the Seller and will not thereafter be available for
distribution to Class A Certificateholders.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
The rate of principal payments on the Class A Certificates, the aggregate
amount of each interest payment on the Class A Certificates and the yield to
maturity of the Class A Certificates are related to the rate and timing of
payments of principal on the Home Equity Loans in the related Home Equity Loan
Group, which may be in the form of scheduled and unscheduled payments. In
general, when the level of prevailing interest rates for similar loans
significantly declines, the rate of prepayment is likely to increase, although
the prepayment rate is influenced by a number of other factors, including
general economic conditions and homeowner mobility. Defaults on mortgage loans
are expected to occur with greater frequency in their early years and the rate
of default on second or more junior mortgage loans may be greater than that of
mortgage loans secured by first liens on comparable properties. Prepayments,
liquidations and purchases of the Home Equity Loans will result in
distributions to the related Class of Class A Certificates of amounts of
principal which would otherwise be distributed over the remaining terms of the
Home Equity Loans in the related Home Equity Loan Group. See "Risk Factors--
Yield and Prepayment Considerations" herein.
In addition, the Master Servicer may, at its option, purchase from the Trust
all of the outstanding Home Equity Loans and REO Properties, and thus effect
the early retirement of the Certificates, on any Payment Date following the
first date (the "Optional Termination Date") on which the Pool Principal
Balance (as defined herein) is less than 10% of the sum of the Original Pool
Principal Balance and the aggregate principal balance of the Subsequent Loans
as of their respective
S-34
<PAGE>
Subsequent Transfer Dates (such sum referred to herein as the "Adjusted
Original Pool Principal Balance"). If the Master Servicer does not exercise
such option within 90 days of the first Payment Date upon which the Pool
Principal Balance is less than 10% of the Adjusted Original Pool Principal
Balance, the Trustee is required to conduct a Termination Auction. If
satisfactory bids are received as described under "Description of the
Certificates--Termination and Purchase of Home Equity Loans" herein, such
remaining Home Equity Loans and REO Properties will be sold and the proceeds
distributed to the Certificateholders in the same priority as distributions are
made on any Payment Date.
Furthermore, amounts (other than investment earnings) remaining in the Pre-
Funding Account at the end of the Pre-Funding Period, if any, will be
distributed as principal prepayments to the related Class of Certificates to
the extent such funds have not been used to purchase Subsequent Loans.
As with fixed rate obligations generally, the rate of prepayment on a pool of
mortgage loans with fixed rates such as the Fixed Rate Loans is affected by
prevailing market rates for mortgage loans of a comparable term and risk level.
When the market interest rate is below the mortgage coupon, mortgagors may have
an increased incentive to refinance their mortgage loans. Depending on
prevailing market rates, the future outlook for market rates and economic
conditions generally, some mortgagors may sell or refinance mortgaged
properties in order to realize their equity in the mortgaged properties, to
meet cash flow needs or to make other investments. No assurance can be given as
to the overall rate of prepayment on the Fixed Rate Loans.
As is the case with conventional fixed rate mortgage loans, adjustable rate
mortgage loans may be subject to a greater rate of principal prepayments in a
declining interest rate environment. For example, if prevailing interest rates
fall significantly, adjustable rate mortgage loans such as the ARM Loans could
be subject to higher prepayment rates than if prevailing interest rates remain
constant because the availability of fixed rate mortgage loans at competitive
interest rates may encourage mortgagors to refinance their adjustable rate
mortgage loans to "lock in" a low fixed interest rate. The prepayment behavior
of the Delayed First Adjustment Loans may differ from that of the Fixed Rate
Loans and the other ARM Loans. As a Delayed First Adjustment Loan approaches
its initial Adjustment Date, the borrower may become more likely to refinance
such loan to avoid an increase in the Mortgage Interest Rate, even if fixed
rate loans are only available at rates that are slightly lower or higher than
the Mortgage Interest Rate before adjustment. The existence of the applicable
Periodic Cap, Maximum Mortgage Rate and Minimum Mortgage Rate also may affect
the likelihood of prepayments resulting from refinancings. However, no
assurance can be given as to the overall rate of prepayment on the ARM Loans.
The prepayment experience on non-conventional home equity loans such as the
Home Equity Loans may differ from that on conventional first mortgage loans
primarily due to the credit quality of the typical borrower. Because the credit
histories of many home equity borrowers may preclude them from other
traditional sources of financing, such borrowers may be less likely to
refinance due to a decline in market interest rates. Non-conventional home
equity loans may also experience more prepayments in a rising interest rate
environment as the borrowers' finances are stressed to the point of default.
However, the increased level of competition among home equity lenders has
increased the awareness among credit-impaired borrowers of the availability of
credit and the attraction of refinancing.
S-35
<PAGE>
Slower than anticipated prepayments of principal will decrease the yield on
Class A Certificates purchased at a price less than par. Greater than
anticipated prepayments of principal will decrease the yield on Class A
Certificates purchased at a price greater than par. The effect on an investor's
yield due to principal prepayments on the related Home Equity Loans occurring
at a rate that is faster (or slower) than the rate anticipated by the investor
in the period immediately following the issuance of the Class A Certificates
will not be entirely offset by a subsequent like reduction (or increase) in the
rate of principal payments. The weighted average life of the Class A
Certificates will also be affected by the amount and timing of delinquencies
and defaults on the Home Equity Loans in the related Home Equity Loan Group and
the recoveries, if any, on defaulted Home Equity Loans and foreclosed
properties in such Home Equity Loan Group.
The Class A Certificates have been structured so that principal distributions
thereon will be made, to the extent funds are available, in an amount necessary
to cause the principal balances of the related Home Equity Loans to exceed the
Class Certificate Balance of the related Class A Certificates by the applicable
Overcollateralization Requirement. So long as such application of funds
continues, the weighted average lives of the Class A Certificates will be
different than would have been the case in the absence of such provisions.
No representation is made as to the particular factors that will affect the
prepayment of the Home Equity Loans, as to the relative importance of such
factors, as to the percentage of the principal balance of the Home Equity Loans
that will be paid as of any date or as to the overall rate of prepayment on the
Home Equity Loans. See "Certain Yield and Prepayment Considerations" in the
Prospectus.
SPECIAL YIELD AND PREPAYMENT CONSIDERATIONS APPLICABLE TO THE CLASS A-2
CERTIFICATES
Each Accrual Period for the Class A-2 Certificates will consist of the actual
number of days elapsed from the Payment Date in the month preceding the month
of the applicable Payment Date (or, in the case of the first Accrual Period,
from the Closing Date) through the day preceding such Payment Date.
The Pass-Through Rate for the Class A-2 Certificates will be calculated by
reference to One-Month LIBOR. Although the Mortgage Interest Rates on the ARM
Loans in Loan Group 2 are subject to adjustment, the Mortgage Interest Rates
adjust less frequently than the Pass-Through Rate with respect to the Class A-2
Certificates and adjust by reference to the applicable Index. In addition, a
substantial majority of the ARM Loans are Delayed First Adjustment Loans with
Mortgage Interest Rates that will not adjust for a significant period of time.
Changes in One-Month LIBOR may not correlate with changes in the applicable
Index and either may not correlate with prevailing interest rates. It is
possible that an increased level of One-Month LIBOR could occur simultaneously
with a lower level of prevailing interest rates, which would be expected to
result in faster prepayments, thereby reducing the weighted average life of the
Class A-2 Certificates.
Additionally, the Pass-Through Rate for the Class A-2 Certificates will be
calculated by reference to the Group 2 Net WAC Cap. If Home Equity Loans in
Loan Group 2 bearing higher fixed Mortgage Interest Rates were to prepay, the
weighted average Mortgage Interest Rate of the remaining Home Equity Loans in
Loan Group 2, and consequently the Group 2 Net WAC Cap,
S-36
<PAGE>
would be lower than otherwise would be the case. If this were to reduce the
Group 2 Net WAC Cap below the LIBOR Rate, the Pass-Through Rate for the Class
A-2 Certificates would be lower than otherwise would be the case. Although
holders of the Class A-2 Certificates will be entitled to any related LIBOR
Carryover Amount from and to the limited extent of funds available therefor as
provided herein, there can be no assurance that such funds will be available or
sufficient for such purposes. In addition, the Certificate Insurance Policy
does not cover, and the ratings of the Class A-2 Certificates do not address
the likelihood of, payment of any LIBOR Carryover Amount.
Certain of the ARM Loans were originated with initial Mortgage Interest Rates
that were based on competitive conditions and did not equal the sum of the
Index and the related Margin. As a result, the Mortgage Interest Rates on such
ARM Loans are more likely to adjust on their first, and possibly subsequent
Adjustment Dates, subject to the effects of the applicable Periodic Cap and the
Maximum Mortgage Rate. Because the Pass-Through Rate for the Class A-2
Certificates is limited by the Group 2 Net WAC Cap on each Payment Date, limits
on changes in the Mortgage Interest Rates of the ARM Loans may limit changes in
the Pass-Through Rate for the Class A-2 Certificates.
Home Equity Loans with higher Mortgage Interest Rates may be more likely to
prepay than Home Equity Loans with relatively lower Mortgage Interest Rates in
response to a given change in market interest rates. In addition, since Home
Equity Loans with relatively higher Mortgage Interest Rates generate more
excess interest to cover losses, create overcollateralization and pay any LIBOR
Carryover Amount, any such disproportionate prepayment of the Home Equity Loans
may adversely affect the yield on the Class A-2 Certificates.
PREPAYMENT MODEL
Prepayments on mortgage loans are commonly measured relative to a prepayment
standard or model. The model used in this Prospectus Supplement with respect to
the Class A-1 Certificates (the "Prepayment Assumption") represents an assumed
rate of prepayment each month relative to the then outstanding principal
balance of a pool of mortgage loans for the life of such mortgage loans. For
the Class A-1 Certificates, a 100% Prepayment Assumption assumes a constant
prepayment rate ("CPR") of 2.7% per annum of the outstanding principal balance
of the Fixed Rate Loans in Loan Group 1 in the first month of the life of such
Fixed Rate Loans and an additional 2.7% per annum in each month thereafter
until the tenth month; beginning in the eleventh month and in each month
thereafter during the life of such Fixed Rate Loans, a CPR of 27% per annum
each month is assumed. As used in the table below, 0% Prepayment Assumption
assumes a CPR equal to 0% of the Prepayment Assumption, i.e. no prepayments.
Correspondingly, 125% Prepayment Assumption assumes prepayment rates equal to
125% of the Prepayment Assumption, and so forth. The Prepayment Assumption does
not purport to be a historical description of prepayment experience or a
prediction of the anticipated rate of prepayment of any pool of mortgage loans,
including the Home Equity Loans. For the Class A-2 Certificates, a CPR of 30%
per annum of the outstanding principal balance of the Home Equity Loans in Loan
Group 2 for each month in the life of such Home Equity Loans is assumed.
For the purpose of the tables below, it is assumed that: (i) the Home Equity
Loans of each Home Equity Loan Group consist of loans with the characteristics
set forth below, (ii) the Closing Date is November 24, 1998, (iii)
distributions on the Class A Certificates are made on the 25th day
S-37
<PAGE>
of each month regardless of the day on which the Payment Date actually occurs,
commencing in December 1998 in accordance with the priorities described
herein, (iv) the scheduled monthly payments of principal and interest on the
Home Equity Loans will be timely delivered to the Master Servicer each month
(with no defaults), commencing with November 1998, (v) the Mortgage Interest
Rate for each ARM Loan in Loan Group 2 is adjusted on its next rate adjustment
date (and on subsequent rate adjustment dates, if necessary) to equal the sum
of (a) an assumed level of the applicable Index (which remains constant at
4.46% and 5.1887% with respect to 1 Year CMT and 6 Month LIBOR, respectively)
and (b) the respective gross margin (such sum being subject to the applicable
Periodic Cap, Maximum Mortgage Rate and Minimum Mortgage Rate), (vi) all
prepayments are prepayments in full received on the last day of each month
(commencing November 1998) and include 30 days' interest thereon, (vii) the
Class A Certificates have the respective Pass-Through Rates and Class
Certificate Balances as set forth herein and One-Month LIBOR is equal to
5.277%, (viii) the numbers under the "Months to Next Rate Adjustment Date"
heading for Loan Group 2 table below indicate the number of months from the
Cut-off Date to the first interest rate change date for the applicable pools
of loans and (ix) the entire Pre-Funding Amount is used to purchase Subsequent
Loans on December 25, 1998.
LOAN GROUP 1
<TABLE>
<CAPTION>
AMORTIZATION CURRENT MORTGAGE ORIGINAL TERM TO REMAINING TERM TO
METHODOLOGY PRINCIPAL BALANCE INTEREST RATE MATURITY (MONTHS) MATURITY (MONTHS)
- ------------ ----------------- ------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Level
Pay(1) $ 4,223,473.09 9.110% 49 44
Level Pay 14,265,334.94 11.055 103 97
Level Pay 28,890,571.71 11.845 179 170
Level Pay 7,435,033.87 12.406 237 232
Level Pay 5,611,366.72 13.022 298 291
Level Pay 7,891,023.11 11.869 357 354
Level Pay 602,763.25 9.110 49 49
Level Pay 2,035,912.24 11.055 103 103
Level Pay 4,123,188.76 11.845 179 179
Level Pay 1,061,109.08 12.406 237 237
Level Pay 800,839.96 13.022 298 298
Level Pay 1,126,186.71 11.869 357 357
</TABLE>
- --------
(1) A "Level Pay" amortization methodology provides for amortization of the
principal balance thereof in equal monthly installments by the stated
maturity.
S-38
<PAGE>
LOAN GROUP 2
<TABLE>
<CAPTION>
ORIGINAL REMAINING NET NET MONTHS FREQUENCY
CURRENT MORTGAGE TERM TO TERM TO MAXIMUM MINIMUM TO NEXT OF RATE
PRINCIPAL INTEREST MATURITY MATURITY MORTGAGE MORTGAGE PERIODIC ADJUSTMENT ADJUSTMENT
BALANCE RATE (MONTHS) (MONTHS) MARGIN RATE RATE CAP DATE (MONTHS) INDEX
- ------------- -------- -------- --------- ------ -------- -------- -------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 107,033.95 13.500% 180 176 N/A N/A N/A N/A N/A N/A N/A
497,409.37 12.990 300 294 N/A N/A N/A N/A N/A N/A N/A
2,896,145.90 9.595 355 351 9.345 15.095% 8.845% 2.000% 8 12 1 Year CMT
4,583,953.09 9.935 340 337 8.935 15.435 8.435 2.000 22 12 1 Year CMT
428,393.01 10.307 360 358 7.557 15.807 7.057 2.000 22 6 6 Month LIBOR
3,388,280.00 8.648 360 343 2.875 14.148 2.375 2.000 21 12 1 Year CMT
1,301,160.40 9.047 360 353 8.851 14.547 8.351 1.000 1 6 6 Month LIBOR
747,144.39 9.595 355 355 9.345 15.095 8.845 2.000 8 12 1 Year CMT
1,182,562.94 9.935 340 340 8.935 15.435 8.435 2.000 22 12 1 Year CMT
110,516.34 10.307 360 360 7.557 15.807 7.057 2.000 22 6 6 Month LIBOR
874,104.58 8.648 360 360 2.875 14.148 2.375 2.000 21 12 1 Year CMT
335,671.86 9.047 360 360 8.851 14.547 8.351 1.000 1 6 6 Month LIBOR
</TABLE>
Any discrepancy between the characteristics of the Home Equity Loans actually
included in the Trust and the characteristics of the Home Equity Loans expected
to be so included may affect the percentages of the original outstanding
principal balance set forth in the tables and the weighted average lives of the
Certificates. In addition, to the extent that the Home Equity Loans included in
the Trust have characteristics that differ from those assumed in preparing the
following tables, the outstanding principal balance of any Certificate will be
reduced to zero earlier or later than that indicated by the table.
Variations in actual prepayment experience and the principal balances of the
Home Equity Loans that prepay may increase or decrease the percentages of the
Initial Certificate Balance outstanding and each of the Class A Certificates'
respective Weighted Average Life to Maturity and Weighted Average Life to Call
shown in the following tables. Such variations may occur even if the average
prepayment experience of all such Home Equity Loans equals the indicated levels
of the Prepayment Assumption. There is no assurance that prepayments of the
Home Equity Loans will conform to any level of the Prepayment Assumption.
Based on the foregoing assumptions, the following tables set forth the
percentages of the Initial Certificate Balance of each Class of Class A
Certificates that would be outstanding after each of the dates shown at various
percentages of the Prepayment Assumption and the corresponding weighted average
lives.
S-39
<PAGE>
CLASS A-1 CERTIFICATES
Percent of Initial Class A-1 Certificate Balance Outstanding at the
Following Percentages of the Prepayment Assumption
<TABLE>
<CAPTION>
PAYMENT
DATE: 0% 50% 75% 100% 125% 150% 200%
------- ----- --- --- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100 100 100
11/25/99 93 81 76 70 64 59 47
11/25/00 88 66 56 48 39 32 19
11/25/01 82 53 42 32 24 18 9
11/25/02 76 42 31 22 15 10 4
11/25/03 71 34 23 15 9 5 1
11/25/04 66 27 17 10 6 3 0
11/25/05 60 22 12 7 3 1 0
11/25/06 53 17 9 4 2 0 0
11/25/07 48 13 6 3 1 0 0
11/25/08 44 10 5 2 0 0 0
11/25/09 39 8 3 1 0 0 0
11/25/10 34 6 2 0 0 0 0
11/25/11 29 4 1 0 0 0 0
11/25/12 22 3 1 0 0 0 0
11/25/13 20 2 0 0 0 0 0
11/25/14 18 1 0 0 0 0 0
11/25/15 16 1 0 0 0 0 0
11/25/16 15 1 0 0 0 0 0
11/25/17 13 0 0 0 0 0 0
11/25/18 11 0 0 0 0 0 0
11/25/19 10 0 0 0 0 0 0
11/25/20 9 0 0 0 0 0 0
11/25/21 7 0 0 0 0 0 0
11/25/22 6 0 0 0 0 0 0
11/25/23 4 0 0 0 0 0 0
11/25/24 4 0 0 0 0 0 0
11/25/25 3 0 0 0 0 0 0
11/25/26 2 0 0 0 0 0 0
11/25/27 0 0 0 0 0 0 0
11/25/28 0 0 0 0 0 0 0
11/25/29 0 0 0 0 0 0 0
Weighted Average Life
to Maturity (years)(1): 10.00 4.5 3.4 2.7 2.2 1.8 1.3
Weighted Average Life
to Call (years)(2): 9.9 4.2 3.1 2.5 2.0 1.6 1.2
</TABLE>
- --------
(1) The "Weighted Average Life to Maturity" of the Class A-1 Certificates as
shown above is determined by (i) multiplying the amount of the principal
payments with respect to the Class A-1 Certificates by the number of years
from the date of issuance of the Class A-1 Certificates to the related
Payment Date upon which such Certificates mature, (ii) summing the results
and (iii) dividing the sum by the sum of the amounts in clause (i) above.
(2) The "Weighted Average Life to Call" of the Class A-1 Certificates as shown
above is determined by (i) multiplying the amount of the principal
payments with respect to the Class A-1 Certificates by the number of years
from the date of issuance of the Class A-1 Certificates to the earliest
Payment Date upon which the Class A-1 Certificates would be subject to
optional termination by the Master Servicer, (ii) summing the results and
(iii) dividing the sum by the sum of the amounts in clause (i) above.
S-40
<PAGE>
CLASS A-2 CERTIFICATES
Percent of Initial Class A-2 Certificate Balance Outstanding at the
Following CPR's
<TABLE>
<CAPTION>
PAYMENT
DATE: 0% 10% 20% 26% 30% 40% 50%
------- ---- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100 100 100
11/25/99 92 79 72 66 59 52 39
11/25/00 91 67 56 46 37 29 15
11/25/01 91 56 43 32 23 16 6
11/25/02 90 47 33 22 14 9 2
11/25/03 89 40 25 15 9 5 1
11/25/04 89 34 19 11 5 2 0
11/25/05 88 28 15 7 3 1 0
11/25/06 87 24 11 5 2 0 0
11/25/07 86 20 9 3 1 0 0
11/25/08 84 17 7 2 0 0 0
11/25/09 83 14 5 1 0 0 0
11/25/10 81 12 4 1 0 0 0
11/25/11 80 10 3 0 0 0 0
11/25/12 78 8 2 0 0 0 0
11/25/13 76 7 1 0 0 0 0
11/25/14 73 5 1 0 0 0 0
11/25/15 71 4 1 0 0 0 0
11/25/16 68 4 0 0 0 0 0
11/25/17 64 3 0 0 0 0 0
11/25/18 60 2 0 0 0 0 0
11/25/19 56 2 0 0 0 0 0
11/25/20 52 1 0 0 0 0 0
11/25/21 46 1 0 0 0 0 0
11/25/22 40 0 0 0 0 0 0
11/25/23 33 0 0 0 0 0 0
11/25/24 26 0 0 0 0 0 0
11/25/25 18 0 0 0 0 0 0
11/25/26 9 0 0 0 0 0 0
11/25/27 2 0 0 0 0 0 0
11/25/28 0 0 0 0 0 0 0
11/25/29 0 0 0 0 0 0 0
Weighted Average Life
to Maturity (years)(1): 19.6 5.4 3.6 2.6 2.0 1.6 1.1
Weighted Average Life
to Call (years)(2): 18.9 4.7 3.2 2.4 1.9 1.5 1.0
</TABLE>
- --------
(1) The "Weighted Average Life to Maturity" of the Class A-2 Certificates as
shown above is determined by (i) multiplying the amount of the principal
payments with respect to the Class A-2 Certificates by the number of years
from the date of issuance of the Class A-2 Certificates to the related
Payment Date upon which such Certificates mature, (ii) summing the results
and (iii) dividing the sum by the sum of the amounts in clause (i) above.
(2) The "Weighted Average Life to Call" of the Class A-2 Certificates as shown
above is determined by (i) multiplying the amount of the principal
payments with respect to the Class A-2 Certificates by the number of years
from the date of issuance of the Class A-2 Certificates to the earliest
Payment Date upon which such Class A-2 Certificates would be subject to
optional termination by the Master Servicer, (ii) summing the results and
(iii) dividing the sum by the sum of the amounts in clause (i) above.
S-41
<PAGE>
THE MASTER SERVICER--ORIGINATION AND SERVICING EXPERIENCE
GENERAL
For a general discussion of the Seller and the Master Servicer, see "The
Seller" and "The Master Servicer and Its Affiliates" in the Prospectus.
Certain representations and warranties will be made by the Master Servicer
with respect to the Home Equity Loans. Such representations and warranties will
include, among others, the representations and warranties set forth in the
Prospectus under "Representations and Warranties of the Seller" and
"Description of the Class A Certificates--Representations and Warranties of the
Seller and the Master Servicer" herein.
Metropolitan Mortgage Company ("MMC") will be the Master Servicer. The Master
Servicer will be responsible for servicing the Home Equity Loans in accordance
with the Pooling and Servicing Agreement and generally in accordance with the
first and second mortgage loan servicing standards and procedures accepted by
prudent mortgage lending institutions. See "Description of the Certificates--
Servicing Standards" in the Prospectus for a further description of the
provisions of the Pooling and Servicing Agreement relating to servicing
standards.
METROPOLITAN MORTGAGE COMPANY
MMC was incorporated in Florida in 1953. It was acquired by an affiliate of
Transamerica Finance Corporation in March 1997 and is now a wholly-owned
indirect subsidiary of Transamerica Finance Corporation. MMC's underwriting and
servicing operations are centralized in Miami, Florida.
All of the Home Equity Loans have been originated exclusively to borrowers
owning residential properties located in the states of Florida, Georgia or
North Carolina under the three lending programs described below.
As of the Cut-off Date, approximately 83% (by principal amount) of the Home
Equity Loans in Loan Group 1 were originated by MMC under its retail program
(the "Retail Program"). MMC markets loans in the states of Florida and Georgia
under the Retail Program through its 31 retail branch offices located in the
states of Florida and Georgia. Direct mail solicitation, telemarketing and
extensive television and radio advertising are utilized. Such marketing efforts
are targeted at MMC's primary market of credit-impaired borrowers who have
significant equity in their homes but whose borrowing needs are not being met
by traditional financial institutions.
As of the Cut-off Date, all of the Home Equity Loans included in Loan Group 2
were originated by MMC under its wholesale lending program (the "Wholesale
Program"). This program was implemented by MMC in March of 1997. Under this
program, participating banks, thrifts and mortgage companies identify borrowers
who do not meet such lender's underwriting criteria but may qualify for a loan
from MMC. When such a borrower is identified, the originator may complete the
underwriting and documentation of a loan in conformance with the underwriting
standards of MMC. MMC will purchase such a loan after MMC has re-underwritten
the loan and reviewed the documentation.
S-42
<PAGE>
As of the Cut-off Date, approximately 17% (by principal amount) of the Home
Equity Loans included in Loan Group 1 were originated by MMC under its
institutional lending program (the "Institutional Program"). Such loans are
underwritten in accordance with more traditional guidelines and are targeted at
a more traditional market of borrowers whose profiles do not fit MMC's Retail
Program. MMC directs borrowers who desire a higher Combined Loan-to-Value Ratio
to its Institutional Program.
Underwriting -- Retail Program
Underwriting guidelines and procedures under the Retail Program generally
rely more heavily upon the value of the Mortgaged Property and typically do not
rely as heavily upon the borrower's credit grade or income. The underwriting
standards described herein include such criteria and characteristics as
guidelines only. If compensating factors exist, underwriting personnel may use
their judgement in assessing such compensating factors and the overall
feasibility of the loan. See "Underwriting Guidelines" below.
MMC's underwriting guidelines are based upon the maximum Combined Loan-to-
Value Ratio, which can vary up to 80% or higher under certain circumstances.
See "Underwriting Guidelines" below. Certain credit related criteria are
considered at each Combined Loan-to-Value Ratio, including the following: (i)
the maximum mortgage debt service to monthly gross income ratio; (ii) the
maximum total debt service to monthly gross income ratio; (iii) the minimum
monthly dollars remaining after satisfaction of current obligations; (iv) the
status of superior mortgages; (v) the collateral type; and (vi) the occupancy
type.
Appraisals are an integral part of the underwriting process for the Retail
Program. Appraisals are required for all loans and are heavily relied upon in
assessing a loan application. MMC performs its own appraisals through its staff
of licensed appraisers employed by First Florida Appraisal Services, Inc.
("FFAS") and First Georgia Appraisal Services, Inc., both wholly owned
subsidiaries of MMC. All of the appraisers are certified as residential
appraisers and are full-time employees compensated by salary and a bonus that
is not dependent on the completion of loan transactions.
Verification of income is not generally required under MMC's underwriting
guidelines. Furthermore, the underwriting guidelines established by MMC do not
rely heavily upon the borrower's credit history (other than the borrower's
mortgage credit history over the prior twelve months). As a result many of the
borrowers have delinquencies and other derogatory information on their credit
report. A "dial up" credit bureau report is obtained in connection with each
application. A "dial up" credit report is a short form credit report produced
by credit bureaus which lists only a summary of the applicant's credit history.
Of all the factors considered, MMC views the borrower's performance on first
mortgage loans as highly indicative. If the borrower has performed
satisfactorily on such first mortgage, substantial consideration will be given
to that performance in the underwriting process. Borrowers on the Home Equity
Loans originated through the Retail Program may have had a prior bankruptcy at
some point in time.
Subject to the discussion under "Underwriting Guidelines" below, for all
Loans under the Retail Program, borrowers are allowed a maximum mortgage debt
to income ratio of 50% and a maximum total debt to income ratio of 55%.
S-43
<PAGE>
Loans are underwritten at each Combined Loan-to-Value Ratio based upon the
criteria set forth in Appendix B.
Underwriting Guidelines. As discussed above, MMC's underwriting process
employs criteria that are guidelines only. The indicated underwriting standards
applicable at a certain Combined Loan-to-Value Ratio vary with respect to a
substantial portion of the Home Equity Loans originated through the Retail
Program and a certain amount of discretion is utilized by MMC's underwriting
personnel based upon compensating factors. Variances from the guidelines may,
for example, result in Combined Loan-to-Value Ratios varying from the standards
set forth in Appendix B, sometimes as a result of high credit scores as
reported on the "dial-up" credit bureau report, and sometimes as a result of
good job stability, an excellent payment history on an existing first mortgage
or rapid marketability of the subject property. This underwriting process
extensively utilizes and relies upon the judgement and experience of MMC's
underwriting personnel. In addition, Home Equity Loans may be originated to
purchasers of REO properties acquired by MMC at higher Combined Loan-to-Value
Ratios than those specified in Appendix B, and without regard to the guidelines
with respect to collateral type specified therein. The Mortgage Pool includes
three Home Equity Loans that were originated to purchasers of REO properties
with an aggregate principal balance of approximately $145,530 as of the Cut-Off
Date.
Quality Control. MMC usually conducts both a pre-closing and a post-closing
review of the loan documents and the underwriting guidelines for a sample of
loans originated under the Retail Program. Such review is conducted
periodically by senior management and includes, among other things, a review of
the loan and appraisal documentation and reverification of the Combined Loan-
to-Value Ratio and various other closing statement amounts.
Insurance. Title insurance is generally required for all properties. Hazard
insurance is generally required for all properties unless the value of the land
is greater than the loan amount or the loan balance is under $5,000. MMC will
monitor such insurance during the life of the loan and force place such
insurance if necessary. MMC does not require the establishment of escrow
accounts for the payment of insurance premiums or taxes. Some of the Home
Equity Loans include private mortgage guarantee insurance.
Underwriting -- Institutional Program
The Home Equity Loans originated under MMC's Institutional Program have been
underwritten in accordance with the underwriting guidelines developed by a
large U.S. mortgage loan wholesaler/retailer. Such guidelines classify loans as
"A," "B," "C" or "D" in accordance with the progressively greater risk
characteristics each such loan possesses.
Underwriting -- Wholesale Program
As discussed above, MMC acquires loans under its Wholesale Program from
banks, thrifts and mortgage companies located in the states of Florida and
Georgia. MMC requires a standard FNMA application from all borrowers. All
submissions from originators include a credit report and an appraisal. Under
the full documentation loan program, MMC may also determine and verify the
borrower's income and debt levels. Loans are assigned a grade of A, B, C, D, or
X based upon the borrower's most recent 12 month mortgage or rental payment
history using the borrower's overall credit history as a compensating factor.
S-44
<PAGE>
Servicing
MMC is a FNMA-approved servicer. MMC's mortgage servicing activities include
processing and administering mortgage loan payments, monitoring the status of
homeowner's insurance and property taxes, collection monitoring and management,
foreclosure and other administration of mortgage loans. MMC currently has
approximately nine employees on its collection staff and eight employees on its
servicing staff.
Collection efforts on loans generally begin when the account is 6-10 days
delinquent with phone calls and thereafter late notices. MMC may reach a verbal
or written payment agreement with the borrower, depending upon a number of
factors, including the borrower's payment history and the reason for the
inability to make current payments. MMC prefers to reach a payment agreement
with a delinquent borrower rather than accepting partial payments. A payment
agreement may provide that a borrower who is delinquent may make up such
delinquent payments over a specified period of time.
When a loan is more than 30 days past due in accordance with its original
terms, the facts surrounding the delinquency are generally reviewed. MMC will
generally recommend that legal action be commenced to force foreclosure of the
underlying collateral only if it deems a delinquency cannot otherwise be cured.
After a mortgage is from 76 to 120 days delinquent, its status is reviewed and
a foreclosure determination is made. The underlying property may be appraised
or a field inspection performed and the results evaluated to help MMC determine
the proper course of action. If the delinquency cannot be cured, MMC may then
commence foreclosure proceedings. In appropriate circumstances MMC may pursue
various loss mitigation alternatives to foreclosure, including pre-foreclosure
sales and deeds in lieu of foreclosure.
S-45
<PAGE>
LOSS AND DELINQUENCY EXPERIENCE
MMC serviced loans under the Retail, Institutional and Wholesale Programs
aggregating approximately $178,742,000, $160,425,000, $169,136,000, and
$175,197,000 as of December 31, 1997, 1996, 1995 and 1994 , respectively. Set
forth below is certain loss and delinquency information relating to such
loans.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDING DECEMBER 31, ENDING
------------------------------------- SEPTEMBER 30,
1994 1995 1996 1997 1998
------- ------- ------- ------- -------------
(Dollars in 000s)
<S> <C> <C> <C> <C> <C>
Servicing Portfolio (at
period end) (number of
loans).................. 11,804 11,042 9,935 9,651 9,340
Servicing Portfolio (at
period end) ($)......... 175,197 169,136 160,425 178,742 205,416
Delinquency of Home
Equity Loans Serviced
(at period end) (as a
percentage of number of
loans:)
30 Days:
Number of loans...... 347 464 382 389 347
Percent of
Delinquency......... 2.94% 4.20% 3.84% 4.03% 3.71%
60 Days:
Number of loans...... 69 99 92 91 93
Percent of
Delinquency......... .58% .90% .93% 0.94% 0.99%
90 Days or more:
Number of loans...... 12 9 22 26 36
Percent of
Delinquency......... .10% 0.08% 0.22% 0.27% 0.39%
Total Delinquencies
Number of loans...... 428 572 496 506 476
Percent of
Delinquency......... 3.63% 5.18% 4.99% 5.24% 5.10%
In foreclosure and
bankruptcy
Number of loans...... 180 180 205 213 186
Percent of
Delinquency......... 1.52% 1.63% 2.06% 2.21% 1.99%
REO Property at Period
End(1).................. 2,324 2,390 2,165 114 704
REO as a percentage of
Serviced Portfolio(2)... 1.33% 1.41% 1.35% 0.06% 0.34%
Net Gain/(Loss) on REO
Portfolio(3)............ (415) (475) (330) 3 (16)
Net Gain /(Loss) as a
percentage of Serviced
Portfolio(4)............ (0.24)% (0.28)% (0.21)% 0.00% (0.01)%
</TABLE>
- --------
(1) Outstanding principal balance of loans where the servicer has acquired
title to the property ("real estate owned properties" or "REO Property").
(2) Outstanding principal balance of loans related to REO Property as a
percent of outstanding principal of all loans in serviced portfolio.
(3) REO and Net Gain/(Loss) data include property acquired by a related
mortgage insurance company.
(4) Net Gain/(Loss) on REO Portfolio as a percentage of outstanding principal
balance of all loans in serviced portfolio.
S-46
<PAGE>
The delinquency percentages set forth in the preceding table are calculated
on the basis of the number of mortgage loans included in the portfolio as of
the end of the periods indicated. The net loss percentages set forth above are
calculated on the basis of the outstanding principal balance of mortgage loans
included in the portfolio as of the end of the periods indicated. The actual
delinquency percentages and loss experience with respect to the Home Equity
Loans in the Mortgage Pool may be expected to be substantially higher than the
delinquency percentages indicated above because the composition of the Mortgage
Pool will not change.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The following summary describes certain terms of the Certificates and the
Pooling and Servicing Agreement. Reference is made to the accompanying
Prospectus for important additional information regarding the terms of the
Class A Certificates and the underlying documents. A form of the Pooling and
Servicing Agreement has been filed as an exhibit to the Registration Statement
of which the Prospectus forms a part. The summary does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
the provisions of the Class A Certificates and the Pooling and Servicing
Agreement. Where particular provisions or terms used in any of such documents
are referred to, the actual provisions (including definitions of terms) are
incorporated by reference as part of such summaries.
The TFC Home Equity Loan Asset-Backed Certificates, Series 1998-1, will
consist of the Class A-1 and Class A-2 Certificates (collectively, the "Class A
Certificates"), and the Class R Certificate (together with the Class A
Certificates, the "Certificates"). Only the Class A Certificates are offered
hereby.
The Certificates represent interests in the Trust (the "Trust") created
pursuant to the Pooling and Servicing Agreement. The Trust consists of (i) a
pool (the "Mortgage Pool") of fixed and adjustable rate mortgage loans (each, a
"Home Equity Loan") secured by mortgages, deeds of trust or other instruments
(each, a "Mortgage") creating a first, second or more junior lien primarily on
one- to four-family dwellings, condominiums, units in planned unit developments
and manufactured homes (each, a "Mortgaged Property") to be deposited into the
Trust by the Seller for the benefit of the holders of the Certificates (the
"Certificateholders"), (ii) all monies received on the Home Equity Loans after
the Cut-off Date and (iii) the Certificate Insurance Policy.
Each Class A Certificate will be issued in a minimum denomination of $100,000
and integral multiples of $1,000 in excess thereof. Each Class A Certificate
will represent a percentage interest (a "Percentage Interest") in the
Certificates of the applicable Class determined by dividing the original dollar
amount represented by such Certificate by the Class Certificate Balance for
such Class.
Each Class of Class A Certificates (the "Book-Entry Certificates") will
initially be represented by one or more certificates registered in the name of
Cede & Co. ("Cede"), the nominee of The Depository Trust Company ("DTC").
Persons acquiring beneficial ownership in the Class A Certificates
("Certificate Owners") will hold their Certificates through DTC in the United
States, or the Euroclear System ("Euroclear") or Cedel Bank societe anonyme
("Cedel") in Europe, if they
S-47
<PAGE>
are participants in such systems, or indirectly through organizations which are
participants in such systems. 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. Cross-market transfers between persons
holding directly or indirectly through DTC, on the one hand, and counterparties
holding directly or indirectly through Euroclear or Cedel, on the other, will
be effected in DTC through The Chase Manhattan Bank ("Chase") or Citibank, N.A.
("Citibank"), the relevant depositaries of Euroclear and Cedel, respectively,
and each a participating member of DTC. The interests of the Certificate Owners
will be represented by book entries on the records of DTC and participating
members thereof. No Certificate Owner will be entitled to receive a definitive
certificate representing such person's interest, except in the event that
definitive Certificates are issued in the limited circumstances described in
the Pooling and Servicing Agreement. All references in this Prospectus
Supplement to any of the Class A Certificates reflect the rights of Certificate
Owners only as such rights may be exercised through DTC and its participating
organizations for so long as such Class A Certificates are held by DTC. See
"Risk Factors" and "Appendix A" hereto.
On each Payment Date, the Trustee will pay to each person in whose name a
Certificate is registered on the related Record Date (which in the case of
Book-Entry Certificates initially will be only Cede, as nominee of DTC), the
portion of the aggregate payment to be made to Certificateholders of the
applicable Class of Certificates to which such holder is entitled based on the
Percentage Interest of the Certificates of such Class held by such holder.
Distributions will be made by wire transfer of immediately available funds to
the account of such holder at a bank or other entity having appropriate
facilities therefor if such holder owns of record Certificates in denominations
aggregating in excess of $1,000,000 and shall have provided complete wiring
instructions to the Trustee at least five Business Days prior to the Record
Date, and otherwise by check mailed to the address of the person entitled
thereto as it appears on the Certificate Register. A "Business Day" is defined
to be any day other than (i) a Saturday or Sunday or (ii) a day on which
banking institutions in New York, New York, Miami, Florida, or the city in
which the corporate trust office of the Trustee or the executive office of the
Insurer is located shall be authorized or obligated by law, executive order, or
governmental decree to be closed.
FINAL SCHEDULED PAYMENT DATES
The final scheduled payment dates (the "Final Scheduled Payment Dates") of
the Class A Certificates will be as follows:
<TABLE>
<S> <C>
Class A-1...................................... March 25, 2030
Class A-2...................................... March 25, 2030
</TABLE>
The Final Scheduled Payment Date with respect to the Class A-1 Certificates
is the Payment Date on which the Class A-1 Certificate Balance would be reduced
to zero assuming that, among other things, that there are no principal
prepayments on the Home Equity Loans in Loan Group 1. The Final Scheduled
Payment Date with respect to the Class A-2 Certificates is also the Payment
Date on which the Class A-2 Certificate Balance would be reduced to zero
assuming that, among other things, that there are no principal prepayments on
the Home Equity Loans in Loan Group 2. The rate of payment of principal of the
Class A Certificates will depend on the rate of payments of principal
(including prepayments) and any repurchases of the related Home Equity Loans.
Since the
S-48
<PAGE>
Final Scheduled Payment Dates have been determined based upon the assumptions
set forth above, the actual final Payment Date of each Class is likely to occur
prior to its Final Scheduled Payment Date although, in the event of defaults in
payment of the Home Equity Loans, it could occur later or earlier.
REPRESENTATIONS AND WARRANTIES OF THE SELLER AND THE MASTER SERVICER
The Seller will make the representations, among others, as to each Home
Equity Loan conveyed by the Seller as of the Closing Date described under
"Description of the Certificates--Representations and Warranties of the Seller"
in the Prospectus and will also represent that:
(i) As of the Cut-off Date, no Home Equity Loans in the Mortgage Pool are
more than 30 days contractually delinquent.
(ii) No Home Equity Loan is subject to foreclosure proceedings as of the
Cut-off Date.
(iii) No Home Equity Loan has a Combined Loan-to-Value Ratio in excess of
100%.
(iv) All Home Equity Loans have Mortgage Interest Rates equal to or in
excess of 7% per annum.
The Seller will make similar representations and warranties with respect to the
Subsequent Loans. The Master Servicer will make the same representations and
warranties that the Seller makes. Upon the breach of such representations and
warranties, the Master Servicer will be required to cure such breach or
repurchase or substitute for such affected Home Equity Loans upon the terms and
conditions sets forth in the Pooling and Servicing Agreement. See "Description
of the Certificates--Representations and Warranties of the Seller" in the
Prospectus.
DISTRIBUTIONS
General. Distributions will be made on the Certificates on each Payment Date
to the extent monies are available therefor, if and to the extent such
Certificates are then entitled to such distributions, as described herein.
On any Payment Date, the amount available for distribution to the Class A-1
Certificateholders generally will equal the Available Payment Amount with
respect to Loan Group 1, and the amount available for distribution to Class A-2
Certificateholders generally will equal the Available Payment Amount with
respect to Loan Group 2.
The term "Available Payment Amount" generally means, with respect to any
Payment Date and each Home Equity Loan Group, the sum of (a) collections on or
with respect to the Home Equity Loans in such Home Equity Loan Group received
by the Master Servicer during the immediately preceding calendar month other
than scheduled payments due in months subsequent to such calendar month, net of
the portion attributable to such Home Equity Loan Group of the Servicing Fee
paid to the Master Servicer and reimbursements for accrued and unpaid Servicing
Fees, previous Advances and Servicing Advances and certain expenses paid by the
Master Servicer, and of the amount of the monthly premium payable to the
Insurer with respect to the preceding calendar month, (b) the amount of any
Advances with respect to the Home Equity Loans in such Home Equity Loan Group,
(c) Compensating Interest, (d) any Insured Payments, (e) amounts transferred
from the Capitalized
S-49
<PAGE>
Interest Account to the Certificate Account with respect to such Home Equity
Loan Group and (f) amounts allocable to such Home Equity Loan Group on deposit
in the Pre-Funding Account following the end of the Pre-Funding Period.
For purposes of determining the Available Payment Amount with respect to each
Home Equity Loan Group, the Servicing Fee and certain expenses paid by the
Master Servicer, and the amount of the monthly premium payable to the Insurer,
will be all allocated to each Home Equity Loan Group based upon the aggregate
principal balance of the Home Equity Loans in such Home Equity Loan Group.
Interest. Interest on the Class A Certificates will accrue for each Accrual
Period on the Class A Certificate Balance immediately prior to such Payment
Date.
Interest will accrue on the Class A-1 Certificates at the Pass-Through Rate
of 6.60% with respect to any Payment Date that occurs on or prior to the
Optional Termination Date and will be distributed, to the extent monies are
available therefor, on each Payment Date, commencing in December, 1998.
Interest will accrue at the Pass-Through Rate of 7.10% with respect to any
Payment Date occurring after the Optional Termination Date. Interest with
respect to the Class A-1 Certificates will accrue on the basis of a 360-day
year consisting of twelve 30-day months.
The Class A-2 Certificates will accrue interest during each Accrual Period at
a rate equal to the lesser of (a) (i) One-Month LIBOR plus 0.54% with respect
to any Payment Date that occurs on or prior to the Optional Termination Date or
(ii) One-Month LIBOR plus 1.08% with respect to any Payment Date that occurs
after the Optional Termination Date and (b) the Group 2 Net WAC Cap (the "Class
A-2 Pass-Through Rate"). Interest with respect to the Class A-2 Certificates
will accrue on the basis of a 360-day year and actual days elapsed.
The "Accrual Period" for each Payment Date and with respect to (i) the Class
A-1 Certificates is defined to be the calendar month immediately prior to such
Payment Date and (ii) the Class A-2 Certificates is defined to be the period
from the preceding Payment Date, or the Closing Date in the case of the first
Accrual Period, to and including the day preceding the current Payment Date.
"One-Month LIBOR" means, as of any LIBOR Determination Date, the rate for
deposits in United States dollars for a period of one month which appears in
the Telerate Page 3750 as of 11:00 a.m., London time, on such date. If such
rate does not appear on Telerate Page 3750, the rate for that day will be
determined on the basis of the rates at which deposits in United States dollars
are offered by the Reference Banks at approximately 11:00 a.m., London time, on
that day to prime banks in the London interbank market for a period of one
month. The Trustee will request the principal London office of each of the
Reference Banks to provide a quotation of its rate. If at least two such
quotations are provided, the rate for that day will be the arithmetic mean of
the quotations. If fewer than two quotations are provided as requested, the
rate for that day will be the arithmetic mean of the rates quoted by major
banks in New York City, selected by the Master Servicer, at approximately 11:00
a.m., New York City time, on that day for loans in United States dollars to
leading European banks for a period of one month.
"Telerate Page 3750" means the display page currently so designated on the
Bridge Telerate Service (or such other page as may replace that page on that
service for the purpose of displaying comparable rates or prices).
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"LIBOR Determination Date" means with respect to any Accrual Period, the
second LIBOR business day prior to such Accrual Period.
"Reference Banks" means two major banks in the London interbank market
selected by the Master Servicer and not controlled by or under common control
with the Master Servicer.
The "Current Interest" for any Class of Class A Certificates and any Payment
Date will equal the sum of (i) interest accrued during the applicable Accrual
Period at the related Pass-Through Rate on the related Class Certificate
Balance immediately prior to such Payment Date and (ii) the Carryforward
Amount.
The "Carryforward Amount" with respect to any Class of Class A Certificates
is the amount, as of any Payment Date, equal to the sum of (i) the amount, if
any, by which (x) the Current Interest for such Class on the immediately
preceding Payment Date exceeds (y) the amount of the actual distribution in
respect of interest on such Class of Class A Certificates made to the holders
of such Class of Class A Certificates on the immediately preceding Payment Date
and (ii) 30 days' interest on such excess at the related Pass-Through Rate for
such Class of Class A Certificates.
The "Group 2 Net WAC Cap" for any Payment Date will equal the average of the
Net Mortgage Rates for the Home Equity Loans in Loan Group 2 as of the first
day of the preceding calendar month less the premium payable to the Insurer
with respect to Loan Group 2 (calculated as a per annum rate) and, if such
Payment Date occurs after the date that is six months after the Closing Date,
less 0.75%, with such average weighted by the respective principal balances of
each such Home Equity Loan as of such first day.
The "Net Mortgage Rate" for each Home Equity Loan is equal to the Mortgage
Interest Rate less the per annum rate used to determine the Servicing Fee.
Principal. Holders of the Class A Certificates will be entitled to receive on
each Payment Date, to the extent of the portion of the Available Payment Amount
with respect to the related Home Equity Loan Group remaining after payment of
items of higher priority (but not more than the applicable Class Certificate
Balance of the Class A Certificates then outstanding), a distribution allocable
to principal as described in "--Distributions--Payment Priority" below.
Payment Priority. The Available Payment Amount with respect to each Home
Equity Loan Group on deposit in the Collection Account will be distributed on
each Payment Date in the following amounts and order of priority:
(i) first, the premium allocable to such Home Equity Loan Group and
payable with respect to the Certificate Insurance Policy shall be paid to
the Insurer;
(ii) second, the Trustee shall, for each Home Equity Loan Group, allocate
(but not actually pay pursuant to this clause) an amount equal to the sum
of (x) the Total Monthly Excess Spread with respect to such Home Equity
Loan Group plus (y) any Overcollateralization Reduction Amount with respect
to such Home Equity Loan Group and Payment Date (such sum being the "Total
Monthly Excess Cashflow" for such Home Equity Loan Group) in the following
order of priority:
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(A) first, such Total Monthly Excess Cashflow shall be allocated to
the payment of the related Principal Payment pursuant to clause (iv)(C)
below in an amount equal to the amount, if any, by which (x) the amount
specified in clause (b) of the definition of "Principal Payment"
(excluding any Overcollateralization Increase Amount) exceeds (y)
Available Funds with respect to such Home Equity Loan Group for such
Payment Date, net of the related Current Interest and the premium
payable to the Insurer allocable to such Home Equity Loan Group (the
amount of such difference with respect to such Home Equity Loan Group
being an "Available Funds Shortfall" for such Home Equity Loan Group);
(B) second, any portion of Total Monthly Excess Cashflow with respect
to such Home Equity Loan Group remaining after the allocation described
in clause (A) above shall be allocated for payment pursuant to clause
(iv)(D) below against any Available Funds Shortfall with respect to the
other Home Equity Loan Group;
(C) third, any portion of Total Monthly Excess Cashflow with respect
to such Home Equity Loan Group remaining after the allocations
described in clauses (A) and (B) above shall be allocated to the
Insurer in respect of any Reimbursement Amount (as defined in the
Pooling and Servicing Agreement) owed to the Insurer with respect to
such Home Equity Loan Group;
(D) fourth, any portion of Total Monthly Excess Cashflow remaining
after the allocations described in clauses (A), (B) and (C) above shall
be allocated to the Insurer in respect of any Reimbursement Amount owed
to the Insurer with respect to the other Home Equity Loan Group;
(iii) third, the amount, if any, of the Total Monthly Excess Cashflow
with respect to each Home Equity Loan Group on a Payment Date remaining
after the allocations described in clause (ii) above is the "Net Monthly
Excess Cashflow" with respect to such Home Equity Loan Group and Payment
Date and is required to be allocated (but not actually paid pursuant to
this clause) in the following order of priority:
(A) first, an amount equal to the lesser of such Net Monthly Excess
Cashflow and any Overcollateralization Deficiency with respect to such
Home Equity Loan Group as of such Payment Date shall be allocated to
payment of an Overcollateralization Increase Amount with respect to
such Home Equity Loan Group;
(B) second, an amount equal to the lesser of any Net Monthly Excess
Cashflow remaining after the application described in clause (A) above
and the Overcollateralization Deficiency, if any, with respect to the
other Home Equity Loan Group as of such Payment Date shall be allocated
to payment of an Overcollateralization Increase Amount with respect to
such other Home Equity Loan Group; and
(iv) fourth, following the making of all of the allocations and
disbursements described above, the following disbursements shall be made
from the remaining Available Payment Amount with respect to each Home
Equity Loan Group:
(A) to the Insurer, the amounts described in (ii)(C) and (D) above;
(B) to the Class A Certificateholders related to such Home Equity
Loan Group, the related Current Interest;
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(C) to the Class A Certificateholders related to such Home Equity
Loan Group, an amount equal to the related Principal Payment;
(D) to the holders of the Class A Certificates related to the other
Home Equity Loan Group, any amounts specified in clauses (ii)(B) and
(iii)(B) above; and
(E) to the holders of the Class A-2 Certificates, the LIBOR Carryover
Amount; and
(v) fifth, to the Class R Certificateholder, any remaining distributable
amounts as described in the Pooling and Servicing Agreement.
The "Principal Payment" for each Home Equity Loan Group and Payment Date
shall be the lesser of:
(a) the Total Available Funds (as defined herein) for such Home Equity
Loan Group minus the related Current Interest and the premium payable to
the Insurer for such Payment Date with respect to the related Class A
Certificates; and
(b) the excess, if any, of
(i) the sum of (without duplication):
(A) the principal portion of all scheduled monthly payments on
the Home Equity Loans in such Home Equity Loan Group due during the
Remittance Period related to such Payment Date, to the extent
actually received by the Master Servicer during such Remittance
Period and any prepayments made by the Mortgagors and actually
received by the Master Servicer during such Remittance Period;
(B) the principal balance of each Home Equity Loan (the
"Principal Balance") in such Home Equity Loan Group that was
repurchased by the Seller with respect to the related Remittance
Period, to the extent such Principal Balance is actually received
by the Trustee;
(C) any substitution amounts (i.e. the excess, if any, of the
Principal Balance of a Home Equity Loan being replaced over the
outstanding principal balance of a replacement Home Equity Loan
plus accrued and unpaid interest) delivered by the Seller in
connection with a substitution of a Home Equity Loan in such Home
Equity Loan Group (to the extent such substitution amounts relate
to principal), to the extent such substitution amounts are actually
received by the Trustee;
(D) all Net Liquidation Proceeds actually collected by the Master
Servicer with respect to the Home Equity Loans in such Home Equity
Loan Group during the related Remittance Period (to the extent such
Net Liquidation Proceeds relate to principal);
(E) the amount of any Overcollateralization Deficit with respect
to such Home Equity Loan Group for such Payment Date;
(F) the principal portion of the proceeds received with respect
to such Home Equity Loan Group by the Trustee upon termination of
the Trust; and
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(G) the amount of any Overcollateralization Increase Amount with
respect to such Home Equity Loan Group for such Payment Date to the
extent of any Net Monthly Excess Cashflow available for such
purpose;
over
(ii) the amount of any Overcollateralization Reduction Amount with respect to
such Home Equity Loan Group for such Payment Date.
The "Remittance Period" with respect to any Payment Date is the calendar
month immediately preceding such Payment Date.
The "Group Principal Balance" with respect to either Home Equity Loan Group
at any time equals the aggregate outstanding principal balance of the Home
Equity Loans in such Home Equity Loan Group.
The "Overcollateralization Requirement" with respect to each of the Class A-1
Certificates and the Class A-2 Certificates with respect to each Payment Date
is an amount provided for in the Pooling and Servicing Agreement. The
Overcollateralization Requirement provides for a certain level of
overcollateralization with respect to the each of the Class A-1 Certificates
and the Class A-2 Certificates, i.e. the outstanding principal balance of the
Home Equity Loans in the related Home Equity Loan Group shall exceed the
aggregate Class Certificate Balance of such Class of Class A Certificates by a
certain amount. Such level of overcollateralization may increase or decrease
over time as a result of the performance of the Home Equity Loans in the
related Home Equity Loan Group with respect to certain tests specified in the
Pooling and Servicing Agreement. In addition, the Overcollateralization
Requirement is subject to certain floors specified in the Pooling and Servicing
Agreement.
"Available Funds" as to each Home Equity Loan Group and each Payment Date is
defined to be the Available Payment Amount with respect to such Home Equity
Loan Group (net of Total Monthly Excess Cashflow and disregarding any Insured
Payments to be made on such Payment Date).
The "Class Certificate Balance" as of any Payment Date with respect to any
Class of Class A Certificates equals the principal amount set forth next to
such Class of Class A Certificates on the cover page hereof less all amounts
distributed to the Certificateholders of such Class as principal.
As of any Payment Date, the "Class A Certificate Balance" will equal the sum
of the Class A-1 and Class A-2 Certificate Balance.
"LIBOR Carryover Amount" for any Payment Date will equal the excess, if any,
of (i) the sum of (a) the excess of interest accrued during the applicable
Accrual Period on the Class A-2 Balance at the rate determined by reference to
One-Month LIBOR and the applicable margin (the "LIBOR Rate") over interest
accrued at the Class A-2 Pass-Through Rate, and (b) 30 days' interest on such
excess at the applicable LIBOR Rate over (ii) the amount, if any, distributed
in respect of such excess on prior Payment Dates. The Certificate Insurance
Policy does not cover, and the ratings of the Class A Certificates do not
address the likelihood of, the payment of any LIBOR Carryover Amount.
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"Total Available Funds" as to each Home Equity Loan Group and Payment Date
is the sum of (i) the Available Payment Amount on deposit in the Collection
Account with respect to such Home Equity Loan Group (net of Total Monthly
Excess Cashflow with respect to such Home Equity Loan Group) on such Payment
Date and (ii) any amounts of Total Monthly Excess Cashflow with respect to
such Home Equity Loan Group to be applied on such Payment Date (disregarding
the amount of any Insured Payment to be made on such Payment Date).
CREDIT ENHANCEMENT
General. The credit enhancement provided for the benefit of the Class A
Certificateholders consists of (x) the overcollateralization and
crosscollateralization mechanics which utilize the internal cash flows of the
Trust and (y) the Certificate Insurance Policy. For a description of the
Certificate Insurance Policy, see "The Certificate Insurance Policy and the
Insurer" herein.
Overcollateralization Resulting from Cash Flow Structure. The Pooling and
Servicing Agreement requires that, on each Payment Date, Net Monthly Excess
Cashflow with respect to a Home Equity Loan Group be applied on such Payment
Date as an accelerated payment of principal on the related Class of Class A
Certificates then entitled to distributions of principal, but only to the
limited extent hereafter described. Net Monthly Excess Cashflow equals the
excess of (I) the excess, if any, of (x) the interest which is collected or
advanced on the Home Equity Loans in such Home Equity Loan Group during a
calendar month, together with amounts payable from the Capitalized Interest
Account and payments of Compensating Interest (net of the Servicing Fee, the
premium paid to the Insurer and certain miscellaneous administrative amounts
with respect to such Home Equity Loan Group including reimbursement of
Advances and Servicing Advances) over (y) the related Current Interest (the
difference between (x) and (y) is the "Total Monthly Excess Spread" with
respect to such Home Equity Loan Group), over (II) the portion of the Total
Monthly Excess Cashflow that is applied to reduce the Available Funds
Shortfall on such Payment Date with respect to the related Home Equity Loan
Group or the other Home Equity Loan Group, or used to reimburse the Insurer,
as described in "--Distributions--Payment Priority" above.
The application of Net Monthly Excess Cashflow has the effect of
accelerating the amortization of the Class A Certificates relative to the
amortization of the Home Equity Loans in the related Home Equity Loan Group.
To the extent that any Net Monthly Excess Cashflow is not so used (and is not
required to satisfy requirements with respect to the other Home Equity Loan
Group or to pay Reimbursement Amounts (as defined in the Pooling and Servicing
Agreement) to the Insurer), the Pooling and Servicing Agreement provides that
it will be paid to the Class R Certificateholder.
Each Home Equity Loan Group's Net Monthly Excess Cashflow will be applied as
an accelerated payment of principal on the related Class A Certificates until
the Overcollateralization Amount has increased to the level required under the
Pooling and Servicing Agreement. "Overcollateralization Amount" means, with
respect to each Home Equity Loan Group and Payment Date, the excess, if any,
of the sum of (i) the aggregate principal balances of the Home Equity Loans in
such Home Equity Loan Group as of the close of business on the last day of the
preceding calendar month and (ii) the amount on deposit in the Pre-Funding
Account allocable to such Home Equity Loan Group as of such day over the Class
Certificate Balance of the related Class A
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Certificates as of such Payment Date (after taking into account the payment of
the Principal Payment to such Home Equity Loan Group (except for any
Overcollateralization Reduction Amount or Overcollateralization Increase
Amount) on such Payment Date). With respect to each Home Equity Loan Group, any
amount of Net Monthly Excess Cashflow actually applied as an accelerated
payment of principal is an "Overcollateralization Increase Amount." The
required level of the Overcollateralization Amount for each Home Equity Loan
Group with respect to a Payment Date is the "Overcollateralization
Requirement." The Pooling and Servicing Agreement generally provides that the
related Overcollateralization Requirement may, over time, decrease, or
increase, based on the performance on the Home Equity Loans in the related Home
Equity Loan Group with respect to certain tests specified in the Pooling and
Servicing Agreement based on delinquency rates and cumulative losses.
In the event that the Overcollateralization Requirement with respect to a
Home Equity Loan Group is permitted to decrease on a Payment Date in the
future, the Pooling and Servicing Agreement provides that a portion of the
amounts in respect of principal which would otherwise be distributed to the
related Class A Certificateholders on such Payment Date shall be distributed to
the holder of the Class R Certificate. This has the effect of decelerating the
amortization of Class A Certificates relative to the amortization of the Home
Equity Loans in the related Home Equity Loan Group and of reducing the related
Overcollateralization Amount. With respect to any Home Equity Loan Group and
Payment Date, the excess, if any, of (x) the related Overcollateralization
Amount on such Payment Date after taking into account all distributions to be
made on such Payment Date (except for any distributions of related
Overcollateralization Reduction Amounts as described in this sentence) over (y)
the related Overcollateralization Requirement is the "Excess
Overcollateralization Amount" for such Home Equity Loan Group and Payment Date.
If, on any Payment Date, the Excess Overcollateralization Amount is greater
than zero, then amounts in respect of principal of the related Home Equity
Loans, up to the amount of such excess (the "Overcollateralization Reduction
Amount"), will be distributed to the holder of the Class R Certificate.
The Pooling and Servicing Agreement provides generally that, on any Payment
Date all amounts collected (other than any such amount applied to the payment
of an Overcollateralization Reduction Amount) with respect to a Home Equity
Loan Group during the prior calendar month will be distributed to the related
Class A Certificateholders on such Payment Date. If any Home Equity Loan became
a Liquidated Home Equity Loan during such prior calendar month, the Net
Liquidation Proceeds related thereto and allocated to principal may be less
than the principal balance of the related Home Equity Loan; the amount of any
such insufficiency is a "Net Loss." In addition, the Pooling and Servicing
Agreement provides that the principal balance of any Home Equity Loan which
becomes a Liquidated Home Equity Loan shall thenceforth equal zero. The Pooling
and Servicing Agreement does not require that the amount of any Net Loss be
distributed to the related Class A Certificateholders on the Payment Date which
immediately follows the event of loss; i.e., the Pooling and Servicing
Agreement does not require the current recovery of losses. However, the
realization of a Net Loss will reduce the Overcollateralization Amount with
respect to the related Home Equity Loan Group, which to the extent that such
reduction causes the Overcollateralization Amount to be less than the related
Overcollateralization Requirement applicable to the related Payment Date, will
require the payment of an Overcollateralization Increase Amount on such Payment
Date (or, if insufficient funds are available on such Payment Date, on
subsequent Payment
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Dates, until the Overcollateralization Amount equals the related
Overcollateralization Requirement). The effect of the foregoing is to allocate
losses to the Class R Certificateholder by reducing, or eliminating entirely,
payments of Total Monthly Excess Spread and Overcollateralization Reduction
Amounts which such Certificateholder would otherwise receive.
Overcollateralization and the Certificate Insurance Policy. The Pooling and
Servicing Agreement defines an "Overcollateralization Deficit" with respect to
a Home Equity Loan Group and Payment Date to be the amount, if any, by which
the aggregate Class Certificate Balance of the related Class A Certificates
with respect to such Payment Date, after taking into account all distributions
to be made on such Payment Date (without regard to any Insured Payment to be
made on such Payment Date), exceeds the aggregate principal balances of the
Home Equity Loans in such Home Equity Loan Group as of the close of business on
the last day of the prior calendar month. The Pooling and Servicing Agreement
requires the Trustee to make a claim for an Insured Payment under the
Certificate Insurance Policy not later than the second Business Day prior to
any Payment Date as to which the Trustee has determined that an
Overcollateralization Deficit will occur for the purpose of applying the
proceeds of such Insured Payment as a payment of principal to the related Class
A Certificateholders on such Payment Date. The Certificate Insurance Policy is
thus similar to the subordination provisions described above insofar as the
Certificate Insurance Policy guarantees ultimate, rather than current, payment
of the amounts of any Net Losses to the Class A Certificateholders. Investors
in the Class A Certificates should realize that, under extreme loss or
delinquency scenarios applicable to the related Home Equity Loan Group, they
may temporarily receive no distributions of principal when they would otherwise
be entitled thereto under the principal allocation provisions described herein.
Nevertheless, the exposure to risk of loss of principal of the Class A
Certificates depends in part on the ability of the Insurer to satisfy its
obligations under the Certificate Insurance Policy. In that respect and to the
extent that the Insurer satisfies such obligations, the Class A
Certificateholders are insulated from shortfalls in Available Funds that may
arise.
The Pooling and Servicing Agreement will provide that to the extent that the
Insurer makes Insured Payments, either directly or indirectly to the holders of
such Class A Certificates, the Insurer will be subrogated to the rights of such
holders of Class A Certificates with respect to such Insured Payments, and
shall receive reimbursement for such Insured Payment as provided in the Pooling
and Servicing Agreement, but only from the sources and in the manner provided
in the Pooling and Servicing Agreement, such subrogation and reimbursement to
have no effect on the Insurer's obligations under the Certificate Insurance
Policy.
Cross-collateralization. In addition to the foregoing, the Total Monthly
Excess Spread and Net Monthly Excess Cashflow will be available to cover the
Overcollateralization Increase Amounts, Available Funds Shortfalls and
Overcollateralization Deficits with respect to the other Home Equity Loan Group
as described above under "Description of the Certificates--Distributions;
Payment Priority."
ADVANCES; COMPENSATING INTEREST
Not later than two Business Days prior to each Payment Date, the Master
Servicer will make an advance (each, an "Advance") in an amount equal to all
monthly payments of interest that were due
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on the Home Equity Loans during the preceding calendar month and delinquent at
the close of business on the last day of such calendar month, to the extent the
Master Servicer believes that the amount so advanced will be recoverable from
subsequent payments and collections in respect of the related Home Equity Loan.
On each Payment Date, the Master Servicer will be entitled to a first priority
reimbursement for previous Advances from funds received with respect to such
delinquent Home Equity Loans. When the Master Servicer has determined that any
Advances are nonrecoverable, the Master Servicer will be entitled to a first
priority reimbursement for such Advances from any funds received with respect
to the Home Equity Loans in the related Home Equity Loan Group.
Not later than two Business Days prior to each Payment Date, the Master
Servicer is required to remit to the Trustee, without any right of
reimbursement, an amount equal to, with respect to each Home Equity Loan as to
which a principal prepayment in full was received during the preceding calendar
month, the lesser of (a) the excess, if any, of 30 days' interest on the
principal balance of each such Home Equity Loan at the Mortgage Interest Rate
(or at such lower rate as may be in effect because of application of the Civil
Relief Act) minus the Servicing Fees for such Home Equity Loan, over the amount
of interest actually paid by the related Mortgagor in connection with each such
principal prepayment (with respect to all such Home Equity Loans, the
"Prepayment Interest Shortfall") and (b) the sum of the Servicing Fees for the
most recently ended calendar month. Such payments are referred to herein as
"Compensating Interest."
In addition, the Master Servicer is obligated to advance funds to satisfy or
to keep current any mortgage loans senior to a Home Equity Loan, in order to
preserve the Trust's interest in such Home Equity Loan, or to pay taxes, legal
expenses and attorney fees, insurance premiums and similar expenses relating to
a Home Equity Loan (each, a "Servicing Advance"), to the extent that the Master
Servicer believes that the amount so advanced will be recoverable from
subsequent payments and collections on the related Home Equity Loan. The Master
Servicer will be entitled to a first priority reimbursement for such Servicing
Advances from amounts received with respect to the Home Equity Loans.
SERVICING COMPENSATION
The Master Servicer will be entitled to a fee of 0.50% per annum of the
outstanding principal balance of each Home Equity Loan (the "Servicing Fee")
payable out of collections with respect to the Home Equity Loans as provided in
the Pooling and Servicing Agreement. In addition to the Servicing Fee, the
Master Servicer is entitled under the Pooling and Servicing Agreement to retain
as additional servicing compensation any prepayment charges and assumption and
other administrative fees (including bad check charges, late payment fees and
similar fees), the excess of any net liquidation proceeds over the outstanding
principal balance of a Liquidated Home Equity Loan, to the extent not otherwise
required to be remitted to the Trustee for deposit into the Collection Account,
and earnings paid on Permitted Investments and similar items.
CERTAIN MATTERS REGARDING THE MASTER SERVICER
The Pooling and Servicing Agreement provides that the Master Servicer may not
resign from its obligations and duties thereunder, unless such duties and
obligations are no longer permissible under
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applicable laws as evidenced by an opinion of counsel delivered to the Trustee.
No such resignation will become effective until the Trustee or a successor
servicer has assumed the Master Servicer's obligations and duties under the
Agreement.
The Master Servicer may perform any of its duties and obligations under the
Pooling and Servicing Agreement through one or more subservicers or delegates,
which may be affiliates of the Master Servicer. Notwithstanding any such
arrangement, the Master Servicer will remain liable and obligated to the
Trustee, the Insurer and the Certificateholders for the Master Servicer's
duties and obligations under the Pooling and Servicing Agreement, without any
diminution of such duties and obligations and as if the Master Servicer itself
were performing such duties and obligations.
Any corporation into which the Master Servicer may be merged or consolidated,
or any corporation resulting from any merger, conversion or consolidation to
which the Master Servicer shall be a party, or any corporation succeeding to
the business of the Master Servicer shall be the successor of the Master
Servicer under the Pooling and Servicing Agreement, provided, however, that, so
long as Certificates are outstanding under the Pooling and Servicing Agreement,
the Master Servicer will covenant that any such consolidation, merger, sale or
transfer shall be upon the condition that the due and punctual performance and
observance of all the terms, covenants and conditions of the Pooling and
Servicing Agreement to be kept or performed by the Master Servicer shall, by an
agreement supplemental thereto, executed and delivered to the Trustee, be
assumed by the corporation (if other than the Master Servicer) formed by or
resulting from any such consolidation or merger, or which shall have received
the transfer of all or substantially all of the property and assets of the
Master Servicer, just as fully and effectually as if such successor corporation
had been an original party thereto, and the representations and warranties set
forth by the Master Servicer therein shall be true and correct with respect to
such successor corporation in all material respects. No consent or approval of
the Certificateholders shall be required as to any such transaction.
MASTER SERVICER TERMINATION EVENTS
Any one of the following events constitutes a "Master Servicer Termination
Event": (i) failure by the Master Servicer to make any payment, transfer or
deposit, or to give instructions to the Trustee to make any payment, transfer
or deposit, on the date the Master Servicer is required to do so under the
Pooling and Servicing Agreement, which is not cured within a five Business Day
grace period; (ii) the Master Servicer assigns its duties under the Pooling and
Servicing Agreement, except as specifically permitted thereunder, or failure on
the part of the Master Servicer duly to observe or perform in any material
respect any other covenants or agreements of the Master Servicer in the Pooling
and Servicing Agreement which has a material adverse effect on the Insurer or
the Certificateholders and which continues unremedied for a period of 60 days
after the date on which the Master Servicer shall have received written notice
(or had actual knowledge) of such failure from the Trustee, the Insurer or the
Holders of Certificates evidencing not less than 33 1/3% of the Class A
Certificate Balance; (iii) any representation, warranty or certification made
by the Master Servicer in the Pooling and Servicing Agreement or in any
certificate delivered pursuant to the Pooling and Servicing Agreement proves to
have been incorrect in any material respect when made, which has a material
adverse effect on the rights of the Certificateholders or the Insurer, and
which material adverse effect continues for a period of 60 days after written
notice; (iv) certain bankruptcy or
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insolvency events occur with respect to the Master Servicer; and (v) certain
tests with respect to the performance of the Home Equity Loans in the Mortgage
Pool are not met.
RIGHTS UPON THE OCCURRENCE OF A MASTER SERVICER TERMINATION EVENT
Subject to the cure periods specified above and so long as a Master Servicer
Termination Event has not been remedied, the Insurer may terminate all of the
rights and obligations of the Master Servicer as servicer of the Home Equity
Loans under the Pooling and Servicing Agreement. On or after the receipt by the
Master Servicer of written notice of such termination, all authority and power
of the Master Servicer under the Pooling and Servicing Agreement, whether with
respect to the Certificates or the Home Equity Loans or otherwise, will pass to
and be vested in the Trustee.
TERMINATION; PURCHASE OF HOME EQUITY LOANS
The Pooling and Servicing Agreement will terminate upon the taking of the
last action required to be taken by the Trustee on the final Payment Date
following the earlier of (i) the purchase or (ii) the final payment or other
liquidation, of the principal balance of the last Home Equity Loan remaining in
the Trust and the disposition of all property acquired upon foreclosure or deed
in lieu of foreclosure of any Home Equity Loan.
Subject to provisions in the Pooling and Servicing Agreement concerning
adopting a plan of complete liquidation, the Master Servicer may, at its
option, terminate the Pooling and Servicing Agreement on any Payment Date
following the first date (the "Optional Termination Date") on which the Pool
Principal Balance is less than 10% of the Adjusted Original Pool Principal
Balance by purchasing, on the next succeeding Payment Date, all of the
outstanding Home Equity Loans and REO Properties then remaining in the Trust at
a price (the "Termination Price") equal to the sum of (w) 100% of the principal
balance of each Home Equity Loan (other than any Liquidated Home Equity Loans
and any Home Equity Loan which is in "REO Property" status and whose fair
market value is included pursuant to clause (x) below) as of the Payment Date
upon which the proceeds of any such purchase are to be distributed, (x) the
fair market value of REO Property (but in no event less than the principal
balance and accrued and unpaid interest of the related Home Equity Loan),
(y) accrued and unpaid interest at the applicable Mortgage Interest Rate on the
principal balance of each Home Equity Loan and (z) all Reimbursement Amounts
owing the Insurer.
If the Master Servicer does not exercise such option within 90 days of the
first Payment Date upon which the Pool Principal Balance is less than 10% of
the Adjusted Original Pool Principal Balance, the Trustee is required to
conduct a termination auction (the "Termination Auction"). The Trustee will
solicit one or more active participants in the asset-backed securities or
mortgage loan markets that are not affiliated with the Master Servicer to make
a bid to purchase the Home Equity Loans at the Termination Auction. The Trustee
will sell all the Home Equity Loans to the highest bidder, subject, among other
things, to: (i) the requirement that the highest bid equal or exceed the
Minimum Termination Amount; and (ii) the requirement that at least one bid be
tendered by an active participant in the asset-backed securities or mortgage
loan market that is not affiliated with the Master Servicer. If the foregoing
requirements are satisfied, the successful bidder or bidders shall remit the
aggregate purchase price for the Home Equity Loans to the Trustee. If the
foregoing requirements are not satisfied, the purchase shall not occur and
distributions will continue to be made
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on the Certificates. Any sale and consequent termination of the Trust as a
result of a Termination Auction must constitute a "qualified liquidation" of
the Trust under Section 860F of the Code. If satisfactory bids are received as
described above, such remaining Home Equity Loans will be sold and the proceeds
distributed to the Certificateholders in the same priority as distributions are
made on any Payment Date.
The "Minimum Termination Amount" is defined to be the sum of (i) the Class A
Certificate Balance, (ii) the interest on the respective Class Certificate
Balance for each Class of Class A Certificates at the respective Pass-Through
Rate for the next succeeding Payment Date, (iii) all Reimbursement Amounts
owing to the Insurer, (iv) all outstanding Advances and Servicing Advances and
(v) Liquidation Expenses (as defined in the Pooling and Servicing Agreement)
owing to the Master Servicer.
The "Pool Principal Balance" as of any date is the sum of the Group Principal
Balances for each of Loan Group 1 and Loan Group 2.
AMENDMENT OF POOLING AND SERVICING AGREEMENT
The Pooling and Servicing Agreement may be amended from time to time by the
Seller, the Master Servicer and the Trustee by written agreement, without prior
notice to, or consent of, the Certificateholders, but with the consent of the
Insurer, to cure any ambiguity, to correct or supplement any provisions
therein, or to make any other provisions with respect to matters or questions
arising under the Pooling and Servicing Agreement which shall not be
inconsistent with the provisions of the Pooling and Servicing Agreement,
provided that such action does not, as evidenced by an opinion of counsel
delivered to the Trustee, adversely affect in any material respect the
interests of any Certificateholder.
The Pooling and Servicing Agreement may also be amended from time to time by
the Seller, the Master Servicer and the Trustee by written agreement, without
prior notice to, or consent of, the Certificateholders, but with the consent of
the Insurer, to modify, eliminate or add to the provisions thereof as may be
necessary to maintain the qualification of the Trust as a REMIC under the Code
or to avoid, or minimize the risk of, the imposition of any tax on the Trust
under the Code, or to prevent the Trust from entering into any "prohibited
transaction" as defined in the Code; provided that (a) there shall have been
delivered an opinion of counsel addressed to the Trustee to the effect that
such action is necessary or appropriate to prevent the Trust from entering into
such prohibited transaction and (b) such amendment shall not adversely affect
in any material respect the interests of any Certificateholder.
The Pooling and Servicing Agreement may also be amended from time to time by
the Seller, the Master Servicer and the Trustee with the consent of the Insurer
and Holders of Certificates evidencing Percentage Interests aggregating not
less than 51% of the Class A Certificate Balance, such classes voting together
as a class for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of this Agreement, or of modifying
in any manner the rights of the Holders of Certificates; provided, however,
that no such amendment shall (i) increase or reduce in any manner the amount
of, or accelerate or delay the timing of, collections of payments on Home
Equity Loans or distributions that shall be required to be made on any
Certificate without the
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consent of the Holder of such Certificate, or (ii) reduce the aforesaid
percentage required to consent to any such amendment, without the consent of
the Holders of all Certificates then outstanding. Furthermore, no such
amendment shall be effective unless the Trustee has received an opinion of
counsel with respect to certain tax matters.
ASSIGNMENT OF HOME EQUITY LOANS
On the Closing Date, the Seller will transfer to the Trust all of its right,
title and interest in and to each Home Equity Loan, the related mortgage note,
mortgages and other related documents (collectively, the "Related Documents"),
including all payments received after the Cut-off Date. The Trustee,
concurrently with such initial transfer, will deliver the Certificates to the
Seller. Each Home Equity Loan transferred to the Trust will be identified on a
schedule (the "Mortgage Loan Schedule") delivered to the Trustee pursuant to
the Pooling and Servicing Agreement. Such schedule will include information as
to the principal balance of each Home Equity Loan as of the Cut-off Date, as
well as other information. The Seller will comply with the same requirements
for all Subsequent Loans.
The Pooling and Servicing Agreement will require that, within the time period
specified therein, the Seller will deliver to the Trustee (or a custodian, as
the Trustee's agent for such purpose) the Home Equity Loans endorsed to the
Trustee and the Related Documents. Under the terms of the Pooling and Servicing
Agreement, the Seller will prepare assignments of the Mortgages related to each
Home Equity Loan in favor of the Trustee.
During the period that the Class A Certificates are outstanding and so long
as certain conditions specified by the Insurer are met, assignments of the
related Mortgages from the entities that will sell Home Equity Loans to the
Seller and from the Seller to the Trustee will not be required to be recorded.
See "Risk Factors--Creditors' Rights and Bankruptcy Considerations" herein.
If the conditions specified by the Insurer are not met, assignments of the
Mortgages in favor of the Trustee will be required to be recorded (or opinions
of counsel acceptable to the Insurer and the Rating Agencies will be obtained
to the effect that recording is not required to protect the Trust's interest in
and to the related Home Equity Loan). See "Description of the Certificates--
Assignment of the Home Equity Loans" in the Prospectus.
Within 60 days of the Closing Date the Trustee will review the Home Equity
Loans and the Related Documents pursuant to the Pooling and Servicing Agreement
and if any Home Equity Loan or Related Documents are found to be defective in
any material respect (a "Defective Home Equity Loan") and such defect is not
cured within 90 days (with respect to defects relating to the Mortgage Note) or
within 120 Days (with respect to defects relating to the Related Documents)
following notification thereof to the Seller by the Trustee or the Insurer, the
Seller will be obligated to either (i) substitute for such Home Equity Loan an
Eligible Substitute Home Equity Loan or Loans; however, such substitution is
permitted only within two years of the Closing Date or (ii) purchase such Home
Equity Loan at a price (the "Purchase Price") equal to the outstanding
principal balance of such Home Equity Loan as of the date of purchase, plus
accrued and unpaid interest thereon through the calendar month in which such
purchase occurs. The obligation of the Seller to repurchase or substitute for a
Defective Home Equity Loan is the sole remedy regarding any defects in the Home
Equity Loans and Related Documents available to the Trustee or the
Certificateholders.
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In connection with the substitution of an Eligible Substitute Home Equity
Loan or Loans for a Defective Home Equity Loan, the Seller will be required to
deposit in the Collection Account the amount of any accrued and unpaid interest
on the Defective Home Equity Loan plus the excess, if any, of the Principal
Balance of the Defective Home Equity Loan over the aggregate Principal Balances
of the Eligible Substitute Home Equity Loan or Loans for deposit into the
Collection Account as a payment with respect to the Eligible Substitute Home
Equity Loan or Loans.
An "Eligible Substitute Home Equity Loan" is a Home Equity Loan to be
substituted by the Seller for a Defective Home Equity Loan which must have an
aggregate Principal Balance equal to or less than the Principal Balance of such
Defective Home Equity Loan, a Mortgage Interest Rate of not less than the
Mortgage Interest Rate of such Defective Home Equity Loan and not more than 1%
in excess thereof, a final maturity of no more than six months earlier or later
than the final maturity of such Defective Home Equity Loan (and in no event
later than the latest maturing Home Equity Loan in the related Home Equity Loan
Group) and a Combined Loan-to-Value Ratio no higher than that of the Defective
Home Equity Loan and shall not be a Balloon Loan. In addition, if the Defective
Home Equity Loan is an ARM Loan, the Eligible Substitute Home Equity Loan must
be an ARM Loan and likewise for Fixed Rate Loans. Each Eligible Substitute Home
Equity Loan shall itself be subject to repurchase or substitution. The Insurer
may vary the above criteria.
The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee with respect to each Home Equity Loan. In addition, the Seller will
represent and warrant, on the Closing Date, that, among other things: (i) at
the time of transfer to the Trust, the Seller has transferred or assigned all
of its right, title and interest in each Home Equity Loan and the Related
Documents, free of any lien; and (ii) each Home Equity Loan complied, at the
time of origination, in all material respects with applicable state and federal
laws. Upon discovery of a breach of any such representation and warranty which
materially and adversely affects the interests of the Certificateholders or the
Insurer in the related Home Equity Loan and Related Documents, the Seller will
have a period of 90 days after discovery or notice of the breach to effect a
cure. If the breach cannot be cured with the 90-day period, the Seller will be
obligated to (i) substitute for such Home Equity Loan an Eligible Substitute
Home Equity Loan or Loans or (ii) purchase such Home Equity Loan from the
Trust. The same procedure and limitations that are set forth above for the
substitution or purchase of Defective Home Equity Loans as a result of
deficient documentation relating thereto will apply to the substitution or
purchase of a Home Equity Loan as a result of a breach of a representation or
warranty in the Pooling and Servicing Agreement that materially and adversely
affects the interests of the Certificateholders or the Insurer.
THE CERTIFICATE INSURANCE POLICY AND THE INSURER
The information set forth in this section has been provided by Ambac
Assurance Corporation (the "Insurer"). No representation is made by the Seller,
the Master Servicer, the Underwriter or any of their affiliates as to the
accuracy or completeness of any such information.
THE INSURER
The Insurer is a Wisconsin-domiciled stock insurance corporation regulated by
the Office of the Commissioner of Insurance of the State of Wisconsin and
licensed to do business in 50 states, the
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District of Columbia, the Commonwealth of Puerto Rico and the Territory of
Guam. The Insurer primarily insures newly issued municipal and structured
finance obligations. The Insurer is a wholly-owned subsidiary of Ambac
Financial Group, Inc. (formerly, AMBAC Inc.), a 100% publicly-held company.
Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Rating Services
("S&P") and Fitch IBCA, Inc. have each assigned a triple-A claims-paying
ability rating to the Insurer.
The consolidated financial statements of the Insurer and its subsidiaries as
of December 31, 1997 and December 31, 1996 and for the three years ended
December 31, 1997, prepared in accordance with generally accepted accounting
principles, included in the Current Report on Form 10-K of Ambac Financial
Group, Inc. (which was filed with the Commission on March 31, 1998; Commission
File No. 1-10777) and the consolidated financial statements of the Insurer and
its subsidiaries as of September 30, 1998 and for the periods ending September
30, 1998 and September 30, 1997 included in the Quarterly Report on Form 10-Q
of Ambac Financial Group, Inc. for the period ended September 30, 1998 (which
was filed with the Commission on November 13, 1998) are hereby incorporated by
reference into this Prospectus Supplement and shall be deemed to be a part
hereof. Any statement contained in a document incorporated herein by reference
shall be modified or superseded for the purposes of this Prospectus Supplement
to the extent that a statement contained herein by reference herein also
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus Supplement.
All financial statements of the Insurer and its subsidiaries included in
documents filed by Ambac Financial Group, Inc. with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended, subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Class A Certificates shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing such documents.
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The following table sets forth the capitalization of the Insurer as of
December 31, 1995, December 31, 1996, December 31, 1997 and September 30,
1998, respectively, in conformity with generally accepted accounting
principles.
AMBAC ASSURANCE CORPORATION
CONSOLIDATED CAPITALIZATION TABLE
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1995 1996 1997 1998
------------ ------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
(Dollars in Millions)
Unearned premiums........ $ 906 $ 995 $1,184 $1,260
Other liabilities........ 295 259 562 803
------ ------ ------ ------
Total liabilities........ 1,201 1,254 1,746 2,063
====== ====== ====== ======
Stockholder's equity:(1)
Common stock........... 82 82 82 82
Additional paid in
capital............... 481 515 521 527
Accumulated other
comprehensive income.. 87 66 118 167
Retained earnings...... 907 992 1,180 1,341
------ ------ ------ ------
Total stockholder's
equity.................. 1,557 1,655 1,901 2,117
------ ------ ------ ------
Total liabilities and
stockholder's equity.... $2,758 $2,909 $3,647 $4,180
====== ====== ====== ======
</TABLE>
- --------
(1) Components of stockholder's equity have been restated for all periods
presented to reflect "Accumulated other comprehensive income" in
accordance with the Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" adopted by the Insurer effective January
1, 1998. As this new standard only requires additional information in the
financial statements, it does not affect the Insurer's financial position
or results of operations.
For additional financial information concerning the Insurer, see the audited
and unaudited financial statements of the Insurer incorporated by reference
herein. Copies of the financial statements of the Insurer incorporated herein
by reference and copies of the Insurer's annual statement for the year ended
December 31, 1997 prepared in accordance with statutory accounting standards
are available, without charge from the Insurer. The address of the Insurer's
administrative offices and its telephone number are One State Street Plaza,
17th Floor, New York, New York 10004 and (212) 668-0340.
The Insurer makes no representation regarding the Certificates or the
advisability of investing in the Certificates and makes no representation
regarding, nor has it participated in the preparation of, this Prospectus
Supplement other than the information supplied by the Insurer and presented
under this heading "The Certificate Insurance Policy and the Insurer" and in
the financial statements incorporated herein by reference.
THE CERTIFICATE INSURANCE POLICY
The Insurer will issue its Certificate Guarantee Insurance Policy for the
Class A Certificates (the "Certificate Insurance Policy"). The Certificate
Insurance Policy unconditionally guarantees the payment of Insured Payments on
the Class A Certificates. The Insurer will make each required
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Insured Payment to the Trustee on the later of (i) the Payment Date on which
such Insured Payment is distributable to the Class A Certificateholders
pursuant to the Pooling and Servicing Agreement and (ii) the Business Day next
following the day on which the Insurer shall have received telephonic or
telegraphic notice, subsequently confirmed in writing, or written notice by
registered or certified mail, from the Trustee, specifying that an Insured
Payment is due in accordance with the terms of the Certificate Insurance
Policy.
The Insurer's obligation under the Certificate Insurance Policy will be
discharged to the extent that funds are received by the Trustee for
distribution to the Class A Certificateholders, whether or not such funds are
properly distributed by the Trustee.
For purposes of the Certificate Insurance Policy, "Class A Certificateholder"
as to a particular Certificate, does not and may not include the Trust, the
Master Servicer or the Seller.
The Certificate Insurance Policy does not guarantee to the Class A
Certificateholders any rate of principal payments on the Class A Certificates.
Furthermore, the Certificate Insurance Policy does not guarantee any payments
of the LIBOR Carryover Amount. The Certificate Insurance Policy expires and
terminates without any action on the part of the Insurer or any other person on
the date that is one year and one day following the date on which the Class A
Certificates have been paid in full.
"Insured Payment" means (x) with respect to any Home Equity Loan Group and
for any Payment Date the excess, if any, of (i) the sum of (a) the related
Current Interest, (b) the related Overcollateralization Deficit and (c) the
related Preference Amount (without duplication) over (ii) the related Total
Available Funds (after applying the cross-collateralization provisions of the
Pooling and Servicing Agreement, after any deduction of the related premium and
after taking into account the portion of the related Principal Payment to be
actually distributed on such Payment Date without regard to any related Insured
Payments to be made with respect to such Payment Date) and (y) (without
duplication) on the Payment Date in March, 2030, the Class Certificate Balance
of any Class A Certificates then outstanding, to the extent not otherwise paid
on such Payment Date.
"Preference Amount" means any amount previously distributed to a holder of a
Class A Certificate that is recoverable and sought to be recovered as a
voidable preference by a trustee in bankruptcy pursuant to the United States
Bankruptcy Code (11 U.S.C.) as amended from time to time, in accordance with a
final non-appealable order of a court having competent jurisdiction.
In the absence of payments under the Certificate Insurance Policy,
Certificateholders will directly bear the credit and other risks associated
with their undivided interest in the Trust.
The Certificate Insurance Policy is non-cancelable.
The Certificate Insurance Policy is issued under and pursuant to and shall be
construed under, the laws of the State of New York, without giving effect to
the conflict of laws principles thereof.
THE CERTIFICATE INSURANCE POLICY IS NOT COVERED BY THE PROPERTY/CAUSALITY
INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
The information set forth above concerning the Insurer has been provided by
the Insurer.
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THE TRUSTEE
The First National Bank of Chicago, a national banking association organized
under the laws of the United States of America (the "Trustee"), has its
corporate trust offices at One First National Plaza, Chicago, Illinois 60670-
0126.
Pursuant to the Pooling and Servicing Agreement, the Trustee is required at
all times to be a banking association organized and doing business under the
laws of the United States of America or of any State, authorized under such
laws to exercise corporate trust powers, having a combined capital and surplus
of at least $50,000,000 and subject to supervision or examination by federal or
state authorities. If at any time the Trustee shall cease to be eligible in
accordance with the provisions described in this paragraph, the Trustee shall
give notice of such ineligibility to the Master Servicer and shall resign, upon
the request of the Insurer or of the Master Servicer (with the consent of the
Insurer), in the manner and with the effect specified in the Pooling and
Servicing Agreement.
Any resignation or removal of the Trustee and appointment of a successor
trustee shall become effective upon the acceptance of appointment by such
successor trustee.
The Trustee, or any successor trustee or trustees, may resign at any time by
giving written notice to the Master Servicer in the manner set forth in the
Pooling and Servicing Agreement. Upon receiving notice of resignation, the
Master Servicer is required to promptly appoint a successor trustee or trustees
acceptable to the Insurer meeting the eligibility requirements set forth above
in the manner set forth in the Pooling and Servicing Agreement. The Master
Servicer will deliver a copy of the instrument used to appoint a successor
trustee to the Certificateholders. If no successor trustee shall have been
appointed and have accepted appointment within 60 days after the giving of such
notice of resignation, the resigning trustee may petition any court of
competent jurisdiction for the appointment of a successor trustee. Such court
may thereupon, after such notice, if any, as it may deem proper and prescribe,
appoint a successor trustee.
At any time, for the purpose of meeting any legal requirements of any
jurisdiction in which any part of the Trust or property securing the same may
at the time be located, the Master Servicer 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, and to vest in such person or persons, in such
capacity, such title to the Trust, or any part thereof, and, subject to the
provisions of the Pooling and Servicing Agreement, such powers, duties,
obligations, rights and trusts as the Master Servicer and the Trustee may
consider necessary or desirable.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Class A Certificates, Orrick, Herrington & Sutcliffe
LLP, counsel to the Seller, will deliver its opinion generally to the effect
that, assuming compliance with all provisions of the Pooling and Servicing
Agreement, for federal income tax purposes, the Trust (as defined in the
Pooling and Servicing Agreement) will qualify as a REMIC under the Code.
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For federal income tax purposes, (a) the Class R Certificate will constitute
the sole class of "residual interests" in the Trust and (b) each class of Class
A Certificates will represent ownership of "regular interests" in the Trust and
will generally be treated as representing ownership of debt instruments of the
Trust. See "Certain Federal Income Tax Consequences--REMICs" in the Prospectus.
For federal income tax reporting purposes, the Class A Certificates will not
be treated as having been issued with original issue discount. The prepayment
assumption that will be used in determining the rate of accrual of original
issue discount, market discount and premium, if any, for federal income tax
purposes will be based on the assumption that subsequent to the date of any
determination the Home Equity Loans in Loan Group 1 will prepay at a rate equal
to 100% of the Prepayment Assumption and the Home Equity Loans in Loan Group 2
will prepay at a CPR of 30%. No representation is made that the Home Equity
Loans will prepay at that rate or at any other rate. See "Certain Federal
Income Tax Consequences--REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" in the Prospectus.
The Internal Revenue Service (the "IRS") has issued regulations (the "OID
Regulations") under Sections 1271 to 1275 of the Code generally addressing the
treatment of debt instruments issued with original issue discount. Purchasers
of the Class A-2 Certificates should be aware that the OID Regulations and
Section 1272(a)(6) of the Code do not adequately address certain issues
relevant to, or are not applicable to, securities such as the Class A-2
Certificates. In addition, because of the uncertainties concerning the
application of Section 1272(a)(6) of the Code to debt instruments having an
adjustable rate of interest and because the rules of the OID Regulations
relating to such debt instruments are limited in their application in ways that
could preclude their application to the Class A-2 Certificates even in the
absence of Section 1272(a)(6) of the Code, the IRS could assert that the Class
A-2 Certificates should be treated as having been issued with original issue
discount, or that the Class A-2 Certificates should be governed by the rules
applicable to debt instruments having contingent payments or by some other
method not yet set forth in regulations. Prospective purchasers of the Class A-
2 Certificates are advised to consult their tax advisors concerning the tax
treatment of such Certificates.
In the absence of other authority, the Master Servicer believes that if the
Class A-2 Certificates were determined to have been issued with original issue
discount in excess of a de minimis amount, it would be proper to report all
income with respect to such Certificates as original issue discount for each
period, computing such original issue discount (i) by assuming that the value
of the applicable index will remain constant for purposes of determining the
original yield to maturity of, and projecting future distributions on, such
Certificates, thereby treating such Certificates as fixed rate instruments to
which the original issue discount rules described in the Prospectus can be
applied, and (ii) by accounting for any positive or negative variation in the
applicable index in any period from its assumed value as a current adjustment
to original issue discount with respect to such period.
If the method for computing original issue discount described in the
Prospectus results in a negative amount for any period with respect to a
Certificateholder, the amount of original issue discount allocable to such
period would be zero and such Certificateholder will be permitted to offset
such negative amount only against future original issue discount (if any)
attributable to such Certificates.
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The OID Regulations permit the holder of a debt instrument to recognize
original issue discount under a method that differs in certain respects from
that used by the issuer. Accordingly, it is possible for the holder of a
Certificate to recognize original issue discount in amounts different from
those to be reported by the Master Servicer to Certificateholders and the IRS.
Certain classes of the Class A Certificates may be treated for federal income
tax purposes as having been issued at a premium. Whether any holder of such
Certificates will be treated as holding a certificate with amortizable bond
premium will depend on such Certificateholder's purchase price and the
distributions remaining to be made on such Certificate at the time of its
acquisition by such Certificateholder. Holders of such classes of Certificates
should consult their own tax advisors regarding the possibility of making an
election to amortize such premium. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates" and "--
Premium" in the Prospectus.
The Class A Certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" under Section 856(c)(4)(A)
of the Code generally in the same proportion that the assets of the Trust Fund
would be so treated. In addition, interest on the Class A Certificates will be
treated as "interest on obligations secured by mortgages on real property"
under Section 856(c)(3)(B) of the Code generally to the extent that such Class
A Certificates are treated as "real estate assets" under Section 856(c)(4)(A)
of the Code. Moreover, the Class A Certificates will be "qualified mortgages"
within the meaning of Section 860G(a)(3) of the Code if transferred to another
REMIC on its startup day in exchange for a regular or residual interest
therein. See "Certain Federal Income Tax Consequences--REMICs--Characterization
of Investments in REMIC Certificates" in the Prospectus.
For further information regarding federal income tax consequences of
investing in the Class A Certificates, see "Certain Federal Income Tax
Consequences" in the Prospectus.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other plan or arrangement subject
to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
or Section 4975 of the Code (a "Plan"), or any insurance company (whether
investing through its general or separate accounts) or other person investing
"plan assets" of any Plan, should carefully review with its legal advisors
whether the purchase or holding of Class A Certificates could give rise to a
transaction prohibited or not otherwise permissible under ERISA or Section 4975
of the Code. The U.S. Department of Labor has issued an Exemption, as described
under "ERISA Considerations--Prohibited Transaction Exemptions" in the
Prospectus, to Prudential Securities Incorporated. The purchase or holding of
the Class A Certificates by, on behalf of or with "plan assets" of a Plan may
qualify for exemptive relief under the Exemption. However, the Exemption
contains a number of conditions, as described under "ERISA Considerations--
Prohibited Transaction Exemptions" in the Prospectus, including the requirement
that any such Plan must be an "accredited investor" as defined in Rule
501(a)(i) of Regulation D of the Securities and Exchange Commission under the
Securities Act of 1933, amended. See "ERISA Considerations" in the Prospectus.
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On July 21, 1997, the U.S. Department of Labor (the "DOL") published in the
Federal Register an amendment to the Exemption, which extends exemptive relief
to certain mortgage-backed and asset-backed securities transactions using pre-
funding accounts for trusts issuing pass-through certificates. With respect to
the Certificates, the amendment will generally allow Subsequent Loans
supporting payments to Certificateholders, and having a value equal to no more
than 25% of the total principal amount of the Certificates, to be transferred
to the Trust during the Pre-Funding Period, instead of requiring that all the
Home Equity Loans be either identified or transferred on or before the Closing
Date. In general, the relief applies to the purchase, sale and holding of
Certificates which otherwise qualify for the Exemption, provided that the
following general conditions are met:
(1) the ratio of the amount allocated to the Pre-Funding Account to the
total principal amount of the Certificates must not exceed 25%;
(2) all Subsequent Loans transferred to the Trust after the Closing Date
must meet the same terms and conditions for eligibility as the Initial
Loans used to create the Trust, which terms and conditions have been
approved by one of the Exemption Rating Agencies;
(3) the transfer of the Subsequent Loans to the Trust during the Pre-
Funding Period must not result in the Certificates receiving a lower credit
rating from an Exemption Rating Agency upon termination of the Pre-Funding
Period than the rating that was obtained at the time of the initial
issuance of the Certificates by the Trust;
(4) solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate (the "Average Interest Rate") for all of
the Home Equity Loans in the Trust at the end of the Pre-Funding Period
must not be more than 100 basis points lower than the Average Interest Rate
for the Home Equity Loans which were transferred to the Trust on the
Closing Date;
(5) either:
(i) the characteristics of the Subsequent Loans must be monitored by
an insurer or other credit support provider which is independent of the
Seller; or
(ii) an independent accountant retained by the Seller must provide
the Seller with a letter (with copies provided to the Exemption Rating
Agencies rating the Certificates, the Underwriter and the Trustee)
stating whether or not the characteristics of the Subsequent Loans
conform to the characteristics described in the Prospectus Supplement
and/or the Pooling and Servicing Agreement. In preparing such letter,
the independent accountant must use the same type of procedures as were
applicable to the Home Equity Loans which were transferred to the Trust
as of the Closing Date;
(6) the Pre-Funding Period must end no later than three months or 90 days
after the Closing Date or earlier in certain circumstances if the Pre-
Funding Account falls below the minimum level specified in the Pooling and
Servicing Agreement or an event of default occurs;
(7) amounts transferred to the Pre-Funding Account and any capitalized
interest account used in connection with the pre-funding may be invested
only in cash or in investments which are permitted by the Exemption Rating
Agencies rating the Certificates, and such investment must be described in
the Pooling and Servicing Agreement and must:
(i) be direct obligations of, or obligations fully guaranteed as to
timely payment of principal and interest by, the United States or any
agency or instrumentality thereof
S-70
<PAGE>
(provided that such obligations are backed by the full faith and credit
of the United States); or
(ii) have been rated (or the obligor has been rated) in one of the
three highest generic rating categories by one of the Exemption Rating
Agencies;
(8) the Prospectus or Prospectus Supplement must describe the duration of
the Pre-Funding Period; and
(9) the Trustee (or any agent with which the Trustee contracts to provide
trust services) must be a substantial financial institution or trust
company experienced in trust activities and familiar with its duties,
responsibilities and liabilities as a fiduciary under ERISA. The Trustee,
as legal owner of the Trust, must enforce all the rights created in favor
of Certificateholders of the Trust, including Plans.
The Seller believes that the Exemption will apply to the acquisition and
holding of Class A Certificates by Plans and that all conditions of the
Exemption (other than those within the control of the investors) have been or
will be met. See "ERISA Considerations" in the Prospectus.
LEGAL INVESTMENT
Although upon their initial issuance the Class A Certificates will be rated
"Aaa" by Moody's and "AAA" by S&P, the Class A Certificates will not constitute
"mortgage related securities" under the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA") because the Mortgage Pool includes Home Equity Loans that
are secured by second Mortgages. Investors should consult their own legal
advisers in determining whether and to what extent any Class of Certificates
constitutes legal investments for such investors.
USE OF PROCEEDS
The Seller will use the net proceeds received from the sale of the Class A
Certificates to purchase the Home Equity Loans.
S-71
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement") between the Seller and the Underwriter, the
Seller has agreed to sell to the Underwriter, and the Underwriter has agreed to
purchase from the Seller, all of the Class A Certificates offered hereby if any
of such Certificates are purchased.
The Seller has been advised that the Underwriter proposes initially to offer
the Class A Certificates to certain dealers at such price less a selling
concession not to exceed the percentage of the Certificate denomination set
forth below, and that the Underwriter may allow and such dealers may reallow a
reallowance discount not to exceed the percentage of the Certificate
denomination set forth below:
<TABLE>
<CAPTION>
SELLING REALLOWANCE
CLASS CONCESSION DISCOUNT
----- ---------- -----------
<S> <C> <C>
A-1................................................... 0.225% 0.1125%
A-2................................................... 0.225% 0.1125%
</TABLE>
Until the distribution of the Class A Certificates is completed, rules of the
Commission may limit the ability of the Underwriter and certain selling group
members to bid for and purchase the Class A Certificates. As an exception to
these rules, the Underwriter is permitted to engage in certain transactions
that stabilize the price of the Class A Certificates. Such transactions consist
of bids or purchases for the purpose of pegging, fixing or maintaining the
price of the Class A Certificates.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither the Seller nor the Underwriter makes any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the prices of the Class A Certificates. In addition, neither
the Seller nor the Underwriter makes any representation that the Underwriter
will engage in such transactions or that such transactions, once commenced,
will not be discontinued without notice.
The Underwriting Agreement provides that the Seller and the Master Servicer
will indemnify the Underwriter against certain liabilities, including
liabilities under the Securities Act of 1933, as amended.
In the ordinary course of its businesses, the Underwriter and/or its
affiliates has engaged, and may in the future engage, in investment banking
and/or commercial banking transactions with the Seller and its affiliates.
EXPERTS
The consolidated financial statements of Ambac Assurance Corporation, as of
December 31, 1997 and 1996 and for each of the years in the three year period
ending December 31, 1997 are incorporated by reference herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, incorporated by reference herein, and
upon the authority of said firm as experts in accounting and auditing.
S-72
<PAGE>
RATINGS
It is a condition to the issuance of the Class A Certificates that they be
rated "Aaa" by Moody's and "AAA" by S&P. Such ratings do not address the
likelihood that any LIBOR Carryover Amount will be paid.
A security rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the assigning Rating
Agency. No person is obligated to maintain the rating on any Certificate, and,
accordingly, there can be no assurance that the ratings assigned to the Class A
Certificates upon initial issuance will not be lowered or withdrawn by a Rating
Agency at any time thereafter. In general, ratings address credit risk and do
not represent any assessment of the likelihood or rate of principal
prepayments.
LEGAL MATTERS
In addition to the legal opinions referred to in the Prospectus, certain
legal matters relating to the Certificates will be passed upon for the Seller
by Orrick, Herrington & Sutcliffe LLP and for the Underwriter by Stroock &
Stroock & Lavan LLP. Certain federal income tax matters will be passed upon for
the Seller by Orrick, Herrington & Sutcliffe LLP.
S-73
<PAGE>
INDEX OF DEFINITIONS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1 Year CMT................................................................. S-26
6 Month LIBOR.............................................................. S-26
Accrual Period............................................................. S-36
Advance.................................................................... S-56
Adjusted Original Pool Principal Balance................................... S-35
ARM Loans.................................................................. S-19
Available Funds............................................................ S-48
Available Funds Shortfall.................................................. S-52
Available Payment Amount................................................... S-49
Average Interest Rate...................................................... S-70
Book-Entry Certificates.................................................... S-47
Business Day............................................................... S-48
Capitalized Interest Account............................................... S-34
Carryforward Amount........................................................ S-51
Cede....................................................................... S-47
Cedel...................................................................... S-47
Certificate Insurance Policy............................................... S-65
Certificate Owners......................................................... S-47
Certificateholders......................................................... S-47
Certificates............................................................... S-47
Chase...................................................................... S-48
Citibank................................................................... S-48
Class A Certificate Balance................................................ S-54
Class A Certificateholder.................................................. S-66
Class A Certificates....................................................... S-47
Class A-2 Pass-Through Rate................................................ S-50
Class Certificate Balance.................................................. S-54
Compensating Interest...................................................... S-58
CPR........................................................................ S-37
Current Interest........................................................... S-51
Cut-off Date............................................................... S-19
Defective Home Equity Loan................................................. S-62
Delayed First Adjustment Loans............................................. S-27
DOL........................................................................ S-70
DTC........................................................................ S-47
Eligible Substitute Home Equity Loan....................................... S-63
ERISA...................................................................... S-69
Euroclear.................................................................. S-47
Excess Overcollateralization Amount........................................ S-56
Final Scheduled Payment Dates.............................................. S-48
Fixed Rate Loans........................................................... S-19
FFAS....................................................................... S-43
Group 2 Net WAC Cap........................................................ S-1
Group Principal Balance.................................................... S-54
Home Equity Loan........................................................... S-47
Home Equity Loan Group..................................................... S-19
Initial Loans.............................................................. S-19
Institutional Program...................................................... S-43
Insured Payment............................................................ S-66
</TABLE>
S-74
<PAGE>
INDEX OF DEFINITIONS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Insurer.................................................................... S-63
IRS........................................................................ S-68
LIBOR Carryover Amount..................................................... S-54
LIBOR Determination Date................................................... S-32
LIBOR Rate................................................................. S-54
Loan Group 1............................................................... S-6
Loan Group 2............................................................... S-6
Margin..................................................................... S-26
Master Servicer Termination Event.......................................... S-59
Maximum Mortgage Rate...................................................... S-26
Minimum Mortgage Rate...................................................... S-26
Minimum Termination Amount................................................. S-61
MMC........................................................................ S-42
Moody's.................................................................... S-64
Mortgage................................................................... S-47
Mortgage Loan Schedule..................................................... S-62
Mortgage Notes............................................................. S-19
Mortgage Pool.............................................................. S-47
Mortgaged Property......................................................... S-47
Net Mortgage Rate.......................................................... S-51
OID Regulations............................................................ S-68
One-Month LIBOR............................................................ S-50
Optional Termination Date.................................................. S-34
Original Pool Principal Balance............................................ S-19
Overcollateralization Amount............................................... S-55
Overcollateralization Deficit.............................................. S-57
Overcollateralization Increase Amount...................................... S-52
Overcollateralization Reduction Amount..................................... S-54
Overcollateralization Requirement.......................................... S-36
Percentage Interest........................................................ S-47
Periodic Cap............................................................... S-26
Plan....................................................................... S-69
Pool Principal Balance..................................................... S-61
Portfolio.................................................................. S-19
Preference Amount.......................................................... S-66
Pre-Funded Amount.......................................................... S-32
Pre-Funding Account........................................................ S-32
Pre-Funding Period......................................................... S-32
Prepayment Assumption...................................................... S-37
Prepayment Interest Shortfall.............................................. S-58
Principal Balance.......................................................... S-53
Principal Payment.......................................................... S-52
Purchase Price............................................................. S-62
real estate assets......................................................... S-69
Rating Agencies............................................................ S-17
Reference Banks............................................................ S-51
Related Documents.......................................................... S-62
Remittance Period.......................................................... S-54
REO Property............................................................... S-46
</TABLE>
S-75
<PAGE>
INDEX OF DEFINITIONS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Retail Program............................................................. S-42
Riegle Act................................................................. S-13
S&P........................................................................ S-64
Servicing Advance.......................................................... S-58
Servicing Fee.............................................................. S-58
SMMEA...................................................................... S-71
Subsequent Loans........................................................... S-19
Subsequent Transfer Dates.................................................. S-32
Telerate Page 3750......................................................... S-50
Termination Auction........................................................ S-60
Termination Price.......................................................... S-60
Total Available Funds...................................................... S-55
Total Monthly Excess Cashflow.............................................. S-51
Total Monthly Excess Spread................................................ S-55
Trust...................................................................... S-47
Trustee.................................................................... S-67
Underwriting Agreement..................................................... S-72
Wholesale Program.......................................................... S-42
</TABLE>
S-76
<PAGE>
APPENDIX A
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered TFC Home
Equity Loan Trust 1998-1 Class A-1 Certificates and Class A-2 Certificates
(collectively, the "Global Securities") will be available only in book-entry
form. Investors in the Global Securities may hold such Global Securities
through any of The Depository Trust Company ("DTC"), CEDEL or Euroclear. The
Global Securities will be tradable as home market instruments in both the
European and U.S. domestic markets. Initial settlement and all secondary
trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities through
CEDEL and Euroclear will be conducted in the ordinary way in accordance with
their normal rules and operating procedures and in accordance with
conventional Eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities through
DTC will be conducted according to the rules and procedures applicable to U.S.
corporate debt obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery against
payment basis through the respective Depositaries of CEDEL and Euroclear (in
such capacity) and as DTC Participants.
Non U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities
will be represented through financial institutions acting on their behalf as
direct and indirect Participants in DTC. As a result, CEDEL and Euroclear will
hold positions on behalf of their participants through their respective
Depositaries, which in turn will hold such positions in accounts as DTC
Participants.
Investor securities custody accounts will be credited with their holdings
yet payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lockup" or restricted period. Global Securities will be credited to
the securities custody accounts on the settlement date against payment in
same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired
value date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
A-1
<PAGE>
Trading between DTC seller and CEDEL or Euroclear purchaser. When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a CEDEL Participant or a Euroclear Participant, the purchaser will
send instructions to CEDEL or Euroclear through a CEDEL Participant or
Euroclear Participant at least one Business Day prior to settlement. CEDEL or
Euroclear will instruct the respective Depositary, as the case may be, to
receive the Global Securities against payment. Payment will include interest
accrued on the Global Securities from and including the last coupon payment
date to and excluding the settlement date, calculated on the basis of either a
360 day year composed of twelve 30-day months or a year of 360 days, as
applicable, and the actual number of days occurring in the period for which
such interest is payable, as applicable. Payment will then be made by the
respective Depositary to the DTC Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the CEDEL Participant's or
Euroclear Participant's account. The securities credit will appear the next
day (European time) and the cash debit will be back-valued to, and the
interest on the Global Securities will accrue from, the value date (which
would be the preceding day when settlement occurred in New York). If
settlement is not completed on the intended value date (i.e., the trade
fails), the CEDEL or Euroclear cash debit will be valued instead as of the
actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available to
the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to pre-position funds for
settlement, either from cash on hand or existing lines of credit, as they
would for any settlement occurring within CEDEL or Euroclear. Under this
approach, they may take on credit exposure to CEDEL or Euroclear until the
Global Securities are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants can elect not to preposition funds and allow that
credit line to be drawn upon to finance settlement. Under this procedure,
CEDEL Participants or Euroclear Participants purchasing Global Securities
would incur overdraft charges for one day, assuming they cleared the overdraft
when the Global Securities were credited to their accounts. However, interest
on the Global Securities would accrue from the value date. Therefore, in many
cases the investment income on the Global Securities earned during that one-
day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each CEDEL Participant's or
Euroclear Participant's particular Cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities
to the respective Depositary for the benefit of CEDEL Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller
on the settlement date. Thus, to the DTC Participant a cross-market
transaction will settle no differently than a trade between two DTC
Participants.
Trading between CEDEL or Euroclear seller and DTC purchaser. Due to time
zone differences in their favor, CEDEL Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through
the respective Depositary, to a DTC Participant. The seller will send
instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one Business Day prior to settlement. In these cases,
CEDEL or Euroclear will instruct the respective Depositary, as appropriate, to
deliver the bonds to the DTC Participant's account against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment date to and excluding the settlement date, calculated on
the basis of a either a 360 day year composed of twelve 30-day months year of
360 days and the actual number of days occurring in the period for which such
interest is payable, as applicable. The payment will then be reflected in the
account of the CEDEL Participant or Euroclear Participant the following day,
and receipt of the cash proceeds in the CEDEL Participant's or Euroclear
Participant's account would be back-valued to the value date (which would be
the proceeding day, when settlement occurred in New York). Should the CEDEL
Participant or Euroclear Participant have a line of credit with its respective
clearing system and elect to be in debit in anticipation of receipt of the
A-2
<PAGE>
sale proceeds in its account, the back-valuation will extinguish any overdraft
charges incurred over the one-day period. If settlement is not completed on
the intended value date (i.e., the trade fails), receipt of the cash proceeds
in the CEDEL Participant's or Euroclear Participant's account would instead be
valued as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase Global
Securities from DTC Participants for delivery to CEDEL Participants or
Euroclear Participants should note that these trades would automatically fail
on the sale side unless affirmative action was taken. At least three
techniques should be readily available to eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the purchase
side of the day trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures.
(b) borrowing the Global Securities in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their CEDEL or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at least
one day prior to the value date for the sale to the CEDEL Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through CEDEL or
Euroclear (or through DTC if the holder has an address outside the U.S.) will
be subject to the 30% U.S. withholding tax that generally applies to payments
of interest (including original issue discount) on registered debt issued by
U.S. Persons, unless under currently applicable laws (i) each clearing system,
bank or other financial institution that holds customers' securities in the
ordinary course of its trade or business in the chain of intermediaries
between such beneficial owner and the U.S. entity required to withhold tax
complies with applicable certification requirements and (ii) such beneficial
owner takes one of the following steps to obtain an exemption or reduced tax
rate.
Exemption for non-US. Persons (Form W8). Beneficial owners of Class A
Certificates that are non-U.S. Persons can obtain a complete exemption from
the withholding tax by filing a signed Form W8 (Certificate of Foreign
Status). If the information shown on Form W8 changes, a new Form W8 must be
filed within 30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its
conduct of a trade or business in the United States, can obtain an exemption
from the withholding tax by filing Form 4224 (Exemption from Withholding of
Tax on Income Effectively Connected with the Conduct of a Trade or Business in
the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty countries
(Form 1001). Non-U.S. Persons that are Certificateholders residing in a
country that has a tax treaty with the United States can obtain an exemption
or reduced tax rate (depending on the treaty terms) by filing Form 1001
(Ownership, Exemption or Reduced Rate Certificate). If the treaty provides
only for a reduced rate, withholding tax will be imposed at that rate unless
the filer alternatively files Form W8. Form 1001 may be filed by the
Certificateholder or his agent.
Exemption for U.S. Persons (Form W9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The holder of a Global Security
or, in the case of a Form 1001 or a Form 4224 filer, his agent, files by
submitting the appropriate form to the person through whom it holds (the
clearing agency, in the case of persons holding directly on the books of the
clearing agency). Form W8 and Form 1001 are effective for three calendar years
and Form 4224 is effective for one calendar year.
A-3
<PAGE>
The term "U.S. Person" means (i) a citizen or resident of the United States,
(ii) a corporation or partnership organized in or under the laws of the United
States, any state thereof or the District of Columbia, (iii) an estate or
trust the income of which is includible in gross income for United States tax
purposes, regardless of its source. This summary does not deal with all
aspects of U.S. federal income tax withholding that may be relevant to foreign
holders of the Global Securities. Investors are advised to consult their own
tax advisors for specific tax advice concerning their holding and disposing of
the Global Securities.
Further, the U.S. Treasury Department has recently finalized new regulations
that will revise some aspects of the current system for withholding on amounts
paid to foreign persons. Under these regulations, interest or OID paid to a
nonresident alien would continue to be exempt from U.S. withholding taxes
(including backup withholding) provided that the holder complies with the new
certification procedures.
A-4
<PAGE>
APPENDIX B
METROPOLITAN MORTGAGE COMPANY UNDERWRITING CRITERIA
Loans are underwritten at each Combined Loan-to-Value Ratio based upon the
criteria set forth below. The application of such criteria is subject to the
discussion under "Underwriting-Retail Program; Underwriting Guidelines."
70% Combined Loan-to-Value Ratio--Loans are made in an amount up to 70% of
the value of the Mortgaged Property for single family owner occupied
residences. The property must have a stable market value. Minimum credit score
of 620 is required for the borrower. Refinances and cash out refinancings are
permitted under this category. Any existing senior mortgage on the property
must be current.
60% Combined Loan-to-Value Ratio--Loans are made in an amount up to 60% of
the value of the Mortgaged Property for single family owner occupied
residences. Condominium units and townhomes are permitted under this category.
Only refinances are permitted under this category. Any existing senior
mortgage on the property must be current.
55% Combined Loan-to-Value Ratio--Loans are made in an amount up to 55% of
the value of the Mortgaged Property for single family owner occupied
residences. Condominium units and townhomes are permitted under this category.
Cash out refinances, home improvements and debt consolidations are permitted
under this category. Any existing senior mortgage on the property must not be
30 days or more past due.
50% Combined Loan-to-Value Ratio--Loans are made in an amount up to 50% of
the value of the Mortgaged Property for single family residences,
condominiums, and townhomes, in each case whether or not owner occupied. Cash
out refinances, home improvements and purchases are permitted under this
category. Any existing senior mortgage on the property must not be 60 days or
more past due.
40% Combined Loan-to-Value Ratio--Loans are made in an amount up to 40% of
the value of the Mortgaged Property for single family residences,
condominiums, mobile homes and townhomes, in each case whether or not owner
occupied. In addition, mobile homes that are less than 5 years old and are
located inside mobile home parks are permitted within this category, provided
that the borrower owns the land underlying the mobile home. Cash out
refinances, debt consolidation, home improvements, purchases and new
construction are permitted under this category. Any existing senior mortgage
on the property must not be 90 days or more past due.
25% Combined Loan-to-Value Ratio--Loans are made in an amount up to 25% of
the value of the Mortgaged Property for single family residences,
condominiums, mobile homes and townhomes, in each case whether or not owner
occupied. In addition, mobile homes that are less than 5 years old and are
located inside mobile home parks are permitted within this category, provided
that the borrower owns the land underlying the mobile home. In addition, all
other mobile homes are permitted within this category. Cash out refinances,
debt consolidation, home improvements, purchases and new construction are
permitted under this category. The status of any existing senior mortgage on
the property is not considered.
Additional Guidelines
In certain instances, such as if the property (i) is for sale, (ii) is non-
owner occupied, (iii) was inherited within the last 12 months, (iv) is located
in a congested area, (v) is located behind a privately held first mortgage or
(vi) is located in an historic district or is very old, then the maximum
Combined Loan-to-Value Ratio may be reduced by 10%. Certain other
circumstances may require prior approval from a senior executive at MMC's home
office. These circumstances include the following: (a) all loans where the
borrower has been in bankruptcy within the prior year, (b) all loans secured
by buildings that do not conform to current zoning laws, (c) all loans secured
by property located in a flight path, (d) all loans secured by property in
foreclosure and all loans where the borrower is more than 90 days past due on
the first mortgage, (e) all loans secured by vacant or
B-1
<PAGE>
non-buildable lots, (f) all construction loans and loans secured by commercial
property or property used for mixed commercial and residential purposes, and
(g) all loans secured by property with unique single purpose usage for the
area and luxury or estate homes. MMC will consider an 80% Combined Loan-to-
Value Ratio on mortgaged property consisting of single family owner occupied
residences where the borrower has a credit score greater than 620, job
stability, current first mortgage with an excellent payment history for two
years and a marketing time of 0-3 months that would have been approved under
the institutional non-conforming product guidelines.
B-2
<PAGE>
PROSPECTUS
TFC HOME EQUITY LOAN TRUSTS
TFC HOME EQUITY LOAN ASSET-BACKED CERTIFICATES
(ISSUABLE IN SERIES)
---------------
TRANSAMERICA MORTGAGE COMPANY OR METROPOLITAN MORTGAGE COMPANY
MASTER SERVICER
The TFC Home Equity Loan Asset-Backed Certificates (the "Certificates")
offered hereby may be sold from time to time in series (each, a "Series") as
described in the related Prospectus Supplement. Each Series of Certificates
will be issued by a separate trust (each, a "Trust").
The assets of each Trust will consist primarily of (i) a pool (a "Mortgage
Pool") of mortgage loans (each, a "Home Equity Loan") secured primarily by
mortgages, deeds of trust or other instruments (each, a "Mortgage") creating a
first, second or more junior lien on one- to four-family dwellings, units in
planned unit developments, condominium developments or cooperatives and mobile
or manufactured homes (each, a "Mortgaged Property") to be transferred to such
Trust by Transamerica Consumer Mortgage Receivables Corporation, as specified
in the related Prospectus Supplement (the "Seller") and (ii) all monies
received on the Home Equity Loans on and after the related Cut-off Date (as
defined herein). All of the Home Equity Loans are closed-end Home Equity Loans
where the principal amount is disbursed in full at origination. The Home
Equity Loans will be master serviced by Transamerica Mortgage Company or
Metropolitan Mortgage Company (in such capacity as servicer, the "Master
Servicer") and were originated or acquired by Transamerica Mortgage Company,
Metropolitan Mortgage Company or certain of their affiliates in the ordinary
course of business, as described in the related Prospectus Supplement. The
Home Equity Loans and other assets of each Trust as described herein and in
the related Prospectus Supplement will be held for the benefit of the holders
of the related Series of Certificates.
Each Series of Certificate may be issuable in one or more classes (each, a
"Class"), each of which may represent beneficial ownership interests in the
Home Equity Loans held by the related Trust. A Series may include one or more
Classes of Certificates entitled to principal distributions and
disproportionate, nominal or no interest distributions, or to interest
distributions and disproportionate, nominal or no principal distributions.
The rights of one or more Classes of Certificates of a Series may be senior or
subordinate to the rights of one or more of the other Classes of Certificates
of such Series. A Series may include two or more Classes of Certificates which
differ as to the timing, sequential order, priority of payment, interest rate
or amount of distributions of principal or interest or both.
If specified in the related Prospectus Supplement, one or more Classes of
Certificates of a Series may have the benefit of one or more of a letter of
credit, financial guaranty insurance policy, mortgage pool insurance policy,
special hazard insurance policy, reserve fund, spread account, cash collateral
account, overcollateralization or other form of credit enhancement. If
specified in the related Prospectus Supplement, the Home Equity Loans
underlying a Series of Certificates may be insured under one or more of a
mortgage pool insurance policy, bankruptcy bond, special hazard insurance
policy or similar credit enhancement. In addition to or in lieu of any or all
of the foregoing, credit enhancement with respect to one or more Classes of
Certificates of a Series may be provided through subordination. See
"Description of Credit Enhancement" in the related Prospectus Supplement.
The yield on each Class of Certificates of a Series will be affected by,
among other things, the rate of payment of principal (including prepayments)
on the Home Equity Loans in the related Trust and the timing of receipt of
such payments. See "Certain Yield and Prepayment Considerations" herein and in
the related Prospectus Supplement. A Trust may be subject to early termination
under the circumstances described herein and in the related Prospectus
Supplement.
Offers of the Certificates of a Series may be made through one or more
different methods, including offerings through underwriters, as described
under "Plan of Distribution" herein and "Underwriting" in the related
Prospectus Supplement. There will have been no secondary market for the
Certificates of any Series prior to the offering thereof. There can be no
assurance that a secondary market for any Class of Certificates of any Series
will develop or, if one does develop, that it will continue. None of the
Certificates will be listed on any securities exchange.
---------------
FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING INVESTMENTS IN THE
CERTIFICATES, SEE "RISK FACTORS," WHICH BEGINS ON PAGE 13 HEREIN.
---------------
One or more elections will be made to treat the related Trust or a
designated portion of the assets of the related Trust as one or more real
estate mortgage investment conduits (each, a "REMIC") for federal income tax
purposes. For a description of certain tax consequences of owning the
Certificates, including, without limitation, original issue discount, see
"Certain Federal Income Tax Consequences" herein and in the related Prospectus
Supplement.
---------------
PROCEEDS OF THE ASSETS IN THE TRUST ARE THE SOLE SOURCE OF PAYMENTS ON THE
CERTIFICATES. THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION
OF THE SELLER, THE MASTER SERVICER OR ANY OF THEIR AFFILIATES. EXCEPT AS
EXPRESSLY SET FORTH IN THE RELATED PROSPECTUS SUPPLEMENT, NEITHER THE
CERTIFICATES NOR THE UNDERLYING HOME EQUITY LOANS WILL BE GUARANTEED OR
INSURED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE SELLER, THE
MASTER SERVICER OR ANY OF THEIR AFFILIATES.
---------------
NONE OF SUCH ENTITIES WILL HAVE ANY OBLIGATIONS IN RESPECT OF THE
CERTIFICATES, EXCEPT AS EXPRESSLY SET FORTH HEREIN OR IN THE RELATED
PROSPECTUS SUPPLEMENT.
---------------
THESE CERTIFICATES 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.
Prospective investors should refer to the "Index of Principal Definitions"
herein for the location of the definitions of capitalized terms that appear in
this Prospectus.
November 23, 1998
<PAGE>
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 or the related Prospectus Supplement and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Seller or any dealer, salesman, or any other person. Neither
the delivery of this Prospectus or the related Prospectus Supplement nor any
sale made hereunder or thereunder shall under any circumstances create an
implication that there has been no change in the information herein or therein
since the date hereof. This Prospectus and the related Prospectus Supplement
are not an offer to sell or a solicitation of an offer to buy any security in
any jurisdiction in which it is unlawful to make such offer or solicitation.
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the related Certificates, whether or not
participating in the distribution thereof, may be required to deliver this
Prospectus and the related Prospectus Supplement. This delivery requirement 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.
AVAILABLE INFORMATION
The Seller has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Certificates. This Prospectus, which forms a part
of the Registration Statement, omits certain information contained in such
Registration Statement pursuant to the Rules and Regulations of the
Commission. The Registration Statement and the exhibits thereto 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 its
Regional Offices located as follows: Chicago Regional Office, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511; and Northeast Regional
Office, 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of
such material may also be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates, and electronically through the Commission's Electronic Data Gathering,
Analysis and Retrieval system at the Commission's Web site
(http://www.sec.gov).
REPORTS TO HOLDERS
Unless and until the Offered Certificates are no longer issued in book-entry
form, the Trust will provide to CEDE & Co., as nominee of The Depository Trust
Company ("DTC") and registered holder of the Offered Certificates and, upon
request, to Participants (as defined herein) of DTC, monthly and annual
reports concerning the Certificates pursuant to the Pooling and Servicing
Agreement. See "Description of the Certificates--Reports to Holders." Such
reports may be made available to the owners of the certificates (the
"Certificate Owners") upon request to their Participants. Such reports will
not constitute financial statements prepared in accordance with generally
accepted accounting principles. The Trust does not intend to provide any
financial information to any holder of the Certificates which has been
examined and reported upon, with an opinion expressed, by an independent
public accountant.
The Master Servicer will file with the Commission such periodic reports with
respect to each Trust as are required by the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and the rules regulations or orders of the
Commission thereunder. Each Trust that issues a Series of Certificates may
discontinue filing periodic reports under the Exchange Act at the beginning of
the fiscal year following the issuance of such Certificates if there are fewer
than 300 holders of such Certificates.
2
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All reports and other documents filed by the Seller pursuant to Section
13(a), Section 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 offered hereby shall be deemed to be incorporated by reference in
this Prospectus and to be part hereof. 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 other 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 Seller will provide without charge to each person to whom a copy of this
Prospectus is delivered, on the written or oral request of any such person, a
copy of any of or all the documents incorporated herein by reference (other
than exhibits to such documents). Requests for such copies should be directed
to Corporate Secretary, 1150 South Olive Street, Suite 2800, Los Angeles,
California 90015.
3
<PAGE>
SUMMARY OF PROSPECTUS
The following Summary of Prospectus 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 each Series of Certificates
contained in the related Prospectus Supplement. Capitalized terms used but not
defined in this Summary of Prospectus shall have the meanings ascribed to such
terms elsewhere in this Prospectus. The Index of Principal Definitions included
in this Prospectus sets forth the pages on which the definitions of certain
principal terms appear.
Seller........................ Transamerica Consumer Mortgage Receivables
Corporation, a Delaware corporation (the
"Seller") and a special purpose, wholly owned
indirect subsidiary of Transamerica Finance
Corporation, will sell and assign the Home
Equity Loans to the Trust. Each Home Equity
Loan will be serviced by the Master Servicer.
Issuer........................ With respect to each Series of Certificates, a
trust entitled "TFC Home Equity Loan Trust"
(the "Trust"), with an additional designation
to indicate the Series of Certificates to
which it relates. Each Trust will be formed
pursuant to a Pooling and Servicing Agreement
among the Seller, the Master Servicer (defined
herein) and the trustee named therein (the
"Trustee").
Master Servicer............... Transamerica Mortgage Company, a California
corporation, or Metropolitan Mortgage Company,
a Florida corporation (in such capacity as
servicer, the "Master Servicer").
Trustee....................... The entity or entities named as trustee in the
related Prospectus Supplement.
Cut-off Date.................. The date specified in the related Prospectus
Supplement on and after which payments due or
received on the related Home Equity Loans, as
specified in the related Prospectus
Supplement, are transferred to the related
Trust and available for payment to the holders
of the related Certificates (each, a "Cut-off
Date").
Closing Date.................. The date on which the Certificates of any
Series are initially issued (each, a "Closing
Date") as specified in the related Prospectus
Supplement.
Description of Certificates... The Certificates of each Series may be issued
in one or more classes (each, a "Class") and
will represent beneficial interests in a
segregated pool (each, a "Mortgage Pool") of
mortgage loans (the "Home Equity Loans")
originated or acquired by Transamerica
Mortgage Company, Metropolitan Mortgage
Company or certain of their affiliates. See
"Description of the Mortgage Pools."
A Series of Certificates may include one or
more Classes entitled to distributions of
principal and disproportionate, nominal or
4
<PAGE>
no interest distributions or distributions of
interest and disproportionate, nominal or no
principal distributions. The principal amount
of any Certificate may be zero or may be a
notional amount as specified in the related
Prospectus Supplement. A Class of Certificates
of a Series entitled to payments of interest
may receive interest at a specified rate (a
"Pass-Through Rate") which may be fixed,
variable or adjustable and may differ from
other Classes of the same Series, may receive
interest based on the weighted average
interest rate on the underlying Home Equity
Loans or may receive interest as otherwise
determined, all as described in the related
Prospectus Supplement. One or more Classes of
a Series may be Certificates upon which
interest will accrue but not be currently paid
until certain other Classes have received
principal payments due to them in full or
until the happening of certain events, as set
forth in the related Prospectus Supplement.
One or more Classes of Certificates of a
Series may be entitled to receive principal
payments pursuant to a planned amortization
schedule or may be entitled to receive
interest payments based on a notional
principal amount which reduces in accordance
with a planned amortization schedule. The
rights of one or more Classes of Certificates
may be senior or subordinate to the rights of
one or more of the other Classes of
Certificates. A Series may include two or more
Classes of Certificates which differ as to the
timing, sequential order, priority of payment
or amount of distributions of principal or
interest or both.
Except as expressly set forth in the related
Prospectus Supplement, neither the
Certificates nor the underlying Home Equity
Loans will be guaranteed or insured by any
governmental agency or instrumentality or the
Seller, the Master Servicer or any of their
affiliates.
Payment Date.................. The monthly date specified in the related
Prospectus Supplement on which payments will
be made to holders of Certificates (each, a
"Payment Date").
Determination Date............ With respect to each Payment Date the day
(each, a "Determination Date") specified in
the related Prospectus Supplement.
Record Date................... The calendar day (each, a "Record Date")
specified in the related Prospectus
Supplement.
Interest...................... Unless otherwise specified in the related
Prospectus Supplement, interest on each Class
of Certificates of a Series (other than a
Class of Certificates entitled to receive only
principal) will accrue during each period
specified in the related Prospectus Supplement
(each, an "Accrual Period") at the Pass-
Through Rate for such Class specified in the
related Prospectus
5
<PAGE>
Supplement. Interest accrued on each Class of
Certificates at the applicable Pass-Through
Rate during each Accrual Period will be paid,
to the extent monies are available therefor,
on each Payment Date, commencing on the day
specified in the related Prospectus Supplement
and will be distributed in the manner
specified in such Prospectus Supplement,
except for any Class of Certificates ("Accrual
Certificates") on which interest is to accrue
and not be paid until the interest and
principal of certain other Classes has been
paid in full or until the occurrence of
certain events as specified in such Prospectus
Supplement. If so described in the related
Prospectus Supplement, interest that has
accrued but is not yet payable on any Accrual
Certificates will be added to the principal
balance thereof on each Payment Date and will
thereafter bear interest at the applicable
Pass-Through Rate. Payments of interest with
respect to any Class of Certificates entitled
to receive interest only or a disproportionate
amount of interest and principal will be paid
in the manner set forth in the related
Prospectus Supplement. Payments of interest
(or accruals of interest, in the case of
Accrual Certificates) with respect to any
Series of Certificates or one or more Classes
of Certificates of such Series, may be reduced
to the extent of interest shortfalls not
covered by Advances (defined herein), if any,
or by any applicable credit enhancement.
Principal..................... On each Payment Date, commencing with the
Payment Date specified in the related
Prospectus Supplement, principal with respect
to the related Home Equity Loans during the
period specified in the related Prospectus
Supplement (each such period, a "Remittance
Period") will be paid to holders of the
Certificates of the related Series (other than
a Class of Certificates of such Series
entitled to receive interest only) in the
priority, manner and amount specified in such
Prospectus Supplement, to the extent funds are
available therefor. Unless otherwise specified
in the related Prospectus Supplement, such
principal payments will generally include (i)
the principal portion of all scheduled
payments ("Monthly Payments") received on the
related Home Equity Loans during the related
Remittance Period, (ii) any principal
prepayments of any such Home Equity Loans in
full ("Principal Prepayments") and in part
("Curtailments") received during the related
Remittance Period or such other period (each,
a "Prepayment Period") specified in the
related Prospectus Supplement, (iii) the
principal portion of (A) the proceeds of any
insurance policy relating to a Home Equity
Loan, a Mortgaged Property (defined herein) or
a REO Property (defined herein), net of any
amounts applied to the repair of the Mortgaged
Property or released to the Mortgagor (defined
herein) and net of reimbursable expenses (such
net proceeds, "Insurance Proceeds"), (B)
proceeds received in connection with the
6
<PAGE>
liquidation of any defaulted Home Equity Loans
("Liquidation Proceeds"), net of fees and
advances reimbursable therefrom ("Net
Liquidation Proceeds") and (C) proceeds
received in connection with a taking of a
related Mortgaged Property by condemnation or
the exercise of eminent domain or in
connection with any partial release of any
such Mortgaged Property from the related lien
("Released Mortgaged Property Proceeds"), (iv)
the principal portion of all amounts paid by
the Seller or the Master Servicer in
connection with the purchase of or
substitution for a Home Equity Loan as to
which there is defective documentation or a
breach of a representation or warranty
contained in the related Pooling and Servicing
Agreement and (v) the principal balance of
each defaulted Home Equity Loan or REO
Property as to which the Master Servicer has
determined that all amounts expected to be
recovered have been recovered (each, a
"Liquidated Home Equity Loan"), to the extent
not included in the amounts described in
clauses (i) through (iv) above (the aggregate
of the amounts described in clauses (i)
through (v), the "Basic Principal Payment").
Payments of principal with respect to a Series
of Certificates or one or more Classes of such
Series may be delayed or reduced to the extent
of delinquencies or losses not covered by
Advances, if any, or any applicable credit
enhancement.
Denominations................. Each Class of Certificates of a Series will be
issued in the minimum denominations set forth
in the related Prospectus Supplement. Each
Certificate will represent a percentage
interest (a "Percentage Interest") in the
Certificates of the related Class determined
by dividing the original dollar amount (or
Notional Principal Amount (as defined below),
in the case of Certificates entitled to
interest only and assigned a Notional
Principal Amount) represented by such
Certificate by the original aggregate
principal balance (or original aggregate
Notional Principal Amount, if applicable). The
related Prospectus Supplement will set forth
the amount or method of calculating the
Notional Principal Amount with respect to any
Certificate having a Notional Principal
Amount.
Registration of the
Certificates.................. Each or any Class of Certificates of a Series
may be issued in definitive form or may
initially be represented by one or more
certificates registered in the name of Cede &
Co. ("Cede") ("Book-Entry Certificates"), the
nominee of The Depository Trust Company
("DTC"), and available only in the form of
book-entries on the records of DTC,
participating members thereof ("Participants")
and other entities, such as banks, brokers,
dealers and trust companies, that clear
through or maintain custodial relationships
with a Participant, either directly or
indirectly ("Indirect Participants").
Certificateholders may also hold Certificates
of a Series
7
<PAGE>
through CEDEL or Euroclear (in Europe), if
they are participants in such systems or
indirectly through organizations that are
participants in such systems. Certificates
representing Book-Entry Certificates will be
issued in definitive form only under the
limited circumstances described herein and in
the related Prospectus Supplement. With
respect to the Book-Entry Certificates, all
references herein to "holders" shall reflect
the rights of owners of the Book-Entry
Certificates as they may indirectly exercise
such rights through DTC and Participants,
except as otherwise specified herein. See
"Risk Factors" and "Description of the
Certificates--Registration and Transfer of the
Certificates" herein.
The Trust Property............ Each Class of Certificates of a Series will
represent an interest in (i) a segregated pool
(the "Mortgage Pool") of fixed or adjustable
rate mortgage loans originated or acquired by
Transamerica Mortgage Company, Metropolitan
Mortgage Company or certain of their
affiliates and evidenced by promissory notes
or other evidence of indebtedness (the "Home
Equity Loans") secured primarily by mortgages,
deeds of trust or other instruments (each, a
"Mortgage") creating a first, second or more
junior lien on one- to four-family dwellings,
units in condominium developments, planned
unit developments or cooperatives and mobile
or manufactured homes (each, a "Mortgaged
Property"), with the aggregate principal
balance as of the Cut-off Date specified in
the related Prospectus Supplement, after
giving effect to payments due or received, as
specified in the related Prospectus
Supplement, on or prior to the Cut-off Date
(the "Original Pool Principal Balance") and
(ii) all monies due or received, as specified
in the related Prospectus Supplement, on or
with respect to the Home Equity Loans on or
after the Cut-off Date. All of the Home Equity
Loans are closed-end Home Equity Loans where
the principal amount is disbursed in full at
origination. One or more Classes of
Certificates of any Series may, if so
specified in the related Prospectus
Supplement, have the benefit of one or more of
a letter of credit, financial guaranty
insurance policy, mortgage pool insurance
policy, special hazard insurance policy,
spread account, reserve fund, cash collateral
account, overcollateralization, subordination
or other credit enhancement as described
herein under "Description of the
Certificates--Description of Credit
Enhancement."
The Prospectus Supplement for each Series of
Certificates will specify certain information
with respect to the related Mortgage Pool
including, without limitation, the number of
Home Equity Loans in the Mortgage Pool, the
Original Pool Principal Balance, the
respective percentages of the Home Equity
Loans which are secured by first Mortgages,
second
8
<PAGE>
Mortgages and more junior Mortgages, the
minimum and maximum outstanding principal
balances of the Home Equity Loans, the
weighted average of the annual rates of
interest on the Home Equity Loans (each such
annual rate of interest hereinafter referred
to as the "Mortgage Interest Rate"), the
weighted average original term to maturity,
the weighted average remaining term to
maturity, the minimum and maximum remaining
terms to maturity and the range of origination
dates. If so specified in the related
Prospectus Supplement, such information may be
approximate, based on the expected Mortgage
Pool, in which case the final information, to
the extent of any variances, will be contained
in the Current Report on Form 8-K referred to
below. See "Description of the Mortgage
Pools--General" herein and "Description of the
Mortgage Pool" in the related Prospectus
Supplement.
A Current Report on Form 8-K will be available
to purchasers or underwriters of the related
Series of Certificates and will generally be
filed, together with the related primary
documents, with the Securities and Exchange
Commission within fifteen days after the
related Closing Date.
Optional Termination.......... The Master Servicer, the Seller or the holders
of the Class of Certificates specified in the
related Prospectus Supplement may cause the
Trust to sell all of the Home Equity Loans and
all Mortgaged Properties acquired by
foreclosure or deed in lieu of foreclosure
("REO Properties") when the Pool Principal
Balance declines to the percentage of the
Original Pool Principal Balance specified in
the related Prospectus Supplement, the
proceeds of which will be applied to retire
the related Certificates. See "Description of
the Certificates--Optional Disposition of Home
Equity Loans" herein.
Mandatory Termination......... If so specified in the related Prospectus
Supplement, the Trustee, the Master Servicer
or such other entities as may be specified in
such Prospectus Supplement, may be required to
effect early retirement of a Series of
Certificates by soliciting competitive bids
for the purchase of the assets of the related
Trust or otherwise, under the circumstances
and in the manner specified under "Description
of the Certificates--Mandatory Disposition of
Home Equity Loans" herein.
Yield and Prepayment
Considerations................ The yield on each Class of Certificates of a
Series will be affected by, among other
things, the rate of payment of principal
(including prepayments) on the Home Equity
Loans in the related Trust and the timing of
receipt of such payments. See "Certain Yield
and Prepayment Considerations" herein and in
9
<PAGE>
the related Prospectus Supplement. The
Prospectus Supplement for a Series may specify
certain yield calculations, based upon an
assumed rate or range of prepayment
assumptions on the related Home Equity Loans,
for Classes receiving disproportionate
allocations of principal and interest. A
higher level of principal prepayments on the
related Home Equity Loans than anticipated is
likely to have an adverse effect on the yield
of any Class of Certificates that is purchased
at a premium and a lower level of principal
prepayments on the related Home Equity Loans
than anticipated is likely to have an adverse
effect on the yield of any Class of
Certificates that is purchased at a discount
from its principal amount. It is possible
under certain circumstances that holders of
Certificates purchased at a premium (including
Certificates entitled to receive interest
only) could suffer a lower than anticipated
yield or could fail to recoup fully their
initial investment. See "Certain Yield and
Prepayment Considerations" herein and in the
related Prospectus Supplement.
Credit Enhancement............ If so specified in the related Prospectus
Supplement, credit enhancement may be provided
by any one or a combination of a letter of
credit, financial guaranty insurance policy,
mortgage pool insurance policy, special hazard
insurance policy, reserve fund, spread
account, cash collateral account,
overcollateralization or other type of credit
enhancement to provide full or partial
coverage for certain defaults and losses
relating to the underlying Home Equity Loans.
Credit support may also be provided by
subordination. The amount of any credit
enhancement may be limited or have exclusions
from coverage and may decline or be reduced
over time or under certain circumstances, all
as specified in the related Prospectus
Supplement. See "Description of the
Certificates--Description of Credit
Enhancement" herein.
Advances...................... If so specified in the related Prospectus
Supplement, on each Payment Date the Master
Servicer may be required to make advances
(each, an "Advance") to cover shortfalls in
the amount payable to Certificateholders
resulting from delinquent payments on the Home
Equity Loans that remain uncollected as of the
end of the preceding Remittance Period, to the
extent the Master Servicer believes that the
amount so advanced will be recoverable from
subsequent payments and collections in respect
of the related Home Equity Loan. However, no
Advances will be made if after giving effect
thereto the total amount of such Advances with
respect to a particular Home Equity Loan
outstanding at that time would exceed the
total amount of delinquent payments of
principal and interest on such Home Equity
Loan as of the preceding Record Date, plus the
total amount of Servicing Advances made during
the
10
<PAGE>
preceding Remittance Period with respect to
such Home Equity Loan. On each Payment Date,
the Master Servicer will be entitled to a
first priority reimbursement from amounts paid
by borrowers for previous Advances.
In addition, the related Prospectus Supplement
will specify whether the Servicer may advance
funds to satisfy or to keep current any Home
Equity Loans secured by senior liens, in order
to preserve the Trust's interest in such Home
Equity Loans, or to pay taxes, legal expenses
and attorney fees, insurance premiums and
similar expenses relating to a Home Equity
Loan, to the extent that the Master Servicer
believes that the amount so advanced will be
recoverable from subsequent payments and
collections on the related Home Equity Loan.
The Master Servicer will be entitled to a
first priority reimbursement from amounts paid
by borrowers for such previous advances. See
"Description of the Certificates--Advances;
Servicing Advances" herein.
Servicing Fee................. The Master Servicer will be entitled to receive
a fee for its servicing duties in the amount
specified in the related Prospectus Supplement
(the "Servicing Fee"), payable monthly from
payments and collections with respect to the
Home Equity Loans.
Ratings....................... At the date of issuance, as to each series,
each class of Certificates offered hereby will
be rated at the request of the Seller in one
of the four highest rating categories by one
or more nationally recognized statistical
rating agencies (each, a "Rating Agency"). See
"Ratings" in the related Prospectus
Supplement.
A security rating is not a recommendation to
buy, sell or hold securities and may be
subject to revision or withdrawal at any time.
No person is obligated to maintain any rating
on any Certificate and, accordingly, there can
be no assurance that the ratings assigned to
any Class of Certificates upon initial
issuance thereof will not be lowered or
withdrawn by a Rating Agency at any time
thereafter. If a rating of any Class of
Certificates of a Series is revised or
withdrawn, the liquidity of such Class of
Certificates may be adversely affected. In
general, the ratings address credit risk and
do not represent any assessment of the
likelihood or rate of principal prepayments.
See "Risk Factors Certificates Limited
Liquidity" and "Ratings" herein.
Certain Legal Aspects of the
Home Equity Loans............. The Home Equity Loans relating to a Series of
Certificates may be secured by second or more
junior Mortgages which are subordinate to one
or more mortgage liens on the related
Mortgaged Property prior to the lien of such
Home Equity
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Loan (such senior lien, if any, a "Senior
Lien"). A primary risk with respect to a
junior Mortgage is that funds received in
connection with a foreclosure will not be
sufficient to satisfy fully both the Senior
Lien and the junior Mortgage. See "Risk
Factors" and "Certain Legal Aspects of the
Home Equity Loans" herein.
Tax Status of the
Certificates.................. One or more elections will be made to treat the
Trust relating to a Series of Certificates or
one or more segregated pools of assets
comprising such a Trust as one or more "real
estate mortgage investment conduits" (each, a
"REMIC"). The Certificates will constitute
"regular interests" in a REMIC or "residual
interests" in a REMIC, as specified in the
related Prospectus Supplement. See "Certain
Federal Income Tax Consequences" herein and in
the related Prospectus Supplement.
ERISA Considerations.......... A fiduciary of any employee benefit plan or
other plan or arrangement subject to the
Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or Section 4975 of
the Internal Revenue Code of 1986, as amended
(the "Code") (a "Plan"), or any insurance
company (whether through its general or
separate accounts) or other person investing
"plan assets" of any Plan, should carefully
review with its legal advisors whether the
purchase or holding of any Class of
Certificates could give rise to a transaction
prohibited or not otherwise permissible under
ERISA or Section 4975 of the Code. Certain
Classes of Certificates may not be permitted
to be acquired by, on behalf of or with "plan
assets" of any Plan, as specified in the
related Prospectus Supplement. See "ERISA
Considerations" herein and in the related
Prospectus Supplement.
Legal Investment.............. Unless otherwise specified in the related
Prospectus Supplement, no Class of
Certificates will constitute "mortgage related
securities" under the Secondary Mortgage
Market Enhancement Act of 1984 because the
related Mortgage Pool will include Home Equity
Loans that are secured by second or more
junior mortgages. Investors should consult
their own legal advisers in determining
whether and to what extent the Certificates
constitute legal investments for such
investors. See "Legal Investment" herein and
in the related Prospectus Supplement.
Use of Proceeds............... The Seller will use the net proceeds received
from each sale of Certificates to purchase
Home Equity Loans from its affiliates. Such
affiliates will use such proceeds for general
corporate purposes.
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RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of Certificates:
RISKS OF THE HOME EQUITY LOANS
General Economic Conditions. General economic conditions have an impact on
the ability of borrowers to repay mortgage loans. Loss of earnings, illness
and other similar factors may lead to an increase in delinquencies and
bankruptcy filings by borrowers. In the event of personal bankruptcy of a
borrower under a Home Equity Loan (a "Mortgagor"), it is possible that the
holders of the related Certificates could experience a loss with respect to
such Mortgagor's Home Equity Loan. In conjunction with a Mortgagor's
bankruptcy, a bankruptcy court may suspend or reduce the payments of principal
and interest to be paid with respect to such Home Equity Loan, thus delaying
the amount received by the holders of the related Certificates with respect to
such Home Equity Loan. Moreover, if a bankruptcy court prevents the transfer
of the related Mortgaged Property to the related Trust, any remaining balance
on such Home Equity Loan may not be recoverable.
Real Estate Market Conditions. An investment in securities such as the
Certificates which are secured by or represent interests in mortgage loans may
be affected by, among other things, a decline in real estate values. No
assurance can be given that values of the Mortgaged Properties will remain at
the levels existing on the dates of origination of the related Home Equity
Loans. If the residential real estate market should experience an overall
decline in property values such that the outstanding balances of the Home
Equity Loans, together with loans secured by Senior Liens (defined below), if
any, on the Mortgaged Properties, become equal to or greater than the value of
the Mortgaged Properties, the actual rates of delinquencies, foreclosures and
losses could be higher than those now generally experienced in the mortgage
lending industry.
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 Home Equity
Loans relating to any Series of Certificates in such a region may present risk
considerations in addition to those generally present for similar mortgage-
backed securities without such concentration. See "Description of the Mortgage
Pool" in the related Prospectus Supplement for further information regarding
the geographic concentration of the Home Equity Loans underlying the
Certificates of any Series.
Junior Liens. The Home Equity Loans underlying the Certificates of a Series
may be secured by Mortgages junior or subordinate to one or more other
mortgages ("Senior Liens"), and the related Senior Liens may not be included
in the Mortgage Pool. The rate of default of second or more junior mortgage
loans may generally be expected to be greater than that of mortgage loans
secured by senior liens on comparable properties. A primary risk to holders of
Home Equity Loans secured by junior Mortgages is the possibility that adequate
funds will not be received in connection with a foreclosure of the related
Senior Lien to first satisfy fully the Senior Lien and then make any payment
in connection with the Home Equity Loan. A foreclosure sale by the holder of a
Senior Lien will extinguish the lien of the junior Mortgage and it is unlikely
that the holder of the junior Mortgage will receive any proceeds from such
foreclosure sale. Thus, in servicing junior Mortgages, the Master Servicer may
in certain circumstances desire to advance funds to keep the Senior Lien
current in the event the Mortgagor is in default thereunder in order to
forestall a foreclosure of the Senior Lien until after such time as the Master
Servicer is able to foreclose on the junior Mortgage (subject to the Senior
Lien). The related Prospectus Supplement will specify whether the Master
Servicer may advance such amounts. Unless such amounts are advanced by the
Master Servicer, the related Trust will have no source of funds to satisfy any
Senior Lien or make payments due to any senior mortgagee.
If the Master Servicer were to foreclose on any junior Home Equity Loan, it
would do so subject to any related Senior Lien. The amount received at any
such sale will therefore be reduced to reflect the fact that the
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interest in the property conveyed will be subject to the Senior Lien. If such
proceeds from a foreclosure or similar sale of the related Mortgaged Property
(subject to the Senior Lien) are insufficient to satisfy the Home Equity Loan,
the related Trust, as the holder of the junior Mortgage and, accordingly,
holders of the Certificates, would bear (i) the risk of delay in distributions
while a deficiency judgment against the Mortgagor is obtained and (ii) the
risk of loss if the deficiency judgment is not realized upon. Moreover,
deficiency judgments may not be available in certain jurisdictions. The junior
Mortgages securing the Home Equity Loans are subject and subordinate to any
Senior Liens affecting the related Mortgaged Property, including negative
amortization features that may increase the outstanding balance secured by a
Senior Lien and limitations and prohibitions which may be contained in such
Senior Liens upon subordinate financing.
Delays in Liquidating Defaulted Home Equity Loans or Property. Even assuming
that the Mortgaged Properties provide adequate security for the Home Equity
Loans underlying a Series of Certificates, substantial delays could be
encountered in connection with the liquidation of defaulted Home Equity Loans
and corresponding delays in the receipt of related proceeds by the related
Trust could occur. An action to foreclose on a Mortgaged Property securing a
Home Equity Loan is regulated by state statutes and rules and is subject to
many of the delays and expenses of other lawsuits if defenses or counterclaims
are interposed, sometimes requiring several years to complete. Some states
allow a nonjudicial foreclosure proceeding which may proceed more swiftly than
a judicial foreclosure action. However, in some states an action to obtain a
deficiency judgment is not permitted following a nonjudicial sale of a
Mortgaged Property. In the event of a default by a Mortgagor, these
restrictions, among other things, may impede the ability of the Master
Servicer to foreclose on or sell the Mortgaged Property or to obtain Net
Liquidation Proceeds sufficient to repay all amounts due on the related Home
Equity Loan. In addition, the Master Servicer will be entitled to deduct from
the amount of payments and collections received during the preceding
Remittance Period all expenses reasonably incurred in attempting to recover
amounts due and not yet repaid on Liquidated Home Equity Loans, including
payments to senior lienholders, legal fees and costs of legal action,
settlement costs, real estate taxes and maintenance and preservation expenses,
thereby reducing collections available to the related Trust. See "Certain
Legal Aspects of the Home Equity Loans--Foreclosure in General," and "--Rights
of Redemption" herein.
Likelihood of Disproportionate Liquidation Expenses. Some liquidation
expenses with respect to defaulted mortgage loans do not vary directly with
the outstanding principal balance of the loan at the time of default.
Therefore, assuming that the Master Servicer took the same steps in realizing
upon a defaulted mortgage loan having a small remaining principal balance as
it would in the case of a defaulted mortgage loan having a large remaining
principal balance, the amount realized after expenses of liquidation would be
smaller as a percentage of the outstanding principal balance of the small
mortgage loan than would be the case with the defaulted mortgage loan having a
large remaining principal balance. To the extent that the average outstanding
principal balance of the Home Equity Loans is small relative to the size of
the average outstanding principal balance of the loans in a pool consisting
only of conventional purchase-money mortgage loans, Net Liquidation Proceeds
on Liquidated Home Equity Loans may also be smaller as a percentage of the
principal balance of a Home Equity Loan than would be the case in a pool
consisting only of conventional purchase-money mortgage loans.
Risk of Early Defaults. Certain of the Home Equity Loans underlying a Series
of Certificates may be recently originated as of the date of inclusion in the
related Mortgage Pool. Defaults on mortgage loans may generally be expected to
occur with greater frequency in their early years.
Balloon Loans. Certain of the Home Equity Loans underlying a Series of
Certificates may provide for the payment of the unamortized principal balance
of the Home Equity Loan in a single payment at the maturity of the Home Equity
Loan that is significantly greater than the scheduled monthly payments
("Balloon Loans"). See "Description of the Mortgage Pools" herein and
"Description of the Mortgage Pool" in the related Prospectus Supplement.
Because borrowers under Balloon Loans are required to make a relatively large
payment upon maturity, it is possible that the default risk associated with
Balloon Loans is greater than that associated with fully-amortizing mortgage
loans. The ability of a Mortgagor on a Balloon Loan to repay the Home Equity
Loan upon maturity frequently depends upon, among other things, the borrower's
ability to refinance the Home Equity Loan, which will be affected by a number
of factors, including, without limitation, the level of mortgage
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rates available in the primary mortgage market at the time, the Mortgagor's
equity in the related Mortgaged Property, the financial condition of the
Mortgagor, the condition of the Mortgaged Property, tax law, general economic
conditions and the general willingness of financial institutions to extend
credit.
Although a low interest rate environment may facilitate the refinancing of a
balloon payment, the receipt and reinvestment by holders of the Certificates
of the proceeds in such an environment may produce a lower return than that
previously received in respect of the related Home Equity Loan. Conversely, a
high interest rate environment may make it more difficult for the Mortgagor to
accomplish a refinancing and may result in delinquencies or defaults.
Certain Home Equity Loans. Certain of the Home Equity Loans underlying a
Series of Certificates may be delinquent for a period not exceeding 59 days,
as specified in the related Prospectus Supplement. Such Home Equity Loans may
be subject to a greater risk of default. See "Description of the Mortgage
Pools" herein and "Description of the Mortgage Pool" in the related Prospectus
Supplement.
Legal and Regulatory Considerations. Applicable state laws generally
regulate interest rates and other charges, require certain disclosures and,
unless an exemption is available, require licensing of the originators of home
equity loans. In addition, most states have other laws, public policy and
general principles of equity relating to the protection of consumers, unfair
and deceptive practices and practices which may apply to the origination,
servicing and collection of the Home Equity Loans. Depending on the provisions
of the applicable law and the specific facts and circumstances involved, these
laws, policies and principles may limit the ability of the Master Servicer to
collect all or part of the principal of or interest on the Home Equity Loans,
may entitle the borrower to a refund of amounts previously paid and, in
addition, could subject the Master Servicer to damages and administrative
sanctions. See "Certain Legal Aspects of the Home Equity Loans" herein.
The Home Equity 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 Mortgagors regarding the terms of the Home
Equity Loans; (ii) 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, in the extension of credit; (iii) the Fair Credit Reporting Act, which
regulates the use and reporting of information related to the Mortgagor's
credit experience; and (iv) certain other laws and regulations.
Under environmental legislation and case law applicable in certain states,
it is possible that liability for environmental hazards in respect of real
property may be imposed on a holder of a mortgage note (such as the Trust)
secured by real property. See "Certain Legal Aspects of the Home Equity
Loans--Environmental Legislation" herein.
LIMITED OPERATING HISTORY OF TRANSAMERICA MORTGAGE COMPANY
Transamerica Mortgage Company commenced originating and servicing mortgage
loans in June 1996 as part of TFC's strategy to build a centralized real
estate-secured lending operation. Accordingly, Transamerica Mortgage Company
has a limited operating history, and no relevant delinquency or loss
experience data is available.
CERTIFICATES
Limited Liquidity. There is no assurance that a secondary market for any of
the Certificates will develop or, if one does develop, that it will provide
the holders with liquidity of investment or that it will continue for the life
of such Certificates. None of the Certificates will be listed on any
securities exchange.
Issuance of any of the Certificates in book-entry form may reduce the
liquidity of such Certificates in the secondary trading market because
investors may be unwilling to purchase Certificates for which they cannot
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obtain physical certificates. See "Description of the Certificates--
Registration and Transfer of the Certificates" herein.
Limited Obligations. No Class of Certificates of any Series will represent
an interest in or obligation of the Seller, the Master Servicer or any of
their affiliates. The only obligations of the foregoing entities with respect
to any of the Certificates or the related Home Equity Loans will be the Master
Servicer's servicing obligations under the Pooling and Servicing Agreement and
the obligations of the Seller to purchase, or substitute substantially similar
mortgage loans for any Home Equity Loans as to which there is defective
documentation or a breach of certain representations and warranties in the
Pooling and Servicing Agreement. Except as expressly set forth in the related
Prospectus Supplement, neither the Certificates nor the underlying Home Equity
Loans will be guaranteed or insured by any governmental agency or
instrumentality, or by the Seller, the Master Servicer or any of their
affiliates.
ERISA Considerations. An investment in a Class of Certificates of any Series
by Plans may give rise to a prohibited transaction under Section 406 of ERISA
and/or be subject to tax under Section 4975 of the Code unless a statutory or
administrative exemption is available. Accordingly, fiduciaries of any
employee benefit plan or other plan or arrangement subject to ERISA or Section
4975 of the Code (a "Plan") or any insurance company (whether through its
general or separate accounts) or other person investing "plan assets" of any
Plan, should consult their counsel before purchasing any Class of
Certificates. Certain Classes of Certificates will not be eligible for
purchase by, on behalf of or with "plan assets" of Plans. See "ERISA
Considerations" herein and in the related Prospectus Supplement.
Limitations, Reduction and Substitution of Credit Enhancement. Credit
enhancement may be provided with respect to one or more Classes of
Certificates of a Series to cover certain types of losses on the underlying
Home Equity Loans. Credit enhancement may be provided by one or more forms,
including but not limited to subordination of one or more Classes of
Certificates of such Series, letter of credit, financial guaranty insurance
policy, mortgage pool insurance policy, special hazard insurance policy,
reserve fund, spread account, cash collateral account, overcollateralization
or other type of credit enhancement. The coverage of any credit enhancement
may be limited or have exclusions from coverage and may decline over time or
under certain circumstances, all as specified in the related Prospectus
Supplement. See "Description of the Certificates-- Description of Credit
Enhancement" herein.
CREDITORS' RIGHTS AND BANKRUPTCY CONSIDERATIONS
Creditors' Rights Considerations. During the period that the related
Certificates are outstanding and so long as the ratings of the long-term
senior unsecured debt of TFC satisfy the ratings requirements specified in the
related Prospectus Supplement, assignments of the related Mortgages from the
entities that will sell Home Equity Loans to the Seller (collectively, the
"Prior Owners") to the Seller and from the Seller to the Trustee will not be
required to be recorded. The failure to record assignments of the Mortgages to
the Seller and to the Trustee in some states in which the Mortgaged Properties
are located may have the result of making the sale thereof potentially
ineffective against (i) creditors of a Prior Owner or the Seller, (ii) a
purchaser to whom a Prior Owner or the Seller fraudulently, negligently, or
inadvertently sells a Home Equity Loan, or (iii) any bankruptcy trustee or
similar official appointed for a Prior Owner or the Seller.
If TFC's long-term senior unsecured debt rating does not satisfy the ratings
requirements specified in the related Prospectus Supplement, assignments of
the Mortgages in favor of the Seller and the Trustee will be required to be
recorded (or opinions of counsel acceptable to the Rating Agencies will be
obtained to the effect that recording is not required to protect the Trust's
interest in and to the related Home Equity Loan). See "Description of the
Certificates--Assignment of the Home Equity Loans" herein.
Bankruptcy Related Matters. The transactions described herein and by the
related Prospectus Supplement will be structured such that the Seller is
unlikely to become the debtor in a case under the United States Bankruptcy
Code and so that, even if such a filing should occur, it should not result in
consolidation of the assets
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and liabilities of the Seller with those of the Prior Owners. These steps
include the creation of the Seller as a separate, limited purpose corporation,
the certificate of incorporation of which contains limitations on the nature
of its business and restrictions on the ability of the Seller to commence
voluntary or involuntary cases or proceedings under the Bankruptcy Code
without the prior unanimous affirmative vote of all its directors. The Seller
does not and will not engage in any activities other than the transactions
described herein and other similar transactions and activities incidental to,
or necessary or convenient to accomplish the foregoing. Each of the Seller and
the Prior Owners has no current intention of filing a voluntary petition under
the Bankruptcy Code. No assurance can be given, however, that the Seller or a
Prior Owner will not become a debtor in a case under the Bankruptcy Code, or
that the activities of the Seller would not result in a court concluding that
the assets and liabilities of the Seller should be consolidated with those of
the Prior Owners.
The Prior Owners will represent and warrant that the transfer of the Home
Equity Loans to the Seller will constitute a sale by each of the Prior Owners
to the Seller, and that the Prior Owners have taken and will take all actions
that are required to perfect the Seller's ownership interests in the Home
Equity Loans. Accordingly, it is intended that such Home Equity Loans will not
be part of the bankruptcy estate of any Prior Owner, and will not be available
to the creditors of any Prior Owner. However, in the event of the bankruptcy
of any Prior Owner, it is possible that such Prior Owner, a bankruptcy trustee
for such Prior Owner or a creditor of such Prior Owner may attempt to
recharacterize the transaction between the Prior Owner and the Seller as a
pledge of the Home Equity Loans in connection with a borrowing by such Prior
Owner rather than a true sale. This position, if asserted, could prevent
timely payments of amounts due on the related Certificates. If such an attempt
were successful, reductions in distributions of principal and interest on such
Certificates could result, or such a trustee in bankruptcy could elect to
accelerate payment of the obligation to the Seller and liquidate the Home
Equity Loans.
Furthermore, for so long as the ratings of the long-term senior unsecured
debt of TFC satisfy the ratings requirements specified in the related
Prospectus Supplement, the Master Servicer is entitled to commingle with its
own funds payments made with respect to the Home Equity Loans until the
relevant Payment Date. In the event of a bankruptcy by the Master Servicer,
the Trustee will likely not have a perfected interest in such payments and the
inclusion thereof in the bankruptcy estate of the Master Servicer may result
in delays in payment and failure to pay amounts due on the Certificates.
YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of each Class of Certificates of a Series will depend
on the rate and timing of payment of principal on the related Home Equity
Loans, including prepayments, liquidations due to defaults and repurchases due
to defective documentation or breaches of representations and warranties. Such
yield may be adversely affected by a higher or lower than anticipated rate of
prepayments on the Home Equity Loans. Prepayments are influenced by a number
of factors, including prevailing mortgage market interest rates, local and
regional economic conditions and homeowner mobility. The yield to maturity of
certain Classes of Certificates identified in the related Prospectus
Supplement may be particularly sensitive to the rate and timing of principal
payments (including prepayments, liquidations and repurchases) of the related
Home Equity Loans, which may fluctuate significantly from time to time.
Investors in a Class of Certificates offered at a discount from the principal
amount thereof or with no stated principal amount should fully consider the
associated risks, including the risk that an extremely rapid rate of principal
payments could result in the failure of such investors to recoup their initial
investments. See "Certain Yield and Prepayment Considerations" herein and in
the related Prospectus Supplement.
ORIGINAL ISSUE DISCOUNT
Certain Classes of Certificates of a Series may be treated as having been
issued with original issue discount for federal income tax purposes. As a
result, holders of such Certificates will be required to include amounts in
income without the receipt of cash corresponding to that income. See "Certain
Federal Income Tax Consequences--Original Issue Discount" herein and, if
applicable, in the related Prospectus Supplement.
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DESCRIPTION OF THE MORTGAGE POOLS
GENERAL
Each Mortgage Pool will consist of Home Equity Loans having the aggregate
principal balance outstanding as of the related Cut-off Date, after giving
effect to payments due or received prior to such date, specified in the
related Prospectus Supplement (the "Original Pool Principal Balance"). Unless
otherwise specified in the related Prospectus Supplement, each Mortgage Pool
will consist of fixed or adjustable rate Home Equity Loans (including both
fully amortizing Home Equity Loans and Balloon Loans) originated and
underwritten by or acquired by Transamerica Mortgage Company, Metropolitan
Mortgage Company or certain of their affiliates. This subsection describes
generally certain characteristics of the Home Equity Loans.
Each Home Equity Loan will be selected by the Seller for inclusion in a
Mortgage Pool from among those originated or acquired by Transamerica Mortgage
Company, Metropolitan Mortgage Company and their affiliates. If a Mortgage
Pool includes Home Equity Loans originated by entities other than Transamerica
Mortgage Company, Metropolitan Mortgage Company or any of their affiliates,
the related Prospectus Supplement will specify the extent of Home Equity Loans
so acquired. The characteristics of the Home Equity Loans are as described in
the related Prospectus Supplement. Other mortgage loans available for purchase
by the Seller may have characteristics that would make them eligible for
inclusion in a Mortgage Pool but were not selected for inclusion in such
Mortgage Pool.
The related Prospectus Supplement will describe certain characteristics of
the related Home Equity Loans, including without limitation (i) the range of
dates of origination and the latest scheduled maturity date, (ii) the minimum
remaining term to maturity, the weighted average original term to maturity and
the weighted average remaining term to maturity, (iii) the range of Mortgage
Interest Rates and the weighted average Mortgage Interest Rate, (iv) the range
of principal balances outstanding, the range of original principal balances
and the weighted average outstanding principal balance, (v) the percentages of
Home Equity Loans secured by first Mortgages, second Mortgages and more junior
Mortgages, respectively, (vi) the maximum Combined Loan-to-Value Ratio at
origination (defined below), the weighted average Combined Loan-to-Value
Ratio, the maximum Home Equity Loan Ratio (defined below) at origination and
the weighted average Home Equity Loan Ratio, (vii) the percentage of Home
Equity Loans secured by fee simple interests in single-family dwelling units,
attached or detached two- to four-family dwelling units, units in planned unit
developments, condominiums or cooperatives, and manufactured or mobile homes,
respectively, and the percentage of Home Equity Loans secured by units in
cooperatives, (viii) the percentage of Home Equity Loans as to which the
related Mortgagor represented at the time of origination that the related
Mortgaged Property would be occupied by such Mortgagor as a primary or
secondary residence, (ix) certain summary information relating to the
geographic concentration of the Mortgaged Properties securing the Home Equity
Loans, (x) the percentage of Home Equity Loans that are Balloon Loans and the
dates after origination the balloon payment is due, (xi) the percentage of
Home Equity Loans that are 0-29 days and 30-59 days contractually delinquent.
If so specified in the related Prospectus Supplement, the characteristics of
the Home Equity Loans described in items (v) through (ix) above, inclusive,
may be based on a random sample of Home Equity Loans included in the related
initial Mortgage Pool (a "Sample Pool"). No assurance can be given, however,
that the characteristics of a Sample Pool are representative of the
characteristics of the initial Mortgage Pool. In addition, if so specified in
the related Prospectus Supplement, such information may be approximate based
on the expected characteristics of the Home Equity Loans to be included in the
related Mortgage Pool and any significant variations therefrom provided on the
related Current Report on Form 8-K, as described below.
For purposes of the foregoing, the "Combined Loan-to-Value Ratio" of any
Home Equity Loan is the ratio (expressed as a percentage) of (i) the sum of
(a) the original principal balance of such Home Equity Loan at the date of
origination (which, unless otherwise specified in the related Prospectus
Supplement, includes certain financed fees) plus (b) the outstanding balance
of the Senior Lien, if any, at such time divided by the value of the related
Mortgaged Property, based upon the appraisal or other valuation, such as a
real estate broker's price opinion, made at the time of origination of the
Home Equity Loan or not less than 12 months prior to the time of
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origination of the Home Equity Loan. See "The Consumer Mortgage Loan Program--
Credit Policy and Procedures Relating to Consumer Mortgage Loans" herein. The
"Home Equity Loan Ratio" of any Home Equity Loan is the ratio (expressed as a
percentage) of (i) the original principal balance of such Home Equity Loan
divided by (ii) the lesser of (a) the value of the related Mortgaged Property,
based upon the appraisal, if any, or other valuation made at the time of
origination of the Home Equity Loan and (b) the purchase price of the
Mortgaged Property if the Home Equity Loan proceeds were used to purchase the
Mortgaged Property. For Home Equity Loans secured by a first Mortgage, the
Combined Loan-to-Value Ratio and the Home Equity Loan Ratio will be the same.
In addition, the related Prospectus Supplement or, if so specified therein,
the Current Report on Form 8-K to be filed within fifteen days after the
delivery of a Series of Certificates, will set forth in tabular form certain
more detailed information relating to the characteristics of the related Home
Equity Loans by number and outstanding principal balance and by percentage of
the Mortgage Pool including, without limitation, the outstanding principal
balances of the Home Equity Loans, the geographic distribution of the related
Mortgaged Properties (by state), the Combined Loan-to-Value Ratios, the Home
Equity Loan Ratios, the Mortgage Interest Rates, the remaining months to
stated maturity and the number of months since origination, in each case
(except for geographic distribution) within the ranges specified therein. If
so specified in the related Prospectus Supplement, some or all of this
information may be based on a Sample Pool.
PAYMENTS ON THE HOME EQUITY LOANS
The related Prospectus Supplement will specify the percentage of Home Equity
Loans underlying a Series of Certificates that provide for (a) payments that
are allocated to principal and interest according to the daily simple interest
method (a "Simple Interest Loan"), (b) payments in level monthly installments
(except, in the case of Balloon Loans, the final payment) consisting of
interest equal to one-twelfth of the applicable Mortgage Interest Rate times
the unpaid principal balance, with the remainder of such payment applied to
principal (an "Actuarial Loan") and (c) adjustable Mortgage Interest Rates
("ARM Loans").
A Simple Interest Loan provides for the amortization of the amount financed
under the Home Equity Loan over a series of equal monthly payments (except, in
the case of a Balloon Loan, the final payment). Each monthly payment consists
of an installment of interest which is calculated on the basis of the
outstanding principal balance of the Home Equity Loan multiplied by the stated
Mortgage Interest Rate and further multiplied by a fraction, the numerator of
which is the number of days in the period elapsed since the preceding payment
of interest was made and the denominator of which is the number of days in the
annual period for which interest accrues on such Home Equity Loan. As payments
are received under a Simple Interest Loan, the amount received is applied
first to interest accrued to the date of payment and the balance is applied to
reduce the unpaid principal balance. Accordingly, if a borrower pays a fixed
monthly installment on a Simple Interest Loan before its scheduled due date,
the portion of the payment allocable to interest for the period since the
preceding payment was made will be less than it would have been had the
payment been made as scheduled, and the portion of the payment applied to
reduce the unpaid principal balance will be correspondingly greater. However,
the next succeeding payment will result in an allocation of a greater amount
to interest if such payment is made on its scheduled due date.
Conversely, if a borrower pays a fixed monthly installment after its
scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be greater than it would have
been had the payment been made as scheduled, and the remaining portion, if
any, of the payment applied to reduce the unpaid principal balance will be
correspondingly less. If each scheduled payment under a Simple Interest Loan
is made on or prior to its scheduled due date, the principal balance of the
Home Equity Loan will amortize in the manner described in the preceding
paragraph. However, if the borrower consistently makes scheduled payments
after the scheduled due date the Home Equity Loan will amortize more slowly
than scheduled. If a Simple Interest Loan is prepaid, the borrower is required
to pay interest only to the date of prepayment.
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ARM Loans generally will provide for a fixed initial Mortgage Interest Rate
until the first date on which such Mortgage Interest Rate is to be adjusted.
Thereafter, the Mortgage Interest Rate is subject to periodic adjustment as
described in the related Prospectus Supplement based on changes in the
relevant index (the "Index") described in the applicable Prospectus
Supplement, to a rate equal to the Index plus a fixed percentage spread over
the Index established contractually for each ARM Loan at the time of its
origination (the "Gross Margin"). The initial Mortgage Interest Rate on an ARM
Loan may be lower than the sum of the then-applicable Index and the Gross
Margin for such ARM Loan.
ARM Loans have features that provide investment considerations different
from those for fixed rate loans. In particular, adjustable interest rates can
cause payment increases that may exceed some Mortgagors' capacity to cover
such payments. However, to the extent specified in the related Prospectus
Supplement, an ARM Loan may provide that its Mortgage Interest Rate may not be
adjusted to a rate above the applicable maximum Mortgage Interest Rate (the
"Maximum Mortgage Rate") or below the applicable minimum Mortgage Interest
Rate (the "Minimum Mortgage Rate"), if any, for such ARM Loan. In addition, to
the extent specified in the related Prospectus Supplement, certain of the ARM
Loans may provide for limitations on the maximum amount by which their
interest rates may adjust for any single adjustment period (the "Periodic
Cap"). Some ARM Loans provide for limitations on the amount of scheduled
payments of principal and interest.
Certain ARM Loans may be subject to negative amortization from time to time
prior to their maturity (such ARM Loans, "Neg-Am ARM Loans"). Such negative
amortization may result from either the adjustment of the Mortgage Interest
Rate on a more frequent basis than the adjustment of the scheduled payment or
the application of a cap on the size of the scheduled payment. In the first
case, negative amortization results if an increase in the Mortgage Interest
Rate occurs prior to an adjustment of the scheduled payment on the related
Home Equity Loan and such increase causes accrued monthly interest on the Home
Equity Loan to exceed the scheduled payment. In the second case, negative
amortization results if an increase in the Mortgage Interest Rate causes
accrued monthly interest on a Home Equity Loan to exceed the limit on the size
of the scheduled payment on such Home Equity Loan. In the event that the
scheduled payment is not sufficient to pay the accrued monthly interest on a
Neg-Am ARM Loan, the amount of accrued monthly interest that exceeds the
scheduled payment on such Home Equity Loans (the "Deferred Interest") is added
to the principal balance of such ARM Loan and is to be repaid from future
scheduled payments. Neg-Am ARM Loans do not provide for the extension of their
original stated maturity to accommodate changes in their Mortgage Interest
Rates. The related Prospectus Supplement will specify whether the ARM Loans
underlying a series are Neg-Am ARM Loans.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
The rate of principal payments on each Class of Certificates of a Series
entitled to principal, the aggregate amount of each interest payment on each
Class of Certificates of a Series entitled to interest and the yield to
maturity of each Class of Certificates of a Series will be related to the rate
and timing of payments of principal on the related Home Equity Loans, which
may be in the form of scheduled and unscheduled payments. The rate of
prepayment on a pool of mortgage loans is affected by prevailing market rates
for mortgage loans of a comparable term and risk level. In general, when the
level of prevailing interest rates for similar loans significantly declines,
the rate of prepayment is likely to increase, although the prepayment rate is
influenced by a number of other factors, including general economic conditions
and homeowner mobility. Defaults on mortgage loans may generally be expected
to occur with greater frequency in their early years. The rate of default on
second or more junior mortgage loans may be greater than that of mortgage
loans secured by first liens on comparable properties. Prepayments,
liquidations and purchases of the Home Equity Loans will result in
distributions to the holders of amounts of principal which would otherwise be
distributed over the remaining terms of the Home Equity Loans.
In addition, unless otherwise specified in the related Prospectus
Supplement, the Master Servicer, the Seller or the holders of the Class of
Certificates of any Series specified in the related Prospectus Supplement may,
at
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their option, cause the related Trust to sell all of the outstanding Home
Equity Loans and REO Properties underlying the related Series of Certificates,
and thus effect the early retirement of the related Certificates, after the
date on which the Pool Principal Balance (as defined herein) is less than the
percentage of the Original Pool Principal Balance specified in the related
Prospectus Supplement. See "Description of the Certificates--Optional
Disposition of Home Equity Loans" herein. Further, if so specified in the
related Prospectus Supplement, the Master Servicer or such other entities as
may be specified in such Prospectus Supplement may be required to effect early
retirement of a Series of Certificates by soliciting competitive bids for the
purchase of the assets of the related Trust or otherwise. See "Description of
the Certificates--Mandatory Disposition of Home Equity Loans" herein.
As described above, the rate of prepayment on a pool of mortgage loans is
affected by prevailing market rates for comparable mortgage loans. When the
market interest rate is below the mortgage coupon, mortgagors may have an
increased incentive to refinance their mortgage loans. Depending on prevailing
market rates, the future outlook for market rates and economic conditions
generally, some mortgagors may sell or refinance mortgaged properties in order
to realize their equity in the mortgaged properties, to meet cash flow needs
or to make other investments. No representation is made as to the particular
factors that will affect the prepayment of the Home Equity Loans underlying
any Series of Certificates, as to the relative importance of such factors, as
to the percentage of the principal balance of the Home Equity Loans that will
be paid as of any date or as to the overall rate of prepayment on the related
Home Equity Loans.
The yield to maturity of certain Classes of Certificates of a Series may be
particularly sensitive to the rate and timing of principal payments (including
prepayments) of the Home Equity Loans, which may fluctuate significantly from
time to time. The Prospectus Supplement relating to such Certificates will
provide certain additional information with respect to the effect of such
payments on the yield to maturity of such Certificates under varying rates of
prepayment, including the rate of prepayment, if any, which would reduce the
holder's yield to zero.
Greater than anticipated prepayments of principal will increase the yield on
Certificates purchased at a price less than par. Conversely, greater than
anticipated prepayments of principal will decrease the yield on Certificates
purchased at a price greater than par. The effect on an investor's yield due
to principal prepayments on the Home Equity Loans occurring at a rate that is
faster (or slower) than the rate anticipated by the investor in the period
immediately following the issuance of the Certificates will not be entirely
offset by a subsequent like reduction (or increase) in the rate of principal
payments. The weighted average life of each Class of Certificates of a Series
will also be affected by the amount and timing of delinquencies and defaults
on the related Home Equity Loans and the recoveries, if any, on defaulted Home
Equity Loans and foreclosed properties in the related Mortgage Pool.
The "weighted average life" of a Certificate refers to the average amount of
time that will elapse from the date of issuance to the date each dollar in
respect of principal of such Certificate is repaid. The weighted average life
of each Class of Certificates of a Series will be influenced by, among other
factors, the rate at which principal payments are made on the Home Equity
Loans, including final payments made upon the maturity of Balloon Loans.
THE TRUSTS
Each Trust will be formed under a Pooling and Servicing Agreement (a
"Pooling and Servicing Agreement") among the Seller, the Master Servicer and
the Trustee named therein (a "Trustee"). The property of each Trust will
include: (i) the related Home Equity Loans as from time to time are subject to
the related Pooling and Servicing Agreement and all proceeds thereof, (ii)
such assets as from time to time are identified as REO Property or are
deposited in the Collection Account (defined herein) or other accounts
established under any of the documents governing the Trust or the related
Certificates, including amounts on deposit in such accounts and invested in
Permitted Instruments, (iii) the Trustee's rights under all insurance policies
with respect
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to the Home Equity Loans required to be maintained pursuant to the Pooling and
Servicing Agreement and any Insurance Proceeds, (iv) Liquidation Proceeds and
(v) Released Mortgaged Property Proceeds.
The Master Servicer will service the Home Equity Loans either directly or
through Subservicers in accordance with the Pooling and Servicing Agreement
and generally in accordance with the first and second mortgage loan servicing
standards and procedures accepted by prudent mortgage lending institutions.
See "The Consumer Mortgage Loan Program--Servicing of Consumer Mortgage Loans"
and "Description of the Certificates--Servicing Standards" and "--Use of
Subservicers" below for a further description of the Master Servicer's
servicing procedures and provisions of the Pooling and Servicing Agreement
relating to servicing standards and the use of Subservicers.
TRANSAMERICA FINANCE CORPORATION
Transamerica Finance Corporation ("TFC") was incorporated in Delaware in
1931 and is a wholly owned subsidiary of Transamerica Corporation, a Delaware
corporation ("Transamerica"). TFC borrows money in wholesale markets and,
through its subsidiaries, provides a wide range of consumer and commercial
financing, including leasing, to individuals and businesses primarily in the
United States, Canada and Europe. Transamerica is a Delaware corporation with
approximately $49 billion in assets which, through its subsidiaries, engages
primarily in the finance and insurance business. TFC's principal executive
offices are located at 600 Montgomery Street, San Francisco, California, and
its telephone number is (415) 983-4000.
THE MASTER SERVICER AND ITS AFFILIATES
Transamerica Mortgage Company, Metropolitan Mortgage Company and their
consumer lending affiliates, which are all wholly owned indirect subsidiaries
of TFC, originate mortgage loans secured by residential dwellings, purchase
such loans on a wholesale basis from other lenders and service such loans.
Transamerica Mortgage Company was incorporated in Delaware in 1996 as part of
TFC's strategy to build a centralized real estate-secured lending operation.
Transamerica Mortgage Company generates its loans through independent loan
brokers. Its underwriting and servicing operations are located in Dallas,
Texas. Metropolitan Mortgage Company was incorporated in Florida in 1953 and
was acquired by TFC in March 1997. Metropolitan Mortgage Company's
underwriting and servicing operations are located in Miami, Florida.
Transamerica's consumer lending business is also conducted through
Transamerica Home Loan. Transamerica Home Loan was incorporated in California
in 1992 and was previously in the business of originating and servicing
unsecured loans to professionals. Transamerica Home Loan commenced servicing
and originating mortgage loans in June 1997, following the sale in June 1997
of Transamerica's former consumer lending business, Transamerica Financial
Services Holding Company. Transamerica Home Loan's loan underwriting and
servicing operations are located in Lenexa, Kansas.
In the event that Transamerica Mortgage Company is to act as Master Servicer
with respect to a Series, both Transamerica Home Loan and Metropolitan
Mortgage Company will subservice the Home Equity Loans they have originated or
acquired with respect to any such Series.
Transamerica is also establishing a federal savings bank, Transamerica
Federal Savings Bank ("Transamerica FSB"), to originate mortgage loans.
Transamerica may establish other affiliates from time to time to originate and
service mortgage loans. Such other affiliates, if any, will be described in
the related Prospectus Supplement.
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THE SELLER
Transamerica Consumer Mortgage Receivables Corporation (the "Seller") was
incorporated in December 1995 in the State of Delaware, with the special
purpose of acquiring mortgage loans and selling them to the Trusts.
Transamerica Consumer Finance Holding Company, a Delaware corporation and
wholly owned subsidiary of TFC, owns all of the outstanding capital stock of
the Seller. The Seller's executive office is located at 1150 South Olive
Street, Suite 2800, Los Angeles, California 90015 and its telephone number is
(213) 742-4865.
The Seller's charter limits the Seller's purpose to acquiring and selling
mortgage loans, acting as grantor of one or more trusts consisting primarily
of mortgage loans and other liens on and interests in real estate and related
activities incidental to and necessary to accomplish such activities.
In addition, the Seller's charter provides that the Seller will not, without
the consent of the Rating Agencies, undertake certain significant actions such
as liquidating or filing a bankruptcy petition. Furthermore, the related
Pooling and Servicing Agreement will require the Seller to obtain the approval
of the Rating Agencies prior to amending certain provisions in the Seller's
charter.
The Seller has no intent to file, and Transamerica Consumer Finance Holding
Company and TFC have advised the Seller that they have no intent to cause the
filing of, a voluntary petition for relief under the Bankruptcy Code with
respect to the Seller.
THE CONSUMER MORTGAGE LOAN PROGRAM
The following is a general discussion of the lending practices of
Transamerica Mortgage Company and its consumer lending affiliates
(collectively, "TMC"). If a Mortgage Pool includes Home Equity Loans that have
been originated under lending practices that vary materially from those
described below, the related Prospectus Supplement will describe such other
lending practices. In particular, the underwriting criteria applied by the
originators of Home Equity Loans included in a Mortgage Pool may vary
significantly. The related Prospectus Supplement will describe generally
certain aspects of the underwriting criteria, to the extent known by the
Company, that were applied by the originators of such Home Equity Loans. TMC's
portfolio of mortgage loans are secured by first, second and third mortgages
on residential dwellings. Such loans are referred to herein as the "Consumer
Mortgage Loans."
LENDING
Consumer Mortgage Loans are originated under several lending programs.
Potential borrowers may be identified based on a variety of factors and a
database of such borrowers is maintained. Potential borrowers may be contacted
by mail or by sales representatives based in sales offices located in key
metropolitan areas. In addition, borrowers contact TMC themselves in response
to media advertising.
Consumer Mortgage Loans are also originated under a correspondent program
with unaffiliated licensed mortgage lenders or other financial institutions.
Under this program, participating lenders identify borrowers who do not meet
such lenders' underwriting criteria but may qualify for a loan from TMC. When
such a borrower is identified, the lender may refer the borrower to TMC or may
complete the underwriting and documentation of a loan in conformance with
underwriting and documentation requirements specified by TMC. TMC will either
fund or purchase such a loan after TMC has re-underwritten the loan and
reviewed the documentation.
Consumer Mortgage Loans may also be originated by independent loan brokers
located throughout the United States who underwrite and document loans in
conformance with underwriting and documentation requirements specified by TMC.
These loans are underwritten again by TMC prior to their purchase by TMC.
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In the State of Florida, Consumer Mortgage Loans are marketed through retail
branch offices and through television and radio advertising.
TMC may also acquire Consumer Mortgage Loans through acquisitions of
businesses or bulk purchases of such loans from unaffiliated financial
institutions. If a Mortgage Pool includes Home Equity Loans originated by
entities other than TMC, the related Prospectus Supplement will specify the
extent of Home Equity Loans so acquired.
CREDIT POLICY AND PROCEDURES RELATING TO CONSUMER MORTGAGE LOANS
Underwriting standards utilized by TMC are less stringent than those used by
conventional mortgage loan lenders or purchase programs such as those
administered by FHLMC or FNMA. For example, Consumer Mortgage Loans are made
to borrowers who have a wide range of experiences in their recent credit
histories, including bankruptcy, or whose ratio of total monthly credit
payments may be 50% or more of income. In addition, the loan-to-value ratio of
a Consumer Mortgage Loan may exceed 80% without the benefit of private
mortgage insurance. The applicable Prospectus Supplement will specify the
number and principal amount of Home Equity Loans with loan-to-value ratios in
excess of 80% and, if available, the number and principal amount of Home
Equity Loans whose borrowers have been subject to bankruptcy proceedings. In
addition, if so specified in the related Prospectus Supplement, Home Equity
Loans included in a Mortgage Pool may have been originated in connection with
a governmental program under which underwriting standards were designed to
promote home ownership, such as loans partially guaranteed by the Veterans
Administration ("VA Loans") or insured by the Federal Housing Administration
("FHA Loans").
Unless a potential borrower qualifies for a "no documentation," "limited
documentation" or "limited income verification" loan described below,
potential borrowers generally complete an application designed to provide
pertinent information concerning assets, liabilities, income, credit history,
employment history and personal information. They also authorize TMC to obtain
credit reports from credit repositories, verification of deposits in financial
institutions, verification of employment from employers, and verification of
mortgage payment history from prior real estate lenders. Borrowers are
required to have sufficient credit history established to allow reliable
evaluation.
In order to arrive at a lending decision, TMC generally evaluates the
creditworthiness of the borrower, the sufficiency of projected income to total
fixed obligations, the adequacy of the property to serve as collateral and
economic conditions in the metropolitan area in which the property is located.
Income sufficiency on adjustable rate loans is underwritten at no less than 1%
below fully indexed rates. A title insurance policy sufficient to cover the
Consumer Mortgage Loan and payable to TMC is required along with properly
endorsed property casualty insurance.
In determining the value of the related Mortgaged Property, TMC relies on
written appraisal reports prepared by impartial state licensed or certified
residential property appraisers or, if so specified in the related Prospectus
Supplement, other acceptable valuation methods described in the Prospectus
Supplement such as a real estate broker's price opinion or an appraisal
prepared by a staff appraiser.
TMC's experience indicates that the presence of an individual high-risk loan
attribute historically generally does not result in an unacceptable level of
loan losses. However, when multiple high risk attributes are exhibited in the
same loan without sufficient compensating factors (commonly referred to as
"layering" of risk factors or "layered risks"), their cumulative effect
dramatically increases the observed loan losses. Thus, TMC generally bases
credit decisions on the existence of multiple risk attributes on the same loan
which combine to produce unacceptable levels of credit risk.
If so specified in the related Prospectus Supplement, certain Home Equity
Loans may have been originated under "limited documentation," "no
documentation" or "limited income verification" programs which generally
require less documentation and verification than do traditional "full
documentation" programs. Under
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such a program, underwriting may be based primarily or entirely on an
appraisal or other valuation of the Mortgaged Property and the Loan-to-Value
Ratio at origination, and minimal or no investigation is undertaken as to a
borrower's credit history and income profile. Loans may be originated under
these programs at lower Loan-to-Value Ratios than loans originated with full
documentation and full income verification.
A Consumer Mortgage Loan is funded after a review by one or more loan
officers and, in certain cases, management personnel, confirming that the loan
conforms with established credit policies and procedures.
TMC's management regularly reviews the quality of the Consumer Mortgage
Loans included in its portfolio and also periodically conducts audits to
ensure compliance with its established policies and procedures.
SERVICING OF CONSUMER MORTGAGE LOANS
TMC follows specific servicing and collection procedures. Servicing
includes, but is not limited to, post-origination loan processing, customer
service, payment handling, collections and liquidations.
It is TMC's policy to begin the collection process after a payment due under
a Consumer Mortgage Loan is between one and 30 days past due. TMC collection
representatives handling delinquent accounts attempt to initiate contact with
the delinquent borrower by telephone and/or through letters targeted to the
particular history of an account.
Foreclosure procedures begin when all collection methods have proved
ineffective. Typically, an account is between 60 to 120 days past due at this
point. The recommendation to initiate a foreclosure action is made by a
foreclosure specialist and approved by a manager. If TMC obtains title to the
property upon foreclosure, the account is placed in a "Real Estate Owned"
status until the property is liquidated.
TMC may not foreclose on the property securing a second mortgage loan unless
it forecloses subject to the first mortgage. If the first mortgage is in
default after TMC has initiated its foreclosure action, TMC may advance funds
to keep the mortgage current. In the event that foreclosure proceedings have
been instituted on the first mortgage prior to the initiation of TMC's
foreclosure action, TMC will either satisfy the first mortgage at or before
the time of the foreclosure sale or take other action to protect its interest
in the related property. See "Description of the Certificates--Advances;
Servicing Advances" herein.
Upon sale of a "Real Estate Owned" property, the proceeds are applied to the
loan balance and any collectible expenses due to TMC. If the sale proceeds do
not cover the existing balance due TMC, the remainder of the balance is
charged off to bad debts.
Payment extensions require special circumstances and must be approved by a
manager. In situations where a borrower is experiencing a temporary financial
difficulty (most commonly loss of employment), the payment schedule of a
Consumer Mortgage Loan may be modified if certain requirements relating to the
Consumer Mortgage Loan, such as minimum equity requirements, are satisfied.
DELINQUENCY AND LOSS EXPERIENCE
Because Transamerica Mortgage Company commenced originating and servicing
mortgage loans only recently, no relevant delinquency or loan loss experience
for home equity loans serviced by Transamerica Mortgage Company is available.
Furthermore, with respect to Home Equity Loans acquired from an originator
other than Transamerica Mortgage Company, including as a result of the
acquisition of or merger with such originator, delinquency and loan loss
experience with respect to home equity loans serviced or owned by such
originator is generally not available to Transamerica Mortgage Company.
However, if such data is available with respect to purchased Home Equity Loans
included in a Mortgage Pool, it will be set forth in the related Prospectus
Supplement.
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DESCRIPTION OF THE CERTIFICATES
GENERAL
The following summary describes certain terms of the Certificates common to
each Pooling and Servicing Agreement. A form of the Pooling and Servicing
Agreement has been filed as an Exhibit to the Registration Statement of which
this Prospectus forms a part. The summary does not purport to be complete and
is subject to, and is qualified in its entirety by reference to, the
provisions of the Certificates, the Pooling and Servicing Agreement and the
related Prospectus Supplement. Where particular provisions or terms used in
any of such documents are referred to, the actual provisions (including
definitions of terms) are incorporated by reference as part of such summaries.
The Certificates will represent beneficial interests in the assets of the
related Trust, including (i) the Home Equity Loans and all proceeds thereof,
(ii) REO Property, (iii) amounts on deposit in the funds and accounts
established with respect to the related Trust, including all investments of
amounts on deposit therein, and (iv) certain other property, if described in the
related Prospectus Supplement. If specified in the related Prospectus
Supplement, one or more Classes of Certificates of a Series may have the benefit
of one or more of a letter of credit, financial guaranty insurance policy,
mortgage pool insurance policy, special hazard insurance policy, reserve fund,
spread account, cash collateral account, overcollateralization or other form of
credit enhancement. If so specified in the related Prospectus Supplement, a
Series of Certificates may have the benefit of one or more of a mortgage pool
insurance policy, bankruptcy bond, special hazard insurance policy of similar
credit enhancement. Any such credit enhancement may be included in the assets of
the related Trust. See "Description of the Certificates--Description of Credit
Enhancement" herein.
A Series of Certificates may include one or more Classes entitled to
distributions of principal and disproportionate, nominal or no interest
distributions or distributions of interest and disproportionate, nominal or no
principal distributions. The principal amount of any Certificate may be zero
or may be a notional amount as specified in the related Prospectus Supplement.
A Class of Certificates of a Series entitled to payments of interest may
receive interest at a specified rate (a "Pass-Through Rate") which may be
fixed, variable or adjustable and may differ from other Classes of the same
Series, may receive interest based on the weighted average Mortgage Interest
Rate on the related Home Equity Loans, or may receive interest as otherwise
determined, all as described in the related Prospectus Supplement. One or more
Classes of a Series may be Certificates upon which interest will accrue but
not be currently paid until certain other Classes have received principal
payments due to them in full or until the occurrence of certain events, as set
forth in the related Prospectus Supplement. One or more Classes of
Certificates of a Series may be entitled to receive principal payments
pursuant to a planned amortization schedule or may be entitled to receive
interest payments based on a notional principal amount which reduces in
accordance with a planned amortization schedule. The rights of one or more
Classes of Certificates may be senior or subordinate to the rights of one or
more of the other Classes of Certificates. A Series may include two or more
Classes of Certificates which differ as to the timing, sequential order,
priority of payment or amount of distributions of principal or interest or
both.
Each Class of Certificates of a Series will be issued in the denominations
specified in the related Prospectus Supplement. Each Certificate will
represent a percentage interest (a "Percentage Interest") in the Certificates
of the respective Class, determined by dividing the original dollar amount (or
Notional Principal Amount (as defined below), in the case of certain
Certificates entitled to receive interest only) represented by such
Certificate by the Original Principal Balance of such Class. The related
Prospectus Supplement will set forth the amount or method of calculating the
Notional Principal Amount with respect to any Certificate.
One or more Classes of Certificates of a Series may be issuable in the form
of fully registered definitive certificates or, if so specified in the related
Prospectus Supplement, one or more Classes of Certificates of a Series (the
"Book-Entry Certificates") may initially be represented by one or more
certificates registered in the name of Cede & Co. ("Cede"), the nominee of The
Depository Trust Company ("DTC"), and available only in the form of book-
entries on the records of DTC, participating members thereof ("Participants")
and other entities,
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such as banks, brokers, dealers and trust companies, that clear through or
maintain custodial relationships with a Participant, either directly or
indirectly ("Indirect Participants"). Certificateholders may also hold
Certificates of a Series through CEDEL or Euroclear (in Europe), if they are
participants in such systems or indirectly through organizations that are
participants in such systems. Certificates representing the Book-Entry
Certificates will be issued in definitive form only under the limited
circumstances described herein and in the related Prospectus Supplement. With
respect to Book-Entry Certificates, all references herein to "holders" of
Certificates shall reflect the rights of owners of the Book-Entry
Certificates, as they may indirectly exercise such rights through DTC and
Participants, except as otherwise specified herein. See "--Registration and
Transfer of the Certificates" herein.
Unless otherwise specified in the related Prospectus Supplement, on each
Payment Date there shall be paid to each person in whose name a Certificate is
registered on the related Record Date (which in case of the Book-Entry
Certificates initially will be only Cede, as nominee of DTC), the portion of
the aggregate payment to be made to holders of such Class to which such holder
is entitled, if any, based on the Percentage Interest, held by such holder of
such Class.
INTEREST
Unless otherwise specified in the related Prospectus Supplement, interest
will accrue on each Class of Certificates of a Series (other than a Class of
Certificates entitled to receive only principal) during each period specified
in the related Prospectus Supplement (each, an "Accrual Period") at the Pass-
Through Rate for such Class specified in the related Prospectus Supplement.
Interest accrued on each Class of Certificates at the applicable Pass-Through
Rate during each Accrual Period will be paid, to the extent monies are
available therefor, on each Payment Date, commencing on the day specified in
the related Prospectus Supplement and will be distributed in the manner
specified in such Prospectus Supplement, except for any Class of Certificates
("Accrual Certificates") on which interest is to accrue and not be paid until
the interest and principal of certain other Classes has been paid in full or
the occurrence of certain events as specified in such Prospectus Supplement.
If so described in the related Prospectus Supplement, interest that has
accrued but is not yet payable on any Accrual Certificates will be added to
the principal balance thereof on each Payment Date and will thereafter bear
interest at the applicable Pass-Through Rate. Payments of interest with
respect to any Class of Certificates entitled to receive interest only or a
disproportionate amount of interest and principal will be paid in the manner
set forth in the related Prospectus Supplement. Payments of interest (or
accruals of interest, in the case of Accrual Certificates) with respect to any
Series of Certificates or one or more Classes of Certificates of such Series,
may be reduced to the extent of interest shortfalls not covered by Advances,
if any, or by any applicable credit enhancement.
PRINCIPAL
On each Payment Date, commencing with the Payment Date specified in the
related Prospectus Supplement, principal with respect to the related Home
Equity Loans during the period specified in the related Prospectus Supplement
(each such period, a "Remittance Period") will be paid to holders of the
Certificates of the related Series (other than a Class of Certificates of such
Series entitled to receive interest only) in the priority, manner and amount
specified in such Prospectus Supplement, to the extent funds are available
therefor. Unless otherwise specified in the related Prospectus Supplement,
such principal payments will generally include (i) the principal portion of
all scheduled payments ("Monthly Payments") received on the related Home
Equity Loans during the related Remittance Period, (ii) any principal
prepayments of any such Home Equity Loans in full ("Principal Prepayments")
and in part ("Curtailments") received during the related Remittance Period or
such other period (each, a "Prepayment Period") specified in the related
Prospectus Supplement, (iii) the principal portion of (A) the proceeds of any
insurance policy relating to a Home Equity Loan, a Mortgaged Property (defined
herein) or a REO Property (defined herein), net of any amounts applied to the
repair of the Mortgaged Property or released to the Mortgagor (defined herein)
and net of reimbursable expenses ("Insurance Proceeds"), (B) proceeds received
in connection with the liquidation of any defaulted Home Equity Loans
("Liquidation
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Proceeds"), net of fees and advances reimbursable therefrom ("Net Liquidation
Proceeds") and (C) proceeds received in connection with a taking of a related
Mortgaged Property by condemnation or the exercise of eminent domain or in
connection with any partial release of any such Mortgaged Property from the
related lien ("Released Mortgaged Property Proceeds"), (iv) the principal
portion of all amounts paid by the Seller in connection with the purchase of
or substitution for a Home Equity Loan as to which there is defective
documentation or a breach of a representation or warranty contained in the
related Pooling and Servicing Agreement and (v) the principal balance of each
defaulted Home Equity Loan or REO Property as to which the Master Servicer has
determined that all amounts expected to be recovered have been recovered
(each, a "Liquidated Home Equity Loan"), to the extent not included in the
amounts described in clauses (i) through (iv) above (the aggregate of the
amounts described in clauses (i) through (v), the "Basic Principal Payment").
Payments of principal with respect to a Series of Certificates or one or more
Classes of such Series may be reduced to the extent of delinquencies or losses
not covered by advances or any applicable credit enhancement.
ASSIGNMENT OF THE HOME EQUITY LOANS
At the time of issuance of a Series of Certificates, the Seller will assign
the Home Equity Loans to the Trust pursuant to a Pooling and Servicing
Agreement together with all principal and interest received on or with respect
to the Home Equity Loans, other than principal and interest due or received on
or before the related Cut-off Date, as specified in the related Prospectus
Supplement.
Each Home Equity Loan will be identified in a schedule included as an
exhibit to the related Pooling and Servicing Agreement (the "Home Equity Loan
Schedule"). The Home Equity Loan Schedule will set forth certain information
with respect to each Home Equity Loan, including, among other things, the
principal balance as of the Cut-off Date, the Mortgage Interest Rate, the
Index for ARM Loans, the scheduled monthly payment of principal and interest,
the maturity of the Mortgage Note, the Combined Loan-to-Value Ratio at
origination and, as applicable, the Home Equity Loan Ratio at origination.
Under the terms of each Pooling and Servicing Agreement, during the period
that the related Certificates are outstanding and so long as the ratings of
the long-term senior unsecured debt of TFC satisfy the rating conditions set
forth in the related Prospectus Supplement, assignments of the Mortgages in
favor of the Seller or the Trustee are not required to be recorded. If TFC's
long-term senior unsecured debt rating does not satisfy the above-described
conditions, assignments of the Mortgages in favor of the Trustee will be
required to be recorded (or opinions of counsel acceptable to the Rating
Agencies will be obtained to the effect that recording is not required to
protect the Trust's interest in and to the related Home Equity Loan). Under
the Pooling and Servicing Agreement, the Trustee is appointed attorney-in-fact
for the Seller with power to prepare, execute and record assignments of the
Mortgages in the event that the Seller fails to do so on a timely basis. See
"Risk Factors-- Creditors' Rights and Bankruptcy Considerations" herein.
Since assignments of the Mortgages to the Seller and to the Trustee will not
be recorded, it might be possible for a Prior Owner and the Seller to transfer
the Home Equity Loans to third parties, notwithstanding and in derogation of
the rights of the Trustee. See "Risk Factors--Creditors' Rights and Bankruptcy
Considerations" herein.
The Trustee is required to review the original documentation delivered to it
relating to each Home Equity Loan, including the related Mortgage Note and
Mortgage (the "Mortgage File"), and if any document required to be included in
the Mortgage File is found to be defective in any material respect and such
defect is not cured within 90 days following written notification thereof to
the Master Servicer by the Trustee, the Seller will be required to repurchase
the related Home Equity Loan in the manner set forth below.
The Trustee will be authorized to appoint a custodian to review and maintain
possession of the Mortgage Files as the agent of the Trustee. The custodian
may not be an affiliate of the Master Servicer and shall meet certain other
criteria set forth in the Pooling and Servicing Agreement. Any such Custodian
will be required to release the Mortgage Files to the Master Servicer or to
any Subservicers in connection with its servicing activities
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or for review by licensing authorities. Any such Custodial Agreement will be
on such terms as the Trustee, the Master Servicer and the Custodian shall
agree.
REPRESENTATIONS AND WARRANTIES OF THE SELLER
Unless otherwise specified in the related Prospectus Supplement, the Seller
will represent, among other things, that as to each Home Equity Loan conveyed
by the Seller as of the related Closing Date:
1. The information with respect to each Home Equity Loan set forth in the
Home Equity Loan Schedule is true and correct.
2. All of the original or certified documentation constituting the
Mortgage Files (including all material documents related thereto) has been
delivered to the Trustee or the custodian appointed to hold the Mortgage
Files, if any, on the Closing Date or as otherwise provided in the
Agreement.
3. Each Home Equity Loan is secured primarily by the related Mortgaged
Property. Each Mortgaged Property is improved by a one- to four-family
residential dwelling, including, if and to the extent specified in the
related Prospectus Supplement, cooperatives.
4. All of the Balloon Loans, if any, provide for monthly payments based
on an amortization schedule specified in the related Mortgage Note and have
a final balloon payment no earlier than the number of months following the
date of origination set forth in the related Prospectus Supplement and no
later than at the end of the year following the date of origination set
forth in the related Prospectus Supplement. Each other Mortgage Note will
provide for a schedule of substantially equal monthly payments which are,
if timely paid, sufficient to fully amortize the principal balance of such
Mortgage Note on or before its maturity date.
5. Each Mortgage is a valid and subsisting first, second or, if so
specified in the related Prospectus Supplement, more junior lien of record
on the Mortgaged Property subject, in the case of any second or more junior
Home Equity Loans, only to the Senior Lien or Liens on such Mortgaged
Property and subject in all cases to the exceptions to title set forth in
the title insurance policy, or the other evidence of title delivered
pursuant to the Pooling and Servicing Agreement, with respect to the
related Home Equity Loan, which exceptions are generally acceptable to
second mortgage lending companies, and such other exceptions to which
similar properties are commonly subject and which do not individually, or
in the aggregate, materially and adversely affect the benefits of the
security intended to be provided by such Mortgage.
6. Immediately prior to the transfer of the Home Equity Loans to the
Trust, the Seller held good and indefeasible title to, and was the sole
owner of, each Home Equity Loan conveyed by the Seller subject to no liens,
charges, mortgages, encumbrances or rights of others.
7. Each Home Equity Loan conforms, and all Home Equity Loans in the
aggregate conform, to the description thereof set forth in this Prospectus
and the related Prospectus Supplement.
Such Seller will also make representations in the related Prospectus
Supplement as to the percentage of all of the Home Equity Loans or of the Home
Equity Loans in the Sample Pool which are secured by an owner-occupied
Mortgaged Property, the percentage of Home Equity Loans which are Balloon
Loans and the percentage of Home Equity Loans secured by Mortgaged Properties
located within any single zip code area.
Upon the discovery by any of the Seller, the Master Servicer, any
Subservicer, the Custodian, if any, the Credit Provider, if any, the Trustee
or any other party specified in the Pooling and Servicing Agreement that any
of the representations and warranties described above have been breached in
any material respect as of the Closing Date, with the result that the
interests of the holders of the related Certificates in the related Home
Equity Loan or the interests of any Credit Provider or any other party
specified in such Pooling and Servicing Agreement are materially and adversely
affected, the party discovering such breach is required to give prompt written
notice to the other parties. Within 60 days (or such other period as may be
specified in the related Prospectus
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Supplement) of the earlier to occur of its discovery or its receipt of notice
of any such breach, the Seller is required to (i) cure such breach in all
material respects, (ii) remove each Home Equity Loan which has given rise to
the requirement for action, or substitute one or more mortgage loans that meet
certain criteria set forth in the related Pooling and Servicing Agreement
(each a "Qualified Substitute Home Equity Loan") and, if the outstanding
principal balance of such Qualified Substitute Home Equity Loans plus accrued
and unpaid interest thereon as of the date of such substitution is less than
the outstanding principal balance, plus accrued and unpaid interest thereon,
of the replaced Home Equity Loans as of the date of substitution, deliver or
cause to be delivered to the Trustee, the amount of any such shortfall (a
"Substitution Adjustment"), or (iii) purchase such Home Equity Loan at a price
equal to the outstanding principal balance of such Home Equity Loan as of the
date of purchase plus all accrued and unpaid interest on such outstanding
principal balance computed at the Mortgage Interest Rate, and deposit such
purchase price into the Collection Account on the next succeeding
Determination Date or other date specified in the related Pooling and
Servicing Agreement; provided, however, that no such purchase or substitution
may be made if such Home Equity Loan is not in default or no default as to
such Home Equity Loan is imminent and no substitution may be made more than
two years after the Closing Date, in each case unless there shall have been
delivered to the Trustee an opinion of counsel knowledgeable in federal income
tax matters which states that such a purchase or substitution would not
constitute a prohibited transaction under the REMIC Provisions (defined
herein) or cause the Trust to otherwise incur a tax liability or to fail to
qualify as a REMIC at any time the related Certificates are outstanding. The
obligation of the Seller to cure, substitute or purchase any Home Equity Loan
as described above will constitute the sole remedy respecting a material
breach of any such representation or warranty to the holders of the related
Certificates or the Trustee.
PAYMENTS ON THE HOME EQUITY LOANS
Unless otherwise specified in the related Prospectus Supplement, the Pooling
and Servicing Agreement will permit the Master Servicer to retain payments
received in respect of the Home Equity Loans and commingle them with its own
assets until the Payment Date of the month following the calendar date of
receipt for so long as the ratings on the short-term unsecured senior debt
obligations of TFC are at least the ratings specified in the related
Prospectus Supplement. On each Payment Date, the Master Servicer will be
required to deposit all amounts received in respect of the Home Equity Loans
during the preceding Remittance Period, net of the amounts specified in the
related Prospectus Supplement, into the Collection Account for distribution to
Certificateholders.
If the ratings criteria specified in the related Prospectus Supplement are
not met, the Master Servicer will be required to deposit payments received in
respect of the Home Equity Loans, not later than two Business Days following
the application of such amounts on the accounting system at its headquarter
office. Unless otherwise specified in the related Prospectus Supplement, all
funds in the Collection Account are required to be held (i) uninvested, either
in trust or insured by the Federal Deposit Insurance Corporation up to the
limits provided by law, (ii) invested in certain permitted investments, which
are generally limited to United States government securities and other high-
quality investments and repurchase agreements or similar arrangements with
respect to such investments or (iii) invested in certain asset management
accounts maintained by the Trustee (collectively, "Permitted Instruments").
Unless otherwise specified in the related Prospectus Supplement, any
investment earnings on funds held in the Collection Account will be for the
account of the Master Servicer.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer may make withdrawals from the Collection Account only for the
following purposes:
(i) to pay to the Trustee any fees and expenses payable under the Pooling
and Servicing Agreement;
(ii) to pay to the Credit Provider any premiums or fees for the credit
enhancement, if any;
(iii) to reimburse itself for any accrued unpaid Servicing Fees,
unreimbursed Servicing Advances and certain other expenses paid by the
Master Servicer, the Master Servicer's rights to such reimbursement being
prior to the rights of holders of the related Certificates;
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(iv) for payment to Certificateholders, the aggregate excess, if any, of
interest collected on the related Home Equity Loans during the Remittance
Period over interest accrued on the related Certificates at the applicable
Pass-Through Rates on the related Payment Date (the "Excess Spread"), and
the Available Payment Amount for the related Remittance Period;
(v) to withdraw any amount received from a Mortgagor that is recoverable
and sought to be recovered as a voidable preference by a trustee in
bankruptcy pursuant to the United States Bankruptcy Code in accordance with
a final, nonappealable order of a court having competent jurisdiction;
(vi) to make investments in Permitted Instruments and, after effecting
the remittance described in clause (iii) above, to pay itself interest
earned in respect of Permitted Instruments or on funds deposited in the
Collection Account;
(vii) to withdraw any funds deposited in the Collection Account that were
not required to be deposited therein (such as servicing compensation) or
were deposited therein in error;
(viii) to pay itself the Servicing Fee and any other permitted servicing
compensation to the extent not previously retained or paid;
(ix) to withdraw funds necessary for the conservation and disposition of
REO Property;
(x) to make Servicing Advances, as more fully described below; and
(xi) to clear and terminate the Collection Account upon the termination
of the Pooling and Servicing Agreement.
ADVANCES; SERVICING ADVANCES
If so specified in the related Prospectus Supplement, on each Payment Date
the Master Servicer may be required to make advances (each, an "Advance") to
cover shortfalls in the amount payable to Certificateholders resulting from
delinquent payments on the Home Equity Loans that remain uncollected as of the
end of the preceding Remittance Period, to the extent the Master Servicer
believes that the amount so advanced will be recoverable from subsequent
payments and collections in respect of the related Home Equity Loan. However,
no Advances will be made if after giving effect thereto the total amount of
such Advances with respect to a particular Home Equity Loan outstanding at
that time would exceed the total amount of delinquent payments of principal
and interest on such Home Equity Loan as of the preceding Record Date, plus
the total amount of Servicing Advances made with respect to such Home Equity
Loan during the preceding Remittance Period.
In the course of performing its servicing obligations, the Master Servicer
will pay certain out-of-pocket costs and expenses incurred in the performance
of its servicing obligations ("Servicing Advances"), including, but not
limited to, the cost of (i) maintaining REO Properties; (ii) any enforcement
or judicial proceedings, including foreclosures; and (iii) the management and
liquidation of Mortgaged Property acquired in satisfaction of the related
Mortgage, in each case to the extent that the Master Servicer believes that
the amount so advanced will be recoverable from subsequent payments and
collections in respect of the related Home Equity Loan.
On each Payment Date, the Master Servicer will be entitled to a first
priority reimbursement from amounts paid by borrowers for previous Advances
and Servicing Advances.
DISTRIBUTIONS
The Trustee is required to establish a trust account (referred to herein as
the "Collection Account," but which may have such other designation as is set
forth in the related Prospectus Supplement) into which there shall be
deposited collections with respect to the Home Equity Loans. The Collection
Account is required to be maintained as an Eligible Account. Amounts on
deposit in the Collection Account may be invested in Permitted Instruments and
other investments specified in the related Prospectus Supplement.
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Unless otherwise specified in the related Prospectus Supplement, on each
Payment Date the Trustee is required to withdraw from the Collection Account
and distribute the amounts set forth in the related Prospectus Supplement, to
the extent available, in the priority set forth therein, which generally will
include (in no particular order of priority):
(i) deposits into any account established for the purpose of paying
credit enhancement fees and premiums;
(ii) if a Spread Account, Reserve Account or similar account is
established with respect to a Series of Certificates, deposits into such
fund or account of the Excess Spread or other amounts required to be
deposited therein;
(iii) payments to the holders of the Certificates on account of interest
and principal, in the order and manner set forth in the related Prospectus
Supplement;
(iv) reimbursement of the Master Servicer for amounts expended by the
Master Servicer
and reimbursable thereto under the related Pooling and Servicing Agreement
but not previously reimbursed; and
(v) after the payments and deposits described above and in the related
Prospectus Supplement, the balance, if any, to the persons specified in the
related Prospectus Supplement.
The amount available to make the payments described above will generally
equal (a) the sum of (i) the Available Payment Amount for the related
Remittance Period and (ii) the amount available under any credit enhancement,
including amounts withdrawn from any Spread Account or Reserve Account, less
(b) the amount of the premiums or fees payable to the Trustee, the Master
Servicer and the Credit Provider, if any, during the related Remittance
Period.
Generally, to the extent a Credit Provider makes payments to holders of
Certificates, such Credit Provider will be subrogated to the rights of such
holders with respect to such payments and shall be deemed, to the extent of
the payments so made, to be a registered holder of such Certificates.
For purposes of the provisions described above, the following terms have the
respective meanings ascribed to them below, each determined as of any Payment
Date.
"Available Payment Amount" generally means the result of (a) collections on
or with respect to the Home Equity Loans received by the Master Servicer
during the related Remittance Period, net of the Servicing Fee paid to the
Master Servicer during the related Remittance Period and reimbursements for
accrued unpaid Servicing Fees and for certain expenses and Advances and
Servicing Advances paid by the Master Servicer during prior Remittance
Periods, fees and expenses payable to the Trustee and premiums and fees
payable to the Credit Provider, if any, plus (b) the amount of Advances, if
any, less, if so specified in the related Prospectus Supplement, plus (c) the
Excess Spread or other amounts specified in such Prospectus Supplement.
"Home Equity Loan Losses" means, for Home Equity Loans that become
Liquidated Home Equity Loans during the related Remittance Period, the amount,
if any, by which (i) the sum of the outstanding principal balance of each such
Home Equity Loan (determined immediately before such Home Equity Loan became a
Liquidated Home Equity Loan) and accrued and unpaid interest thereon at the
Mortgage Interest Rate to the date on which such Home Equity Loan became a
Liquidated Home Equity Loan exceeds (ii) the Net Liquidation Proceeds received
during such Remittance Period in connection with the liquidation of such Home
Equity Loan which have not theretofore been used to reduce the Principal
Balance of such Home Equity Loan.
"Payment Date" means the monthly date specified in the related Prospectus
Supplement on which payments will be made to holders of the related
Certificates.
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OPTIONAL DISPOSITION OF HOME EQUITY LOANS
If so specified in the related Prospectus Supplement, the Master Servicer,
the Seller or the holders of the Class of Certificates or such other person
specified in such Prospectus Supplement may cause the Trust to sell all of the
Home Equity Loans and all REO Properties when the Pool Principal Balance
declines to the percentage of the Original Pool Principal Balance specified in
the related Prospectus Supplement, when the outstanding principal balance of a
Class of Certificates specified in the related Prospectus Supplement declines
to the percentage of the original principal balance of such Class specified in
the related Prospectus Supplement or at such other time as is specified in the
related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, the related Pooling and Servicing Agreement will
establish a minimum price at which such Home Equity Loans and REO Properties
may be sold. Such minimum price may include certain expenses and other amounts
or such party as is specified in the related Prospectus Supplement may be
required to pay all or a portion of such expenses or other amounts at the time
of sale. Unless otherwise specified in the related Prospectus Supplement, the
proceeds of any such sale will be distributed to holders of the Certificates
on the Payment Date next following the date of disposition.
MANDATORY DISPOSITION OF HOME EQUITY LOANS
If so specified in the related Prospectus Supplement, the Master Servicer,
the Seller or such other entities as may be specified in such Prospectus
Supplement may be required to effect early retirement of a Series of
Certificates by soliciting competitive bids for the purchase of the assets of
the related Trust or otherwise, under the circumstances set forth in such
Prospectus Supplement. The procedures for the solicitation of such bids will
be described in the related Prospectus Supplement. Unless otherwise specified
in the related Prospectus Supplement, the Master Servicer and any Underwriter
(defined herein) will be permitted to submit bids. If so specified in the
related Prospectus Supplement, a minimum bid or reserve price may be
established. If so specified in the related Prospectus Supplement, or if the
Master Servicer or the Seller is the purchaser, the Underwriter or such other
entity specified in such Prospectus Supplement will be required to confirm
that the accepted bid will result in the sale of the assets of the Trust at
their fair market value.
REPORTS TO HOLDERS
On each Payment Date, there will be forwarded to each holder a statement
setting forth, among other things, the information as to such Payment Date
required by the related Pooling and Servicing Agreement, which generally will
include, except as otherwise provided therein, if applicable:
(A) the Available Payment Amount (and any portion of the Available
Payment Amount that has been deposited in the Collection Account but may
not be withdrawn therefrom pursuant to an order of a United States
bankruptcy court of competent jurisdiction imposing a stay pursuant to
Section 362 of the United States Bankruptcy Code);
(B) the principal balance of each class of Certificates as reported in
the report for the immediately preceding Payment Date, or, with respect to
the first Payment Date for a Series of Certificates, the Original Principal
Balance of such Class;
(C) the principal portion of all Monthly Payments received during the
related Remittance Period;
(D) the amount of interest received on the Home Equity Loans during the
related Remittance Period;
(E) the aggregate amount of the Advances, if any, to be made with respect
to the Payment Date;
(F) certain delinquency and foreclosure information as described more
fully in the related Pooling and Servicing Agreement, and the amount of
Home Equity Loan Losses during the related Remittance Period;
(G) the amount of interest and principal due to the holders of each Class
of Certificates of such Series on such Payment Date;
(H) the amount then available in any Spread Account or Reserve Account;
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(I) the amount of the payments, if any, to be made from any credit
enhancement on the Payment Date;
(J) the amount to be distributed to the holders of any subordinated or
residual securities on the Payment Date;
(K) the principal balance of each Class of Certificates of such Series
after giving effect to the payments to be made on the Payment Date;
(L) with respect to the Mortgage Pool, the weighted average maturity and
the weighted average Mortgage Interest Rate of the Home Equity Loans as of
the last day of the related Remittance Period;
(M) the amount of all payments or reimbursements to the Master Servicer
for accrued unpaid Servicing Fees, unreimbursed Servicing Advances and
interest in respect of Permitted Instruments or funds on deposit in the
Collection Account and certain other amounts during the related Remittance
Period;
(N) the Pool Principal Balance as of the immediately preceding Payment
Date, the Pool Principal Balance after giving effect to payments received
and Home Equity Loan Losses incurred during the related Remittance Period
and the ratio of the Pool Principal Balance to the Original Pool Principal
Balance. As of any Payment Date, the "Pool Principal Balance" equals the
aggregate outstanding principal balance of all Home Equity Loans, as
reduced by the aggregate Home Equity Loan Losses, at the end of the related
Remittance Period;
(O) certain information with respect to the funding, availability and
release of monies from any Spread Account or Reserve Account;
(P) the number of Home Equity Loans outstanding at the beginning and at
the end of the related Remittance Period;
(Q) the amounts that are reimbursable to the Master Servicer or the
Seller, as appropriate; and
(R) such other information as the holders may reasonably request in
writing.
The Master Servicer will also be required to furnish to any holder upon
request (i) annual audited financial statements of TFC (which include on a
consolidated basis the Master Servicer) for one or more of the most recently
completed three fiscal years for which such statements are available, and (ii)
interim unaudited financial statements of TFC (which include on a consolidated
basis the Master Servicer) relating to periods subsequent to the most recent
annual audited period.
DESCRIPTION OF CREDIT ENHANCEMENT
To the extent specified in the related Prospectus Supplement, credit
enhancement for one or more Classes of a Series of Certificates may be
provided by one or more of a letter of credit, financial guaranty insurance
policy, mortgage pool insurance policy, special hazard insurance policy,
reserve fund, spread account, cash collateral account, overcollateralization,
subordination or other type of credit enhancement. Credit enhancement may also
be provided by subordination of one or more Classes of Certificates of a
Series to one or more other Classes of Certificates of such Series. Any credit
enhancement will be limited in amount and scope of coverage. Unless otherwise
specified in the related Prospectus Supplement, credit enhancement for a
Series of Certificates will not be available for losses incurred with respect
to any other Series of Certificates. To the extent credit enhancement for any
Series of Certificates is exhausted, or losses are incurred which are not
covered by such credit enhancement, the holders of the Certificates will bear
all further risk of loss.
The amounts and types of credit enhancement, as well as the provider thereof
(the "Credit Provider"), if applicable, with respect to each Series of
Certificates will be set forth in the related Prospectus Supplement. To the
extent provided in the applicable Prospectus Supplement and the related
Pooling and Servicing Agreement, any credit enhancement may be periodically
modified, reduced or substituted for as the aggregate principal balance of the
related Mortgage Pool decreases, upon the occurrence of certain events or
otherwise. Unless otherwise specified in the related Prospectus Supplement, to
the extent permitted by the applicable Rating
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Agencies and provided that the then current rating of the affected
Certificates is not reduced or withdrawn as a result thereof, any credit
enhancement may be cancelled, reduced or modified in amount or scope of
coverage or both.
The descriptions of credit enhancement arrangements included in this
Prospectus or any Prospectus Supplement and the coverage thereunder do not
purport to be complete and are qualified in their entirety by reference to the
actual forms of governing documents, copies of which will be available upon
request.
To the extent that any credit enhancement represents a material asset of the
related Trust, additional disclosure regarding the provider of the credit
enhancement, including where appropriate financial statements of such
provider, will be included in the Prospectus Supplement. If the provider of
any such credit enhancement is subsequently replaced with another provider, or
if such credit enhancement is subsequently replaced with another form of
credit enhancement, similar additional disclosure will be included in the
periodic reports of the related Trust.
Financial Guaranty Insurance Policy. If so specified in the related
Prospectus Supplement, a financial guaranty insurance policy or surety bond (a
"Certificate Insurance Policy") may be obtained and maintained for a Class or
Series of Certificates. The issuer of the Certificate Insurance Policy (the
"Insurer") will be described in the related Prospectus Supplement and a copy
of the form of Certificate Insurance Policy will be filed with the related
Current Report on Form 8-K.
Unless otherwise specified in the related Prospectus Supplement, a
Certificate Insurance Policy will be unconditional and irrevocable and will
guarantee to holders of the applicable Certificates that an amount equal to
the full amount of distributions due to such holders will be received by the
Trustee or its agent on behalf of such holders for distribution on each
Payment Date. The specific terms of any Certificate Insurance Policy will be
set forth in the related Prospectus Supplement. A Certificate Insurance Policy
may have limitations and generally will not insure the obligation of the
Seller or the Master Servicer to purchase or substitute for a defective Home
Equity Loan and will not guarantee any specific rate of principal prepayments.
Unless otherwise specified in the related Prospectus Supplement, the Insurer
will be subrogated to the rights of each holder to the extent the Insurer
makes payments under the Certificate Insurance Policy.
Letter of Credit. If so specified in the related Prospectus Supplement, all
or a component of credit enhancement for a Class or a Series of Certificates
may be provided by a letter of credit (a "Letter of Credit") issued by a bank
or other financial institution (a "Letter of Credit Issuer") identified in the
related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, each Letter of Credit will be irrevocable. A Letter of
Credit may provide coverage with respect to one or more Classes of
Certificates or the underlying Home Equity Loans or, if specified in the
related Prospectus Supplement, may support a specified obligation or be
provided in lieu of the funding with cash of a Reserve Account or Spread
Account (each as defined below). The amount available, conditions to drawing,
if any, and right to reimbursement with respect to a Letter of Credit will be
specified in the related Prospectus Supplement. A Letter of Credit will expire
on the date specified in the related Prospectus Supplement, unless earlier
terminated or extended in accordance with its terms.
Mortgage Pool Insurance Policy. If so specified in the related Prospectus
Supplement, credit enhancement with respect to a Series of Certificates may be
provided by a mortgage pool insurance policy (a "Pool Insurance Policy")
issued by the insurer (a "Pool Insurer") specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
each Pool Insurance Policy will, subject to limitations described in such
Prospectus Supplement, insure against losses due to defaults in the payment of
principal or interest on the underlying Home Equity Loans up to the amount
specified in such Prospectus Supplement (or in a Current Report on Form 8-K).
The Pooling and Servicing Agreement with respect to any Series of Certificates
for which a Pool Insurance Policy is provided will require the Master Servicer
or other party specified therein to use reasonable efforts to maintain the
Pool Insurance Policy and to present claims to the Pool Insurer in the manner
required thereby. No Pool Insurance Policy will be a blanket policy against
loss and will be subject to the limitations and conditions precedent described
in the related Prospectus Supplement.
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Special Hazard Insurance Policy. If so specified in the related Prospectus
Supplement, credit enhancement with respect to a Series of Certificates may be
provided in part by an insurance policy (a "Special Hazard Policy") covering
losses due to physical damage to a Mortgaged Property other than a loss of the
type covered by a standard hazard insurance policy or flood insurance policy
or losses resulting from the application of co-insurance clauses contained in
standard hazard insurance policies. The Prospectus Supplement relating to a
Series of Certificates for which a Special Hazard Policy is provided will
identify the issuer of such policy and any limitations on coverage. No Special
Hazard Policy will cover extraordinary losses such as those due to war, civil
insurrection, governmental action, errors in design or workmanship, chemical
contamination or similar causes. Each Special Hazard Policy will contain an
aggregate limit on claims specified in the related Prospectus Supplement. No
claim will be paid under any Special Hazard Policy unless hazard insurance on
the Mortgaged Property is in force and protection and preservation expenses
have been paid.
Spread Account and Reserve Account. If so specified in the related
Prospectus Supplement, all or any component of credit enhancement for a Series
of Certificates may be provided by a reserve account (a "Reserve Account") or
a spread account (a "Spread Account"). A Reserve Account or Spread Account may
be funded by a combination of cash, one or more letters of credit or one or
more Permitted Instruments provided by the Seller or other party identified in
the related Prospectus Supplement, amounts otherwise distributable to one or
more Classes of Certificates subordinated to one or more other Classes of
Certificates or all or any portion of Excess Spread. If so specified in the
related Prospectus Supplement, a Reserve Account for a Series of Certificates
may be funded in whole or in part on the applicable Closing Date. If so
specified in the related Prospectus Supplement, cash deposited in a Reserve
Account or a Spread Account may be withdrawn and replaced with one or more
letters of credit or Permitted Instruments. A Reserve Account or Spread
Account may be pledged or otherwise made available to a Credit Provider. If so
specified in the related Prospectus Supplement, a Reserve Account or Spread
Account may not be deemed part of the assets of the related Trust or may be
deemed to be pledged or provided by one or more of the Seller, the holders of
the Class of Certificates otherwise entitled to the amounts deposited in such
account or such other party as is identified in such Prospectus Supplement. If
so specified in the related Prospectus Supplement, a Spread Account or Reserve
Account may also include an account (a "Yield Supplement Account"). Funds on
deposit in the Yield Supplement Account for any Series may be applied to
supplement interest payable on the related Home Equity Loans if necessary to
pay interest to holders of one or more classes of Certificates of such Series
at the applicable Pass-Through Rate.
Cash Collateral Account. If so specified in the related Prospectus
Supplement, all or any portion of credit enhancement for a Series of
Certificates may be provided by the establishment of a cash collateral account
(a "Cash Collateral Account"). A Cash Collateral Account will be similar to a
Reserve Account or Spread Account except that generally a Cash Collateral
Account is funded initially by a loan from a cash collateral lender (the "Cash
Collateral Lender"), the proceeds of which are invested with the Cash
Collateral Lender or other eligible institution. Unless otherwise specified in
the related Prospectus Supplement, the Cash Collateral Account will be
required to be maintained as an Eligible Account. The loan from the Cash
Collateral Lender will be repaid from Excess Spread, if any, or such other
amounts as are specified in the related Prospectus Supplement. Amounts on
deposit in the Cash Collateral Account will be available in generally the same
manner described above with respect to a Spread Account or Reserve Account. As
specified in the related Prospectus Supplement, a Cash Collateral Account may
be deemed to be part of the assets of the related Trust, may be deemed to be
part of the assets of a separate cash collateral trust or may be deemed to be
property of the party specified in the related Prospectus Supplement and
pledged for the benefit of the holders of one or more Classes of Certificates
of a Series.
Subordination. If so specified in the related Prospectus Supplement,
distributions of scheduled principal, Principal Prepayments, Curtailments,
interest or any combination thereof otherwise payable to one or more Classes
of Certificates of a Series ("Subordinated Certificates") may instead be
payable to holders of one or more other Classes of Certificates of such Series
("Senior Certificates") under the circumstances and to the extent specified in
such Prospectus Supplement. A Class of Certificates may be subordinated to one
or more Classes of Certificates and senior to one or more other Classes of
Certificates of a Series. If so specified in the
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related Prospectus Supplement, delays in receipt of scheduled payments on the
Home Equity Loans and losses on defaulted Home Equity Loans 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 such Prospectus
Supplement. The aggregate losses in respect of defaulted Home Equity Loans
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 Senior
Certificates on any Payment Date may be limited as specified in the related
Prospectus Supplement or the availability of subordination may otherwise be
limited as specified in the related Prospectus Supplement. If losses or
delinquencies were to exceed the amounts payable and available to holders of
Subordinated Certificates of a Series or if such amounts were to exceed any
limitation on the amount of subordination available, holders of Senior
Certificates of such Series could experience losses.
In addition, if so specified in the related Prospectus Supplement, amounts
otherwise payable to holders of Subordinated Certificates on any Payment Date
may be deposited in a Reserve Account or Spread Account, as described above.
Such deposits may be made on each Payment Date, on each Payment Date for a
specified period or to the extent necessary to cause the balance in such
account to reach or maintain a specified amount, as specified in the related
Prospectus Supplement, and thereafter, amounts may be released from such
Reserve Account or Spread Account in the amounts and under the circumstances
specified in such Prospectus Supplement.
Distributions may be allocated as among Classes of Senior Certificates and
as among Classes of Subordinated Certificates in order of their final
scheduled payment dates, in accordance with a schedule or formula or
otherwise, as specified in the related Prospectus Supplement. As between
Classes of Subordinated Certificates, payments to holders of Senior
Certificates on account of delinquencies or losses and deposits to any Reserve
Account or Spread Account will be allocated as specified in the related
Prospectus Supplement. Principal Prepayments and Curtailments may be paid
disproportionately to Classes of Senior Certificates pursuant to a "shifting
interest" structure or otherwise, as specified in the related Prospectus
Supplement.
Other Credit Enhancement. Credit enhancement may also be provided for a
Series of Certificates in the form of overcollateralization, surety bond,
insurance policy or other type of credit enhancement approved by the
applicable Rating Agencies to cover one or more risks with respect to the Home
Equity Loans or the Certificates, as specified in the related Prospectus
Supplement. In addition, if so specified in the related Prospectus Supplement,
the form or amount of credit enhancement may be changed after the issuance of
the related Certificates with the approval of the applicable Rating Agencies.
PAYMENT OF CERTAIN EXPENSES
If so specified in the related Prospectus Supplement, in order to provide
for the payment of the fees of the Credit Provider, if any, the Trustee may be
required to establish a credit enhancement account and to deposit therein on
the dates specified in the related Prospectus Supplement, from amounts on
deposit in the Collection Account, in the priority indicated, an amount that
is sufficient to pay the premiums or fees due to the Credit Provider.
Unless otherwise specified in the related Prospectus Supplement, each
Pooling and Servicing Agreement will require the Trustee's fees and reasonable
expenses and disbursements to be paid prior to distributions to
Certificateholders.
SERVICING COMPENSATION
As compensation for servicing and administering the Home Equity Loans, the
Master Servicer is entitled to a fee in the amount specified in the related
Prospectus Supplement (the "Servicing Fee"), payable monthly from payments and
collections with respect to the Home Equity Loans. In addition to the
Servicing Fee, the Master Servicer will generally be entitled under the
related Pooling and Servicing Agreement to retain as additional
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servicing compensation any assumption and other administrative fees (including
bad check charges, late payment fees and similar fees), the excess of any Net
Liquidation Proceeds over the outstanding principal balance of a Liquidated
Home Equity Loan, to the extent not otherwise required to be remitted to the
Trustee for deposit into the Collection Account, and interest paid on funds on
deposit in the Collection Account.
SERVICING STANDARDS
General Servicing Standards. The Master Servicer will agree to service the
Home Equity Loans in accordance with the Pooling and Servicing Agreement and,
in servicing and administering the Home Equity Loans, to employ or cause to be
employed procedures, including collection, foreclosure and REO Property
management procedures, and exercise the same care it customarily employs and
exercises in servicing and administering mortgage loans for its own account,
in accordance with accepted first and junior mortgage servicing practices of
prudent lending institutions and giving due consideration to the holders', and
any Credit Provider's reliance on the Master Servicer. The interests of the
holders of each Class of Certificates of any Series and the Credit Provider,
if any, may differ with respect to servicing decisions which may affect the
rate at which prepayments are received. For example, holders of certain
Classes of Certificates may prefer that "due-on-sale" clauses be waived in the
event of a sale of the underlying Mortgaged Property, that delinquent
Mortgagors be granted extensions or other accommodations and that liquidations
of Home Equity Loans be deferred, if an increase in the rate of principal
prepayments would have an adverse effect on the yield to investors in such
Certificates. Depending on the timing of such prepayments, holders of other
classes of Certificates may prefer that "due-on-sale" clauses be enforced or
that other actions be taken which would increase prepayments. No holder of a
Certificate will have the right to make any decisions with respect to the
underlying Home Equity Loans. The Master Servicer will have the right and
obligation to make such decisions in accordance with its normal servicing
procedures and the standards set forth in the related Pooling and Servicing
Agreement. In certain cases, the consent or approval of the Credit Provider,
if any, may be permitted or required. The interests of the Credit Provider, if
any, with respect to, among other things, matters which affect the timing of
payments and prepayments may not be the same as those of the holders of each
Class of Certificates of such Series.
Hazard Insurance. The Master Servicer will exercise its best reasonable
efforts to cause to be maintained fire and hazard insurance with extended
coverage (sometimes referred to as "standard hazard insurance") customary in
the area where the Mortgaged Property is located, in an amount which is at
least equal to the outstanding Principal Balance owing on the Home Equity
Loan; provided, however, that, if so specified in the related Prospectus
Supplement, standard hazard insurance may not be required for Home Equity
Loans where the principal amount is less than $5,000 or the unimproved land
valuation of the Mortgaged Property. In some states the Master Servicer's
ability to require such insurance coverage may be limited by law. The Master
Servicer will also be required to maintain on REO Property, to the extent such
insurance is available, fire and hazard insurance in the applicable amounts
described above, and liability insurance. Any amounts collected by the Master
Servicer under any such policies (other than amounts to be applied to the
restoration or repair of the Mortgaged Property, or to be released to the
Mortgagor in accordance with customary mortgage servicing procedures) will be
deposited in the Collection Account on the following Payment Date, subject to
retention by the Master Servicer to the extent such amounts constitute
servicing compensation or to withdrawal pursuant to the related Pooling and
Servicing Agreement.
If the Master Servicer obtains and maintains a blanket policy insuring
against fire and hazards of extended coverage on all of the Home Equity Loans
and/or the REO Properties, then, to the extent such policy names the Master
Servicer as loss payee and provides coverage in an amount equal to the
aggregate outstanding principal balance on the Home Equity Loans without co-
insurance, the Master Servicer will be deemed conclusively to have satisfied
its obligations with respect to fire and hazard insurance coverage.
In general, the standard hazard insurance policy covers physical damage to
or destruction of the improvements on the property by fire, lightning,
explosion, smoke, windstorm and hail, and riot, strike and civil commotion,
subject to the conditions and exclusions specified in each policy. Although
the policies relating to
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Home Equity Loans will be underwritten by different insurers under different
state laws in accordance with different applicable state forms and therefore
will not contain identical terms and conditions, the basic terms thereof are
dictated by respective state laws, and most such policies typically do not
cover any physical damage resulting from war, revolution, governmental
actions, floods and other water related causes, earth movement (including
earthquakes, landslides, and mudflows), nuclear reactions, wet or dry rot,
rodents, insects or domestic animals, theft and, in certain cases, vandalism.
The foregoing list is merely indicative of certain kinds of uninsured risks
and is not intended to be all-inclusive. No other insurance coverage (other
than title insurance as specified herein) is required under the Home Equity
Loan or the Pooling and Servicing Agreement.
Since, as a general matter, the cost of construction of residential
properties has increased in recent years, if the amount of hazard insurance
maintained on the improvements securing a Home Equity Loan were to decline as
its principal balance decreased, hazard insurance proceeds could be
insufficient to restore fully the damaged property in the event of a loss.
Enforcement of Due on Sale Clauses. When a Mortgaged Property has been or is
about to be conveyed by the Mortgagor, the Master Servicer, on behalf of the
Trustee, may, but is not required to, enforce the rights of the Trustee as the
mortgagee of record to accelerate the maturity of the related Home Equity Loan
under a "due-on-sale" clause, if any, contained in the related Mortgage or
Mortgage Note; provided, however, that the Master Servicer will not be
permitted to exercise any such right if the "due-on-sale" clause, in the
reasonable belief of the Master Servicer, is not enforceable under applicable
law. The Master Servicer may 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 Mortgage Note
and, unless prohibited by applicable law or the Mortgage Note or Mortgage, the
Mortgagor remains liable thereon. The Master Servicer will also be authorized
(with the prior approval of any Credit Provider, if required) to enter into a
substitution of liability agreement with such person, pursuant to which the
original Mortgagor is released from liability and such person is substituted
as Mortgagor and becomes liable under the Mortgage Note.
Realization Upon Defaulted Home Equity Loans. The Master Servicer is
required to foreclose upon or otherwise comparably effect the ownership in the
name of the Trustee on behalf of the holders of the related Certificates of
Mortgaged Properties relating to defaulted Home Equity Loans as to which no
satisfactory arrangements can be made for collection of delinquent payments;
provided, however, that the Master Servicer will not be required to foreclose
if it determines that foreclosure would not be in the best interests of the
holders or any Credit Provider. In connection with such foreclosure or other
conversion, the Master Servicer 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.
Collection of Home Equity Loan Payments. Each Pooling and Servicing
Agreement will require the Master Servicer to make reasonable efforts to
collect all payments called for under the terms and provisions of the Home
Equity Loans. Consistent with the foregoing, the Master Servicer may at its
own discretion waive any late payment charge, assumption fee or any penalty
interest in connection with the prepayment of a Home Equity Loan or any other
fee or charge which the Master Servicer would be entitled to retain as
servicing compensation and may waive, vary or modify any term of any Home
Equity Loan or consent to the postponement of strict compliance with any such
term or in any matter grant indulgence to any Mortgagor, subject to the
limitations set forth in the related Pooling and Servicing Agreement.
USE OF SUBSERVICERS
The Master Servicer will be permitted under each Pooling and Servicing
Agreement to enter into subservicing agreements ("Subservicing Agreements")
for any servicing and administration of Home Equity Loans with any institution
that is in compliance with the laws of each state necessary to enable it to
perform its obligations under such Subservicing Agreement (a "Subservicer")
and is either (i) designated by Federal National Mortgage Association ("FNMA")
or the Federal Home Loan Mortgage Corporation ("FHLMC") as
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an approved Seller-Master Servicer for first and second mortgage loans, (ii)
approved by the United States Department of Housing and Urban Development
("HUD") as a mortgagee or (iii) an affiliate or a wholly owned subsidiary of
the Master Servicer.
Notwithstanding any Subservicing Agreement, unless otherwise specified in
the related Prospectus Supplement, the Master Servicer will not be relieved of
its obligations under a Pooling and Servicing Agreement, and the Master
Servicer shall be obligated to the same extent and under the same terms and
conditions as if it alone were servicing and administering the Home Equity
Loans. The Master Servicer will be entitled to enter into any agreement with a
subservicer for indemnification of the Master Servicer by such subservicer and
nothing contained in any Pooling and Servicing Agreement shall be deemed to
limit or modify such indemnification.
SERVICING CERTIFICATES AND AUDITS
The Master Servicer is required to deliver, not later than the last day of
the fourth month following the end of the Master Servicer's fiscal year,
commencing in the year specified in the related Pooling and Servicing
Agreement, an officers' certificate stating that (i) the Master Servicer has
fully complied with the provisions of the Pooling and Servicing Agreement
which relate to the servicing and administration of the Home Equity Loans,
(ii) a review of the activities of the Master Servicer during such preceding
year and of performance under the Pooling and Servicing Agreement has been
made under such officers' supervision, and (iii) to the best of such officers'
knowledge, based on such review, the Master Servicer has fulfilled all its
obligations under the Pooling and Servicing Agreement for such year, or, if
there has been a default in the fulfillment of any such obligation, specifying
each such default known to such officers and the nature and status thereof
including the steps being taken by the Master Servicer to remedy such default.
The Master Servicer is required to cause to be delivered, not later than the
last day of the fourth month following the end of the Master Servicer's fiscal
year, commencing in the year set forth in the related Pooling and Servicing
Agreement, a letter or letters of a firm of independent certified public
accountants reasonably acceptable to the Trustee stating that such firm has,
with respect to the Master Servicer's overall servicing operations, examined
such operations in accordance with the requirements of the Uniform Single
Audit Program for Mortgage Bankers, and stating such firm's conclusions
relating thereto.
LIMITATIONS ON LIABILITY OF THE MASTER SERVICER AND ITS AGENTS
Each Pooling and Servicing Agreement will provide that the Master Servicer
and any director, officer, employee or agent of the Master Servicer may rely
on any document of any kind that is reasonably and in good faith believed to
be genuine and adopted or signed by the proper authorities respecting any
matters arising under the Pooling and Servicing Agreement. In addition, the
Master Servicer will not be required to appear with respect to, prosecute or
defend any legal action that is not incidental to the Master Servicer's duty
to service the Home Equity Loans in accordance with the related Pooling and
Servicing Agreement, other than certain claims made by third parties with
respect to such Pooling and Servicing Agreement.
REMOVAL AND RESIGNATION OF MASTER SERVICER
Unless otherwise specified in the related Prospectus Supplement, any Credit
Provider or the holders of Certificates of a Series representing a majority in
principal amount of Certificates of such Series, voting as a single class (a
"Majority in Aggregate Voting Interest"), with the consent of any Credit
Provider, may, pursuant to the related Pooling and Servicing Agreement, remove
the Master Servicer only upon the occurrence and continuation beyond the
applicable cure period of any of the following events (each a "Master Servicer
Termination Event"):
(b) the failure by Master Servicer to make any payment, transfer or
deposit, or to give instructions to the Trustee to make any payment,
transfer or deposit, on the date the Master Servicer is required to do
so under the Pooling and Servicing Agreement, which is not cured within
a five business day grace period;
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(c) the Master Servicer assigns its duties under the Pooling and Servicing
Agreement, except as specifically permitted thereunder, or failure on
the part of the Master Servicer duly to observe or perform in any
material respect any other covenants or agreements of the Master
Servicer in the Pooling and Servicing Agreement which has a material
adverse effect on the Certificateholders and which continues unremedied
for a period of sixty days after written notice or knowledge of such
default;
(d) any representation, warranty or certification made by the Master
Servicer in the Pooling and Servicing Agreement or in any certificate
delivered pursuant to the Pooling and Servicing Agreement proves to
have been incorrect in any material respect when made, which has a
material adverse effect on the rights of the Certificateholders, and
which material adverse effect continues for a period of sixty days
after written notice; or
(e) the occurrence of certain events of bankruptcy with respect to the
Master Servicer, although this provision may not be enforceable.
No removal of the Master Servicer shall be effective until the appointment
and acceptance of a successor Master Servicer other than the Trustee (unless
the Trustee agrees to serve) meeting the requirements described below and
otherwise acceptable to any Credit Provider and majority in Percentage
Interest of each Class of Certificates of such Series.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer may not assign the related Pooling and Servicing Agreement nor resign
from the obligations and duties thereby imposed on it except by mutual consent
of the Master Servicer, any Credit Provider, the Trustee and the Majority in
Aggregate Voting Interest or upon the determination that the Master Servicer's
duties thereunder are no longer permissible under applicable law and such
incapacity cannot be cured by the Master Servicer. No such resignation shall
become effective until a successor has assumed the Master Servicer's
responsibilities and obligations in accordance with the Pooling and Servicing
Agreement.
Unless otherwise specified in the related Prospectus Supplement, upon
removal or resignation of the Master Servicer other than as described in the
second preceding paragraph, the Trustee will be the successor servicer (the
"Successor Master Servicer"). The Trustee, as Successor Master Servicer, is
obligated to make Servicing Advances and certain other advances unless it
determines reasonably and in good faith that such advances would not be
recoverable. If, however, the Trustee is unwilling or unable to act as
Successor Master Servicer, or if the Majority in Aggregate Voting Interest or
any Credit Provider so requests in writing, the Trustee may appoint, or
petition a court of competent jurisdiction to appoint, any established
mortgage loan servicing institution acceptable to such Credit Provider having
a net worth of not less than the amount set forth in the related Pooling and
Servicing Agreement and which is either approved as a servicer by FNMA and
FHLMC or approved as a mortgagee by HUD as the Successor Master Servicer in
the assumption of all or any part of the responsibilities, duties or
liabilities of the Master Servicer.
The Trustee and any other Successor Master Servicer in such capacity is
entitled to the same reimbursement for advances and other Servicing
Compensation as the Master Servicer. See "Servicing Compensation" above.
REGISTRATION AND TRANSFER OF THE CERTIFICATES
If so specified in the related Prospectus Supplement, one or more Classes of
Certificates of a Series will be issued in definitive certificated form and
will be transferable and exchangeable at the office of the registrar
identified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, no service charge will be made for any such
registration or transfer of such Certificates, but the owner may be required
to pay a sum sufficient to cover any tax or other governmental charge.
If so specified in the related Prospectus Supplement, one or more Classes of
Certificates of a Series ("Book-Entry Certificates") may be initially
represented by one or more certificates registered in the name of The
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Depository Trust Company ("DTC") or other securities depository and be
available only in the form of book-entries. Any Book-Entry Certificates will
initially be registered in the name of Cede, the nominee of DTC.
Certificateholders may also hold Certificates of a Series through CEDEL or
Euroclear (in Europe), if they are participants in such systems or indirectly
through organizations that are participants in such systems. CEDEL and
Euroclear will hold omnibus positions on behalf of their participants through
customers' certificates accounts in CEDEL's and Euroclear's names on the books
of their respective Depositaries which in turn will hold such positions in
customers' certificates accounts in the Depositaries' names on the books of
DTC. Citibank, N.A. ("Citibank"), will act as depositary for CEDEL and Morgan
Guaranty Trust Company of New York ("Morgan") will act as depositary for
Euroclear (in such capacities, the "Depositaries").
Transfers between DTC participants will occur in the ordinary way in
accordance with DTC rules. Transfers between CEDEL Participants and Euroclear
Participants will occur in the ordinary way 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, such cross-market transactions 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 (European time). 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
certificates 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 certificates received in CEDEL
or Euroclear as a result of a transaction with a DTC participant will be made
during subsequent certificates settlement processing and dated the business
day following the DTC settlement date. Such credits or any transactions in
such certificates 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 certificates 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. For information with respect to tax documentation
procedures relating to the Certificates, see "Certain Federal Income Tax
Consequences--Foreign Investors in REMIC Certificates" herein.
DTC is a limited-purpose trust company organized under the laws of the State
of New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the
Certificates Exchange Act of 1934, as amended. DTC accepts securities for
deposit from its participating organizations ("Participants") and facilitates
the clearance and settlement of securities transactions between Participants
in such securities through electronic book-entry changes in accounts of
Participants, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers, banks and
trust companies and clearing corporations and may include certain other
organizations. Indirect access to the DTC system is also available to others
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants").
Beneficial owners ("Owners") that are not Participants but desire to
purchase, sell or otherwise transfer ownership of Book-Entry Certificates may
do so only through Participants (unless and until Definitive Certificates, as
defined below, are issued). In addition, Owners will receive all distributions
of principal of, and interest on, the Book-Entry Certificates from the Trustee
or any Trustee, as the case may be, through DTC and Participants. Owners will
not receive or be entitled to receive certificates representing their
respective interests in the Book-Entry Certificates, except under the limited
circumstances described below.
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Unless and until Definitive Certificates (as defined below) are issued, it
is anticipated that the only "holder" of Book-Entry Certificates of any Series
will be Cede, as nominee of DTC. Owners will only be permitted to exercise the
rights of holders indirectly through Participants and DTC.
While any Book-Entry Certificates of a Series are outstanding (except under
the circumstances described below), under the rules, regulations and
procedures creating and affecting DTC and its operations (the "Rules"), DTC is
required to make book-entry transfers among Participants on whose behalf it
acts with respect to the Book-Entry Certificates and is required to receive
and transmit distributions of principal of, and interest on, the Book-Entry
Certificates. Participants with whom Owners have accounts with respect to
Book-Entry Certificates are similarly required to make book-entry transfers
and receive and transmit such distributions on behalf of their respective
Owners. Accordingly, although Owners will not possess certificates, the Rules
provide a mechanism by which Owners will receive distributions and will be
able to transfer their interests.
Unless and until Definitive Certificates are issued, Owners who are not
Participants may transfer ownership of Book-Entry Certificates of a Series
only through Participants by instructing such Participants to transfer Book-
Entry Certificates, by book-entry transfer, through DTC for the account of the
purchasers of such Book-Entry Certificates, which account is maintained with
their respective Participants. Under the Rules and in accordance with DTC's
normal procedures, transfers of ownership of Book-Entry Certificates will be
executed through DTC and the accounts of the respective Participants at DTC
will be debited and credited. Similarly, the respective Participants will make
debits or credits, as the case may be, on their records on behalf of the
selling and purchasing Owners.
Book-Entry Certificates of a Series will be issued in registered form to
Owners, or their nominees, rather than to DTC (such Book-Entry Certificates
being referred to herein as "Definitive Certificates") only under the
circumstances provided in the related Pooling and Servicing Agreement, which
generally will include, except if otherwise provided therein, if (i) DTC or
the Master Servicer advises the Trustee in writing that DTC is no longer
willing or able to discharge properly its responsibilities as nominee and
depository with respect to the Book-Entry Certificates of such Series and the
Master Servicer is unable to locate a qualified successor, (ii) the Master
Servicer, at its sole option, elects to terminate the book-entry system
through DTC or (iii) after the occurrence of a Master Servicer Termination
Event, a majority of the aggregate Percentage Interest of any Class of
Certificates of such Series advises DTC in writing that the continuation of a
book-entry system through DTC (or a successor thereto) to the exclusion of any
physical certificates being issued to Owners is no longer in the best
interests of Owners of such Class of Certificates. Upon issuance of Definitive
Certificates of a Series to Owners, such Book-Entry Certificates will be
transferable directly (and not exclusively on a book-entry basis) and
registered holders will deal directly with the Trustee with respect to
transfers, notices and distributions.
DTC has advised the Master Servicer and the Seller that, unless and until
Definitive Certificates are issued, DTC will take any action permitted to be
taken by a holder only at the direction of one or more Participants to whose
DTC accounts the Certificates are credited. DTC has advised the Master
Servicer and the Seller that DTC will take such action with respect to any
Percentage Interests of the Book-Entry Certificates of a Series only at the
direction of and on behalf of such Participants with respect to such
Percentage Interests of the Book-Entry Certificates. DTC may take actions, at
the direction of the related Participants, with respect to some Book-Entry
Certificates which conflict with actions taken with respect to other Book-
Entry Certificates.
Centrale de Livraison de Valeurs Mobilieres S.A. ("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
securities. Transactions may be settled in CEDEL in any of 28 currencies,
including United States dollars. CEDEL provides to its 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
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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 a Series
of Certificates 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 ("Euroclear") 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"),
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 Euroclear on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers with respect to a Series of Certificates
offered hereby. Indirect access to Euroclear 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 that 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.
Certificates 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 Euroclear and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities
and cash from Euroclear and receipts of payments with respect to securities in
the Euroclear. All securities in Euroclear 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.
Distributions with respect to Certificates held through CEDEL or Euroclear
will be credited to the cash accounts of CEDEL Participants or Euroclear
Participants in accordance with the relevant systems' rules and procedures, to
the extent received by its Depositary. Such distributions will be subject to
tax reporting in accordance with relevant United States tax laws and
regulations. See "Certain Federal Income Tax Consequences" herein. CEDEL or
the Euroclear Operator, as the case may be, will take any other action
permitted to be taken by a Certificateholder under the Pooling and Servicing
Agreement or the relevant Supplement 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.
CERTAIN LEGAL ASPECTS OF THE HOME EQUITY LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans that are general in nature. Because such legal aspects are
governed in part by applicable state laws (which laws may differ substantially
from one another), 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 Mortgaged Properties may be situated. The summaries are qualified in
their entirety by reference to the applicable federal and state laws governing
the Home Equity Loans.
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GENERAL
The Home Equity Loans will be secured by either deeds of trust or mortgages,
depending upon the prevailing practice in the state in which the Mortgaged
Property subject to a Home Equity Loan is located. A mortgage conveys legal
title to or creates a lien upon the property to the mortgagee subject to a
condition subsequent, i.e., the payment of the indebtedness secured thereby.
There are two parties to a mortgage, the mortgagor, who is the borrower and
homeowner, and the mortgagee, who is the lender. Under the mortgage
instrument, the mortgagor 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 borrower-homeowner called the trustor (similar to a
mortgagor), 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 law, the express provisions of the deed of trust or
mortgage, and, in some cases, 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 mortgagor) and a
grantee (similar to a mortgagee). Mortgages, deeds of trust and deeds to
secure debt are not prior to liens for real estate taxes and assessments and
other charges imposed under governmental police powers. Priority between
mortgages, deeds of trust and deeds to secure debt and other encumbrances
depends on their terms in some cases and generally on the order of recordation
of the mortgage, deed of trust or the deed to secure debt in the appropriate
recording office.
If so specified in the related Prospectus Supplement, a Mortgage Pool may
include loans on units in cooperatives ("Cooperative Loans"). Cooperative
Loans are evidenced by notes secured by security interests in shares issued by
cooperatives, which are corporations entitled to be treated as housing
cooperatives under federal tax law, and in the related proprietary leases or
occupancy agreements granting rights to occupy specific dwelling units within
the cooperative buildings. The security agreement will create a lien upon or
grant a title interest in the property which it covers, the priority of which
lien will depend on the terms of the agreement and the order of recordation in
the appropriate recording office. Ownership of a unit in a cooperative is held
through the ownership of stock in the corporation, together with the related
proprietary lease or occupancy agreement. Such ownership interest is generally
financed through a cooperative share loan evidenced by a promissory note and
secured by an assignment of and a security interest in the proprietary lease
or occupancy agreement and a security interest in the related cooperative
shares.
Each cooperative owns in fee or has a leasehold interest in the real
property and improvements, including all separate dwelling units therein. The
cooperative is responsible for property management and generally for the
payment of real estate taxes, insurance and similar charges, the cost of which
is shared by the owners. The cooperative building or underlying land may be
subject to one or more mortgages (generally incurred in connection with the
construction or purchase of the building) for which the cooperative is
responsible. The interest of an occupant under proprietary leases or occupancy
agreements is generally subordinate to that of the holder of such a mortgage
or land lease. If the cooperative is unable to meet the payment obligations
under such mortgage or any land lease, the holder of such mortgage or land
lease could foreclose the mortgage or terminate the land lease, which may have
the effect of terminating all proprietary leases or occupancy agreements. In
the event of such foreclosure or termination, the value of any collateral held
by a lender which financed the purchase by a tenant/shareholder of cooperative
shares or, in the case of the Home Equity Loans, the collateral securing the
Cooperative Loans could be eliminated or significantly reduced.
FORECLOSURE IN GENERAL
Foreclosure of a mortgage is generally accomplished by judicial action. The
action is initiated by the service of legal pleadings upon all parties having
an interest 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 parties
defendant.
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Foreclosure of a deed of trust or a security deed is generally accomplished
by a non-judicial trustee's sale under a specific provision in the deed of
trust or security deed which authorizes the sale of the property upon default
by the borrower under the terms of the note, deed of trust or security deed.
In some states, 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 such notice. In addition, the trustee must provide notice in some states to
any other individual having an interest in the real property, including any
junior lienholders. 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. Generally, 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 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 often a public
sale. Because of the difficulty a potential buyer at the sale would have in
determining the exact status of title and because the physical condition of
the property subject to the lien of the mortgage or the deed of trust may have
deteriorated during the foreclosure proceedings, a third party may be
unwilling to purchase the property at a foreclosure sale.
For these reasons, it is common for the lender to purchase the property from
the trustee or referee with a "credit bid" in an amount less than or equal to
the principal amount of the indebtedness secured by the mortgage or deed of
trust, accrued and unpaid interest and the expenses of foreclosure. The lender
thereby assumes 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. In some states
there is a statutory minimum purchase price which the lender may offer for the
property. 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.
Under the Pooling and Servicing Agreement (and the REMIC Provisions of the
Code), the Master Servicer may 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 Master Servicer.
Some states impose prohibitions or limitations on remedies available to the
mortgagee, including the right to recover the unpaid portion of the debt from
the mortgagor. See "--Anti-Deficiency Legislation and Other Limitations on
Lenders" herein.
JUNIOR MORTGAGES
Some of the Home Equity Loans may be secured by second or more junior
mortgages or deeds of trust, which are subordinate to first or more senior
mortgages or deeds of trust held by other lenders. The rights of the holders,
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 mortgagor, to cause a foreclosure on the 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. See "--
Foreclosure in General" herein.
Furthermore, the terms of the second or more junior mortgage or deed of
trust are subordinate to the terms of the first or 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 deed of trust will govern generally. Upon a failure of the
mortgagor 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 mortgagee or beneficiary become part of
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the indebtedness secured by the 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. See "Risk Factors--Risks of the
Home Equity Loans--Junior Liens" herein for a further discussion of certain
risks associated with junior mortgage loans.
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, redemption may occur only upon payment of the entire principal balance
of the loan, accrued interest and expenses of foreclosure. 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 rights of
redemption would defeat the title of any purchaser from the lender subsequent
to foreclosure or sale under a deed of trust. Consequently, the practical
effect of the redemption right is to force the lender to retain 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 which 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 a nonjudicial
foreclosure or sale under a deed of trust. In addition, some states prohibit a
deficiency judgment where the loan proceeds were used to purchase a dwelling
occupied by the borrower. A deficiency judgment is a personal judgment against
a 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. Finally, other statutory provisions limit any deficiency judgment
against the borrower following a judicial sale to the excess of the
outstanding debt over the "fair 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 both the property (or the proceeds
therefrom) and a large deficiency judgment against the borrower as a result of
low or no bids at the foreclosure sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws 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 bankruptcy 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 allowed modifications that include reducing the amount of
each monthly payment, changing the rate of interest, altering the repayment
schedule, forgiving all or a portion of the debt and reducing 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. Generally, however, the
terms of a mortgage loan secured only by a mortgage on real property that is
the debtor's principal residence may not be modified pursuant to a plan
confirmed pursuant to Chapter 11 or Chapter 13 except with respect to mortgage
payment arrearages, which may be cured within a reasonable time period.
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The Code provides priority to certain tax liens over the lien of the
mortgage. In addition, substantive requirements are imposed upon mortgage
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. 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 Home Equity Loans.
ENFORCEABILITY OF CERTAIN PROVISIONS
Unless otherwise specified in the related Prospectus Supplement, all of the
Home Equity Loans will include 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 of all states will generally enforce
clauses providing for acceleration in the event of a material payment default.
However, courts 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 the lenders to foreclose if the default under the mortgage instrument
or deed of trust is not monetary, such as the borrower's failure to maintain
adequately the property or the borrower's execution of a second mortgage or
deed of trust affecting the property. Finally, some courts have been willing
to relieve a borrower from the consequences of the default if the borrower has
not received adequate notice of the default.
The Home Equity Loans may contain due-on-sale clauses, which permit the
lender to accelerate the maturity of the Home Equity Loan if the borrower
sells, transfers, or conveys the related Mortgaged Property. The
enforceability of these clauses has been the subject of legislation or
litigation in many states. Some jurisdictions automatically enforce such
clauses, while others require a showing of reasonableness and hold, on a case-
by-case basis, that a "due-on-sale" clause may be invoked only where a sale
threatens the legitimate security interests of the lender.
The Garn-St Germain Depository Institutions Act of 1982 purports to preempt
state laws which prohibit the enforcement of "due-on-sale" provisions in
certain loans made after October 15, 1982. The Master Servicer may thus be
able to accelerate the Home Equity Loans that were originated after that date
and contain a "due-on-sale" provision, upon transfer of an interest in the
related Mortgaged Property, regardless of its ability to demonstrate that a
sale threatens its legitimate security interest. Each Pooling and Servicing
Agreement will provide that the Master Servicer, on behalf of the Trustee,
may, but is not required to, enforce any right of the Trustee as the mortgagee
of record to accelerate a Home Equity Loan in the event of a sale or other
transfer of the related Mortgaged Property.
RELIEF ACT LIMITATIONS ON INTEREST PAYMENTS AND FORECLOSURES
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act of
1940, as amended (the "Relief Act"), a Mortgagor who enters military service
after the origination of such Mortgagor's Home Equity Loan (including a
Mortgagor who is a member of the National Guard or is in reserve status at the
time of the origination of the Home Equity Loan and is later called to active
duty) may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of such Mortgagor's active duty status, unless a
court orders otherwise upon application of the lender. It is possible that
such action could have an effect, for an
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indeterminate period of time, on the ability of the Master Servicer to collect
full amounts of interest on certain of the Home Equity Loans underlying a
Series of Certificates. In addition, the Relief Act imposes limitations which
would impair the ability of the Master Servicer to foreclose on an affected
Home Equity Loan during the Mortgagor's period of active duty status. Thus, in
the event that such a Home Equity 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.
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 possibly under state law in a number of states, a secured
party which takes a deed in lieu of foreclosure, acquires a mortgaged property
at a foreclosure sale or which has been involved in decisions which may lead
to contamination of a 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 the related Trust).
The Federal Comprehensive Environmental Response, Compensation and Liability
Act of 1980 ("CERCLA"), as well as some similar state laws, contains an
exemption from liability for holders of security interests in property. The
scope of that exemption was uncertain until the recent passage of the Asset
Conservation, Lender Liability and Deposit Insurance Protection Act of 1996
(the "Asset Conservation Act"). The Asset Conservation Act, which was passed
on September 30, 1996, clarifies that in order to be considered to have
"participated in the management" of a property a lender must actually
participate in the environmental management of the property. The Asset
Conservation Act also provides that most conventional activities by a lender,
taken to protect its security interest, will not subject the lender to CERCLA
liability.
It should be noted that liability for certain cleanup costs may be governed
by state law or may fall outside of CERCLA. CERCLA does not apply to petroleum
products and the security interest exemption, therefore will not apply to many
properties. There is a similar lender liability provision, however, in the
Resource Conservation and Recovery Act ("RCRA"), which applies to underground
storage tanks (other than heating oil tanks).
The Pooling and Servicing Agreement requires that the Master Servicer, in
making a determination to foreclose on or otherwise acquire a Mortgaged
Property, take into account (and the Master Servicer is not required to
foreclose or otherwise acquire a Mortgaged Property in the case of) the
existence of hazardous wastes or hazardous substances on such Mortgaged
Property. If title to a Mortgaged Property securing a Home Equity Loan is
acquired by a Trust and cleanup costs are incurred in respect of the Mortgaged
Property, the holders of the Certificates might incur a loss if such costs
were required to be paid by the Trust and sufficient funds were not available
from any Reserve Account, Spread Account or similar account or from
collections on the Home Equity Loans.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of certain anticipated material
federal income tax consequences of the purchase, ownership and disposition of
the Certificates offered hereunder. This discussion is directed solely to
Certificateholders that hold the Certificates as capital assets within the
meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the
"Code") and does not purport to discuss all federal income tax consequences
that may be applicable to particular categories of investors, some of which
(such as banks, insurance companies and foreign investors) may be subject to
special rules. Further, the authorities on which this
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discussion, and the opinion referred to below, are based are subject to change
or differing interpretations, which could apply retroactively. Taxpayers and
preparers of tax returns (including those filed by any REMIC or other issuer)
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 own tax advisors and tax return preparers regarding the
preparation of any item on a tax return, even where the anticipated tax
treatment has been discussed herein. In addition to the federal income tax
consequences described herein, potential investors should consider the state
and local tax consequences, if any, of the purchase, ownership and disposition
of the Certificates. See "State and Other Tax Consequences" herein.
Certificateholders are advised to consult their own tax advisors concerning
the federal, state, local or other tax consequences to them of the purchase,
ownership and disposition of the Certificates offered hereunder.
The following discussion addresses securities ("REMIC Certificates")
representing interests in a Trust, or a portion thereof, which the Master
Servicer will covenant to elect to have treated as a REMIC under Sections 860A
through 860G (the "REMIC Provisions") of the Code. The Prospectus Supplement
for each series of Certificates will indicate whether a REMIC election (or
elections) will be made for the related Trust and, if such an election is to
be made, will identify all "regular interests" and "residual interests" in the
REMIC. For purposes of this tax discussion, references to a
"Certificateholder" or a "holder" are to the beneficial owner of a
Certificate.
The following discussion is based in part upon the rules governing original
issue discount that are set forth in Sections 1271-1273 and 1275 of the Code
and in the Treasury regulations issued thereunder (the "OID Regulations"), and
in part upon the REMIC Provisions and the Treasury regulations issued
thereunder (the "REMIC Regulations"). The OID Regulations, which are effective
with respect to debt instruments issued on or after April 4, 1994, do not
adequately address certain issues relevant to, and in some instances provide
that they are not applicable to, securities such as the Certificates.
REMICS
Classification of REMICs
Upon the issuance of each series of REMIC Certificates, the special tax
counsel to the Seller identified in the related Prospectus Supplement ("Tax
Counsel"), will deliver their opinion generally to the effect that, assuming
compliance with all provisions of the related Pooling and Servicing Agreement,
the related Trust (or each applicable portion thereof) will qualify as a REMIC
and the REMIC Certificates offered with respect thereto will be considered to
evidence ownership of "regular interests" ("REMIC Regular Certificates") or
"residual interests" ("REMIC Residual Certificates") in that REMIC within the
meaning of the REMIC Provisions.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for such status during any
taxable year, the Code provides that the entity will not be treated as a REMIC
for such year and thereafter. In that event, such entity may be taxable as a
separate corporation under Treasury regulations, and the related REMIC
Certificates may not be accorded the status or given the tax treatment
described below. Although the Code authorizes the Treasury Department to issue
regulations providing relief in the event of an inadvertent termination of
REMIC status, no such regulations have been issued. Any such relief, moreover,
may be accompanied by sanctions, such as the imposition of a corporate tax on
all or a portion of the Trust's income for the period in which the
requirements for such status are not satisfied. The Pooling and Servicing
Agreement with respect to each REMIC will include provisions designed to
maintain the Trust's status as a REMIC under the REMIC Provisions. It is not
anticipated that the status of any Trust as a REMIC will be terminated.
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Characterization of Investments in REMIC Certificates
In general, the REMIC Certificates will be "real estate assets" within the
meaning of Section 856(c)(5)(A) of the Code and assets described in Section
7701(a)(19)(C) of the Code in the same proportion that the assets of the REMIC
underlying such Certificates would be so treated. Moreover, if 95% or more of
the assets of the REMIC qualify for any of the foregoing treatments at all
times during a calendar year, the REMIC Certificates will qualify for the
corresponding status in their entirety for that calendar year. Interest
(including original issue discount) on the REMIC Regular Certificates and
income allocated to the class of REMIC Residual Certificates will be interest
described in Section 856(c)(3)(B) of the Code to the extent that such
Certificates are treated as "real estate assets" within the meaning of Section
856(c)(5)(A) of the Code. In addition, the REMIC Regular Certificates will be
"qualified mortgages" within the meaning of Section 860G(a)(3)(C) of the Code
if transferred to another REMIC on its startup day in exchange for regular or
residual interests therein. The determination as to the percentage of the
REMIC's assets that constitute assets described in the foregoing sections of
the Code will be made with respect to each calendar quarter based on the
average adjusted basis of each category of the assets held by the REMIC during
such calendar quarter. The Master Servicer will report those determinations to
Certificateholders in the manner and at the times required by applicable
Treasury regulations.
The assets of the REMIC will include, in addition to Home Equity Loans,
payments on Home Equity Loans held pending distribution on the REMIC
Certificates and property acquired by foreclosure held pending sale, and may
include amounts in reserve accounts. It is unclear whether property acquired
by foreclosure held pending sale and amounts in reserve accounts would be
considered to be part of the Home Equity Loans, or whether such assets (to the
extent not invested in assets described in the foregoing sections) otherwise
would receive the same treatment as the Home Equity Loans for purposes of all
of the foregoing sections. In addition, in some instances Home Equity Loans
may not be treated entirely as assets described in the foregoing sections. If
so, the related Prospectus Supplement will describe the Home Equity Loans that
may not be so treated. The REMIC Regulations do provide, however, that
payments on Home Equity Loans held pending distribution are considered part of
the Home Equity Loans for purposes of Section 856(c)(5)(A) of the Code.
Tiered REMIC Structures
For certain series of REMIC Certificates, two or more separate elections may
be made to treat designated portions of the related Trust as REMICs ("Tiered
REMICs") for federal income tax purposes. Upon the issuance of any such series
of REMIC Certificates, Tax Counsel will deliver their opinion generally to the
effect that, assuming compliance with all provisions of the related Pooling
and Servicing Agreement, the Tiered REMICs will each qualify as a REMIC and
the REMIC Certificates issued by the Tiered REMICs, respectively, will be
considered to evidence ownership of REMIC Regular Certificates or REMIC
Residual Certificates in the related REMIC within the meaning of the REMIC
Provisions.
Solely for purposes of determining whether the REMIC Certificates will be
"real estate assets" within the meaning of Section 856(c)(5)(A) of the Code
and "loans secured by an interest in real property" under
Section 7701(a)(19)(C) of the Code, and whether the income on such
Certificates is interest described in Section 856(c)(3)(B) of the Code, the
Tiered REMICs will be treated as one REMIC.
TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES
General
Except as otherwise stated in this discussion, REMIC Regular Certificates
will be treated for federal income tax purposes as debt instruments issued by
the REMIC and not as ownership interests in the REMIC or its assets. Moreover,
holders of REMIC Regular Certificates that otherwise report income under a
cash method of accounting will be required to report income with respect to
REMIC Regular Certificates under an accrual method.
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Original Issue Discount
Certain REMIC Regular Certificates may be issued with "original issue
discount" within the meaning of Section 1273(a) of the Code. Any holders of
REMIC Regular Certificates issued with original issue discount generally will
be required to include original issue discount in income as it accrues, in
accordance with the method described below, in advance of the receipt of the
cash attributable to such income. In addition, Section 1272(a)(6) of the Code
provides special rules applicable to REMIC Regular Certificates and certain
other debt instruments issued with original issue discount. Regulations have
not been issued under that section.
The Code requires that a prepayment assumption be used with respect to Home
Equity Loans held by a REMIC in computing the accrual of original issue
discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of such discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner
prescribed in Treasury regulations; as noted above, those regulations have not
been issued. The Conference Committee Report accompanying the Tax Reform Act
of 1986 (the "Committee Report") indicates that the regulations will provide
that the prepayment assumption used with respect to a REMIC Regular
Certificate must be the same as that used in pricing the initial offering of
such REMIC Regular Certificate. The prepayment assumption used by the Master
Servicer in reporting original issue discount for each series of REMIC Regular
Certificates (the "Prepayment Assumption") will be consistent with this
standard and will be disclosed in the related Prospectus Supplement. However,
neither the Seller nor the Master Servicer will make any representation that
the Home Equity Loans will in fact prepay at a rate conforming to the
Prepayment Assumption or at any other rate.
The original issue discount, if any, on a REMIC Regular Certificate will be
the excess of its stated redemption price at maturity over its issue price.
The issue price of a particular class of REMIC Regular Certificates will be
the first cash price at which a substantial amount of REMIC Regular
Certificates of that class is sold (excluding sales to bond houses, brokers
and underwriters). If less than a substantial amount of a particular class of
REMIC Regular Certificates is sold for cash on or prior to the date of their
initial issuance (the "Closing Date"), the issue price for such class will be
treated as the fair market value of such class on the Closing Date. Under the
OID Regulations, the stated redemption price of a REMIC Regular Certificate is
equal to the total of all payments to be made on such Certificate other than
"qualified stated interest." "Qualified stated interest" includes interest
that is unconditionally payable at least annually at a single fixed rate, or
in the case of a variable rate debt instrument, at a "qualified floating
rate," an "objective rate," a combination of a single fixed rate and one or
more "qualified floating rates" or one "qualified inverse floating rate," or a
combination of "qualified floating rates" that generally does not operate in a
manner that accelerates or defers interest payments on such REMIC Regular
Certificate.
In the case of REMIC Regular Certificates bearing adjustable interest rates,
the determination of the total amount of original issue discount and the
timing of the inclusion thereof will vary according to the characteristics of
such REMIC Regular Certificates. If the original issue discount rules apply to
such Certificates, the related Prospectus Supplement will describe the manner
in which such rules will be applied by the Master Servicer with respect to
those Certificates in preparing information returns to the Certificateholders
and the Internal Revenue Service (the "IRS").
Certain classes of the REMIC Regular Certificates may provide for the first
interest payment with respect to such Certificates to be made more than one
month after the date of issuance, a period which is longer than the subsequent
monthly intervals between interest payments. Assuming the "accrual period" (as
defined below) for original issue discount is each monthly period that ends on
a Payment Date, in some cases, as a consequence of this "long first accrual
period," some or all interest payments may be required to be included in the
stated redemption price of the REMIC Regular Certificate and accounted for as
original issue discount. Because interest on REMIC Regular Certificates must
in any event be accounted for under an accrual method, applying this analysis
would result in only a slight difference in the timing of the inclusion in
income of the yield on the REMIC Regular Certificates.
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In addition, if the accrued interest to be paid on the first Payment Date is
computed with respect to a period that begins prior to the Closing Date, a
portion of the purchase price paid for a REMIC Regular Certificate will
reflect such accrued interest. In such cases, information returns to the
Certificateholders and the IRS will be based on the position that the portion
of the purchase price paid for the interest accrued with respect to periods
prior to the Closing Date is treated as part of the overall cost of such REMIC
Regular Certificate (and not as a separate asset the cost of which is
recovered entirely out of interest received on the next Payment Date) and that
portion of the interest paid on the first Payment Date in excess of interest
accrued for a number of days corresponding to the number of days from the
Closing Date to the first Payment Date should be included in the stated
redemption price of such REMIC Regular Certificate. However, the OID
Regulations state that all or some portion of such accrued interest may be
treated as a separate asset the cost of which is recovered entirely out of
interest paid on the first Payment Date. It is unclear how an election to do
so would be made under the OID Regulations and whether such an election could
be made unilaterally by a Certificateholder.
Notwithstanding the general definition of original issue discount, original
issue discount on a REMIC Regular Certificate will be considered to be de
minimis if it is less than 0.25% of the stated redemption price of the REMIC
Regular Certificate multiplied by its weighted average life. For this purpose,
the weighted average life of the REMIC Regular Certificate is computed as the
sum of the amounts determined, as to each payment included in the stated
redemption price of such REMIC Regular Certificate, by multiplying (i) the
number of complete years (rounding down for partial years) from the issue date
until such payment is expected to be made (presumably taking into account the
Prepayment Assumption) by (ii) a fraction, the numerator of which is the
amount of the payment, and the denominator of which is the stated redemption
price at maturity of such REMIC Regular Certificate. Under the OID
Regulations, original issue discount of only a de minimis amount (other than
de minimis original issue discount attributable to a so-called "teaser"
interest rate or an initial interest holiday) will be included in income as
each payment of stated principal is made, based on the product of the total
amount of such de minimis original issue discount and a fraction, the
numerator of which is the amount of such principal payment and the denominator
of which is the outstanding stated principal amount of the REMIC Regular
Certificate. The OID Regulations also would permit a Certificateholder to
elect to accrue de minimis original issue discount into income currently based
on a constant yield method. See "--Taxation of Owners of REMIC Regular
Certificates--Market Discount" herein for a description of such election under
the OID Regulations.
If original issue discount on a REMIC Regular Certificate is in excess of a
de minimis amount, the holder of such Certificate must include in ordinary
gross income the sum of the "daily portions" of original issue discount for
each day during its taxable year on which it held such REMIC Regular
Certificate, including the purchase date but excluding the disposition date.
In the case of an original holder of a REMIC Regular Certificate, the daily
portions of original issue discount will be determined as follows.
As to each "accrual period," that is, unless otherwise stated in the related
Prospectus Supplement, each period that ends on a date that corresponds to a
Payment Date and begins on the first day following the immediately preceding
accrual period (or in the case of the first such period, begins on the Closing
Date), a calculation will be made of the portion of the original issue
discount that accrued during such accrual period. The portion of original
issue discount that accrues in any accrual period will equal the excess, if
any, of (i) the sum of (A) the present value, as of the end of the accrual
period, of all of the distributions remaining to be made on the REMIC Regular
Certificate, if any, in future periods and (B) the distributions made on such
REMIC Regular Certificate during the accrual period of amounts included in the
stated redemption price, over (ii) the adjusted issue price of such REMIC
Regular Certificate at the beginning of the accrual period. The present value
of the remaining distributions referred to in the preceding sentence will be
calculated (i) assuming that distributions on the REMIC Regular Certificate
will be received in future periods based on the Home Equity Loans being
prepaid at a rate equal to the Prepayment Assumption and (ii) using a discount
rate equal to the original yield to maturity of the Certificate. For these
purposes, the original yield to maturity of the Certificate will be calculated
based on its issue price and assuming that distributions on the Certificate
will be made in all accrual periods based on the Home Equity Loans being
prepaid at a rate equal to the Prepayment Assumption. The adjusted issue price
of a REMIC Regular Certificate at the beginning of any accrual period will
equal the
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issue price of such Certificate, increased by the aggregate amount of original
issue discount that accrued with respect to such Certificate in prior accrual
periods, and reduced by the amount of any distributions made on such REMIC
Regular Certificate in prior accrual periods of amounts included in its stated
redemption price. The original issue discount accruing during any accrual
period, computed as described above, will be allocated ratably to each day
during the accrual period to determine the daily portion of original issue
discount for such day.
A subsequent purchaser of a REMIC Regular Certificate that purchases such
Certificate at a cost (excluding any portion of such cost attributable to
accrued qualified stated interest) less than its remaining stated redemption
price will also be required to include in gross income the daily portions of
any original issue discount with respect to such Certificate. However, each
such daily portion will be reduced, if such cost is in excess of such
Certificate's "adjusted issue price," in proportion to the ratio such excess
bears to the aggregate original issue discount remaining to be accrued on such
REMIC Regular Certificate. The adjusted issue price of a REMIC Regular
Certificate on any given day equals the sum of (i) the adjusted issue price
(or, in the case of the first accrual period, the issue price) of such
Certificate at the beginning of the accrual period which includes such day and
(ii) the daily portions of original issue discount for all days during such
accrual period prior to such day.
Market Discount
A Certificateholder that purchases a REMIC Regular Certificate at a market
discount, that is, in the case of a REMIC Regular Certificate issued without
original issue discount, at a purchase price less than its remaining stated
principal amount, or in the case of a REMIC Regular Certificate issued with
original issue discount, at a purchase price less than its adjusted issue
price will recognize income upon receipt of each distribution representing
stated redemption price. In particular, under Section 1276 of the Code such a
Certificateholder generally will be required to allocate the portion of each
such distribution representing stated redemption price first to accrued market
discount not previously included in income, and to recognize ordinary income
to that extent. A Certificateholder may elect to include market discount in
income currently as it accrues rather than including it on a deferred basis in
accordance with the foregoing. If made, such election will apply to all market
discount bonds acquired by such Certificateholder on or after the first day of
the first taxable year to which such election applies. In addition, the OID
Regulations permit a 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 made with respect to a REMIC Regular Certificate with market discount,
the Certificateholder would be deemed to have made an election to include
currently market discount in income with respect to all other debt instruments
having market discount that such Certificateholder acquires during the taxable
year of the election or thereafter, and possibly previously acquired
instruments. Similarly, a Certificateholder that made this election for a
Certificate that is acquired at a premium would be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Certificateholder owns or acquires. See "--
Taxation of Owners of REMIC Regular Certificates--Premium" herein. Each of
these elections to accrue interest, discount and premium with respect to a
Certificate on a constant yield method or as interest would be irrevocable.
However, market discount with respect to a REMIC Regular Certificate will be
considered to be de minimis for purposes of Section 1276 of the Code if such
market discount is less than 0.25% of the remaining stated redemption price of
such REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect
to market discount, presumably taking into account the Prepayment Assumption.
If market discount is treated as de minimis under this rule, it appears that
the actual discount would be treated in a manner similar to original issue
discount of a de minimis amount. See "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" herein. Such treatment would result in
discount being included in income at a slower rate than discount would be
required to be included in income using the method described above.
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Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than
one installment. Until regulations are issued by the Treasury Department,
certain rules described in the Committee Report apply. The Committee Report
indicates that in each accrual period market discount on REMIC Regular
Certificates should accrue, at the Certificateholder's option: (i) on the
basis of a constant yield method, (ii) in the case of a REMIC Regular
Certificate issued without original issue discount, in an amount that bears
the same ratio to the total remaining market discount as the stated interest
paid in the accrual period bears to the total amount of stated interest
remaining to be paid on the REMIC Regular Certificate as of the beginning of
the accrual period, or (iii) in the case of a REMIC Regular Certificate issued
with original issue discount, in an amount that bears the same ratio to the
total remaining market discount as the original issue discount accrued in the
accrual period bears to the total original issue discount remaining on the
REMIC Regular Certificate at the beginning of the accrual period. Moreover,
the Prepayment Assumption used in calculating the accrual of original issue
discount is to be used in calculating the accrual of market discount. Because
the regulations referred to in this paragraph have not been issued, it is not
possible to predict what effect such regulations might have on the tax
treatment of a REMIC Regular Certificate purchased at a discount in the
secondary market.
To the extent that REMIC Regular Certificates provide for monthly or other
periodic distributions throughout their term, the effect of these rules may be
to require market discount to be includable in income at a rate that is not
significantly slower than the rate at which such discount would accrue if it
were original issue discount. Moreover, in any event a holder of a REMIC
Regular Certificate generally will be required to treat a portion of any gain
on the sale or exchange of such 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.
Further, under Section 1277 of the Code a holder of a REMIC Regular
Certificate 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 a REMIC Regular Certificate purchased with market discount.
For these purposes, the
de minimis rule referred to 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 includable 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
A REMIC Regular Certificate purchased at a cost (excluding any portion of
such cost attributable to accrued qualified stated interest) greater than its
remaining stated redemption price will be considered to be purchased at a
premium. The holder of such a REMIC Regular Certificate may elect under
Section 171 of the Code to amortize such premium under the constant yield
method over the life of the Certificate. If made, such an election will apply
to all debt instruments having amortizable bond premium that the holder owns
or subsequently acquires. Amortizable premium will be treated as an offset to
interest income on the related REMIC Regular Certificate, rather than as a
separate interest deduction. The OID Regulations also permit
Certificateholders to elect to include all interest, discount and premium in
income based on a constant yield method, further treating the
Certificateholder as having made the election to amortize premium generally.
See "--Taxation of Owners of REMIC Regular Certificates--Market Discount"
herein. The Committee Report states that the same rules that apply to accrual
of market discount (which rules will require use of a Prepayment Assumption in
accruing market discount with respect to REMIC Regular Certificates without
regard to whether such Certificates have original issue discount) will also
apply in amortizing bond premium under Section 171 of the Code.
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Realized Losses
Under Section 166 of the Code, both corporate holders of the REMIC Regular
Certificates and noncorporate holders of the REMIC Regular Certificates that
acquire such Certificates in connection with a trade or business should be
allowed to deduct, as ordinary losses, any losses sustained during a taxable
year in which their Certificates become wholly or partially worthless as the
result of one or more realized losses on the Home Equity Loans. However, it
appears that a noncorporate holder that does not acquire a REMIC Regular
Certificate in connection with a trade or business will not be entitled to
deduct a loss under Section 166 of the Code until such holder's Certificate
becomes wholly worthless (i.e., until its outstanding principal balance has
been reduced to zero) and that the loss will be characterized as a short-term
capital loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to such Certificate, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the Home Equity Loans or the Underlying Certificates until it
can be established that any such reduction ultimately will not be recoverable.
As a result, the amount of taxable income reported in any period by the holder
of a REMIC Regular Certificate could exceed the amount of economic income
actually realized by the holder in such period. Although the holder of a REMIC
Regular Certificate eventually will recognize a loss or reduction in income
attributable to previously accrued and included income that, as the result of
a realized loss, ultimately will not be realized, the law is unclear with
respect to the timing and character of such loss or reduction in income.
TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
General
As residual interests, the REMIC Residual Certificates will be subject to
tax rules that differ significantly from those that would apply if the REMIC
Residual Certificates were treated for federal income tax purposes as direct
ownership interests in the Home Equity Loans or as debt instruments issued by
the REMIC.
A holder of a REMIC Residual Certificate generally will be required to
report its daily portion of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the REMIC for each day during a
calendar quarter that such holder owned such REMIC Residual Certificate. For
this purpose, the taxable income or net loss of the REMIC will be allocated to
each day in the calendar quarter ratably using a "30 days per month/90 days
per quarter/360 days per year" convention unless otherwise disclosed in the
related Prospectus Supplement. The daily amounts will then be allocated among
the REMIC Residual Certificateholders in proportion to their respective
ownership interests on such day. Any amount included in the gross income or
allowed as a loss of any REMIC Residual Certificateholder by virtue of this
allocation will be treated as ordinary income or loss. The taxable income of
the REMIC will be determined under the rules described below in "--Taxable
Income of the REMIC" and will be taxable to the REMIC Residual
Certificateholders without regard to the timing or amount of cash
distributions by the REMIC. Ordinary income derived from REMIC Residual
Certificates will be "portfolio income" for purposes of the taxation of
taxpayers subject to limitations under Section 469 of the Code on the
deductibility of "passive losses."
A holder of a REMIC Residual Certificate that purchased such Certificate
from a prior holder of such Certificate also will be required to report on its
federal income tax return amounts representing its daily portion of the
taxable income (or net loss) of the REMIC for each day that it holds such
REMIC Residual Certificate. These daily portions generally will equal the
amounts of taxable income or net loss determined as described above. The
Committee Report indicates that certain modifications of the general rules may
be made, by regulations, legislation or otherwise, to reduce (or increase) the
income or loss of a holder of a REMIC Residual Certificateholder that
purchased such REMIC Residual Certificate from a prior holder of such
Certificate at a price greater than (or less than) the adjusted basis (as
defined below) such REMIC Residual Certificate would have had in the hands of
an original holder of such Certificate. The REMIC Regulations, however, do not
provide for any such modifications.
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Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of such REMIC Residual Certificate will be
taken into account in determining the income of such holder for federal income
tax purposes. Although it appears likely that any such payment would be
includable in income immediately upon its receipt, the IRS might assert that
such payment should be included in income over time according to an
amortization schedule or according to some other method. Because of the
uncertainty concerning the treatment of such payments, holders of REMIC
Residual Certificates should consult their tax advisors concerning the
treatment of such payments for income tax purposes.
The amount of income REMIC Residual Certificateholders will be required to
report (or the tax liability associated with such income) may exceed the
amount of cash distributions received from the REMIC for the corresponding
period. Consequently, REMIC Residual Certificateholders should have other
sources of funds sufficient to pay any federal income taxes due as a result of
their ownership of REMIC Residual Certificates or unrelated deductions against
which income may be offset, subject to the rules relating to "excess
inclusions," residual interests without "significant value" and "noneconomic"
residual interests discussed below. The fact that the tax liability associated
with the income allocated to REMIC Residual Certificateholders may exceed the
cash distributions received by such REMIC Residual Certificateholders for the
corresponding period may significantly adversely affect such REMIC Residual
Certificateholders' after-tax rate of return.
Taxable Income of the REMIC
The taxable income of the REMIC will equal the income from the Home Equity
Loans and other assets of the REMIC plus any cancellation of indebtedness
income due to the allocation of realized losses to REMIC Regular Certificates,
less the deductions allowed to the REMIC for interest (including original
issue discount and reduced by the amortization of any premium received on
issuance) on the REMIC Regular Certificates (and any other class of REMIC
Certificates constituting "regular interests" in the REMIC not offered
hereby), amortization of any premium on the Home Equity Loans, bad debt
deductions with respect to the Home Equity Loans and, except as described
below, for servicing, administrative and other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to their fair market value
immediately after their transfer to the REMIC. For this purpose, the Master
Servicer intends to treat the fair market value of the Home Equity Loans as
being equal to the aggregate issue prices of the REMIC Regular Certificates
and REMIC Residual Certificates. Such aggregate basis will be allocated among
the Home Equity Loans collectively and the other assets of the REMIC in
proportion to their respective fair market values. The issue price of any
REMIC Certificates offered hereby will be determined in the manner described
above under "--Taxation of Owners of REMIC Regular Certificates--Original
Issue Discount." Accordingly, if one or more classes of REMIC Certificates are
retained initially rather than sold, the Master Servicer may be required to
estimate the fair market value of such interests in order to determine the
basis of the REMIC in the Home Equity Loans and other property held by the
REMIC.
Subject to the possible application of the de minimis rules, the method of
accrual by the REMIC of original issue discount income and market discount
income with respect to Home Equity Loans that it holds will be equivalent to
the method of accruing original issue discount income for REMIC Regular
Certificateholders (that is, under the constant yield method taking into
account the Prepayment Assumption). However, a REMIC that acquires loans at a
market discount must include such discount in income currently, as it accrues,
on a constant interest basis. See "--Taxation of Owners of REMIC Regular
Certificates" above, which describes a method of accruing discount income that
is analogous to that required to be used by a REMIC as to Home Equity Loans
with market discount that it holds.
A Home Equity Loan will be deemed to have been acquired with discount (or
premium) to the extent that the REMIC's basis therein, determined as described
in the preceding paragraph, is less than (or greater than) its stated
redemption price. Any such discount will be includable in the income of the
REMIC as it accrues, in advance of receipt of the cash attributable to such
income, under a method similar to the method described above for accruing
original issue discount on the REMIC Regular Certificates. It is anticipated
that each REMIC will
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elect under Section 171 of the Code to amortize any premium on the Home Equity
Loans. Premium on any Home Equity Loan to which such election applies may be
amortized under a constant yield method, presumably taking into account a
Prepayment Assumption.
The REMIC will be allowed deductions for interest (including original issue
discount) on the REMIC Regular Certificates (including any other class of
REMIC Certificates constituting "regular interests" in the REMIC not offered
hereby) equal to the deductions that would be allowed if the REMIC Regular
Certificates (including any other class of REMIC Certificates constituting
"regular interests" in the REMIC not offered hereby) were indebtedness of the
REMIC. Original issue discount will be considered to accrue for this purpose
as described above under "--Taxation of Owners of REMIC Regular Certificates--
Original Issue Discount," except that the de minimis rule and the adjustments
for subsequent holders of REMIC Regular Certificates (including any other
class of Certificates constituting "regular interests" in the REMIC not
offered hereby) described therein will not apply.
If a class of REMIC Regular Certificates is issued at a price in excess of
the stated redemption price of such class (such excess, "Issue Premium"), the
net amount of interest deductions that are allowed the REMIC in each taxable
year with respect to the REMIC Regular Certificates of such class will be
reduced by an amount equal to the portion of the Issue Premium that is
considered to be amortized or repaid in that year. Although the matter is not
entirely certain, it is likely that Issue Premium would be amortized under a
constant yield method in a manner analogous to the method of accruing original
issue discount described above under "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount."
As a general rule, the taxable income of the REMIC will be determined in the
same manner as if the REMIC were an individual having the calendar year as its
taxable year and using the accrual method of accounting. However, no item of
income, gain, loss or deduction allocable to a prohibited transaction will be
taken into account. See "--Prohibited Transactions and Other Possible REMIC
Taxes" below. Further, the limitation on miscellaneous itemized deductions
imposed on individuals by Section 67 of the Code (which allows such deductions
only to the extent they exceed in the aggregate two percent of the taxpayer's
adjusted gross income) will not be applied at the REMIC level so that the
REMIC will be allowed deductions for servicing, administrative and other non-
interest expenses in determining its taxable income. All such expenses will be
allocated as a separate item to the holders of REMIC Certificates, subject to
the limitation of Section 67 of the Code. See "--Possible Pass-Through of
Miscellaneous Itemized Deductions" herein. If the deductions allowed to the
REMIC exceed its gross income for a calendar quarter, such excess will be the
net loss for the REMIC for that calendar quarter.
Basis Rules, Net Losses and Distributions
The adjusted basis of a REMIC Residual Certificate will be equal to the
amount paid for such REMIC Residual Certificate, increased by amounts included
in the income of the REMIC Residual Certificateholder and decreased (but not
below zero) by distributions made, and by net losses allocated, to such REMIC
Residual Certificateholder.
A REMIC Residual Certificateholder is not allowed to take into account any
net loss for any calendar quarter to the extent such net loss exceeds such
REMIC Residual Certificateholder's adjusted basis in its REMIC Residual
Certificate as of the close of such calendar quarter (determined without
regard to such net loss). Any loss that is not currently deductible by reason
of this limitation may be carried forward indefinitely to future calendar
quarters and, subject to the same limitation, may be used only to offset
income from the REMIC Residual Certificate. The ability of REMIC Residual
Certificateholders to deduct net losses may be subject to additional
limitations under the Code, as to which REMIC Residual Certificateholders
should consult their tax advisors.
Any distribution on a REMIC Residual Certificate will be treated as a non-
taxable return of capital to the extent it does not exceed the holder's
adjusted basis in such REMIC Residual Certificate. To the extent a
distribution on a REMIC Residual Certificate exceeds such adjusted basis, it
will be treated as gain from the sale
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of such REMIC Residual Certificate. Holders of certain REMIC Residual
Certificates may be entitled to distributions early in the term of the related
REMIC under circumstances in which their bases in such REMIC Residual
Certificates will not be sufficiently large that such distributions will be
treated as nontaxable returns of capital. Their bases in such REMIC Residual
Certificates will initially equal the amount paid for such REMIC Residual
Certificates and will be increased by their allocable shares of taxable income
of the Trust. However, such basis increases may not occur until the end of the
calendar quarter, or perhaps the end of the calendar year, with respect to
which such REMIC taxable income is allocated to the REMIC Residual
Certificateholders. To the extent such REMIC Residual Certificateholders'
initial bases are less than the distributions to such REMIC Residual
Certificateholders, and increases in such initial bases either occur after
such distributions or (together with their initial bases) are less than the
amount of such distributions, gain will be recognized to such REMIC Residual
Certificateholders on such distributions and will be treated as gain from the
sale of their REMIC Residual Certificates.
The effect of these rules is that a Residual Certificateholder may not
amortize its basis in a REMIC Residual Certificate, but may only recover its
basis through distributions, through the deduction of its share of any net
losses of the REMIC or upon the sale of its REMIC Residual Certificate. See
"--Sales of REMIC Certificates" herein. For a discussion of possible
modifications of these rules that may require adjustments to income of a
holder of a REMIC Residual Certificate other than an original holder in order
to reflect any difference between the cost of such REMIC Residual Certificate
to such holder and the adjusted basis such REMIC Residual Certificate would
have had in the hands of the original holder, see "--Taxation of Owners of
REMIC Residual Certificates--General" herein.
Excess Inclusions
Any "excess inclusions" with respect to a REMIC Residual Certificate will,
with an exception discussed below for certain REMIC Residual Certificates held
by thrift institutions, be subject to federal income tax in all events.
In general, the "excess inclusions" with respect to a REMIC Residual
Certificate for any calendar quarter will be the excess, if any, of (i) the
sum of the daily portions of REMIC taxable income allocable to such REMIC
Residual Certificate over (ii) the sum of the "daily accruals" (as defined
below) for each day during such quarter that such REMIC Residual Certificate
was held by such REMIC Residual Certificateholder. The daily accruals of a
REMIC Residual Certificateholder will be determined by allocating to each day
during a calendar quarter its ratable portion of the product of the "adjusted
issue price" of the REMIC Residual Certificate at the beginning of the
calendar quarter and 120% of the "long-term Federal rate" in effect on the
Closing Date. For this purpose, the adjusted issue price of a REMIC Residual
Certificate as of the beginning of any calendar quarter will be equal to the
issue price of the REMIC Residual Certificate, increased by the sum of the
daily accruals for all prior quarters and decreased (but not below zero) by
any distributions made with respect to such REMIC Residual Certificate before
the beginning of such quarter. The issue price of a REMIC Residual Certificate
is the initial offering price to the public (excluding bond houses and
brokers) at which a substantial amount of the REMIC Residual Certificates were
sold. The "long-term Federal 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.
For REMIC Residual Certificateholders, an excess inclusion (i) will not be
permitted to be offset by deductions, losses or loss carryovers from other
activities, (ii) will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization and (iii) will not be eligible for any rate
reduction or exemption under any applicable tax treaty with respect to the 30%
United States withholding tax imposed on distributions to REMIC Residual
Certificateholders that are foreign investors. See, however, "--Foreign
Investors in REMIC Certificates" below.
Although it has not done so, the Treasury also has authority to issue
regulations that would treat the entire amount of income accruing on a REMIC
Residual Certificate as an excess inclusion if the REMIC Residual Certificates
are considered not to have "significant value." The REMIC Regulations provide
that in order to be
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treated as having significant value, the REMIC Residual Certificates must have
an aggregate issue price at least equal to two percent of the aggregate issue
prices of all of the related REMIC's Regular and Residual Certificates. In
addition, based on the Prepayment Assumption, the anticipated weighted average
life of the REMIC Residual Certificates must equal or exceed 20 percent of the
anticipated weighted average life of the REMIC, based on the Prepayment
Assumption and on any required or permitted clean up calls or required
qualified liquidation provided for in the REMIC's organizational documents.
The related Prospectus Supplement will disclose whether offered REMIC Residual
Certificates may be considered to have "significant value" under the REMIC
Regulations; provided, however, that any disclosure that a REMIC Residual
Certificate will have "significant value" will be based upon certain
assumptions, and the Seller will make no representation that a REMIC Residual
Certificate will have "significant value" for purposes of the above-described
rules.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Section 857(b)(2) of
the Code, excluding any net capital gain), will be allocated among the
shareholders of such trust in proportion to the dividends received by such
shareholders from such trust, and any amount so allocated will be treated as
an excess inclusion with respect to a REMIC Residual Certificate as if held
directly by such shareholder. Treasury regulations yet to be issued could
apply a similar rule to regulated investment companies, common trust funds and
certain cooperatives; the REMIC Regulations currently do not address this
subject.
Noneconomic REMIC Residual Certificates
Under the REMIC Regulations, transfers of "noneconomic" REMIC Residual
Certificates will be disregarded for all federal income tax purposes if "a
significant purpose of the transfer was to enable the transferor to impede the
assessment or collection of tax." If such transfer is disregarded, the
purported transferor will continue to remain liable for any taxes due with
respect to the income on such "noneconomic" REMIC Residual Certificate. The
REMIC Regulations provide that a REMIC Residual Certificate is noneconomic
unless, based on the Prepayment Assumption and on any required or permitted
clean up calls, or required qualified liquidation provided for in the REMIC's
organizational documents, (1) the present value of the expected future
distributions (discounted using the "applicable Federal rate" for obligations
whose term ends on the close of the last quarter in which excess inclusions
are expected to accrue with respect to the REMIC Residual Certificate, which
rate is computed and published monthly by the IRS) on the REMIC Residual
Certificate equals at least the present value of the expected tax on the
anticipated excess inclusions, and (2) the transferor reasonably expects that
the transferee will receive distributions with respect to the REMIC Residual
Certificate at or after the time the taxes accrue on the anticipated excess
inclusions in an amount sufficient to satisfy the accrued taxes. Accordingly,
all transfers of REMIC Residual Certificates that may constitute noneconomic
residual interests will be subject to certain restrictions under the terms of
the related Pooling and Servicing Agreement that are intended to reduce the
possibility of any such transfer being disregarded. Such restrictions will
require each party to a transfer to provide an affidavit that no purpose of
such transfer is to impede the assessment or collection of tax, including
certain representations as to the financial condition of the prospective
transferee, as to which the transferor also is required to make a reasonable
investigation to determine such transferee's historic payment of its debts and
ability to continue to pay its debts as they come due in the future. Prior to
purchasing a REMIC Residual Certificate, prospective purchasers should
consider the possibility that a purported transfer of such REMIC Residual
Certificate by such a purchaser to another purchaser at some future date may
be disregarded in accordance with the above-described rules which would result
in the retention of tax liability by such purchaser.
The related Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations; provided, however, that any disclosure that a REMIC
Residual Certificate will not be considered "noneconomic" will be based upon
certain assumptions, and the Seller will make no representation that a REMIC
Residual Certificate will not be considered "noneconomic" for purposes of the
above-described rules. See "--Foreign Investors in REMIC Certificates" below
for additional restrictions applicable to transfers of certain REMIC Residual
Certificates to foreign persons.
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MARK-TO-MARKET RULES
Treasury regulations provide that any REMIC Residual Certificate acquired
after January 4, 1995 will not be treated as a security and therefore
generally may not be marked to market.
POSSIBLE PASS-THROUGH OF MISCELLANEOUS ITEMIZED DEDUCTIONS
Fees and expenses of a REMIC generally will be allocated to the holders of
the related REMIC Residual Certificates. The applicable Treasury regulations
indicate, however, that in the case of a REMIC that is similar to a single
class grantor trust, all or a portion of such fees and expenses should be
allocated to the holders of the related REMIC Regular Certificates. Unless
otherwise stated in the related Prospectus Supplement, such fees and expenses
will be allocated to holders of the related REMIC Residual Certificates in
their entirety and not to the holders of the related REMIC Regular
Certificates.
With respect to REMIC Residual Certificates or REMIC Regular Certificates
the holders of which receive an allocation of fees and expenses in accordance
with the preceding discussion, if any holder thereof is an individual, estate
or trust, or a "pass-through entity" beneficially owned by one or more
individuals, estates or trusts, (i) an amount equal to such individual's,
estate's or trust's share of such fees and expenses will be added to the gross
income of such holder and (ii) such individual's, estate's or trust's share of
such fees and expenses will be treated as a miscellaneous itemized deduction
allowable subject to the limitation of Section 67 of the Code, which permits
such deductions only to the extent they exceed in the aggregate two percent of
a taxpayer's adjusted gross income. In addition, Section 68 of the Code
provides that the amount of itemized deductions otherwise allowable for an
individual whose adjusted gross income exceeds a specified amount will be
reduced by the lesser of (i) 3% of the excess of the individual's adjusted
gross income over such amount or (ii) 80% of the amount of itemized deductions
otherwise allowable for the taxable year. The amount of additional taxable
income reportable by REMIC Certificateholders that are subject to the
limitations of either Section 67 or Section 68 of the Code may be substantial.
Furthermore, in determining the alternative minimum taxable income of such a
holder of a REMIC Certificate that is an individual, estate or trust, or a
"pass-through entity" beneficially owned by one or more individuals, estates
or trusts, no deduction will be allowed for such holder's allocable portion of
servicing fees and other miscellaneous itemized deductions of the REMIC, even
though an amount equal to the amount of such fees and other deductions will be
included in such holder's gross income. Accordingly, such REMIC Certificates
may not be appropriate investments for individuals, estates, or trusts, or
pass-through entities beneficially owned by one or more individuals, estates
or trusts. Such prospective investors should consult carefully with their tax
advisors prior to making an investment in such Certificates.
SALES OF REMIC CERTIFICATES
If a REMIC Certificate is sold, the selling Certificateholder will recognize
gain or loss equal to the difference between the amount realized on the sale
and its adjusted basis in the REMIC Certificate. The adjusted basis of a REMIC
Regular Certificate generally will equal the cost of such REMIC Regular
Certificate to such Certificateholder, increased by income reported by such
Certificateholder with respect to such REMIC Regular Certificate (including
original issue discount and market discount income) and reduced (but not below
zero) by distributions on such REMIC Regular Certificate received by such
Certificateholder and by any amortized premium. The adjusted basis of a REMIC
Residual Certificate will be determined as described under "--Taxation of
Owners of REMIC Residual Certificates--Basis Rules, Net Losses and
Distributions" herein. Except as described below, any such gain or loss
generally will be capital gain or loss.
Gain from the sale of a REMIC Regular Certificate that might otherwise be
capital gain will be treated as ordinary income to the extent such gain does
not exceed the excess, if any, of (i) the amount that would have been
includable in the seller's income with respect to such REMIC Regular
Certificate had income accrued thereon at a rate equal to 110% of the
"applicable Federal rate" (generally, a rate based on an average of current
yields on Treasury securities having a maturity comparable to that of the
Certificate, which rate is computed and published monthly by the IRS),
determined as of the date of purchase of such REMIC Regular Certificate, over
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(ii) the amount of ordinary income actually includable in the seller's income
prior to such sale. In addition, gain recognized on the sale of a REMIC
Regular Certificate by a seller who purchased such REMIC Regular Certificate
at a market discount will be taxable as ordinary income to the extent of any
accrued and previously unrecognized market discount that accrued during the
period the Certificate was held. See "--Taxation of Owners of REMIC Regular
Certificates--Market Discount" herein.
REMIC Certificates will be "evidences of indebtedness" within the meaning of
Section 582(c)(1) of the Code, so that gain or loss recognized from the sale
of a REMIC Certificate by a bank or thrift institution to which such section
applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC Regular Certificate that
might otherwise be capital gain may be treated as ordinary income to the
extent that such Certificate is held as part of a "conversion transaction"
within the meaning of Section 1258 of the Code. A conversion transaction
generally is one in which the taxpayer has taken two or more positions in
Certificates or similar property that reduce or eliminate market risk, if
substantially all of the taxpayer's return is attributable to the time value
of the taxpayer's net investment in such transaction. The amount of gain so
realized in a conversion transaction that is recharacterized as ordinary
income generally will not exceed the amount of interest that would have
accrued on the taxpayer's net investment at 120% of the appropriate
"applicable Federal rate" (which rate is computed and published monthly by the
IRS) at the time the taxpayer enters into the conversion transaction, subject
to appropriate reduction for prior inclusion of interest and other ordinary
income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include such net
capital gain in total net investment income for the taxable year, for purposes
of the limitation on the deduction of interest on indebtedness incurred to
purchase or carry property held for investment to a taxpayer's net investment
income.
Except as may be provided in Treasury regulations yet to be issued, if the
seller of a REMIC Residual Certificate reacquires the Certificate, any other
residual interest in a REMIC or any similar interest in a "taxable mortgage
pool" (as defined in Section 7701(i) of the Code) within six months of the
date of such sale, the sale will be subject to the "wash sale" rules of
Section 1091 of the Code. In that event, any loss realized by the REMIC
Residual Certificateholder on the sale will not be deductible, but instead
will be added to such REMIC Residual Certificateholder's adjusted basis in the
newly-acquired asset.
PROHIBITED TRANSACTIONS AND OTHER POSSIBLE REMIC TAXES
The Code imposes a tax on REMICs equal to 100% of the net income derived
from "prohibited transactions" (a "Prohibited Transactions Tax"). In general,
subject to certain specified exceptions a prohibited transaction means the
disposition of a Home Equity Loan, the receipt of income from a source other
than a Home Equity Loan or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Home Equity Loans for temporary investment pending
distribution on the REMIC Certificates. It is not anticipated that any REMIC
will engage in any prohibited transactions in which it would recognize a
material amount of net income.
In addition, certain contributions to a REMIC made after the day on which
the REMIC issues all of its interests could result in the imposition of a tax
on the REMIC equal to 100% of the value of the contributed property (a
"Contributions Tax"). Each Pooling and Servicing Agreement will include
provisions designed to prevent the acceptance of any contributions that would
be subject to such tax.
REMICs also are 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. "Net income from
foreclosure property" generally means gain from the sale of a foreclosure
property that is inventory property and gross income from foreclosure property
other than qualifying rents and other qualifying income for a real estate
investment trust. Unless otherwise disclosed in the related Prospectus
Supplement, it is not anticipated that any REMIC will recognize "net income
from foreclosure property" subject to federal income tax.
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Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any material state or local income or franchise tax will be
imposed on any REMIC.
Unless otherwise stated in the related Prospectus Supplement, and to the
extent permitted by then applicable laws, any Prohibited Transactions Tax,
Contributions Tax, tax on "net income from foreclosure property" or state or
local income or franchise tax that may be imposed on the REMIC will be borne
by the related Master Servicer or Trustee in either case out of its own funds,
provided that the Master Servicer or the Trustee, as the case may be, has
sufficient assets to do so, and provided further that such tax arises out of a
breach of the Master Servicer's or the Trustee's obligations, as the case may
be, under the related Pooling and Servicing Agreement and in respect of
compliance with applicable laws and regulations. Any such tax not borne by the
Master Servicer or the Trustee will be payable out of the related Trust
resulting in a reduction in amounts payable to holders of the related REMIC
Certificates.
TAX AND RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES TO CERTAIN
ORGANIZATIONS
If a REMIC Residual Certificate is transferred to a "disqualified
organization" (as defined below), a tax would be imposed in an amount
(determined under the REMIC Regulations) equal to the product of (i) the
present value (discounted using the "applicable Federal rate" for obligations
whose term ends on the close of the last quarter in which excess inclusions
are expected to accrue with respect to the Certificate, which rate is computed
and published monthly by the IRS) of the total anticipated excess inclusions
with respect to such REMIC Residual Certificate for periods after the transfer
and (ii) the highest marginal federal income tax rate applicable to
corporations. The anticipated excess inclusions must be determined as of the
date that the REMIC Residual Certificate is transferred and must be based on
events that have occurred up to the time of such transfer, the Prepayment
Assumption and any required or permitted clean up calls or required
liquidation provided for in the REMIC's organizational documents. Such a tax
generally would be imposed on the transferor of the REMIC Residual
Certificate, except that where such transfer is through an agent for a
disqualified organization, the tax would instead be imposed on such agent.
However, a transferor of a REMIC 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. Moreover, an entity will not
qualify as a REMIC unless there are reasonable arrangements designed to ensure
that (i) residual interests in such entity are not held by disqualified
organizations and (ii) information necessary for the application of the tax
described herein will be made available. Restrictions on the transfer of REMIC
Residual Certificates and certain other provisions that are intended to meet
this requirement will be included in the Pooling and Servicing Agreement.
In addition, if a "pass-through entity" (as defined below) includes in
income excess inclusions with respect to a REMIC Residual Certificate, and a
disqualified organization is the record holder of an interest in such entity,
then a tax will be imposed on such entity equal to the product of (i) the
amount of excess inclusions on the REMIC Residual Certificate that are
allocable to the interest in the pass-through entity held by such disqualified
organization and (ii) the highest marginal federal income tax rate imposed on
corporations. A pass-through entity will not be subject to this tax for any
period, however, if each record holder of an interest in such pass-through
entity furnishes to such pass-through entity (i) such holder's social security
number and a statement under penalties of perjury that such social security
number is that of the record holder or (ii) a statement under penalties of
perjury that such record holder is not a disqualified organization.
For these purposes, a "disqualified organization" means (i) the United
States, any State or political subdivision thereof, any foreign government,
any international organization, or any agency or instrumentality of the
foregoing (but would not include instrumentalities described in Section
168(h)(2)(D) of the Code or the Federal Home Loan Mortgage Corporation), (ii)
any organization (other than a cooperative described in Section 521 of the
Code) that is exempt from federal income tax, unless it is subject to the tax
imposed by Section 511 of the Code or (iii) any organization described in
Section 1381(a)(2)(C) of the Code. For these purposes, a "pass-through entity"
means any regulated investment company, real estate investment trust, trust,
partnership or certain other entities
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described in Section 860E(e)(6) of the Code. In addition, a person holding an
interest in a pass-through entity as a nominee for another person will, with
respect to such interest, be treated as a pass-through entity.
TERMINATION
A REMIC will terminate immediately after the Payment Date following receipt
by the REMIC of the final payment in respect of the Home Equity Loans or upon
a sale of the REMIC's assets following the adoption by the REMIC of a plan of
complete liquidation. The last distribution on a REMIC Regular Certificate
will be treated as a payment in retirement of a debt instrument. In the case
of a REMIC Residual Certificate, if the last distribution on such REMIC
Residual Certificate is less than the REMIC Residual Certificateholder's
adjusted basis in such Certificate, such REMIC Residual Certificateholder
should be treated as realizing a loss equal to the amount of such difference,
and such loss may be treated as a capital loss.
REPORTING AND OTHER ADMINISTRATIVE MATTERS
Solely for purposes of the administrative provisions of the Code, the REMIC
will be treated as a partnership and Residual Certificateholders will be
treated as partners. Unless otherwise stated in the related Prospectus
Supplement, the Master Servicer will file REMIC federal income tax returns on
behalf of the related REMIC, will be designated as and will act as the "tax
matters person" with respect to the REMIC in all respects, and generally will
hold at least a nominal amount of REMIC Residual Certificates.
As the tax matters person, the Master Servicer will, subject to certain
notice requirements and various restrictions and limitations, generally have
the authority to act on behalf of the REMIC and the REMIC Residual
Certificateholders in connection with the administrative and judicial review
of items of income, deduction, gain or loss of the REMIC, as well as the
REMIC's classification. REMIC Residual Certificateholders will generally be
required to report such REMIC items consistently with their treatment on the
related REMIC's tax return and may in some circumstances be bound by a
settlement agreement between the Master Servicer, as tax matters person, and
the IRS concerning any such REMIC item. Adjustments made to the REMIC tax
return may require a REMIC Residual Certificateholder to make corresponding
adjustments on its return, and an audit of the REMIC's tax return, or the
adjustments resulting from such an audit, could result in an audit of a REMIC
Residual Certificateholder's return. No REMIC will be registered as a tax
shelter pursuant to Section 6111 of the Code because it is not anticipated
that any REMIC will have a net loss for any of the first five taxable years of
its existence. Any person that holds a REMIC Residual Certificate as a nominee
for another person may be required to furnish to the related REMIC, in a
manner to be provided in Treasury regulations, the name and address of such
person and other information.
Reporting of interest income, including any original issue discount, with
respect to REMIC Regular Certificates is required annually, and may be
required more frequently under Treasury regulations. These information reports
generally are required to be sent to individual holders of REMIC Regular
Interests and the IRS; holders of REMIC Regular Certificates that are
corporations, trusts, securities dealers and certain other non-individuals
will be provided interest and original issue discount income information and
the information set forth in the following paragraph upon request in
accordance with the requirements of the applicable regulations. The
information must be provided by the later of 30 days after the end of the
quarter for which the information was requested, or two weeks after the
receipt of the request. The REMIC must also comply with rules requiring a
REMIC Regular Certificate issued with original issue discount to disclose on
its face certain information including the amount of original issue discount
and the issue date, and requiring such information to be reported to the IRS.
Reporting with respect to the REMIC Residual Certificates, including income,
excess inclusions, investment expenses and relevant information regarding
qualification of the REMIC's assets will be made as required under the
Treasury regulations, generally on a quarterly basis.
As applicable, the REMIC Regular Certificate information reports will
include a statement of the adjusted issue price of the REMIC Regular
Certificate at the beginning of each accrual period. In addition, the reports
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will include information required by regulations with respect to computing the
accrual of any market discount. Because exact computation of the accrual of
market discount on a constant yield method requires information relating to
the holder's purchase price that the Master Servicer will not have, such
regulations only require that information pertaining to the appropriate
proportionate method of accruing market discount be provided. See "--Taxation
of Owners of REMIC Regular Certificates--Market Discount" herein.
The responsibility for complying with the foregoing reporting rules will be
borne by the Trustee. Certificateholders may request any information with
respect to the returns described in Section 1.6049-7(e)(2) of the Treasury
regulations. Such request should be directed to the Trustee at First National
Bank of Chicago, One First National Plaza, Suite 0126, Chicago, Illinois
60670-0126, Attn: Corporate Trust Services Division.
BACKUP WITHHOLDING WITH RESPECT TO REMIC CERTIFICATES
Payments of interest and principal, as well as payments of proceeds from the
sale of REMIC Certificates, may be subject to the "backup withholding tax"
under Section 3406 of the Code at a rate of 31% if recipients of such payments
fail to furnish to the payor certain information, including their taxpayer
identification numbers, or otherwise fail to establish an exemption from such
tax. Any amounts deducted and withheld from a distribution to a recipient
would be allowed as a credit against such recipient's federal income tax.
Furthermore, certain penalties may be imposed by the IRS on a recipient of
payments that is required to supply information but that does not do so in the
proper manner.
FOREIGN INVESTORS IN REMIC CERTIFICATES
A REMIC Regular Certificateholder that is not a "United States person" (as
defined below) and is not subject to federal income tax as a result of any
direct or indirect connection to the United States in addition to its
ownership of a REMIC Regular Certificate will not be subject to United States
federal income or withholding tax in respect of a distribution on a REMIC
Regular Certificate, provided that the holder complies to the extent necessary
with certain identification requirements (including delivery of a statement,
signed by the Certificateholder under penalties of perjury, certifying that
such Certificateholder is not a United States person and providing the name
and address of such Certificateholder). For these purposes, "United States
person" means a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in, or under the laws of, the
United States or any political subdivision thereof, or an estate or trust
whose income from sources without the United States is includable in gross
income for United States federal income tax purposes regardless of its
connection with the conduct of a trade or business within the United States.
It is possible that the IRS may assert that the foregoing tax exemption should
not apply with respect to a REMIC Regular Certificate held by a REMIC Residual
Certificateholder that owns directly or indirectly a 10% or greater interest
in the REMIC Residual Certificates. If the holder does not qualify for
exemption, distributions of interest, including distributions in respect of
accrued original issue discount, to such holder may be subject to a tax rate
of 30%, subject to reduction under any applicable tax treaty.
In addition, the foregoing rules will not apply to exempt a United States
shareholder of a controlled foreign corporation from taxation on such United
States shareholder's allocable portion of the interest income received by such
controlled foreign corporation.
Further, it appears that a REMIC Regular Certificate would not be included
in the estate of a non-resident alien individual and would not be subject to
United States estate taxes. However, Certificateholders who are non-resident
alien individuals should consult their tax advisors concerning this question.
Unless otherwise stated in the related Prospectus Supplement, transfers of
REMIC Residual Certificates to investors that are not United States Persons
will be prohibited under the related Pooling and Servicing Agreement.
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STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences" herein, potential investors should consider
the state and local tax consequences of the acquisition, ownership, and
disposition of the Certificates offered hereunder. State tax law may differ
substantially from the corresponding federal tax law, and the discussion above
does not purport to describe any aspect of the tax laws of any state or other
jurisdiction. Therefore, prospective investors should consult their own tax
advisors with respect to the various tax consequences of investments in the
certificates offered hereunder.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain fiduciary and prohibited transaction restrictions on employee
pension and welfare benefit plans subject to ERISA ("ERISA Plans"). Section
4975 of the Code imposes similar prohibited transaction restrictions on tax-
qualified retirement or annuity plans described in Section 401(a) or 403(a) of
the Code ("Qualified Plans") and on individual retirement accounts ("IRAs")
described in Section 408 of the Code (collectively, "Tax-Favored Plans").
Generally, any person who has discretionary authority or control respecting
the management or disposition of "plan assets" of any ERISA Plan or Tax-
Favored Plan (collectively, "Plans"), and any person who provides investment
advice with respect to such assets for a fee, is a fiduciary of the Plan
involved.
Any fiduciary or other Plan investor considering whether to purchase any
Certificates on behalf of or with "plan assets" of any Plan should consult
with its counsel and refer to the applicable Prospectus Supplement for
guidance regarding the ERISA Considerations applicable to the Certificates
offered thereby.
Certain employee benefit plans, such as 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 the requirements of ERISA or Section 4975 of the
Code. Accordingly, assets of such plans may be invested in the Certificates
without regard to the ERISA considerations described herein and in the
applicable Prospectus Supplement, subject to the provisions of other
applicable federal and state law. However, any such plan that is a Qualified
Plan and exempt from taxation under Section 501(a) of the Code is subject to
the prohibited transaction rules set forth in Section 503(b) of the Code.
In addition to imposing general fiduciary requirements, including those of
investment prudence and diversification and the requirement that an ERISA
Plan's investments be made in accordance with the documents governing the
Plan, Section 406 of ERISA and Section 4975 of the Code prohibit a broad range
of transactions involving "plan assets" of Plans and persons (referred to as
"parties in interest" in ERISA or "disqualified persons" in Section 4975 of
the Code) (collectively, "Parties in Interest") who have certain specified
relationships to the Plans, unless a statutory or administrative exemption is
available. Certain Parties in Interest that participate in a prohibited
transaction may be subject to a penalty or an excise tax imposed pursuant to
Section 502 of ERISA or Section 4975 of the Code, unless a statutory or
administrative exemption is available.
PLAN ASSET REGULATION
An investment of Plan Assets (as defined below) in Certificates may cause
the Home Equity Loans and other assets of the related Trust to be deemed "plan
assets" of all Plans involved. Section 2510.3-101 of the U.S. Department of
Labor (the "DOL") regulations (the "DOL Regulation") addresses whether or not
a Plan's assets would be deemed to include an interest in the underlying
assets of an entity (such as a Trust), for purposes of applying the general
fiduciary responsibility provisions of ERISA and the prohibited transaction
provisions of ERISA and Section 4975 of the Code, when such Plan acquires an
"equity interest" (such as a Certificate) in such entity. Because of the
indefinite nature of certain of the rules set forth in the DOL Regulation, the
assets of a Plan which acquires Certificates of any Class may be deemed to
include merely its interest in the Certificates
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<PAGE>
or both such interest and an undivided interest in the assets of the related
Trust. Therefore, Plan Assets should not be used to acquire or hold
Certificates in reliance upon the availability of any exception under the DOL
Regulation. For purposes of the sections of this Prospectus and any Prospectus
Supplement headed "ERISA Considerations," the terms "Plan Assets" and "assets
of a Plan" have the meaning specified in the DOL Regulation and include an
undivided interest in the underlying assets of certain entities in which a
Plan invests.
The prohibited transaction provisions of Section 406 of ERISA and Section
4975 of the Code may apply to a Trust and cause the Seller, the Master
Servicer, any Subservicer, the Trustee, the obligor under any credit
enhancement mechanism and certain affiliates thereof, to be considered or
become Parties in Interest with respect to the assets of any Plan that are
invested in Certificates issued by the Trust. If so, the acquisition or
holding of Certificates by or on behalf of a Plan or with Plan Assets could
also give rise to a prohibited transaction under ERISA and Section 4975 of the
Code, unless a statutory or administrative exemption is available.
Certificates acquired by a Plan would be assets of that Plan. Under the DOL
Regulation, the Home Equity Loans and other assets held in the Trust may also
be deemed to be assets of each Plan that acquires Certificates. Special
caution should be exercised before Plan Assets are used to acquire a
Certificate in such circumstances, especially if, with respect to such Plan
Assets, a Seller, the Master Servicer, a Subservicer, the Trustee, the obligor
under any credit enhancement mechanism or an affiliate thereof either (1) has
investment discretion with respect to the investment of Plan Assets, or (2)
has authority or responsibility to give (or regularly gives) investment advice
with respect to Plan Assets for a fee pursuant to an agreement or
understanding that such advice will serve as a primary basis for investment
decisions with respect thereto.
Any person who has discretionary authority or control with respect to the
management or disposition of the assets of a Plan, and any person who provides
investment advice with respect to such assets for a fee (in the manner
described above), is a fiduciary with respect to such Plan. If the Home Equity
Loans and other Trust assets were deemed to be Plan Assets, any party
exercising management or discretionary control regarding those assets may be
deemed to be a "fiduciary" with respect to all Plans involved and, therefore,
subject to the fiduciary requirements of ERISA and the prohibited transaction
provisions of ERISA and Section 4975 of the Code with respect to such Plans.
In addition, if the Home Equity Loans and other Trusts assets were deemed to
be Plan Assets, the acquisition or holding of Certificates by or on behalf of
a Plan or with Plan Assets, as well as the normal operations of the Trust, may
constitute or result in a prohibited transaction under ERISA and Section 4975
of the Code.
PROHIBITED TRANSACTION EXEMPTIONS
Underwriters' Exemptions. The DOL has issued individual exemptions (each, an
"Exemption") to a large number of investment banking firms, broker-dealers and
banks or their affiliates (each, an "Underwriter"), which generally exempt
from the application of the prohibited transaction provisions of Section 406
of ERISA, and the excise taxes imposed on prohibited transactions pursuant to
Section 4975(a) and (b) of the Code, certain transactions (among others)
relating to the servicing and operation of mortgage pools and the purchase,
sale and holding of mortgage pass-through certificates issued by a trust as to
which an Underwriter to whom the DOL has issued an Exemption (or any of its
affiliates) is the sole underwriter or the manager or co-manager of the
underwriting syndicate, or a selling or placement agent, with respect to such
certificates, provided that certain conditions set forth in the applicable
Exemption are satisfied. The Prospectus Supplement for each Series will state
(in the section headed "ERISA Considerations") whether or not the DOL has
issued an Exemption to an Underwriter with respect that Series and identify
the Classes of Certificates of that Series to which any such Exemption may
apply.
General Conditions. Each Exemption sets forth six general conditions which
must be satisfied for a transaction involving the purchase, sale and holding
of Certificates to be eligible for exemptive relief thereunder. First, the
acquisition of Certificates with Plan Assets must be on terms that are at
least as favorable to the Plans involved as they would be in an arm's-length
transaction with an unrelated party. Second, an Exemption only applies to
Certificates evidencing rights and interests that are not subordinated to the
rights and interests
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<PAGE>
evidenced by the other Certificates of the same Trust. Third, the
Certificates, at the time of their acquisition with Plan Assets, must be rated
in one of the three highest generic rating categories by S&P, Moody's, D&P or
Fitch (collectively, the "Exemption Rating Agencies"). Fourth, the Trustee
must not be an affiliate of any member of the "Restricted Group," which
consists of any Underwriter, the Seller, the Master Servicer, any Subservicer
and any mortgagor with respect to Home Equity Loans constituting more than 5%
of the aggregate unamortized principal balance of the Home Equity Loans held
in the related Trust as of the date of initial issuance of the Certificates.
Fifth, the sum of all payments made to and retained by the underwriters must
represent not more than reasonable compensation for underwriting or placing
the Certificates; the sum of all payments made to and retained by the Seller
pursuant to the assignment of the Home Equity Loans and other Trust assets to
the related Trust must represent not more than the fair market value of such
obligations; and the sum of all payments made to and retained by the Master
Servicer and any Subservicers must represent not more than reasonable
compensation for such persons' services under the related Pooling and
Servicing Agreement and reimbursement of such persons' reasonable expenses in
connection therewith. Sixth, each Exemption states that the investing Plan
must be an accredited investor as defined in Rule 501(a)(1) of Regulation D of
the Securities and Exchange Commission under the Securities Act of 1933,
as amended.
A Plan fiduciary or other investor of Plan Assets contemplating purchasing a
Certificate must make its own determination that the general conditions
described above will be satisfied with respect to such Certificate.
If the general conditions of an applicable Exemption are satisfied, the
Exemption may provide exemptive relief from the restrictions imposed by
Section 406(a) of ERISA, and the excise taxes imposed by Section 4975(a) and
(b) by reason of Section 4975(c)(1)(A) through (D) of the Code, in connection
with the direct or indirect sale, exchange, transfer, holding or the direct or
indirect acquisition or disposition in the secondary market of Certificates by
a Plan or with Plan Assets. However, no exemption is provided from
the restrictions of Section 406(a)(1)(E) and 406(a)(2) of ERISA for the
acquisition or holding of a Certificate by or with Plan Assets of an Excluded
Plan by any person who has discretionary authority or renders investment
advice with respect to Plan Assets of such Excluded Plan. For purposes of the
sections of this Prospectus and any Prospectus Supplement headed "ERISA
Considerations," the term "Excluded Plan" means a Plan sponsored by any member
of the Restricted Group (as defined above).
Specific Conditions. If certain specific conditions of an applicable
Exemption are also satisfied, the Exemption may provide exemptive relief from
the restrictions imposed by Section 406(b)(1) and (2) of ERISA, and the excise
taxes imposed by Section 4975(a) and (b) by reason of Section 4975(c)(1)(E) of
the Code, in connection with (1) the direct or indirect sale, exchange or
transfer of Certificates, in the initial issuance of Certificates between a
Seller or an Underwriter and an investor of Plan Assets, when the person who
has discretionary authority or renders investment advice with respect to the
investment of the relevant Plan Assets in the Certificates is a mortgagor with
respect to 5% or less of the fair market value of the Home Equity Loans
or other assets held in the Trust (or an affiliate of such a person), and (2)
the direct or indirect acquisition or disposition in the secondary market and
holding of Certificates by a Plan or with Plan Assets.
Further, if certain specific conditions of an applicable Exemption are
satisfied, the Exemption may provide exemptive relief from the restrictions
imposed by Section 406(a) and (b) of ERISA, and the excise taxes imposed by
Section 4975(a) and (b) by reason of Section 4975(c) of the Code, for
transactions in connection with the servicing, management and operation of the
Mortgage Pools. The Seller expect that those specific conditions of an
applicable Exemption will be satisfied with respect to the Certificates so
that the Exemption would provide exemptive relief from those restrictions and
excise taxes for transactions in connection with the servicing, management and
operation of the Mortgage Pools, provided that the general conditions of the
Exemption are satisfied.
An applicable Exemption also may provide exemptive relief from the
restrictions imposed by Section 406(a) of ERISA, and the excise taxes imposed
by Section 4975(a) and (b) by reason of Section 4975(e)(1)(A) through (D) of
the Code, if such restrictions are otherwise deemed to apply merely because a
person is deemed to be a
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<PAGE>
Party in Interest with respect to a Plan (or the investing entity holding Plan
Assets) by virtue of providing services to the Plan(s) involved, or by virtue
of having certain specified relationships to such a person, solely as a result
of the ownership of Certificates by a Plan or with Plan Assets.
Advance Determinations. Before purchasing any Class of Certificates of any
Series, a Plan fiduciary or other investor of Plan Assets should itself
determine that (1) the DOL has issued an Exemption to an Underwriter with
respect that Series, (2) the Exemption applies to Certificates of that Class,
(3) the Certificates constitute "certificates" as defined in the Exemption,
and (4) the specific and general conditions and any other requirements set
forth in the Exemption would be satisfied. In addition to making its own
determination as to the availability of the exemptive relief provided by an
applicable Exemption, the Plan fiduciary or other investor of Plan Assets
should consider its general fiduciary obligations under ERISA in determining
whether to purchase any Certificates with Plan Assets.
Any Plan fiduciary or other of Plan Assets investor who proposes to purchase
Certificates with Plan Assets should consult with its counsel with respect to
the potential applicability of ERISA and Section 4975 of the Code to such
investment and the availability of exemptive relief under an Exemption or any
other prohibited transaction exemption in connection therewith. In particular,
in connection with a contemplated purchase of Certificates representing a
beneficial ownership interest in a pool of single-family residential mortgage
loans, any fiduciary or other Plan investor should consider the availability
of an Exemption or Prohibited Transaction Class Exemption ("PTCE") 83-1 for
certain transactions involving mortgage pool investment trusts. The Prospectus
Supplement for any Series of Certificates may contain additional information
regarding the application of an Exemption, PTCE 83-1 or any other prohibited
transaction exemption with respect to the Certificates offered thereby.
However, PTCE 83-1 does not provide exemptive relief with respect to
Certificates evidencing interests in Trusts which include Cooperative Loans.
In addition, such fiduciary or other Plan Asset investor should consider the
availability of other class exemptions granted by the DOL, which provide
relief from certain of the prohibited transaction provisions of ERISA and the
related excise tax provisions of Section 4975 of the Code, including Sections
I and III of PTCE 95-60, regarding transactions by insurance company general
accounts. The applicable Prospectus Supplement may contain additional
Information regarding the application of the Exemption, PTCE 83-1, PTCE 95-60
or other DOL class exemptions with respect to the Certificates offered
thereby. There can be no assurance that any of these exemptions will apply
with respect to any particular Plan's or other Plan Asset investor's
investment in the Certificates or, even if an exemption were deemed to apply,
that any exemption would apply to all prohibited transactions that may occur
in connection with such an investment.
INSURANCE COMPANY GENERAL ACCOUNTS
In addition to any exemption that may be available under PTCE 95-60 for the
purchase and holding of the Certificates by an insurance company general
account, the Small Business Job Protection Act of 1996 added a new Section
401(c) to ERISA, which provides certain exemptive relief from the provisions
of Part 4 of Title I of ERISA and Section 4975 of the Code, including the
prohibited transaction restrictions imposed by ERISA and the related excise
taxes imposed by Section 4975 of the Code, for transactions involving an
insurance company general account. Pursuant to Section 401(c) of ERISA, the
DOL was required to issue final regulations ("the 401(c) Regulations") no
later than December 31, 1997 which are to provide guidance for the purpose of
determining, in cases where insurance policies or annuity contracts supported
by an insurer's general account are issued to or for the benefit of a Plan on
or before December 31, 1998, which general account assets constitute Plan
Assets. The DOL issued proposed regulations under Section 401(c) on December
22, 1997, but the required final regulations have not been issued as of the
date hereof. Section 401(c) of ERISA generally provides that, until the date
which is 18 months after the 401(c) Regulations become final, no person shall
be subject to liability under Part 4 of Title I of ERISA and Section 4975 of
the Code on the basis of a claim that the assets of an insurance company
general account constitute Plan Assets, unless (i) as otherwise provided by
the Secretary of Labor in the 401(c) Regulations to prevent avoidance of the
regulations or (ii) an action is brought by the Secretary of Labor for certain
breaches of fiduciary duty which would also constitute a violation of federal
or state criminal law. Any assets of an insurance company general account
which support insurance policies or
69
<PAGE>
annuity contracts issued to a Plan after December 31, 1998 or issued to Plans
on or before December 31, 1998 for which the insurance company does not comply
with the 401(c) Regulations may be treated as Plan Assets. In addition,
because Section 401(c) does not relate to insurance company separate accounts,
separate account assets are still treated as Plan Assets of any Plan invested
in such separate account. Insurance companies contemplating the investment of
general account assets in the Certificates should consult with their legal
counsel with respect to the applicability of Sections I and III of PTCE 95-60
and Section 401(c) of ERISA, including the general account's ability to
continue to hold the Certificates after the date which is 18 months after the
date the 401(c) Regulations become final.
REPRESENTATION FROM INVESTING PLANS
The exemptive relief afforded by the Exemption will not apply to the
purchase, sale or holding of any class of Subordinated Certificates. To the
extent Certificates are Subordinated Certificates, transfers of such
Certificates to a Plan, to a trustee or other person acting on behalf of any
Plan, or to any other person using Plan Assets to effect such acquisition will
not be registered by the Trustee unless the transferee provides the Seller,
the Trustee and the Master Servicer with an opinion of counsel satisfactory to
the Seller, the Trustee and the Master Servicer, which opinion will not be at
the expense of the Seller, the Trustee or the Master Servicer, that the
purchase of such Certificates by or on behalf of such Plan is permissible
under applicable law, will not constitute or result in any non-exempt
prohibited transaction under ERISA or Section 4975 of the Code and will not
subject the Seller, the Trustee and the Master Servicer to any obligation in
addition to those undertaken in the Pooling and Servicing Agreement. In lieu
of such opinion of counsel, the transferee may provide a certification of
facts substantially to the effect that the purchase of such Certificates by or
on behalf of such Plan is permissible under applicable law, will not
constitute or result in a non-exempt prohibited transaction under ERISA or
Section 4975 of the Code, will not subject the Seller, the Trustee or the
Master to any obligation in addition to those undertaken in the Pooling and
Servicing Agreement, and the following conditions are met: (a) the source of
funds used to purchase such Certificates is an "insurance company general
account" (as such term is defined in PTCE 95-60), and (b) the conditions set
forth in Sections I and III of PTCE 95-60 have been satisfied as of the date
of the acquisition of such Certificates.
TAX EXEMPT INVESTORS
A Plan that is exempt from federal income taxation pursuant to Section
501(a) of the Code (a "Tax Exempt Investor") nonetheless will be subject to
federal income taxation to the extent that its income is "unrelated business
taxable income" ("UBTI") (within the meaning of Section 512 of the Code). All
"excess inclusions" of a REMIC allocated to a REMIC Residual Certificate held
by a Tax-Exempt Investor will be considered UBTI and, therefore, will be
subject to federal income tax. See "Certain Federal Income Tax Consequences--
Taxation of Owners of REMIC Residual Interests--Excess Inclusions" herein.
CONSULTATION WITH COUNSEL
There can be no assurance that the Exemption or any other DOL exemption will
apply with respect to any particular Plan that acquires the Certificates or,
even if all of the conditions specified therein were satisfied, that the
exemption would apply to transactions involving a Trust. Prospective Plan
investors should consult with their legal counsel concerning the impact of
ERISA and the Code and the potential consequences to their specific
circumstances prior to making an investment in the Certificates.
Any fiduciary or other investor of Plan Assets that proposes to acquire or
hold Certificates on behalf of or with Plan Assets of any Plan should consult
with its counsel with respect to the potential applicability of the fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions
of ERISA and Section 4975 of the Code to the proposed investment and the
Exemption, the availability of exemptive relief under PTCE 83-1, Sections I
and III of PTCE 95-60 or any other DOL class exemption.
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<PAGE>
LEGAL INVESTMENT
Unless otherwise specified in the related Prospectus Supplement, no Class of
Certificates of a Series will constitute "mortgage related securities" under
the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") because the
related Mortgage Pool will include Home Equity Loans that are secured by
second or more junior Mortgages. Investors should consult their own legal
advisers in determining whether and to what extent any Class of Certificates
of a Series constitutes legal investments for such investors.
USE OF PROCEEDS
The Seller will use the net proceeds received from each sale of Certificates
to purchase Home Equity Loans from its affiliates. Such affiliates will use
such proceeds for general corporate purposes.
PLAN OF DISTRIBUTION
The Certificates of each Series may be sold to or through underwriters by a
negotiated firm commitment underwriting and public reoffering by the
underwriters or such other underwriting arrangement as may be specified in the
related Prospectus Supplement or may be offered or placed either directly or
through agents. The Seller intends that Certificates will be offered through
such various methods from time to time and that offerings may be made
concurrently through more than one of such methods or that an offering of a
particular Series of Certificates may be made through a combination of such
methods.
The distribution of Certificates may be effected from time to time in one or
more transactions at a fixed price or prices, which may be changed, or at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or in negotiated transactions or otherwise at varying
prices to be determined at the time of sale.
In connection with the sale of the Certificates, underwriters or agents may
receive compensation in the form of discounts, concessions or commissions.
Underwriters may sell Certificates to certain dealers at prices less a
concession. Underwriters may allow and such dealers may reallow a concession
to certain other dealers. Underwriters, dealers and agents that participate in
the distribution of the Certificates of a Series may be deemed to be
underwriters and any discounts or commissions received by them from the Seller
or the related Trust and any profit on the resale of the Certificates by them
may be deemed to be underwriting discounts and commissions under the
Securities Act of 1933. Any such underwriters or agents will be identified,
and any such compensation received from the Seller or the related Trust will
be described, in the related Prospectus Supplement.
Under agreements which may be entered into by the Seller, underwriters and
agents who participate in the distribution of the Certificates may be entitled
to indemnification by the Seller against certain liabilities, including
liabilities under the Securities Act of 1933.
The underwriters may, from time to time, buy and sell Certificates, but
there can be no assurance that an active secondary market will develop and
there is no assurance that any such market, if established, will continue.
RATINGS
Each Class of Certificates of a Series offered hereby will be rated at their
initial issuance in one of the four highest categories by at least one Rating
Agency.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning
Rating Agency. No person is obligated to maintain the rating on any
Certificate, and, accordingly, there can be no assurance that the ratings
assigned to a Certificate upon initial
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<PAGE>
issuance will not be lowered or withdrawn by a Rating Agency at any time
thereafter. In general, ratings address credit risk and do not represent any
assessment of the likelihood or rate of principal prepayments.
LEGAL MATTERS
Certain legal matters relating to the Certificates and certain federal
income tax consequences of the issuance of the Certificates will be passed
upon by Orrick, Herrington & Sutcliffe LLP, counsel to the Seller, the Master
Servicer and TFC.
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<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Accrual Certificates....................................................... 6
Accrual Period............................................................. 5
Actuarial Loan............................................................. 19
Advance.................................................................... 10
ARM Loans.................................................................. 19
Asset Conservation Act..................................................... 49
Available Payment Amount................................................... 32
Balloon Loans.............................................................. 14
Basic Principal Payment.................................................... 7
Book-Entry Certificates.................................................... 7
Cash Collateral Account.................................................... 36
Cash Collateral Lender..................................................... 36
Cede....................................................................... 7
CEDEL...................................................................... 43
CEDEL Participants......................................................... 43
CERCLA..................................................................... 49
Certificate Insurance Policy............................................... 35
Certificate Owners......................................................... 2
Certificateholder.......................................................... 50
Certificates............................................................... 1
Citibank................................................................... 42
Class...................................................................... 1
Closing Date............................................................... 4
Code....................................................................... 12
Collection Account......................................................... 31
Combined Loan-to-Value Ratio............................................... 18
Commission................................................................. 2
Committee Report........................................................... 52
Consumer Mortgage Loans.................................................... 23
Contributions Tax.......................................................... 62
conversion transaction..................................................... 62
Cooperative................................................................ 44
Cooperative Loans.......................................................... 45
Credit Provider............................................................ 34
Curtailments............................................................... 6
Cut-off Date............................................................... 4
Deferred Interest.......................................................... 20
Definitive Certificates.................................................... 43
Depositaries............................................................... 42
Determination Date......................................................... 5
DOL........................................................................ 66
DOL Regulation............................................................. 66
DTC........................................................................ 7
</TABLE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
ERISA...................................................................... 12
ERISA Considerations....................................................... 12
ERISA Plans................................................................ 66
Euroclear.................................................................. 44
Euroclear Operator......................................................... 44
Euroclear Participants..................................................... 44
Excess Spread.............................................................. 31
Exchange Act............................................................... 2
Excluded Plan.............................................................. 68
Exemption.................................................................. 67
Exemption Rating Agencies.................................................. 68
FHA Loans.................................................................. 24
FHLMC...................................................................... 39
FNMA....................................................................... 30
Gross Margin............................................................... 20
Home Equity Loan........................................................... 1
Home Equity Loan Losses.................................................... 32
Home Equity Loan Ratio..................................................... 19
Home Equity Loan Schedule.................................................. 28
Home Equity Loans.......................................................... 4
HUD........................................................................ 40
Index...................................................................... 20
Index of Principal Definitions............................................. 1
Indirect Participants...................................................... 7
Insurance Proceeds......................................................... 6
Insurer.................................................................... 35
IRAs....................................................................... 66
IRS........................................................................ 52
Issue Premium.............................................................. 58
Letter of Credit........................................................... 35
Letter of Credit Issuer.................................................... 35
Liquidated Home Equity Loan................................................ 7
Liquidation Proceeds....................................................... 7
Majority in Aggregate Voting Interest...................................... 40
Master Servicer............................................................ 1
Master Servicer Termination Event.......................................... 41
Maximum Mortgage Rate...................................................... 20
Minimum Mortgage Rate...................................................... 20
Monthly Payments........................................................... 6
Morgan..................................................................... 42
Mortgage................................................................... 1
Mortgage File.............................................................. 28
</TABLE>
I-1
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS--(CONTINUED)
PAGE PAGE
<TABLE>
<S> <C>
Mortgage Interest Rate...................................................... 9
Mortgage Pool............................................................... 1
mortgage related securities................................................. 12
Mortgaged Property.......................................................... 1
Mortgagor................................................................... 13
Neg-Am ARM Loans............................................................ 20
Net Liquidation Proceeds.................................................... 7
OID Regulations............................................................. 50
Original Pool Principal Balance............................................. 18
Owners...................................................................... 42
Participants................................................................ 7
Parties in Interest......................................................... 66
Pass-Through Rate........................................................... 5
Payment Date................................................................ 5
Percentage Interest......................................................... 7
Periodic Cap................................................................ 20
Permitted Instruments....................................................... 30
Plan........................................................................ 12
Plan Assets................................................................. 12
Plans....................................................................... 66
Pool Insurance Policy....................................................... 35
Pool Insurer................................................................ 35
Pool Principal Balance...................................................... 34
Prepayment Assumption....................................................... 52
Prepayment Period........................................................... 6
Principal Prepayments....................................................... 6
Prior Owners................................................................ 16
Prohibited Transactions Tax................................................. 62
PTCE........................................................................ 69
Qualified Plans............................................................. 66
Qualified Substitute Home Equity Loan....................................... 30
Rating Agency............................................................... 11
RCRA........................................................................ 49
real estate assets.......................................................... 51
Real Estate Owned........................................................... 25
Record Date................................................................. 5
regular interests........................................................... 12
Released Mortgaged Property Proceeds........................................ 7
Relief Act.................................................................. 48
REMIC....................................................................... 1
REMIC Certificates.......................................................... 50
REMIC Provisions............................................................ 50
</TABLE>
<TABLE>
<S> <C>
REMIC Regular Certificates.................................................. 50
REMIC Regulations........................................................... 50
REMIC Residual Certificates................................................. 50
Remittance Period........................................................... 6
REO Properties.............................................................. 9
Reserve Account............................................................. 36
residual interests.......................................................... 12
Rules....................................................................... 43
Sample Pool................................................................. 18
Seller...................................................................... 1
Senior Certificates......................................................... 36
Senior Lien................................................................. 12
Series...................................................................... 1
Servicing Advances.......................................................... 31
Servicing Fee............................................................... 11
Simple Interest Loan........................................................ 19
SMMEA....................................................................... 71
Special Hazard Policy....................................................... 36
Spread Account.............................................................. 36
Subordinated Certificates................................................... 36
Subservicer................................................................. 39
Subservicing Agreements..................................................... 39
Substitution Adjustment..................................................... 30
Successor Master Servicer................................................... 41
Tax Counsel................................................................. 50
Tax Exempt Investor......................................................... 70
Tax-Favored Plans........................................................... 66
Terms and Conditions........................................................ 44
TFC......................................................................... 22
TFC Home Equity Loan Trust.................................................. 4
Tiered REMICs............................................................... 51
TMC......................................................................... 23
Transamerica................................................................ 22
Transamerica FSB............................................................ 22
Trust....................................................................... 1
Trustee..................................................................... 1
UBTI........................................................................ 70
Underwriter................................................................. 67
VA Loans.................................................................... 24
weighted average life....................................................... 21
Yield Supplement Account.................................................... 36
</TABLE>
I-2
<PAGE>
$93,860,000
TFC HOME EQUITY LOAN ASSET-BACKED CERTIFICATES
SERIES 1998-1
METROPOLITAN MORTGAGE COMPANY
MASTER SERVICER
----------------
PROSPECTUS SUPPLEMENT
----------------
PRUDENTIAL SECURITIES INCORPORATED
Underwriter
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION.
WE ARE NOT OFFERING THE CERTIFICATES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED.
WE DO NOT CLAIM THE ACCURACY OF THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS AS OF ANY DATE OTHER THAN THE DATES STATED ON
THEIR RESPECTIVE COVERS.
DEALERS WILL DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS
UNDERWRITERS OF THE CERTIFICATES AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS. IN ADDITION, ALL DEALERS SELLING THE CERTIFICATES WILL DELIVER A
PROSPECTUS SUPPLEMENT AND PROSPECTUS UNTIL 90 DAYS AFTER THE DATE OF THIS
PROSPECTUS SUPPLEMENT.
NOVEMBER 23, 1998
