<PAGE>
424B2
File Number 333-3574
PROSPECTUS SUPPLEMENT
(To Prospectus dated August 19, 1996)
$157,259,000 (Approximate)
First Union Residential Securitization Transactions, Inc.,
Depositor
First Union National Bank of North Carolina,
Seller and Master Servicer
$68,008,000 Class A-1 6.69% Certificates
$34,126,000 Class A-2 6.97% Certificates
$26,157,000 Class A-3 7.29% Certificates
$11,433,000 Class A-4 7.60% Certificates
$17,535,000 Class A-5 7.77% Certificates
Home Equity Loan Asset-Backed Certificates, Series 1996-1
Principal and interest payable on the 25th day of each month, beginning in
September 1996
The Series 1996-1 Home Equity Loan Asset-Backed Certificates (the
"Certificates") will consist of five Classes (each a "Class") of senior
Certificates (the "Senior Certificates") consisting of the Class A-1
Certificates, the Class A-2 Certificates, the Class A-3 Certificates, the Class
A-4 Certificates and the Class A-5 Certificates (collectively, the "Class A
Certificates"), an interest only subordinate class and a residual class (the
"Class R Certificates," and together with such other Class of subordinate
Certificates, the "Subordinated Certificates"). Only the Class A Certificates
(the "Offered Certificates") are being offered hereby. The Certificates will
represent undivided interests in FURST Home Equity Loan Trust 1996-1 (the "Trust
Fund") consisting of a pool of closed-end, fixed-rate home equity loans (the
"Mortgage Loans") secured by mortgages, security deeds or deeds of trust (of
which approximately 81.6% by principal balance are first liens and the remainder
are second liens) on one- to four-family residential properties, all monies
received thereunder on or after August 1, 1996 (the "Cut-Off Date") (exclusive
of payments in respect of principal and interest on the Mortgage Loans due prior
to the Cut-Off Date and received thereafter), security interests in the
properties which secure the Mortgage Loans, the Certificate Insurance Policy
described below and certain other property. The aggregate scheduled principal
balance of the Mortgage Loans as of the Cut-Off Date was $157,259,098.27 (the
"Cut-Off Date Aggregate Loan Balance").
(continued on next page)
The Offered Certificates represent beneficial interests in the Trust Fund
only and do not represent interests in or obligations of the Depositor, the
Seller, the Master Servicer, the Trustee or any of their affiliates. The Offered
Certificates are not insured or guaranteed by any governmental agency or by any
other person or entity (however, the Offered Certificates will have the benefit
of the Certificate Insurance Policy, as defined and to the extent described,
herein), including the Depositor, the Seller, the Master Servicer, the Trustee
or any of their affiliates. Distributions on the Offered Certificates will be
payable solely from the assets transferred to the Trust Fund for the benefit of
the holders of the Offered Certificates.
For a discussion of certain factors relating to an investment in the
Offered Certificates, see "Risk Factors" on page S-12 herein and on page 14 in
the accompanying Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS OR THE RELATED PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Offered Certificates are being offered by First Union Capital Markets
Corp., an affiliate of the Depositor, the Seller and the Master Servicer, and
Lehman Brothers Inc. (together with First Union Capital Markets Corp., the
"Underwriters") from time to time in negotiated transactions or otherwise at
varying prices to be determined, in each case, at the time of sale. The
aggregate proceeds to the Depositor from the sale of the Offered Certificates
will be approximately $156,683,295, plus accrued interest, before deducting
expenses payable by the Depositor, estimated to be $350,000 in the aggregate.
First Union Capital Markets Corp. expects to enter into market making
transactions in the Offered Certificates and may act as principal or agent in
any such transactions. Any such purchases or sales will be made at prices
related to prevailing market prices at the time of sale. This Prospectus
Supplement and the Prospectus may be used by First Union Capital Markets Corp.
in connection with such transactions.
The Offered Certificates offered hereby are offered subject to prior sale,
when, as and if issued by the Trust Fund and accepted by the Underwriters and
subject to their right to reject orders in whole or in part. It is expected that
delivery of the Offered Certificates will be made in book-entry form only
through the facilities of The Depository Trust Company, Cedel Bank, societe
anonyme and the Euroclear System on or about August 28, 1996 (the "Closing
Date"). The Offered Certificates will be offered in Europe and the United States
of America.
First Union Capital Markets Corp. Lehman Brothers
The date of this Prospectus Supplement is August 22, 1996.
<PAGE>
(cover continued from previous page)
The Mortgage Loans conveyed to the Trust Fund by First Union Residential
Securitization Transactions, Inc. (the "Depositor") on the Closing Date were
originated or purchased by First Union National Bank of North Carolina (in such
capacity, the "Seller") or its affiliates and were acquired from the Seller by
the Depositor. First Union National Bank of North Carolina will service the
Mortgage Loans (in such capacity, the "Master Servicer"). The Trust Fund will be
created pursuant to a Pooling and Servicing Agreement to be dated as of August
1, 1996 (the "Pooling and Servicing Agreement") among the Depositor, the Seller,
the Master Servicer, First Union National Bank of North Carolina, Trust
Department, as document custodian (the "Document Custodian"), and Norwest Bank
Minnesota, National Association, as Trustee (the "Trustee"). Terms used and not
otherwise defined herein shall have the respective meanings ascribed to such
terms in the Prospectus dated August 19, 1996, attached hereto (the
"Prospectus").
Holders (alternatively, the "Holders" or the "Certificateholders") of the
Class A Certificates will receive distributions of principal and interest on the
25th day of each month (or, if such day is not a business day, the next
following business day), beginning September 25, 1996 (each such day, a
"Distribution Date"). Interest will be paid to the Holders of the Class A
Certificates on each Distribution Date based on the Class A Principal Balance
(as defined herein) applicable to each such Class of Certificates. The principal
amount of a Class of Class A Certificates (each, a "Class A Principal Balance")
on any Distribution Date is equal to the applicable Class A Principal Balance on
the Closing Date minus the aggregate of amounts actually distributed as
principal to the holders of such Class of Class A Certificates. On any date, the
"Aggregate Class A Principal Balance" is the aggregate of the Class A Principal
Balances of each Class of Class A Certificates. Distributions in reduction of
the Class A Certificate Principal Balance will be made to Holders of Class A
Certificates on each Distribution Date in the manner and in the amounts
described herein.
On or before the issuance of the Certificates, the Depositor will obtain
from Financial Guaranty Insurance Company (the "Certificate Insurer") a
certificate guaranty insurance policy, relating to the Offered Certificates (the
"Certificate Insurance Policy"), in favor of the Trustee. The Certificate
Insurance Policy will protect Holders of the Offered Certificates against
shortfalls in amounts due to be distributed at the times and to the extent
described herein. See "The Certificate Insurer and the Certificate Insurance
Policy."
(FGIC Logo) FINANCIAL GUARANTY INSURANCE
COMPANY
FGIC is a registered service mark used by Financial Guaranty Insurance
Company, a private company not affiliated with any U.S. Government agency.
An election will be made to treat certain assets of the Trust Fund as a
real estate mortgage investment conduit (a "REMIC") for federal income tax
purposes. The Offered Certificates and the Subordinated Certificates, other than
the Class R Certificates, will represent regular interests in the REMIC. The
Class R Certificates will represent the sole class of "residual interest" in the
REMIC. See "Certain Federal Income Tax Consequences" herein and in the
Prospectus.
The Underwriters intend to make a secondary market in the Offered
Certificates, but have no obligation to do so. There can be no assurance that a
secondary market for the Offered Certificates will develop, or if it does
develop, that it will provide holders of the Offered Certificates with liquidity
of investment at any particular time or for the life of the Offered
Certificates. The Offered Certificates will not be listed on any securities
exchange.
The Offered Certificates constitute part of a separate series of Home
Equity Loan Asset-Backed Certificates being offered by the Depositor from time
to time pursuant to the Prospectus. This Prospectus Supplement does not contain
complete information about the offering of the Offered Certificates. Additional
information is contained in the Prospectus, and investors are urged to read both
this Prospectus Supplement and the Prospectus in full. Sales of the Offered
Certificates may not be consummated unless the purchaser has received both this
Prospectus Supplement and the Prospectus.
To the extent that any statements in this Prospectus Supplement modify
statements contained in the Prospectus, the statements in this Prospectus
Supplement shall control.
Upon receipt of a request by an investor who has received an electronic
Prospectus Supplement and Prospectus from an Underwriter or a request by such
investor's representative within the period during which there is an obligation
to deliver a Prospectus Supplement and Prospectus, the Depositor or such
Underwriter will deliver or cause to be delivered, without charge, a paper copy
of the Prospectus Supplement and Prospectus.
Until 90 days from the date of this Prospectus Supplement, all dealers
effecting transactions in the Offered Certificates, whether or not participating
in this distribution, may be required to deliver a Prospectus Supplement and
Prospectus. This is
S-2
<PAGE>
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.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
There are incorporated herein by reference all documents filed by or on
behalf of the Trust Fund with the Commission pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act"),
on or subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Offered Certificates made by this Prospectus
Supplement. The Depositor will provide without charge to each person to whom
this Prospectus Supplement and Prospectus are delivered, on request of such
person, a copy of any or all of the documents incorporated herein by reference
other than the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Requests should be directed to the
Secretary of First Union Residential Securitization Transactions, Inc. in
writing at 301 South College Street, Charlotte, North Carolina 28288-0600, or by
telephone at (704) 383-3624.
S-3
<PAGE>
SUMMARY OF TERMS OF THE OFFERED CERTIFICATES
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and in the
accompanying Prospectus. Capitalized terms used herein and not otherwise defined
shall have the respective meanings assigned them in the Prospectus or elsewhere
in this Prospectus Supplement.
<TABLE>
<S> <C>
Securities Offered.................................... Home Equity Loan Asset-Backed Certificates, Series 1996-1, Class A
Certificates.
Issuer................................................ FURST Home Equity Loan Trust 1996-1 is the issuer of the
Certificates.
Trust Fund............................................ The Trust Fund initially will include the scheduled principal balance
of each Mortgage Loan as of the Cut-Off Date. With respect to any
date, the "Aggregate Loan Balance" will be equal to the aggregate of
the outstanding principal balances of all Mortgage Loans as of such
date. The "Cut-Off Date Loan Balance" with respect to each Mortgage
Loan is the scheduled principal balance thereof as of the Cut-Off
Date. The "Loan Balance" of a Mortgage Loan (other than a Liquidated
Mortgage Loan) on any day is equal to its Cut-Off Date Loan Balance,
minus all collections applied in reduction of the Cut-Off Date Loan
Balance of such Mortgage Loan. The Loan Balance of a Liquidated
Mortgage Loan (as defined herein) after the Collection Period in
which such Mortgage Loan becomes a Liquidated Mortgage Loan shall be
zero. Interest on each Mortgage Loan is payable monthly on the
outstanding Loan Balance thereof at a rate per annum (the "Loan
Rate") specified in the related Mortgage Note.
Depositor............................................. First Union Residential Securitization Transactions, Inc. ("FURST"),
a North Carolina corporation, a wholly owned, limited purpose
subsidiary of the Seller and Master Servicer and an affiliate of
First Union Capital Markets Corp., will sell the Mortgage Loans to
the Trust Fund in exchange for the Certificates. The Mortgage Loans
will be acquired by the Depositor from the Seller.
Seller................................................ First Union National Bank of North Carolina, a national banking
association, a wholly owned subsidiary of First Union Corporation and
an affiliate of First Union Capital Markets Corp., will originate or
acquire the Mortgage Loans and sell them to the Depositor.
Master Servicer....................................... First Union National Bank of North Carolina, a national banking
association, a wholly owned subsidiary of First Union Corporation and
an affiliate of First Union Capital Markets Corp., will service the
Mortgage Loans.
Document Custodian.................................... First Union National Bank of North Carolina, Trust Department, an
affiliate of First Union Capital Markets Corp., will maintain
possession of the Mortgage Files (as defined herein) until the
occurrence of an Assignment Event (as defined herein).
Trustee............................................... Norwest Bank Minnesota, National Association, a national banking
association, will act as trustee of the Trust Fund.
Original Class A Certificate Principal Balance........ $157,259,000.
Description of the Certificates....................... The Certificates will consist of five Classes of Class A
Certificates, an interest only subordinate class and one class of
Class R Certificates, and each such class will evidence undivided
interests in the Trust Fund to be created pursuant to the Pooling and
Servicing Agreement. The Class A Certificates will be senior
certificates as
</TABLE>
S-4
<PAGE>
<TABLE>
<S> <C>
described herein. The interest only subordinate class and the Class R
Certificates will be subordinate certificates as described herein and
are referred to as the "Subordinated Certificates." The Subordinated
Certificates are not being offered hereby. The Subordinated
Certificates will not have a principal balance.
The Offered Certificates will evidence undivided ownership interests
in a pool of closed-end fixed-rate home equity loans. The Mortgage
Loans (as defined herein) are secured by mortgages on primarily
residential one- to four-family properties. The Mortgage Loans are
secured by mortgages of which approximately 81.6% by Cut-Off Date
Aggregate Loan Balance are first mortgages and the remainder are
second mortgages.
Prepayment and Yield Considerations................... The actual rate of prepayment of principal on the Mortgage Loans
cannot be predicted. The investment performance of the Class A
Certificates may vary materially and adversely from the investment
expectations of investors due to prepayments on the Mortgage Loans
being higher or lower than anticipated by investors. The actual yield
to the holder of a Class A Certificate may not be equal to the yield
anticipated at the time of purchase of the Certificate or, notwith-
standing that the actual yield is equal to the yield anticipated at
that time, the total return on investment expected by the investor or
the weighted average life of the Certificate may not be realized.
Weighted Average Life Volatility. One indication of the impact of
varying prepayment rates on a security is the change in its weighted
average life. The "weighted average life" of a Class A Certificate is
the average amount of time that will elapse between the date of
issuance of the Certificate and the date on which each dollar in
reduction of the principal balance of the Certificate is distributed
to the investor. Low rates of prepayment may result in the extension
of the weighted average life of a Certificate; high rates may result
in the shortening of such weighted average life. In general, if the
weighted average life of a Certificate purchased at par is extended
beyond that initially anticipated, such Certificate's market value
may be adversely affected. The weighted average lives of the Class A
Certificates, under various prepayment scenarios, are displayed in
the tables appearing under the heading "Prepayment and Yield
Considerations" in this Prospectus Supplement.
Certificate Rate...................................... The "Certificate Rate" applicable to each of the Class A-1
Certificates, the Class A-2 Certificates, the Class A-3 Certificates,
the Class A-4 Certificates and the Class A-5 Certificates on any
Distribution Date is the respective rate per annum set forth on the
cover hereof, subject, in the case of the Class A-5 Certificates, to
certain limitations set forth herein under "Description of the
Certificates -- Certificate Rate". Interest on each Class of Offered
Certificates in respect of any Distribution Date will accrue from the
first day of the calendar month preceding the month of such
Distribution Date through the last day of such calendar month on the
basis of a 360-day year consisting of twelve 30-day months.
Denominations......................................... The Offered Certificates will be issuable in minimum denominations of
$1000 and integral dollar multiples in excess thereof.
Cut-Off Date.......................................... August 1, 1996.
</TABLE>
S-5
<PAGE>
<TABLE>
<S> <C>
Pooling and Servicing Agreement....................... The Pooling and Servicing Agreement dated as of August 1, 1996 among
the Depositor, the Seller, the Master Servicer, the Document
Custodian and the Trustee relating to the Certificates.
The Mortgage Loans.................................... The Mortgage Loans to be conveyed to the Trust Fund by the Seller
consist of 2,893 Mortgages and the related Mortgage Notes on
single-family homes (which may be condominiums,
mobile/manufactured/modular homes, townhouses, rowhouses or homes in
one- to four-family residences), including investment properties,
located in 47 states and the District of Columbia. No Combined
Loan-to-Value Ratio (as defined herein) (based upon appraisals made
at the time of origination of the related Mortgage Loan) relating to
any Mortgage Loan exceeded 100% as of the Cut-Off Date. The Mortgage
Loans are not insured by primary mortgage insurance policies, nor
does any pool insurance insure the Mortgage Loans; however, certain
distributions due to the holders of the Offered Certificates are
guaranteed by the Certificate Insurer in accordance with the terms of
the Certificate Insurance Policy. See "The Certificate Insurer and
Certificate Insurance Policy." Neither the Offered Certificates nor
the underlying Mortgage Loans are guaranteed by the Depositor, the
Seller or the Master Servicer or any affiliate of the Depositor, the
Seller or the Master Servicer. Neither the Offered Certificates nor
the underlying Mortgage Loans are guaranteed or insured by any
governmental agency or instrumentality.
As of the Cut-Off Date, the average scheduled Loan Balance of the
Mortgage Loans was $54,358.48, the Loan Rates of the Mortgage Loans
ranged from 7.5% to 16.8%, the weighted average Combined
Loan-to-Value Ratio of the Mortgage Loans was 76%, the weighted
average Loan Rate of the Mortgage Loans was 10.55%, and the weighted
average remaining term to maturity of the Mortgage Loans was 196
months. The remaining terms to maturity of the Mortgage Loans as of
the Cut-Off Date ranged from 0 months to 360 months. The maximum Loan
Balance of any Mortgage Loan as of the Cut-Off Date was $761,628.14.
Mortgage Loans containing balloon payments represented 42.7% of the
Cut-Off Date Aggregate Loan Balance.
No Mortgage Loan matures after August 1, 2026. The Trust Fund
consists of 2,893 Mortgage Loans as of the Cut-Off Date, of which
1,991 are secured by first mortgages, security deeds or deeds of
trust and the remainder are secured by second mortgages, security
deeds or deeds of trust. As a percentage of the Cut-Off Date
Aggregate Loan Balance, 94.2% were secured by mortgages, deeds to
secure debt or deeds of trust on single-family dwellings, 3.9% were
secured by mortgages, deeds to secure debt or deeds of trust on
two-to-four family dwellings, 0.77% were secured by mortgages, deeds
to secure debt or deeds of trust on condominium units and planned
unit developments, 0.50% were secured by mortgages, deeds to secure
debt or deeds of trust on mobile homes and 0.63% were secured by
mortgages, deeds to secure debt or deeds of trust on other types of
dwellings.
Distributions on the Certificates..................... On each Distribution Date, the Trustee will be required to distribute
from funds available therefor in the Distribution Account (as
described herein) to the Holders of the Offered Certificates of
record
</TABLE>
S-6
<PAGE>
<TABLE>
<S> <C>
as of the last day of the calendar month preceding the month in which
such Distribution Date occurs (the "Record Date"), in the priorities
described below, an aggregate amount equal to the sum of (a) the
Class Interest Distribution for each Class of Offered Certificates,
and (b) the Class A Principal Distribution. So long as a Certificate
Insurer Default has not occurred and is continuing, the Class A
Principal Distribution will be distributed sequentially such that no
Class of Class A Certificates having a higher numerical designation
is entitled to distributions of principal until the Class A Principal
Balance of each such Class of Certificates having a lower numerical
designation has been reduced to zero. On any Distribution Date during
the continuance of a Certificate Insurer Default, the Class A
Principal Distribution relating to the Class A Certificates will be
distributed to each such Class of Class A Certificates outstanding on
a pro rata basis in accordance with the Class A Principal Balance of
each such Class. See "Description of the
Certificates -- Distributions to Certificateholders" herein.
Interest
On each Distribution Date, to the extent of funds available therefor
as described herein, interest will be distributed with respect to
each Class of Class A Certificates in an amount (each, a "Class
Interest Distribution") equal to the sum of (a) one month's interest
at the related Certificate Rate on the related Class A Principal
Balance, immediately prior to such Distribution Date (the "Class
Monthly Interest Distributable Amount") and (b) any Class Interest
Carryover Shortfall for such Class of Senior Certificates for such
Distribution Date. As to any Distribution Date and Class of Senior
Certificates, the "Class Interest Carryover Shortfall" is the sum of
(a) the excess of the related Class Monthly Interest Distributable
Amount for the preceding Distribution Date and any outstanding Class
Interest Carryover Shortfall with respect to such Class on such
preceding Distribution Date, over the amount in respect of interest
that is actually distributed to such Class on such preceding
Distribution Date plus (b) one month's interest on such excess, to
the extent permitted by law, at the Certificate Rate.
On each Distribution Date, the Class Interest Distribution for each
Class of Senior Certificates will be distributed on an equal priority
and any shortfall in the amount required to be distributed as
interest thereon to each such Class will be allocated among such
Classes pro rata based on the amount each such Class would have been
distributed in the absence of such shortfall.
Principal
On each Distribution Date, to the extent of funds available therefor
as described herein, principal will be distributed to the holders of
Class A Certificates then entitled to distributions of principal in
an amount equal to the lesser of (A) the Aggregate Class A Principal
Balance and (B) the Class A Principal Distribution for such
Distribution Date. "Class A Principal Distribution" means, with
respect to any Distribution Date, the sum of the Class A Monthly
Principal Distributable Amount for such Distribution Date and any
Outstanding Class A Principal Carryover Shortfall (as defined below)
as of the close of business on the preceding Distribution Date.
</TABLE>
S-7
<PAGE>
<TABLE>
<S> <C>
"Class A Monthly Principal Distributable Amount" means, with respect
to any Distribution Date, the amount equal to the sum of the
following amounts (without duplication) with respect to the
immediately preceding Collection Period (as defined below): (i) (a)
each payment of principal on a Mortgage Loan received by the Master
Servicer during such Collection Period, including all full and
partial principal prepayments, other than Payaheads received during
such Collection Period intended for application in subsequent
Collection Periods, and (b) the principal portion of Payaheads
received by the Master Servicer in prior Collection Periods intended
for application in such Collection Period, (ii) the Loan Balance as
of the end of the immediately preceding Collection Period of each
Mortgage Loan that became a Liquidated Mortgage Loan for the first
time during the related Collection Period, (iii) the portion of the
purchase price allocable to principal of all repurchased Defective
Mortgage Loans with respect to such Collection Period, (iv) any
Substitution Adjustment Amounts received on or prior to the previous
Determination Date and not yet distributed and (v) Excess Spread, if
any, up to the overcollateralization requirement in effect for such
Distribution Date (the "Distributable Excess Spread").
"Outstanding Class A Principal Carryover Shortfall" means with
respect to any Distribution Date, the excess of the Class A Principal
Distribution for the preceding Distribution Date over the amount in
respect of principal that is actually distributed to the Class A
Certificateholders on such preceding Distribution Date.
If, on any Distribution Date, the required level of overcollateral-
ization is reduced below the then existing amount of overcollateral-
ization (described below) or if the required level of overcollateral-
ization is satisfied, the amount of the Class A Monthly Principal
Distributable Amount distributed to the Class A Certificates will be
correspondingly reduced by the amount of such reduction or by the
amount necessary such that the overcollateralization will not exceed
the required level of overcollateralization after giving effect to
the distribution in respect of principal to be made on such
Distribution Date.
"Collection Period" means, with respect to any Determination Date or
Distribution Date, the calendar month immediately preceding such
Determination Date or Distribution Date, as the case may be. For a
description of a "Liquidated Mortgage Loan" see "Description of the
Certificates -- Principal" herein.
"Excess Spread" means, with respect to any Distribution Date, the
positive excess, if any, of (x) Available Funds (as defined herein)
for such Distribution Date over (y) the amount required to be
distributed pursuant to items A (i) through (iv) set forth under the
heading "Description of the Certificates -- Distributions to
Certificateholders -- Priority of Distributions" on such Distribution
Date. Distributions of Excess Spread to the Holders of Class A
Certificates will result in acceleration of principal payments to the
Holders of such Class A Certificates creating overcollateralization
to the extent required by the Pooling and Servicing Agreement. This
feature will have the effect of reducing the weighted average lives
of the Class A Certificates. See "Description of the Certificates --
</TABLE>
S-8
<PAGE>
<TABLE>
<S> <C>
Overcollateralization Provisions" and "Prepayment and Yield
Considerations" herein.
The last scheduled Distribution Date for each Class of Offered
Certificates is as follows: Class A-1, November 25, 2009, Class A-2,
May 25, 2011, Class A-3, May 25, 2011, Class A-4, September 25, 2013
and Class A-5, September 25, 2027. It is expected that the actual
last Distribution Date for each Class of Offered Certificates will
occur significantly earlier than such scheduled Distribution Dates.
See "Prepayment and Yield Considerations."
Overcollateralization................................. The credit enhancement provisions of the Trust Fund result in a
limited acceleration of the Class A Certificates relative to the
amortization of the Mortgage Loans in the early months of the
transaction. The accelerated amortization is achieved by the
application of Excess Spread to principal distributions on the Class
A Certificates. This acceleration feature creates
overcollateralization (i.e., the excess of the Aggregate Loan Balance
over the Aggregate Class A Principal Balance for the related period).
Once the required level of overcollateralization is reached and
subject to the provisions described in the next paragraph, the
acceleration feature will cease, unless necessary to maintain the
required level of overcollateralization.
The Pooling and Servicing Agreement provides that, subject to certain
floors, caps and triggers, the required level of overcollateral-
ization may increase or decrease over time. An increase in the
required level of overcollateralization will result in a temporary
period of accelerated amortization of the related Class A
Certificates to increase the actual level of overcollateralization to
its required level; a decrease would result in a temporary period of
decelerated amortization to reduce the actual level of
overcollateralization to its required level.
See "Prepayment and Yield Considerations" and "Description of the
Certificates -- Overcollateralization Provisions."
Certificate Insurance Policy.......................... The Seller will obtain the Certificate Insurance Policy, which is
non-cancelable, in favor of the Trustee, which will provide for
payment of insured amounts solely to the Class A Certificateholders
in accordance with the terms of the Certificate Insurance Policy. The
Certificate Insurance Policy does not guarantee to Class A Certifi-
cateholders, and does not protect against any adverse consequences
caused by, any specified rate of prepayments of the Mortgage Loans.
See "The Certificate Insurer and the Certificate Insurance Policy".
Certificate Insurer................................... Financial Guaranty Insurance Company, a New York stock insurance
company (the "Certificate Insurer"). See "The Certificate Insurer".
Advances.............................................. The Master Servicer will be obligated to make advances of cash in an
amount equal to all amounts of interest, if any, at the time known by
the Master Servicer to be delinquent on each Mortgage Loan and not
previously advanced, but only to the extent that the Master Servicer
believes that such amounts will be recoverable by it.
Any advance made by the Master Servicer with respect to a Mortgage
Loan will be reimbursable to it. The Master Servicer will be entitled
to reimburse itself in respect of otherwise non-
</TABLE>
S-9
<PAGE>
<TABLE>
<S> <C>
recoverable advances from funds otherwise distributable to Class A
Certificateholders. See "Description of the Certificates -- Payments
on Mortgage Loans; Deposits to Collection and Distribution
Accounts -- Advances" herein.
Servicing Fee......................................... The Master Servicer will receive a fee (the "Servicing Fee") with
respect to each Collection Period computed at an annual rate equal to
0.50% on the Loan Balance of each Mortgage Loan as of the first day
of each such Collection Period and, for any Distribution Date, the
Servicing Fee will be deducted from collections allocable to payments
of interest received during the related Collection Period. See
"Description of the Certificates -- Servicing and Other Compensation
and Payment of Expenses" herein.
Optional Termination by the Master Servicer........... The Master Servicer may, at its option, terminate the Pooling and
Servicing Agreement on any date on which the Aggregate Loan Balance
is less than 5% of the Cut-Off Date Aggregate Loan Balance, at the
price described herein under "Description of the
Certificates -- Termination; Purchase of Mortgage Loans."
Certain Federal Income Tax Consequences............... For federal income tax purposes, an election will be made to treat
certain assets of the Trust Fund as a REMIC. The Class A Certificates
and the Subordinated Certificates, other than the Class R
Certificates, will constitute the "Regular Interests" in the REMIC
and generally will be treated for federal income tax purposes as debt
instruments of the Trust Fund with payment terms equivalent to the
terms of such certificates. The Class R Certificates will constitute
the single class of "Residual Interests" in the REMIC. Continued
qualification of the Trust Fund as a REMIC will be subject to
compliance with the applicable provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), and the related requirements
set forth in the Pooling and Servicing Agreement. Interest on the
Class A Certificates will be required to be included in the income of
the holders thereof in accordance with the accrual method of
accounting. See "Certain Federal Income Tax Consequences" herein and
in the Prospectus.
ERISA Considerations.................................. A fiduciary of a pension or other employee benefit plan (a "Plan")
subject to the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), contemplating the purchase of Class A Certificates
should consult with its counsel before making a purchase and the
fiduciary and such legal advisors should consider the possible
application of the prohibited transaction exemption and certain other
exemptions described herein. See "ERISA Considerations" herein and in
the Prospectus.
Legal Investment Considerations....................... The Offered Certificates will not constitute "Mortgage Related
Securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA") because, among other reasons, some of the
mortgages securing the Mortgage Loans are not first mortgages.
Accordingly, many institutions with legal authority to invest in
comparably rated securities based on first mortgage loans may not be
legally authorized to invest in the Offered Certificates. See "Legal
Investment Considerations" herein.
Use of Proceeds....................................... Substantially all of the net proceeds from the sale of the Offered
Certificates will be applied by the Depositor to the purchase price
of the Mortgage Loans and to pay expenses connected with pooling the
Mortgage Loans and issuing the Certificates.
</TABLE>
S-10
<PAGE>
<TABLE>
<S> <C>
Certificate Rating.................................... It is a condition to the issuance of the Offered Certificates that
they be rated "AAA" by Standard & Poor's, a division of the McGraw-
Hill Companies ("S&P") and "Aaa" by Moody's Investors Service, Inc.
("Moody's" and together with S&P, the "Rating Agencies"). 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. There can be no assurance that the ratings assigned to
the Offered Certificates on the date the Offered Certificates are
initially issued will not be lowered or withdrawn at any time by such
Rating Agencies. A security rating does not address the frequency of
prepayments on the Mortgage Loans or the corresponding effect on
yield to investors. See "Certificate Rating" herein.
Registration of Offered Certificates.................. The Class A Certificates will initially be issued in book-entry form.
Persons acquiring beneficial ownership interests in the Class A
Certificates ("Certificate Owners") will hold their Class A
Certificate interests through The Depository Trust Company ("DTC"),
in the United States, or Cedel Bank, societe anonyme ("CEDEL") or the
Euroclear System ("Euroclear"), in Europe. Transfers within DTC,
CEDEL or Euroclear, as the case may be, will be in accordance with
the usual rules and operating procedures of the relevant system. So
long as the Class A Certificates are Book-Entry Certificates (as
defined herein), such Certificates will be evidenced by one or more
Certificates registered in the name of Cede & Co. ("Cede"), as the
nominee of DTC or one of the relevant depositaries (collectively, the
"European Depositaries"). Cross-market transfers between persons
holding directly or indirectly through DTC, on the one hand, and
counterparties holding directly or indirectly through CEDEL or
Euroclear, on the other, will be effected in DTC through Citibank
N.A. ("Citibank") or The Chase Manhattan Bank ("Chase"), the relevant
depositaries of CEDEL or Euroclear, respectively, and each
participating member of DTC. The interests of such 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 (as
defined herein) are issued under the limited circumstances described
herein. All references in this Prospectus Supplement to any 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 -- Book-Entry Certificates", "Description of
the Certificates -- Registration of Offered Certificates" herein and
"ANNEX I" hereto.
</TABLE>
S-11
<PAGE>
RISK FACTORS
Limited Liquidity. There is currently no market for the Offered
Certificates. While the Underwriters currently intend to make a market in the
Offered Certificates, they are under no obligation to do so. There can be no
assurance that a secondary market will develop or, if a secondary market does
develop, that it will provide holders of the Offered Certificates with liquidity
of investment or that it will continue for the lives of the Offered
Certificates. The Offered Certificates will not be listed on any securities
exchange.
Issuance of the Offered Certificates in book-entry form may reduce the
liquidity of such Certificates in the secondary trading market since investors
may be unwilling to purchase Offered Certificates for which they cannot obtain
physical certificates. See "Description of the Certificates -- Registration of
Offered Certificates" herein.
Nature of Collateral. Because some of the Mortgage Loans are secured by
second liens subordinate to the rights of the mortgagee or beneficiary under the
related first mortgage, security deed or deed of trust, the proceeds from any
liquidation, insurance or condemnation proceedings with respect to such Mortgage
Loans will be available to satisfy the outstanding balance of a Mortgage Loan
only to the extent that the claims of such first mortgagee or beneficiary have
been satisfied in full, including any related foreclosure costs. In addition, a
second mortgagee may not foreclose on the property securing a second mortgage
unless it forecloses subject to the first mortgage, in which case it must either
pay the entire amount due on the first mortgage to the first mortgagee at or
prior to the foreclosure sale or undertake the obligation to make payments on
the first mortgage in the event the mortgagor is in default thereunder. In
servicing second mortgages in its portfolio, it is generally the Master
Servicer's practice to satisfy the first mortgage at or prior to the foreclosure
sale. The Master Servicer is required, in certain circumstances described in the
Pooling and Servicing Agreement, to advance funds to keep the first mortgage
current until such time as the Master Servicer satisfies the first mortgage. The
Trust Fund will have no source of funds (and may not be permitted under the
REMIC provisions of the Code) to satisfy the first mortgage or make payments due
to the first mortgagee. The Master Servicer generally will be required to
advance such amounts in accordance with the Pooling and Servicing Agreement.
Certain of the Mortgage Loans do not fully amortize the principal balance
of the Mortgage Loan and, consequently, the payment (a "Balloon Payment") of a
substantial portion of the principal balance of such a Mortgage Loan is due at
the maturity of the Mortgage Loan. As a result, a borrower generally will be
required to pay the entire principal amount of the Mortgage Loan at its
maturity. The ability of a borrower to make such a payment may depend on the
borrower's ability to obtain refinancing of the balance due on the Mortgage
Loan. An increase in interest rates over the Loan Rate applicable at the time
the Mortgage Loan was originated may have an adverse effect on the borrower's
ability to obtain refinancing and to pay the required Balloon Payment.
In addition, adverse economic conditions (which may or may not affect real
property values) may affect the timely payment by borrowers of payments of
principal and interest when due on the Mortgage Loans and, accordingly, the
actual rates of delinquencies, foreclosures and losses with respect to the
Mortgage Loans. For instance, with respect to Mortgage Loans secured by a second
lien on the related Mortgaged Property, if a Mortgaged Property secures a senior
deed of trust or mortgage for an adjustable-rate loan, and interest rates have
increased since the origination of the related Mortgage Loan, the borrower's
ability to pay the required monthly payment on such Mortgage Loan may be further
adversely affected by the increase in monthly payments on such senior loan.
Further, application of federal and state bankruptcy and debtor relief laws
would affect the interests of the Certificateholders in the Mortgage Loans if
such laws result in certain Mortgage Loans being uncollectible. See "Certain
Legal Aspects of the Mortgage Loans -- Anti-Deficiency Legislation; Bankruptcy
and Consumer Protection Legislation."
Even assuming that the Mortgaged Properties provide adequate security for
the Mortgage Loans, delay could be encountered in connection with the
liquidation of defaulted Mortgage Loans, with corresponding delays in the
receipt of related proceeds by the Certificateholders. Further, the Master
Servicer will be entitled to deduct from Liquidation Proceeds all expenses
reasonably incurred in attempting to recover amounts due on Liquidated Mortgage
Loans and not yet repaid, including payments to prior lienholders, legal fees
and costs of legal action, real estate taxes, and maintenance and preservation
expenses, thereby reducing collections available to the Certificateholders. In
the event that any Mortgaged Properties fail to provide adequate security for
the related Mortgage Loans and the protection provided by the subordination
feature is insufficient and the Certificate Insurer defaults under the
Certificate Insurance Policy, Certificateholders could experience a loss on
their investment. See "Certain Legal Aspects of the Mortgage
Loans -- Foreclosure" and " -- Rights of Redemption."
Under federal and state environmental legislation and applicable case law,
it is unclear whether liability for costs of eliminating environmental hazards
in respect of real property may be imposed on a secured lender (such as the
Trust Fund)
S-12
<PAGE>
acquiring title to such real property. Such costs could be substantial. See
"Certain Legal Aspects of the Mortgage Loans -- Environmental Legislation."
Approximately 10.78% of the Mortgage Loans (by Cut-Off Date Aggregate Loan
Balance) are Date of Payment Loans. Date of Payment Loans provide that interest
is charged to the Mortgagor at the applicable Loan Rate on the outstanding
principal balance of the related Mortgage Note and calculated based on the
number of days elapsed from receipt of the Mortgagor's last payment through
receipt of the Mortgager's most current payment. Such interest is deducted from
the Mortgagor's payment amount and the remainder, if any, of the payment is
applied as a reduction to the outstanding principal balance of the related
Mortgage Note. Although the Mortgagor is required to remit equal monthly
payments on a specified monthly payment date that would reduce the outstanding
principal balance of the related Mortgage Note to zero at such Mortgage Note's
maturity date, payments that are made by the Mortgagor after the due date could
cause the outstanding principal balance of the related Mortgage Note not to be
reduced to zero at such Mortgage Note's maturity date. In such a case, the
Mortgagor would be required to make an additional principal payment at the
maturity date for such Mortgage Note. If, however, a Mortgagor makes a payment
before the due date therefor, the reduction in the outstanding principal balance
of the related Mortgage Note would occur over a shorter period of time than it
would have occurred had it been based on the original amortization schedule of
the related Mortgage Note. In addition, late payments may result in a longer
weighted average life and early payments may result in a shorter weighted
average life, of the Offered Certificates. Any increase or decrease in the
weighted average lives of the Offered Certificates may have an effect on the
yield on the Offered Certificates. See "The Mortgage Loan Pool -- Interest
Payments on the Mortgage Loans" and "Prepayment and Yield Considerations."
Local Real Estate Markets. An overall decline in the residential real
estate markets in the states in which the Mortgaged Properties are located could
adversely affect the values of the Mortgaged Properties such that the
outstanding Loan Balances, together with the outstanding balances of any senior
lien thereon, equals or exceeds the value of the Mortgaged Properties. Such
declines would adversely affect the position of a second mortgagee before having
such an effect on that of the related first mortgagee and could extinguish the
interest of the holder of a second mortgage on the Mortgaged Property.
Residential real estate markets in many states have softened in recent years.
There is no reliable information available to the Seller with respect to the
rate at which real estate values have declined in such states. The Seller can
neither quantify the impact of such declines in property values nor predict how
long such decline may continue or when such declines will end. During a period
of such declines, the rates of delinquencies, foreclosures and losses on the
Mortgage Loans would be expected to be higher than those experienced in the
mortgage lending industry in general.
A rise in interest rates over a period of time and the general condition of
the Mortgaged Property as well as other factors may have the effect of reducing
the value of the Mortgaged Property from the appraised value at the time the
Mortgage Loan was originated. If there is a reduction in value of the Mortgaged
Property, the ratio of the amount of the Mortgage Loan to the value of the
Mortgaged Property may increase over what it was at the time the Mortgage Loan
was originated. Such an increase may reduce the likelihood of liquidation or
other proceeds being sufficient to satisfy the Mortgage Loan after satisfaction
of any senior liens.
Cash Flow Considerations. Assuming that the Mortgaged Properties provide
adequate security for the Mortgage Loans, substantial delay could be encountered
in connection with the liquidation of defaulted Mortgage Loans and corresponding
delays in the receipt of related liquidation proceeds by Certificateholders
could occur. Further, liquidation expenses (such as legal fees, real estate
taxes, and maintenance and preservation expenses) will reduce the proceeds
payable to Certificateholders and thereby reduce the security for the Mortgage
Loans. In the event any Mortgaged Properties fail to provide adequate security
for the related Mortgage Loans, required payments under the Certificate
Insurance Policy were not made, and the protection provided by the availability
of overcollateralization has been exhausted, Class A Certificateholders could
experience a loss on their investment.
Prepayments; Due-on-Sale Provisions. The Mortgage Loans may be prepaid in
whole or in part at any time without penalty. In addition, a substantial portion
of the Mortgage Loans contain due-on-sale provisions which, to the extent
enforced by the Master Servicer, will result in prepayment of such Mortgage
Loans. See "Prepayment and Yield Considerations" and "Certain Legal Aspects of
the Mortgage Loans -- Enforceability of Certain Provisions." The rate of
prepayments on fixed-rate mortgage loans, such as the Mortgage Loans, is
sensitive to prevailing interest rates. Generally, if prevailing interest rates
fall significantly below the interest rates on the Mortgage Loans, the Mortgage
Loans are likely to be subject to higher prepayment rates than if prevailing
rates remain at or above the interest rates on the Mortgage Loans. Conversely,
if prevailing interest rates rise significantly above the interest rates on the
Mortgage Loans, the rate of prepayments is likely to
S-13
<PAGE>
decrease. The average life of the Offered Certificates, and, if purchased at
other than par, the yields realized by Certificate Owners of the Offered
Certificates, will be sensitive to levels of payment (including prepayments
relating to the Mortgage Loans, the "Prepayments") on the Mortgage Loans. In
general, the yield on an Offered Certificate that is purchased at a premium from
the outstanding principal amount thereof will be adversely affected by a higher
than anticipated level of Prepayments of the Mortgage Loans and enhanced by a
lower than anticipated level. Conversely, the yield on an Offered Certificate
that is purchased at a discount from the outstanding principal amount thereof
will be enhanced by a higher than anticipated level of Prepayments and adversely
affected by a lower than anticipated level.
The Pooling and Servicing Agreement provides a limited acceleration of the
Offered Certificates relative to the amortization of the related Mortgage Loans
in the early months of the transaction. The accelerated amortization is achieved
by the application of certain excess interest to the payment of the Class A
Principal Balance. This acceleration feature creates overcollateralization which
results from the excess of the Aggregate Loan Balance over the Class A Principal
Balance. Once a required level of overcollateralization is reached, the
acceleration feature will cease, unless necessary to maintain the required level
of overcollateralization.
Difficulty in Pledging. Since transactions in Offered Certificates can be
effected only through DTC, CEDEL, Euroclear, participating organizations,
indirect participants and certain banks, the ability of a Certificate Owner to
pledge an Offered Certificate to persons or entities that do not participate in
the DTC, CEDEL or Euroclear system, or otherwise to take actions in respect of
such Certificates, may be limited due to lack of a physical certificate
representing the Offered Certificates. See "Description of the
Certificates -- Registration of Offered Certificates" herein.
Potential Delays in Receipt of Distributions. Certificate Owners may
experience some delay in their receipt of distributions of interest and
principal on the Class A Certificates since such distributions will be forwarded
by the Trustee to DTC and DTC will credit such distributions to the accounts of
its Participants (as defined herein) which will thereafter credit them to the
accounts of Certificate Owners either directly or indirectly through indirect
participants. See "Description of the Certificates -- Registration of Offered
Certificates" herein.
Certificate Ratings. The rating of the Offered Certificates will depend
primarily on an assessment by the Rating Agencies of the underlying Mortgage
Loans, the claims paying ability rating of the Certificate Insurer and the
amount of overcollateralization. The rating by the Rating Agencies of the
Offered Certificates is not a recommendation to purchase, hold or sell the
Offered Certificates, inasmuch as such rating does not comment as to the market
price or suitability for a particular investor. There is no assurance that the
ratings will remain for any given period of time or that the ratings will not be
reduced, suspended or withdrawn by the Rating Agencies.
Certificate Insurance Policy. Credit enhancement with respect to the
Offered Certificates will be provided by the Certificate Insurance Policy. See
"Certificate Insurer and Certificate Insurance Policy" herein. If the
Certificate Insurer defaults under the Certificate Insurance Policy, the Class A
Certificateholders will be at greater risk with respect to losses on the
Mortgage Loans.
Other Legal Considerations. The Mortgage Loans are primarily secured by
first deeds of trust, security deeds or first mortgages. With respect to any
Mortgage Loan that was originally secured by a second deed of trust, security
deed or mortgage, the Master Servicer has the power under certain circumstances,
after such mortgage lien succeeds to a first lien position, to consent to a new
mortgage lien on the Mortgaged Property having priority over the related
Mortgage Loan. With respect to each Mortgage Loan secured by a second deed of
trust or second mortgage, the Trust Fund will be entitled to the extent
described herein to proceeds that remain from the sale of the related Mortgaged
Property after any related first deed of trust, first security deed or first
mortgage and any other prior liens have been satisfied. In the event that such
proceeds are insufficient to satisfy both loans and such other liens in the
aggregate, the Trust Fund and, accordingly, the Certificateholders, as the
holders of the second deed of trust or second mortgage loan, bear the risk of
delay in distribution while a deficiency judgment against the borrower is
pursued and the risk of loss if the deficiency judgment is not obtained and
realized upon.
Certain states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust, security deed or a mortgagee under a
mortgage. In some states, statutes limit the right of the beneficiary or
mortgagee to obtain a deficiency judgment against the borrower following
foreclosure or sale under a deed of trust, security deed or mortgage. A
deficiency judgment would be a personal judgment against the former borrower
equal in most cases to the difference between the net amount received 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, security deed 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
former borrower following a judicial sale to the excess of the outstanding debt
over the fair market value of the property at the time of the public sale. The
purpose of these statutes is
S-14
<PAGE>
generally to prevent a beneficiary or a mortgagee from obtaining a large
deficiency judgment against the former borrower as a result of low or no bids at
the judicial sale.
Applicable state laws generally regulate interest rates and other charges,
require certain disclosures, and require licensing of the Seller. 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 Mortgage
Loans. The Seller will be required to repurchase any Mortgage Loans which, at
the time of origination did not comply with applicable federal and state laws
and regulations. Depending on the provisions of the applicable law and the
specific facts and circumstances involved, violations of these laws, policies
and principles may limit the ability of the Trust Fund to collect all or part of
the principal of or interest on the Mortgage Loans, may entitle the borrower to
a refund of amounts previously paid and, in addition, could subject the Trust
Fund to damages and administrative enforcement. See "Certain Legal Aspects of
Mortgage Loans."
The Mortgage Loans are also subject to federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding
the terms of the Mortgage Loans;
(ii) the 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 borrower's credit experience;
(iv) the Americans with Disabilities Act, which, among other things,
prohibits discrimination on the basis of disability in the full and equal
enjoyment of the goods, services, facilities, privileges, advantages or
accommodations of any place of public accommodation; and
(v) the Home Equity Loan Consumer Protection Act of 1988, which
required additional application disclosures, limits changes that may be
made to the loan documents without the borrower's consent and restricts a
lender's ability to declare a default or to suspend or reduce a borrower's
credit line to certain enumerated events.
Violations of certain provisions of these federal laws may limit the ability of
the Master Servicer to collect all or part of the principal of or interest on
the Mortgage Loans and in addition could subject the Trust Fund to damages and
administrative enforcement. The Seller will be required to repurchase any
Mortgage Loans which, at the time of origination did not comply with such
federal laws or regulations. See "Certain Legal Aspects of the Mortgage Loans."
The federal Soldiers' and Sailors' Civil Relief Act of 1940 may affect the
ability of the Master Servicer to collect full amounts of interest on certain
Mortgage Loans and could interfere with the ability of the Master Servicer to
foreclose on certain properties. See "Certain Legal Aspects of the Mortgage
Loans -- Soldiers' and Sailors' Civil Relief Act of 1940."
Risk of Early Defaults. Many of the Mortgage Loans were originated within
12 months prior to the Cut-Off Date. The weighted average remaining term to
maturity of the Mortgage Loans as of the Cut-Off Date is approximately 196
months. Although little data is available, defaults on mortgage loans, including
home equity loans similar to the Mortgage Loans, are generally expected to occur
with greater frequency in the early years of the terms of mortgage loans.
Risk of Seller/Master Servicer Insolvency -- Document Custodian. The Seller
believes that the transfer of the Mortgage Loans to the Depositor constitutes a
sale by the Seller to the Depositor and, accordingly, that such Mortgage Loans
will not be part of the assets of the Seller in the event of the insolvency of
the Seller and will not be available to the creditors of the Seller. The terms
of the Pooling and Servicing Agreement provide that the Seller will deliver all
of the Mortgages, the Mortgage Notes and the other Related Documents to the
First Union National Bank of North Carolina, Trust Department, as Document
Custodian, which shall maintain possession of the Mortgages, the Mortgage Notes
and the other Related Documents, and no assignment of any Mortgage is required
to be recorded, in either case unless an Assignment Event as defined in the
Pooling and Servicing Agreement (an "Assignment Event") has occurred, e.g., the
long-term unsecured debt rating of the Seller is reduced below A by S&P or below
A2 by Moody's. Upon any such downgrade or occurrence of another Assignment
Event, the Document Custodian is required to deliver the Mortgages, Mortgage
Notes and the other Related Documents to the Trustee and to either cause proper
assignments of each Mortgage to be recorded in the relevant real property
recording office for each such Mortgage or to deliver assignments of the
Mortgages, in recordable form, to the Trustee, together with an opinion of
counsel to the effect that recordation of such assignments is not necessary in
order to perfect the interest of the
S-15
<PAGE>
Trust Fund in such Mortgages. Prior to such delivery and recording, the interest
of the Trustee in the Mortgages, the Mortgage Notes and the proceeds thereof may
be subject to claims of the Seller's creditors or to sale to a third party, as
well as to a receiver or conservator appointed in the event of the insolvency of
the Seller. In the event of an insolvency of the Seller, it is possible that a
receiver or conservator for, or a creditor of, the Seller, may argue that the
transaction between the Seller and the Trust Fund was a pledge of such Mortgage
Loans in connection with a borrowing by the Seller rather than a true sale. Such
an attempt, even if unsuccessful, could result in delays in distributions on the
Certificates.
If the transfer of the Mortgage Loans by the Seller to the Depositor, or by
the Depositor to the Trust Fund, is deemed, contrary to the intent of the
parties, to be a grant to the Trust Fund of a security interest in the Mortgage
Loans, the Trust Fund should have an enforceable first priority perfected
security interest in the Mortgage Loans upon delivery to the Trustee of the
Mortgage Notes (properly endorsed to the Trustee or in blank) and of the
Mortgages and upon the recordation of a proper assignment to the Trustee of each
Mortgage in the real property recording office for each such Mortgage. Prior to
such delivery and recording, the Trustee will not have a perfected security
interest in the Mortgages, the Mortgage Notes or the proceeds thereof and,
accordingly, creditors of the Seller may take priority over the interests of the
Trustee. If a receiver or conservator were appointed for the Seller, certain
administrative expenses of the receiver or conservator may have priority over
the Trust Fund's interest in the Mortgages, the Mortgage Notes and the proceeds
thereof. For so long as (i) the Master Servicer remains an Affiliate of the
Seller, (ii) no Event of Default under the Pooling and Servicing Agreement shall
have occurred and be continuing and (iii) the Seller maintains a short-term
rating of at least A-1 by Standard & Poor's and P-1 by Moody's, and for five
Business Days following any reduction in either such rating, the Master Servicer
is not required to make daily deposits of cash collections on the Mortgage Loans
into the Collection Account and the Master Servicer may commingle such cash with
its funds for certain periods. In an insolvency proceeding or receivership or
conservatorship of the Master Servicer, the Trust Fund may not have a perfected
interest in such commingled collections.
In the event the Seller is determined to have granted a security interest
in the Mortgage Loans and that security interest was validly perfected prior to
the Seller's insolvency and was not granted or taken in contemplation thereof or
with the intent to hinder, delay or defraud the institution or its creditors,
the Federal Deposit Insurance Corporation (the "FDIC"), or other conservator, or
other federal banking agency or any other person or entity, based on opinions
issued by the general counsel of the FDIC and a statement of policy of the FDIC
addressing the enforceability against the FDIC, as receiver or conservator for a
depository institution, the security interest should not be subject to avoidance
in the event of insolvency of the Seller or upon the appointment of a receiver
or conservator for the Seller, and payments to the Trust Fund with respect to
the Mortgage Loans should not be subject to recovery by such receiver or
conservator. If, however, the receiver or conservator were to assert a contrary
position, to require the Trustee to establish its rights to those payments by
submitting to and completing certain administrative claims procedures (which may
take up to 180 days), or to request a stay of judicial proceedings with respect
to the Seller, delays in payments on the Certificates and possible reductions in
the amount of distributions of principal and interest could occur. A receiver or
conservator may disaffirm or repudiate provisions of the Purchase Agreement and
the Pooling and Servicing Agreement, including provisions obligating the Seller
to repurchase Defective Mortgage Loans. A conservator or receiver also may have
the power to cause the early sale of the Trust Fund and the early retirement of
the Certificates. Further, if a receiver or conservator is appointed for the
Master Servicer, the receiver or conservator may have the power either to
terminate the Master Servicer and replace it with a successor servicer or to
prevent the termination of the Master Servicer and its replacement by a
successor servicer if no default exists other than the insolvency of the Master
Servicer or its receivership or conservatorship.
In an insolvency proceeding of the Seller, if the Mortgage Notes have not
been delivered to the Trustee, and the Mortgages have not been assigned of
record in the real property recording office for each Mortgage, the Trust Fund
may be a general unsecured creditor of the Seller. If the Trust Fund were
determined to be a general unsecured creditor of the Seller, the Mortgages, the
Mortgage Notes and the proceeds thereof would not be available to make payments
on Offered Certificates.
On the Closing Date, the Trustee and the Seller will have received an
opinion of Moore & Van Allen, PLLC, counsel to the Seller, with respect to the
transfer of the Mortgage Loans from the Seller to the Depositor and from the
Depositor to the Trust Fund, in form and substance satisfactory to the Trust
Fund, Moody's and S&P.
Book-Entry Certificates. Issuance of the Offered Certificates in book-entry
form may reduce the liquidity of such Certificates in the secondary trading
market since investors may be unwilling to purchase Offered Certificates for
which they cannot obtain physical certificates. See "Description of the
Certificates -- Registration of Offered Certificates" herein.
S-16
<PAGE>
Since transactions in the Offered Certificates can be effected only through
DTC, CEDEL, Euroclear, participating organizations, indirect participants and
certain banks, the ability of a Certificate Owner to pledge on Offered
Certificate to persons or entities that do not participate in the DTC, CEDEL or
Euroclear system or otherwise to take actions in respect of such Certificates,
may be limited due to lack of a physical certificate representing the Offered
Certificates. See "Description of the Certificates -- Registration of Offered
Certificates" herein.
Certificate Owners may experience some delay in their receipt of
distributions of interest and principal on the Offered Certificates since such
distributions will be forwarded by the Trustee to DTC and DTC will credit such
distributions to the accounts of its Participants (as defined herein) which will
thereafter credit them to the accounts of Certificate Owners either directly or
indirectly through indirect participants. See "Description of the
Certificates -- Registration of Offered Certificates" herein.
THE MORTGAGE LOAN POOL
General
The Mortgage Loans to be transferred by the Depositor to the Trust Fund on
August 28, 1996 (the "Startup Day") will consist of 2,893 closed-end, fixed-rate
conventional home equity loans evidenced by promissory notes (the "Mortgage
Notes") secured by first- and second-priority mortgages and deeds of trust,
security deeds or mortgages, which are located in 47 states and the District of
Columbia. The Mortgaged Properties securing the Mortgage Loans consist of
single-family residences (which may be detached, part of a two-to-four family
dwelling, a condominium unit, a mobile, manufactured or modular home, a
townhouse or a unit in a planned unit development). The Mortgaged Properties may
be owner-occupied (which includes second and vacation homes) and non-owner
occupied investment properties. All Mortgage Loans were originated or purchased
after July 3, 1986. Mortgage Loans aggregating 81.6% of the Cut-Off Date
Aggregate Loan Balance are secured by first liens on the related properties, and
the remaining Mortgage Loans are secured by second liens on the related
properties. No Mortgage Loan was more than 30 days delinquent as of the Cut-Off
Date.
The Combined Loan-to-Value Ratios shown below were calculated based upon
the appraised values of the Mortgaged Properties at the time of origination (the
"Appraised Values").
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market in general or in
any particular area has experienced or should experience an overall decline in
property values such that the outstanding balances of the Mortgage Loans,
together with the outstanding balances of any first mortgage, 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.
No Combined Loan-to-Value Ratio (based upon appraisals made at the time of
origination of the related Mortgage Loan) relating to any Mortgage Loan exceeded
100% as of the Cut-Off Date. The Mortgage Loans are not insured by primary
mortgage insurance policies, nor does any pool insurance insure the Mortgage
Loans; however, certain distributions due to the holders of the Offered
Certificates are guaranteed by the Certificate Insurer in accordance with the
terms of the Certificate Insurance Policy. See "Certificate Insurer and
Certificate Insurance Policy." The Mortgage Loans are not guaranteed by the
Depositor, the Seller or any affiliate of the Depositor or the Seller.
As of the Cut-Off Date, the average scheduled Loan Balance of the Mortgage
Loans was $54,358.48, the Loan Rates of the Mortgage Loans ranged from 7.5% to
16.8%, the weighted average Combined Loan-to-Value Ratio of the Mortgage Loans
was 76%, the weighted average Loan Rate of the Mortgage Loans was 10.55%, and
the weighted average remaining term to maturity of the Mortgage Loans was 196
months. The remaining terms to maturity of the Mortgage Loans as of the Cut-Off
Date ranged from 0 months to 360 months. The maximum Loan Balance of any
Mortgage Loan, as of the Cut-Off Date, was $761,628.14. Mortgage Loans
containing Balloon Payments represented 42.7% of the Cut-Off Date Aggregate Loan
Balance. No Mortgage Loan matures after August 1, 2026. The Trust Fund consists
of 2,893 Mortgage Loans as of the Cut-Off Date, of which 1,991 are secured by
first mortgages, security deeds or deeds of trust and the remainder are secured
by second mortgages, security deeds or deeds of trust. As a percentage of the
Cut-Off Date Aggregate Loan Balance, 81.6% were secured by first mortgages or
deeds of trust, 94.2% were secured by mortgages, deeds to secure debt or deeds
of trust on single-family dwellings, 3.9% were secured by mortgages or deeds of
trust on two-to-four family dwellings, 0.77% were secured by mortgages or deeds
of trust on condominium units and planned unit developments, 0.50% were secured
by mortgages or deeds of trust on mobile homes and 0.63% were secured by
mortgages or deeds of trust on other types of dwellings.
The percentages of the Cut-Off Date Aggregate Loan Balance set forth in the
following tables may not sum to 100.00% due to rounding.
S-17
<PAGE>
Geographic Distribution of Mortgaged Properties (1)
The geographic distribution of Mortgaged Properties by state, as of the
Cut-Off Date, was as follows:
<TABLE>
<CAPTION>
Number of % of
Mortgage Cut-Off Date Cut-Off Date Aggregate
State Loans Loan Balance Loan Balance
<S> <C> <C> <C>
Alabama....................................... 434 $ 14,426,290.60 9.17%
Arizona....................................... 21 1,437,587.32 0.91
Arkansas...................................... 3 172,275.11 0.11
California.................................... 84 4,636,324.45 2.95
Colorado...................................... 41 2,833,701.54 1.80
Connecticut................................... 18 2,782,383.47 1.77
Delaware...................................... 1 62,362.60 0.04
District of Columbia.......................... 2 127,638.58 0.08
Florida....................................... 150 8,988,508.45 5.72
Georgia....................................... 74 4,425,790.57 2.81
Hawaii........................................ 1 59,837.83 0.04
Idaho......................................... 5 439,659.52 0.28
Illinois...................................... 77 5,290,573.66 3.36
Indiana....................................... 167 7,842,725.94 4.99
Iowa.......................................... 12 872,255.25 0.55
Kansas........................................ 22 1,007,068.16 0.64
Kentucky...................................... 40 1,577,455.62 1.00
Louisiana..................................... 35 1,843,203.05 1.17
Maine......................................... 1 24,816.61 0.02
Maryland...................................... 22 1,956,157.45 1.24
Massachusetts................................. 64 5,527,654.27 3.51
Michigan...................................... 135 7,586,711.95 4.82
Minnesota..................................... 62 3,168,957.83 2.02
Mississippi................................... 14 531,555.34 0.34
Missouri...................................... 60 3,475,771.31 2.21
Nebraska...................................... 58 2,875,384.57 1.83
Nevada........................................ 17 690,989.15 0.44
New Hampshire................................. 3 170,770.93 0.11
New Jersey.................................... 104 9,882,861.24 6.28
New Mexico.................................... 19 1,393,329.99 0.89
New York...................................... 120 8,123,565.07 5.17
North Carolina................................ 137 7,041,403.64 4.48
North Dakota.................................. 1 43,921.64 0.03
Ohio.......................................... 258 12,051,007.89 7.66
Oklahoma...................................... 13 576,639.14 0.37
Oregon........................................ 9 742,238.72 0.47
Pennsylvania.................................. 154 8,077,754.21 5.14
Rhode Island.................................. 17 1,081,487.52 0.69
South Carolina................................ 62 2,789,606.64 1.77
South Dakota.................................. 1 46,291.51 0.03
Tennessee..................................... 41 2,110,546.04 1.34
Texas......................................... 26 672,756.37 0.43
Utah.......................................... 87 5,203,932.39 3.31
Virginia...................................... 64 3,959,657.94 2.52
Washington.................................... 84 4,904,555.96 3.12
West Virginia................................. 2 105,380.07 0.07
Wisconsin..................................... 69 3,554,051.16 2.26
Wyoming....................................... 2 63,700.00 0.04
Total.................................. 2,893 $ 157,259,098.27 100.00%
</TABLE>
(1) Determined by property address designated as such in the related Mortgage.
S-18
<PAGE>
Combined Loan-to-Value Ratios (1)
<TABLE>
<CAPTION>
Number of % of
Mortgage Cut-Off Date Cut-Off Date Aggregate
Combined Loan-to-Value Ratio Loans Loan Balance Loan Balance
<S> <C> <C> <C>
5.001% -- 10.000%........................... 1 $ 16,000.00 0.01%
10.001% -- 15.000%........................... 8 166,436.62 0.11
15.001% -- 20.000%........................... 11 183,792.30 0.12
20.001% -- 25.000%........................... 21 453,983.25 0.29
25.001% -- 30.000%........................... 28 860,700.49 0.55
30.001% -- 35.000%........................... 24 709,638.24 0.45
35.001% -- 40.000%........................... 27 678,823.70 0.43
40.001% -- 45.000%........................... 54 2,324,168.23 1.48
45.001% -- 50.000%........................... 72 2,666,289.69 1.70
50.001% -- 55.000%........................... 66 2,903,312.55 1.85
55.001% -- 60.000%........................... 126 5,616,433.32 3.57
60.001% -- 65.000%........................... 174 7,986,067.31 5.08
65.001% -- 70.000%........................... 309 14,006,648.67 8.91
70.001% -- 75.000%........................... 344 17,704,655.60 11.26
75.001% -- 80.000%........................... 793 47,666,428.89 30.31
80.001% -- 85.000%........................... 596 40,827,632.21 25.96
85.001% -- 90.000%........................... 192 10,672,298.40 6.79
90.001% -- 95.000%........................... 20 755,605.30 0.48
95.001% -- 100.000%........................... 27 1,060,183.50 0.67
Total.................................. 2,893 $157,259,098.27 100.00%
</TABLE>
(1) The combined loan-to-value ratios (the "Combined Loan-to-Value Ratios")
shown above are equal, with respect to each Mortgage Loan, to (i) the sum of
(a) the original principal balance of such Mortgage Loan at the date of
origination plus (b) the remaining balance of the senior lien(s), if any, at
the date of origination of such Mortgage Loan divided by (ii) the lesser of
(a) the value of the related Mortgaged Property, based upon the appraisal
made at the time of origination of such Mortgage Loan or (b) the purchase
price of such Mortgaged Property if the Mortgage Loan proceeds from such
Mortgage Loan are used to purchase such Mortgage Property.
S-19
<PAGE>
Loan Rates
The Loan Rates borne by the Mortgage Notes relating to the Mortgage Loans
were distributed as follows as of the Cut-Off Date:
<TABLE>
<CAPTION>
Number of % of
Mortgage Cut-Off Date Cut-Off Date Aggregate
Loan Rates Loans Loan Balance Loan Balance
<S> <C> <C> <C>
7.001% -- 7.500%............................ 1 $ 77,261.57 0.05%
7.501% -- 8.000%............................ 52 2,582,706.06 1.64
8.001% -- 8.500%............................ 122 5,174,952.04 3.29
8.501% -- 9.000%............................ 150 7,982,145.68 5.08
9.001% -- 9.500%............................ 144 10,899,978.00 6.93
9.501% -- 10.000%............................ 542 35,902,612.16 22.83
10.001% -- 10.500%............................ 335 20,398,607.34 12.97
10.501% -- 11.000%............................ 549 29,550,110.20 18.79
11.001% -- 11.500%............................ 285 14,284,179.18 9.08
11.501% -- 12.000%............................ 272 12,482,332.53 7.94
12.001% -- 12.500%............................ 142 6,986,227.78 4.44
12.501% -- 13.000%............................ 126 5,223,808.45 3.32
13.001% -- 13.500%............................ 60 2,143,691.77 1.36
13.501% -- 14.000%............................ 52 1,671,971.70 1.06
14.001% -- 14.500%............................ 18 513,100.87 0.33
14.501% -- 15.000%............................ 17 479,878.41 0.31
15.001% -- 15.500%............................ 12 420,202.78 0.27
15.501% -- 16.000%............................ 9 355,038.51 0.23
16.001% -- 16.500%............................ 4 120,293.24 0.08
16.501% -- 17.000%............................ 1 10,000.00 0.01
Total.................................. 2,893 $157,259,098.27 100.00%
</TABLE>
S-20
<PAGE>
Cut-Off Date Principal Balances
The distribution of the outstanding scheduled Loan Balances of the Mortgage
Loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
Number of % of
Mortgage Cut-Off Date Cut-Off Date Aggregate
Range of Cut-Off Date Loan Balances Loans Loan Balance Loan Balance
<S> <C> <C> <C>
$ 0.01 -- $ 10,000.00.................... 60 $ 406,898.25 0.26%
$ 10,000.01 -- $ 20,000.00.................... 406 6,414,672.72 4.08
$ 20,000.01 -- $ 30,000.00.................... 479 12,204,010.30 7.76
$ 30,000.01 -- $ 40,000.00.................... 453 15,932,860.56 10.13
$ 40,000.01 -- $ 50,000.00.................... 356 16,037,533.36 10.20
$ 50,000.01 -- $ 60,000.00.................... 284 15,628,214.12 9.94
$ 60,000.01 -- $ 70,000.00.................... 199 12,961,066.92 8.24
$ 70,000.01 -- $ 80,000.00.................... 156 11,675,450.29 7.42
$ 80,000.01 -- $ 90,000.00.................... 126 10,710,093.71 6.81
$ 90,000.01 -- $100,000.00.................... 83 7,913,702.29 5.03
$100,000.01 -- $110,000.00.................... 66 6,945,074.42 4.42
$110,000.01 -- $120,000.00.................... 48 5,519,968.75 3.51
$120,000.01 -- $130,000.00.................... 38 4,778,528.48 3.04
$130,000.01 -- $140,000.00.................... 22 2,985,948.57 1.90
$140,000.01 -- $150,000.00.................... 16 2,325,282.76 1.48
$150,000.01 -- $160,000.00.................... 19 2,960,548.91 1.88
$160,000.01 -- $170,000.00.................... 10 1,655,551.14 1.05
$170,000.01 -- $180,000.00.................... 7 1,213,890.73 0.77
$180,000.01 -- $190,000.00.................... 3 557,687.00 0.35
$190,000.01 -- $200,000.00.................... 6 1,181,752.37 0.75
$200,000.01 -- $210,000.00.................... 5 1,019,209.17 0.65
$210,000.01 -- $220,000.00.................... 5 1,063,540.91 0.68
$220,000.01 -- $230,000.00.................... 4 896,385.14 0.57
$230,000.01 -- $240,000.00.................... 2 468,668.28 0.30
$240,000.01 -- $250,000.00.................... 6 1,478,064.13 0.94
$250,000.01 -- $260,000.00.................... 7 1,787,068.30 1.14
$260,000.01 -- $270,000.00.................... 1 260,363.40 0.17
$270,000.01 -- $280,000.00.................... 1 279,492.73 0.18
$290,000.01 -- $300,000.00.................... 2 593,272.68 0.38
$300,000.01 -- $310,000.00.................... 2 612,963.19 0.39
$310,000.01 -- $320,000.00.................... 2 630,777.55 0.40
$320,000.01 -- $330,000.00.................... 2 657,522.83 0.42
$330,000.01 -- $340,000.00.................... 1 338,892.38 0.22
$340,000.01 -- $350,000.00.................... 3 1,049,063.52 0.67
$380,000.01 -- $390,000.00.................... 2 773,555.55 0.49
$400,000.01 -- $410,000.00.................... 1 409,802.49 0.26
$410,000.01 -- $420,000.00.................... 2 829,424.59 0.53
$430,000.01 -- $440,000.00.................... 1 436,884.26 0.28
$440,000.01 -- $450,000.00.................... 1 449,560.21 0.29
$450,000.01 -- $460,000.00.................... 1 459,752.55 0.29
$490,000.01 -- $500,000.00.................... 4 1,994,470.62 1.27
$760,000.01 -- $770,000.00.................... 1 761,628.14 0.48
Total.................................. 2,893 $157,259,098.27 100.00%
</TABLE>
S-21
<PAGE>
Types of Mortgaged Properties
The Mortgaged Properties securing the Mortgage Loans were of the property
types as follows:
<TABLE>
<CAPTION>
Number of % of
Mortgage Cut-Off Date Cut-Off Date Aggregate
Property Type Loans Loan Balance Loan Balance
<S> <C> <C> <C>
Condominium/Planned Unit
Development................................. 26 $ 1,217,004.47 0.77%
Other......................................... 66 3,525,110.87 2.24
Single Family................................. 2,801 152,516,982.93 96.98
Total.................................. 2,893 $157,259,098.27 100.00%
</TABLE>
Months Since Origination
The distribution of the number of months since the date of origination of
the Mortgage Loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
Number of % of
Mortgage Cut-Off Date Cut-Off Date Aggregate
Months Since Origination Loans Loan Balance Loan Balance
<S> <C> <C> <C>
0............................................. 843 $ 46,125,262.48 29.33%
1-12.......................................... 1,585 95,937,236.14 61.01
13-24......................................... 80 2,809,221.55 1.79
25-36......................................... 182 6,542,503.48 4.16
37-48......................................... 108 4,021,509.15 2.56
49-60......................................... 32 804,498.97 0.51
61-72......................................... 17 370,204.81 0.24
73-84......................................... 19 326,536.48 0.21
85-96......................................... 5 77,581.65 0.05
97-108........................................ 8 153,209.67 0.10
109-120....................................... 11 86,482.03 0.05
121-132....................................... 3 4,851.86 0.00
Total.................................. 2,893 $157,259,098.27 100.00%
</TABLE>
S-22
<PAGE>
Remaining Term to Stated Maturity
The distribution of the number of months remaining to stated maturity of
the Mortgage Loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
Number of % of
Remaining Months Mortgage Cut-Off Date Cut-Off Date Aggregate
to Stated Maturity Loans Loan Balance Loan Balance
<S> <C> <C> <C>
Less than 12.................................. 13 $ 345,535.56 0.22%
13 -- 24..................................... 4 19,849.83 0.01
25 -- 36..................................... 8 76,430.59 0.05
37 -- 48..................................... 14 205,856.48 0.13
49 -- 60..................................... 29 427,844.59 0.27
61 -- 72..................................... 19 395,641.19 0.25
73 -- 84..................................... 43 979,863.91 0.62
85 -- 96..................................... 41 861,398.28 0.55
97 -- 108.................................... 35 948,432.74 0.60
109 -- 120.................................... 127 3,229,714.64 2.05
121 -- 132.................................... 25 737,810.95 0.47
133 -- 144.................................... 88 3,940,111.12 2.51
145 -- 156.................................... 136 5,668,513.57 3.60
157 -- 168.................................... 68 2,623,051.45 1.67
169 -- 180.................................... 1,576 96,427,972.73 61.32
181 -- 192.................................... 1 51,747.73 0.03
193 -- 204.................................... 1 72,091.30 0.05
205 -- 216.................................... 6 403,684.44 0.26
217 -- 228.................................... 4 265,785.74 0.17
229 -- 240.................................... 488 27,178,688.53 17.28
337 -- 348.................................... 1 72,638.58 0.05
349 -- 360.................................... 166 12,326,434.32 7.84
Total.................................. 2,893 $157,259,098.27 100.00%
</TABLE>
Occupancy Type of Mortgaged Property
The Mortgaged Properties securing the Mortgage Loans were used as follows
as of the Cut-Off Date:
<TABLE>
<CAPTION>
Number of % of
Mortgage Cut-Off Date Cut-Off Date Aggregate
Occupancy Type Loans Loan Balance Loan Balance
<S> <C> <C> <C>
Non-Owner Occupied............................ 192 $ 7,177,242.44 4.56%
Owner Occupied................................ 2,692 149,633,063.74 95.15
Second Home................................... 9 448,792.09 0.29
Total.................................. 2,893 $157,259,098.27 100.00%
</TABLE>
Original Term to Stated Maturity
<TABLE>
<CAPTION>
% of
Original Term Number of Cut-Off Date Cut-Off Date Aggregate
to Stated Maturity Mortgage Loans Loan Balance Loan Balance
<S> <C> <C> <C>
1 to 60.................................. 23 $ 278,869.40 0.18%
61 to 120................................ 266 5,806,207.52 3.69
121 to 180............................... 1,936 110,760,075.79 70.43
181 to 240............................... 501 28,014,872.66 17.81
301 to 360............................... 167 12,399,072.90 7.88
Total............................. 2,893 $157,259,098.27 100.00%
</TABLE>
S-23
<PAGE>
Interest Payments on the Mortgage Loans
The Mortgage Loans provide that interest is charged to the Mortgagors
thereunder, and payments are due from such Mortgagors, as of a scheduled day of
each month which is fixed at the time of origination. Except for Date-of-Payment
Loans, scheduled monthly payments made by the Mortgagors on the Mortgage Loans
either earlier or later than the scheduled due dates thereof will not affect the
amortization schedule or the relative application of such payments to principal
and interest. All of the Mortgage Loans provide for monthly installments of
principal and interest. Certain Mortgage Loans provide for full amortization of
the principal amount thereof over the term of the Mortgage Loan. Certain other
Mortgage Loans provide for amortization of a portion of the principal amount
thereof over the term of the Mortgage Loan and a balloon payment of the
remaining principal amount thereof at the end of the term of the Mortgage Loan.
Approximately 10.78% of the Mortgage Loans (by Cut-Off Date Aggregate Loan
Balance) are loans on which interest is charged to the Mortgagor at the Loan
Rate on the outstanding principal balance calculated based on the number of days
elapsed between receipt of the Mortgagor's last payment through receipt of the
Mortgagor's most current payment (such Mortgage Loans, the "Date-of-Payment
Loans"). Such interest is deducted from the Mortgagor's payment amount and the
remainder, if any, of the payment is applied as a reduction to the outstanding
principal balance of the Mortgage Note. Although the Mortgagor is required to
remit equal monthly payments on a specified monthly payment date that would
reduce the outstanding principal balance of such Mortgage Note to the proper
amount in accordance with the amortization schedule of such Mortgage Note at
such Mortgage Note's maturity date, payments that are made by the Mortgagor
after the due date therefor would cause the outstanding principal balance of
such Mortgage Note not to be reduced to the proper amount. In such a case, the
Mortgagor would be required to make an additional principal payment at the
maturity date for such Mortgage Note. If it were assumed that all the Mortgagors
on the Date-of-Payment Loans were to pay on the latest date possible without the
Date-of-Payment Loans being in default, the amount of such additional principal
payment would be a de minimis amount of the original aggregate principal balance
of the Date-of-Payment Loans. On the other hand, if a Mortgagor makes a payment
(other than a prepayment) before the due date therefor, the reduction in the
outstanding principal balance of such Mortgage Note would occur over a shorter
period of time than it would have occurred had it been based on the schedule of
amortization in effect on the Cut-Off Date. Accordingly, the timing of principal
payments to the Certificateholders may be affected by the fact that actual
Mortgagor payments may not be made on the due date therefor. The Mortgage Loans
provide for required monthly payments to be due on various days during a month
(the "Due Date").
THE SELLER AND THE MASTER SERVICER
General
First Union National Bank of North Carolina is the Seller and the Master
Servicer under the Pooling and Servicing Agreement. First Union National Bank of
North Carolina is a national banking association and a banking subsidiary of
First Union Corporation, a North Carolina corporation and a multi-bank holding
company registered under the Bank Holding Company Act. First Union Corporation
is the sixth largest bank holding company in the United States based on total
assets as of December 31, 1995. As of December 31, 1995, First Union Corporation
had assets of $131.9 billion, net loans of $90.6 billion, deposits of $92.6
billion and shareholders' equity of $9.04 billion. For the fiscal year ended
December 31, 1995, First Union Corporation had net earnings of $1.4 billion. At
December 31, 1995, First Union Corporation's tier 1 and total capital ratios
were 6.70% and 11.45%, respectively. First Union Corporations's leverage ratio
at December 31, 1995 was 5.49%.
The Depositor will sell and assign each Mortgage Loan to the Trust Fund in
consideration of the net proceeds from the sale of the Offered Certificates,
which are being offered hereby, and for the Subordinated Certificates.
The Offered Certificates will not represent an interest in or obligation
of, nor are the Mortgage Loans guaranteed by, the Seller, or any of its
affiliates.
The Master Servicer may use a subservicer (the "Subservicer") in the
performance of the administrative and servicing obligations of the master
servicer under the Pooling and Servicing Agreement, but no such subservicing
arrangements will discharge the Master Servicer from its obligations under the
Pooling and Servicing Agreement. First Union Mortgage Corporation, a wholly
owned subsidiary of First Union Corporation, will initially act as the
Subservicer for all of the Mortgage Loans.
The Trustee may remove the Master Servicer, and the Master Servicer may
resign, only in accordance with the terms of the Pooling and Servicing
Agreement. No removal or resignation shall become effective until the Trustee or
a successor servicer shall have assumed the Master Servicer's responsibilities
and obligations in accordance therewith.
S-24
<PAGE>
Any collections received by the Master Servicer after removal or
resignation shall be endorsed by it to the Trustee and remitted directly to the
Trustee.
Credit and Underwriting Guidelines
The following is a description of the underwriting guidelines customarily
employed by the Seller with respect to home equity loans which it purchases or
originates. Each Mortgage Loan was underwritten according to these guidelines.
The Seller believes its standards are consistent with those utilized by home
equity lenders generally. The underwriting process is intended to assess both
the prospective borrower's ability to repay and the adequacy of the real
property security as collateral for the loan granted. In certain cases, loans
may be made outside of those guidelines with the prior approval of a senior
official of the Seller.
The Seller generally originates or purchases fixed rate loans, which fully
amortize over a period not to exceed 360 months, if the lien is first priority,
or 240 months, if the lien is second priority. The Seller also originates and
purchases fixed rate loans with original terms to maturity of up to 180 months
with an amortization schedule of up to 360 months and a balloon payment on the
maturity date. The loan amounts generally range from a minimum of $10,000 to a
maximum of $500,000. The Seller originates or purchases non-purchase money first
or second mortgage loans. In addition, the Seller has programs for origination
of purchase money first mortgages.
The homes used for collateral to secure the loans may be either primary
residential (which includes second and vacation homes) or investor owned one- to
four- family homes, condominiums, planned unit developments, mobile,
manufactured or modular homes or townhouses.
The Combined Loan-to-Value Ratio generally may not exceed 90%. If a prior
mortgage exists, the Seller first reviews the first mortgage documentation. The
Seller does not originate or purchase loans where the first mortgage contains a
shared appreciation clause. Each property proposed as security for a loan must
be appraised.
Each mortgage applicant must provide, and the Seller must verify, personal
financial information. The applicant's total monthly obligations (which includes
principal and interest on each mortgage, tax assessments, other loans, charge
accounts and all other scheduled indebtedness) generally cannot exceed 55% of
the applicant's gross monthly income. Applicants who are salaried employees must
provide current employment information in addition to two recent years of
employment history and the Seller verifies this information. Verifications are
based on written confirmation from employers or a combination of a recent pay
stub, the most recent W-2 tax form and telephone confirmation from the employer.
Self-employed applicants must be self-employed in the same field for a minimum
of two years. The self-employed applicant must provide signed copies of complete
federal income tax returns (including schedules) filed for the most recent two
years.
A credit report by an independent credit reporting agency is required
reflecting the applicant's complete credit history. The credit report should
reflect all delinquencies of 30 days or more, repossessions, judgments,
foreclosures, garnishments, bankruptcies, divorce actions and similar adverse
credit practices that can be discovered by a search of public records. If the
report is obtained more than 30 days prior to the loan approval, the lender must
determine that the reported information has not changed. If the loan does not
close within 30 days of approval, the lender must determine that the reported
information has not changed since the date of approval. Written verification is
obtained of the first mortgage balance, its status and whether local taxes,
interest, insurance and assessments are included in the applicant's monthly
payment. All taxes and assessments not included in the payment must be verified
as current.
The Seller is responsible for using sound judgment in underwriting the
loans consistent with prudent industry practices. Generally, the applicant
should have an acceptable credit history given the amount of equity available,
the strength of the applicant's employment history and the level of the
applicant's income to debt obligations. The rescission period must have expired
prior to funding a loan. The rescission period may not be waived by the
applicant except as permitted by law. An attorney's title opinion or an ALTA
title insurance policy is required for all loans.
The applicant is required to secure property insurance in an amount
sufficient to cover the new loan and any prior mortgage. If the sum of the
outstanding first mortgage, if any, and the home equity loan exceeds the policy
coverage limit, then the policy must provide guaranteed replacement cost
coverage. The Seller must ensure that its name and address is properly added to
the mortgagee clause of the insurance policy.
S-25
<PAGE>
Delinquency, Loan Loss and Foreclosure Information
The following table sets forth the Seller's delinquency experience, on its
entire servicing portfolio of mortgage loans similar to the Mortgage Loans at
the dates indicated below. The Seller's portfolio of mortgage loans may differ
significantly from the Mortgage Loans included in the Trust Fund in terms of
interest rates, principal balances, geographic distribution, Combined
Loan-to-Value Ratios and other relevant characteristics. There can be no
assurance the delinquency and loss experienced on the Mortgage Loans (most of
which have been acquired by the Seller during the past twelve months) will be
consistent with the historical information provided below. Such losses and
delinquencies on the Mortgage Loans may be higher than the historical
information presented below.
The following table sets forth information relating to the delinquency
experience of mortgage loans similar to and including the Mortgage Loans for the
four quarters ended, September 30, 1995, December 31, 1995, March 31, 1996 and
June 30, 1996.
<TABLE>
<CAPTION>
Quarter Ended
June 30, 1996 March 31, 1996 December 31, 1995 September 30, 1995
Number of Dollar Number of Dollar Number of Dollar Number of Dollar
Loans Amount Loans Amount Loans Amount Loans Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio.............. 10,619 $501,801,209 8,823 $401,332,214 7,795 $328,292,966 6,741 $272,333,993
Delinquency
percentage (1)
30-59 days........... 1.48% 1.54 % 1.86% 2.05 % 3.16% 3.53 % 3.60% 3.66 %
60-89 days........... 0.37 0.41 0.42 0.39 0.74 0.79 1.10 1.17
90 days or more...... 0.50 0.55 0.49 0.55 0.73 0.89 0.89 1.00
Total.................. 2.35% 2.50 % 2.77% 2.99 % 4.63% 5.21 % 5.59% 5.83 %
Foreclosures........... 0.84% 0.84 % 0.73% 0.72 % 0.45% 0.49 % 0.09% 0.08 %
Percentage of Net
Gains/(Losses) on
liquidated loans..... 0.0% 0.0 % (0.01)% (0.03 )% 0.0% 0.0 % 0.0% 0.0 %
</TABLE>
(1) The period of delinquency is based on the number of days the payment is
contractually past due.
The above delinquency experience percentages are calculated on the basis of
the total home equity loan portfolio serviced by the Seller at the date
indicated, all of which loans were acquired by the Seller. However, because
the total amount of loans serviced by the Seller has rapidly increased over
these periods as a result of new originations, the total amount of loans
serviced as of the end of any indicated period will include many loans that
will not have been outstanding long enough to give rise to some or all of
the indicated periods of delinquency. Because the Trust Fund consists of a
fixed group of Mortgage Loans, the actual delinquency percentages with
respect to the Mortgage Loans may differ from the delinquency percentages
indicated above.
PREPAYMENT AND YIELD CONSIDERATIONS
General
The weighted average life of, and, if purchased at other than par
(disregarding, for purposes of this discussion, the effects on an investor's
yield resulting from the timing of the settlement date and those considerations
discussed below under "Payment Delay Feature of Certificates"), the yield to
maturity on, a Class of the Offered Certificates will relate to the rate of
payment of principal of the Mortgage Loans (other than Payaheads), including for
this purpose Prepayments, liquidations due to defaults, casualties and
condemnations, and repurchases of Mortgage Loans by the Seller. The Mortgage
Loans may be prepaid by the related Mortgagors at any time without payment of
any prepayment fee or penalty. The actual rate of principal prepayments on pools
of mortgage loans is influenced by a variety of economic, tax, geographic,
demographic, social, legal and other factors and has fluctuated considerably in
recent years. In addition, the rate of principal prepayments may differ among
pools of mortgage loans at any time because of specific factors relating to the
mortgage loans in the particular pool, including, among other things, the age of
the mortgage loans, the geographic locations of the properties securing the
loans and the extent of the mortgagors' equity in such properties, and changes
in the mortgagors' housing needs, job transfers and unemployment. Generally,
however, because the Mortgage Loans bear interest at fixed rates, and the rate
of prepayment on fixed rate mortgage loans is sensitive to prevailing interest
rates, if prevailing interest rates fall significantly below the interest rates
on the Mortgage Loans, the Mortgage Loans are likely to be subject to higher
prepayment rates than if prevailing rates remain at or above the interest rates
on the Mortgage Loans. Conversely, if prevailing interest rates rise
significantly
S-26
<PAGE>
above the interest rates on the Mortgage Loans, the rate of prepayments would be
likely to decrease. Defaults on mortgage loans are expected to occur with
greater frequency in the early years of the mortgage loan term. Although little
data is available with respect to the rate of default on second mortgage loans,
it is generally expected that the rate of default on second mortgage loans may
be greater than that of mortgage loans secured by first priority liens on
comparable properties.
The rate of prepayment on the Mortgage Loans cannot be predicted.
Generally, home equity loans are not viewed by borrowers as permanent financing.
Accordingly, the Mortgage Loans may experience a higher rate of prepayment than
traditional first mortgage loans.
In addition to the foregoing factors affecting the weighted average life of
each Class of the Offered Certificates, the provisions of the Pooling and
Servicing Agreement result in a limited acceleration of the Class A-1
Certificates relative to the amortization of the Mortgage Loans in early months
of the transaction, as well as accelerating the first date on which each other
Class of Offered Certificates will begin to receive distributions of principal
than would otherwise be the case. The accelerated amortization is achieved by
the application of certain excess interest to the payment of the Class A
Principal Balance. This acceleration feature creates overcollateralization which
results from the excess of the Aggregate Loan Balance over the Aggregate Class A
Principal Balance. Once the required level of overcollateralization is reached,
the acceleration feature will cease, unless necessary to maintain the required
level of overcollateralization.
As indicated above, if purchased at other than par, the yield to maturity
on an Offered Certificate will be affected by the rate of the payment of
principal of the Mortgage Loans (other than Payaheads). If the actual rate of
payments on the Mortgage Loans is slower than the rate anticipated by an
investor who purchases an Offered Certificate at a discount, the actual yield to
such investor will be lower than such investor's anticipated yield. If the
actual rate of payments on the Mortgage Loans is faster than the rate
anticipated by an investor who purchases an Offered Certificate at a premium,
the actual yield to such investor will be lower than such investor's anticipated
yield.
Weighted Average Lives
Greater than anticipated prepayments of principal will increase the yield
on Offered Certificates purchased at a price less than par. Greater than
anticipated prepayments of principal will decrease the yield on Offered
Certificates purchased at a price greater than par. The effect on an investor's
yield due to principal prepayments on the Mortgage 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 the Offered Certificates will
also be affected by the amount and timing of delinquencies and defaults on the
Mortgage Loans and the recoveries, if any, on defaulted Mortgage Loans and
foreclosed properties.
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
any Class of the Class A Certificates will be influenced by, among other
factors, the rate at which principal payments are made on the Mortgage Loans,
including final payments made upon the maturity of Balloon Loans.
Prepayments on Mortgage Loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement is
the prepayment assumption (the "Prepayment Assumption"), which represents an
assumed rate of prepayment each month relative to the then outstanding principal
balance of the pool of mortgage loans for the life of such mortgage loans. A
100% Prepayment Assumption assumes a conditional prepayment rate ("CPR") of 4%
per annum of the outstanding principal balance of such mortgage loans in the
first month of the life of the mortgage loans and an additional approximate
1.45% (precisely 16/11ths) (expressed as a percentage per annum) in each month
thereafter until the twelfth month and in each month thereafter during the life
of the mortgage loans, a conditional prepayment rate of 20% per annum each month
is assumed. As used in the table below, 0% Prepayment Assumption assumes a
conditional prepayment rate equal to 0% of the Prepayment Assumption, i.e., no
prepayments. Correspondingly, 105% Prepayment Assumption assumes prepayment
rates equal to 105% 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 Mortgage Loans. The Depositor believes that no
existing statistics of which it is aware provide a reliable basis for holders of
Offered Certificates to predict the amount or the timing of receipt of
prepayments on the Mortgage Loans.
Since the tables were prepared on the basis of the assumptions in the
following paragraph, there may be discrepancies between characteristics of the
actual Mortgage Loans and the characteristics of the Mortgage Loans assumed in
preparing the tables. Any such discrepancy may have an effect upon the
percentages of the Loan Balances outstanding and weighted
S-27
<PAGE>
average lives of the Offered Certificates set forth in the tables. In addition,
since the actual Mortgage Loans in the Trust Fund may have characteristics which
differ from those assumed in preparing the tables set forth below, the
distributions of principal on the Offered Certificates may be made earlier or
later than as indicated in the tables.
For the purpose of the tables below, it is assumed that: (i) the Mortgage
Loans consist of pools of loans with the level-pay and balloon amortization
characteristics set forth below, (ii) the Closing Date for the Class A
Certificates is August 28, 1996, (iii) distributions on the Class A Certificates
are made on the 25th day of each month regardless of the day on which the
Distribution Date actually occurs, commencing in September, 1996 and are made in
accordance with the priorities described herein, (iv) the scheduled monthly
payments of principal and interest on the Mortgage Loans will be timely
delivered on the first day of each month (with no defaults), commencing in
September, 1996, (v) the Mortgage Loans' prepayment rates are a multiple of the
Prepayment Assumption, (vi) all prepayments are prepayments in full received on
the last day of each month (commencing August, 1996) and include 30 days'
interest thereon, (vii) no optional termination is exercised, (viii) the Class A
Certificates of each Class have the respective Certificate Rates and initial
Class A Principal Balances as set forth herein, and (ix) the
overcollateralization levels are set initially as specified in the Pooling and
Servicing Agreement, and thereafter decrease in accordance with the provisions
of the Pooling and Servicing Agreement.
<TABLE>
<CAPTION>
Original Original Remaining
Amortization Term to Term to
Loan Loan Term Maturity Maturity
Amortization Methodology Balance Rate (months) (months) (months)
<S> <C> <C> <C> <C> <C>
Balloon..................................................... $67,161,783.47 10.616% 360 180 177
Level Pay................................................... $ 7,319,243.94 10.354% 117 117 103
Level Pay................................................... $42,364,125.30 10.361% 180 180 169
Level Pay................................................... $28,014,872.66 10.663% 240 240 237
Level Pay................................................... $12,399,072.90 10.751% 360 360 358
</TABLE>
Subject to the foregoing discussion and assumptions, the following tables
indicate the weighted average life of each Class of Class A Certificates, and
sets forth the percentages of the initial Class A Principal Balance of each such
Class of Class A Certificates that would be outstanding after each of the dates
shown at various percentages of the Prepayment Assumption.
S-28
<PAGE>
Percent of Initial Class A Principal Balance Outstanding
at the Following Percentages of the Prepayment Assumption
<TABLE>
<CAPTION>
Class A-1 Class A-2 Class A-3
Distribution Date 0% 50% 75% 105% 125% 150% 0% 50% 75% 105% 125% 150% 0% 50% 75% 105% 125%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage............. 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
August 25, 1997................ 90 71 61 50 42 32 100 100 100 100 100 100 100 100 100 100 100
August 25, 1998................ 86 47 28 8 0 0 100 100 100 100 90 59 100 100 100 100 100
August 25, 1999................ 81 25 0 0 0 0 100 100 100 50 21 0 100 100 100 100 100
August 25, 2000................ 75 5 0 0 0 0 100 100 54 2 0 0 100 100 100 100 64
August 25, 2001................ 69 0 0 0 0 0 100 74 16 0 0 0 100 100 100 53 16
August 25, 2002................ 62 0 0 0 0 0 100 42 0 0 0 0 100 100 80 14 0
August 25, 2003................ 54 0 0 0 0 0 100 15 0 0 0 0 100 100 45 0 0
August 25, 2004................ 46 0 0 0 0 0 100 0 0 0 0 0 100 87 16 0 0
August 25, 2005................ 37 0 0 0 0 0 100 0 0 0 0 0 100 59 0 0 0
August 25, 2006................ 29 0 0 0 0 0 100 0 0 0 0 0 100 35 0 0 0
August 25, 2007................ 19 0 0 0 0 0 100 0 0 0 0 0 100 13 0 0 0
August 25, 2008................ 9 0 0 0 0 0 100 0 0 0 0 0 100 0 0 0 0
August 25, 2009................ 0 0 0 0 0 0 95 0 0 0 0 0 100 0 0 0 0
August 25, 2010................ 0 0 0 0 0 0 69 0 0 0 0 0 100 0 0 0 0
August 25, 2011................ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
August 25, 2012................ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
August 25, 2013................ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
August 25, 2014................ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
August 25, 2015................ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
August 25, 2016................ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
August 25, 2017................ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
August 25, 2018................ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
August 25, 2019................ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
August 25, 2020................ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
August 25, 2021................ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
August 25, 2022................ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
August 25, 2023................ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
August 25, 2024................ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
August 25, 2025................ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
August 25, 2026................ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(years)*..................... 7.1 2.0 1.4 1.1 0.9 0.8 14.3 5.8 4.2 3.1 2.6 2.2 14.7 9.5 7.0 5.1 4.3
<CAPTION>
Distribution Date 150%
<S> <C>
Initial Percentage............. 100
August 25, 1997................ 100
August 25, 1998................ 100
August 25, 1999................ 86
August 25, 2000................ 24
August 25, 2001................ 0
August 25, 2002................ 0
August 25, 2003................ 0
August 25, 2004................ 0
August 25, 2005................ 0
August 25, 2006................ 0
August 25, 2007................ 0
August 25, 2008................ 0
August 25, 2009................ 0
August 25, 2010................ 0
August 25, 2011................ 0
August 25, 2012................ 0
August 25, 2013................ 0
August 25, 2014................ 0
August 25, 2015................ 0
August 25, 2016................ 0
August 25, 2017................ 0
August 25, 2018................ 0
August 25, 2019................ 0
August 25, 2020................ 0
August 25, 2021................ 0
August 25, 2022................ 0
August 25, 2023................ 0
August 25, 2024................ 0
August 25, 2025................ 0
August 25, 2026................ 0
Weighted Average Life
(years)*..................... 3.6
</TABLE>
* The weighted average life of a Certificate of any class is determined by (i)
multiplying the amount of each distribution in reduction of the related Class
A Principal Balance by the number of years from the date of issuance of such
Certificate to the related Distribution Date, (ii) adding the results, and
(iii) dividing the sum by the highest related Principal Balance of the
Certificate.
This table has been prepared based on the assumptions described above
(including the assumptions regarding the characteristics and performance of the
Mortgage Loans, which differ from the actual characteristics and performance
thereof) and should be read in conjunction therewith.
S-29
<PAGE>
Percent of Initial Class A Principal Balance Outstanding
at the Following Percentages of the Prepayment Assumption -- (Continued)
<TABLE>
<CAPTION>
Class A-4 Class A-5
Distribution Date 0% 50% 75% 105% 125% 150% 0% 50% 75% 105% 125% 150%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage................... 100 100 100 100 100 100 100 100 100 100 100 100
August 25, 1997...................... 100 100 100 100 100 100 100 100 100 100 100 100
August 25, 1998...................... 100 100 100 100 100 100 100 100 100 100 100 100
August 25, 1999...................... 100 100 100 100 100 100 100 100 100 100 100 100
August 25, 2000...................... 100 100 100 100 100 100 100 100 100 100 100 100
August 25, 2001...................... 100 100 100 100 100 56 100 100 100 100 100 100
August 25, 2002...................... 100 100 100 100 58 0 100 100 100 100 100 92
August 25, 2003...................... 100 100 100 64 0 0 100 100 100 100 99 62
August 25, 2004...................... 100 100 100 11 0 0 100 100 100 100 71 42
August 25, 2005...................... 100 100 82 0 0 0 100 100 100 81 51 27
August 25, 2006...................... 100 100 37 0 0 0 100 100 100 61 36 17
August 25, 2007...................... 100 100 0 0 0 0 100 100 100 45 25 11
August 25, 2008...................... 100 85 0 0 0 0 100 100 79 33 17 6
August 25, 2009...................... 100 44 0 0 0 0 100 100 62 23 11 3
August 25, 2010...................... 100 8 0 0 0 0 100 100 48 16 7 1
August 25, 2011...................... 38 0 0 0 0 0 100 25 10 2 0 0
August 25, 2012...................... 17 0 0 0 0 0 100 20 7 1 0 0
August 25, 2013...................... 0 0 0 0 0 0 96 15 4 0 0 0
August 25, 2014...................... 0 0 0 0 0 0 80 11 2 0 0 0
August 25, 2015...................... 0 0 0 0 0 0 61 7 1 0 0 0
August 25, 2016...................... 0 0 0 0 0 0 46 4 0 0 0 0
August 25, 2017...................... 0 0 0 0 0 0 43 3 0 0 0 0
August 25, 2018...................... 0 0 0 0 0 0 40 2 0 0 0 0
August 25, 2019...................... 0 0 0 0 0 0 36 1 0 0 0 0
August 25, 2020...................... 0 0 0 0 0 0 32 1 0 0 0 0
August 25, 2021...................... 0 0 0 0 0 0 28 0 0 0 0 0
August 25, 2022...................... 0 0 0 0 0 0 23 0 0 0 0 0
August 25, 2023...................... 0 0 0 0 0 0 17 0 0 0 0 0
August 25, 2024...................... 0 0 0 0 0 0 11 0 0 0 0 0
August 25, 2025...................... 0 0 0 0 0 0 4 0 0 0 0 0
August 25, 2026...................... 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (years)*....... 15.2 12.9 9.8 7.3 6.2 5.1 21.7 15.6 13.7 11.2 9.7 8.2
</TABLE>
* The weighted average life of a Certificate of any class is determined by (i)
multiplying the amount of each distribution in reduction of the related Class
A Principal Balance by the number of years from the date of issuance of such
Certificate to the related Distribution Date, (ii) adding the results, and
(iii) dividing the sum by the highest related Principal Balance of the
Certificate.
This table has been prepared based on the assumptions described above
(including the assumptions regarding the characteristics and performance of the
Mortgage Loans, which differ from the actual characteristics and performance
thereof) and should be read in conjunction therewith.
Payment Delay Feature of Certificates
The effective yield to the Certificateholders of the Class A Certificates
will be lower than the yield otherwise produced by the Certificate Rate for each
such Class and the purchase price of such Certificates because distributions
will not be payable to the Certificateholders until the 25th day of the month
following the month of accrual (without any additional distribution of interest
or earnings thereon in respect of such delay).
S-30
<PAGE>
Distributable Excess Spread
The provisions of the Pooling and Servicing Agreement result in a limited
acceleration of the Offered Certificates relative to the amortization of the
related Mortgage Loans in early months of the transaction. The accelerated
amortization is achieved by the application of certain excess interest to the
payment of the Class A Principal Balance. This acceleration feature creates
overcollateralization which results from the excess of the Aggregate Loan
Balance over the Aggregate Class A Principal Balance. Once the required level of
overcollateralization is reached, the acceleration feature will cease, unless
necessary to maintain the required level of overcollateralization.
The Class A Certificates receive distributions of principal payments (other
than Payaheads not intended for application in the related Collection Period) in
sequential order, such that all principal payments (other than Payaheads not
intended for application in the related Collection Period) are applied first to
reduce the principal balance of the Class A-1 Certificates to zero, second to
reduce the principal balance of the Class A-2 Certificates to zero and
thereafter to the principal balances of the Class A-3, the Class A-4 and the
Class A-5 Certificates, in that order until each Class is reduced to zero.
Therefore, the Class A-1 Certificates will experience the greatest initial
accelerated amortization as a result of the limited acceleration feature of the
Offered Certificates.
FORMATION OF THE TRUST FUND AND TRUST PROPERTY
The FURST Home Equity Loan Trust 1996-1 will be created and established
pursuant to the Pooling and Servicing Agreement. As of the Closing Date, the
Depositor will convey without recourse (subject to certain obligations to
repurchase Defective Mortgage Loans or replace Defective Mortgage Loans with
Eligible Substitute Mortgage Loans) the Mortgage Loans to the Trust Fund and the
Trust Fund will issue (a) the Offered Certificates and (b) the Subordinated
Certificates to the Depositor.
The property of the Trust Fund shall include (a) the Mortgage Loans (other
than payments in respect of principal and interest due prior to the Cut-Off Date
and received thereafter) together with the related Mortgage Loan documents
(including any guaranty executed in connection therewith) and the Depositor's
interest in any property which secures a Mortgage Loan (the "Mortgaged
Property") and all payments thereon and proceeds of the conversion, voluntary or
involuntary, of the foregoing, (b) such amounts as may be held in the
Distribution Account and the Collection Account, (c) the Certificate Insurance
Policy and (d) proceeds of all the foregoing (including, but not by way of
limitation, all of any mortgage insurance, hazard insurance and title insurance
policy relating to the Mortgage Loans, cash proceeds, accounts, accounts
receivable, notes, drafts, acceptances, chattel paper, checks, deposit accounts,
rights to payment of any and every kind, and other forms of obligations and
receivables which at any time constitute all or part of or are included in the
proceeds of any of the foregoing but excluding any net investment income from
the investment of funds in the Collection Account, if any, and the Distrbution
Account) to pay the Certificates as specified in the Pooling and Servicing
Agreement.
The Certificates will not represent an interest in or an obligation of, nor
will the Mortgage Loans be guaranteed by, the Depositor, the Seller, the Master
Servicer, the Trustee or any of their affiliates. In addition to the Offered
Certificates, the Trust Fund will also issue a subordinate interest only class
and a residual class entitled "FURST Home Equity Loan Trust 1996-1, Class R
Certificates" which will be designated as the residual interest in the REMIC for
purposes of the Code. The subordinate interest only class will be issued to the
Depositor and the residual class will be issued to the Depositor and to the
Trustee, in its capacity as tax matters person, and are not being offered
hereby.
Prior to its formation the Trust Fund will have had no assets or
obligations. Upon formation, the Trust Fund will not engage in any business
activity other than acquiring, holding and collecting payments on the Mortgage
Loans, issuing the Certificates and distributing payments thereon. The Trust
Fund will not acquire any receivables or assets other than the Mortgage Loans
and the rights appurtenant thereto. To the extent that borrowers make scheduled
payments under the Mortgage Loans, the Trust Fund will have sufficient liquidity
to make distributions on the Certificates. As the Trust Fund does not have any
operating history and will not engage in any business activity other than
issuing the Certificates and making distributions thereon, there has not been
included any historical or pro forma ratio of earnings to fixed charges with
respect to the Trust Fund.
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement among the Document Custodian, the Depositor, the Seller, the Master
Servicer and the Trustee. Reference is made to the Prospectus for additional
information regarding the terms and conditions of the Pooling and Servicing
Agreement to the extent not revised by the following
S-31
<PAGE>
description. To the extent that the statements in this Prospectus Supplement
modify statements in the Prospectus, the statements in this Prospectus
Supplement control.
The following summaries do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, the provisions of the
Pooling and Servicing Agreement. When particular provisions or terms used in the
Pooling and Servicing Agreement are referred to, the actual provisions
(including definitions of terms) are incorporated by reference.
General
Each Offered Certificate will represent certain undivided, fractional
ownership interests in the Trust Fund created and held pursuant to the Pooling
and Servicing Agreement, subject to the limits and the priority of distribution
described therein. The Subordinated Certificates will represent the entire
interest in the assets of the Trust Fund other than that represented by the
Offered Certificates and shall be issued to the Depositor.
On the Closing Date, upon the order of the Depositor concurrently with the
sale and assignment to the Trustee of the Trust Fund assets, the Trustee will
execute, deliver and authenticate the Certificates. The Class A Certificates
will be issued in minimum dollar denominations of $1,000 and integral dollar
multiples in excess thereof.
Assignment of Mortgage Loans
At the time of issuance of the Offered Certificates, the Depositor will
assign to the Trustee all of its right, title and interest in and to the
Mortgage Loans, including all payments of interest and principal, from whatever
source derived, which are received on or with respect to the Mortgage Loans on
or after the Cut-Off Date, together with the other assets and related documents
(collectively, the "Related Documents") included in the Trust Fund. In addition,
on or prior to the date the Offered Certificates are initially issued by the
Trust Fund, the Certificate Insurance Policy will be delivered to the Trustee.
Concurrently with such assignment, the Trustee will deliver the Certificates to
the Depositor. Each Mortgage Loan will be identified in a schedule delivered to
the Trustee.
Under the terms of the Pooling and Servicing Agreement, the Depositor will
deliver the Mortgages, the Mortgage Notes and the other Related Documents to
First Union National Bank of North Carolina, Trust Department, as Document
Custodian, and, so long as the Seller's long-term unsecured debt is rated above
A2 by Moody's and A by S&P and no other Assignment Event shall have occurred and
be continuing, the Document Custodian shall be entitled to maintain possession
of the documentation relating to each Mortgage Loan (the "Mortgage Files"). In
the event that the Seller's long-term unsecured debt rating does not satisfy the
above-described standards or another Assignment Event has occurred and is
continuing, the Seller will cause within 60 days after the occurrence of an
Assignment Event the Mortgage Files pertaining to each such Mortgage Loan to be
delivered to the Trustee or the Trustee's bailee. The Document Custodian will
review such Mortgage Files within the period specified in the Pooling and
Servicing Agreement and notify the Trustee of any material defect discovered in
such review. Notwithstanding the foregoing, the Document Custodian shall perform
the review required by the Pooling and Servicing Agreement as to each Mortgage
Note within 60 days from the (i) the Closing Date with respect to Mortgage Notes
delivered on or before the Closing Date and (ii) the date a Mortgage Note is
delivered, if delivered after the Closing Date. If any document required to be
included in any Mortgage File does not bear manual signatures, has not been
received or is unrelated to the applicable Mortgage Loan, and such defect is not
cured as provided in the Pooling and Servicing Agreement following receipt of
notification thereof to the Seller by the Trustee, the Seller will be required
either to repurchase or to replace the affected Mortgage Loan in the manner set
forth below. In the Pooling and Servicing Agreement, Norwest Bank Minnesota,
National Association as trustee of Trust Fund will acknowledge the assignment of
the Mortgage Loans to the Trust Fund and the Document Custodian will agree to
hold the Mortgage Files of the Loans for and on behalf of the Trust Fund for so
long as the Mortgage Loans are owned by the Trust Fund or until the occurrence
of an Assignment Event.
The Seller will make certain representations and warranties with respect to
each Mortgage Loan. In the event there is a breach of any representation or
warranty made by the Seller in the Pooling and Servicing Agreement as to a
Mortgage Loan that materially and adversely affects the interest of the
Certificateholders or the Certificate Insurer, the Seller will be required
either to (i) repurchase the related Mortgage Loan from the Trust Fund or (ii)
prior to the expiration of two years following the date the Offered Certificates
are initially issued, substitute therefor an Eligible Substitute Mortgage Loan,
in each case in the manner described below.
Any Mortgage Loan required to be repurchased by the Seller as a result of a
defect, omission or breach of representation or warranty will be repurchased at
the applicable Purchase Price. The Purchase Price will be deposited into the
Collection Account on the second Business Day next preceding the Distribution
Date following expiration of the related cure period.
S-32
<PAGE>
As to any Eligible Substitute Mortgage Loan, the Seller will deposit into
the Collection Account the amount, if any, by which the conveyed balance of such
Eligible Substitute Mortgage Loan at the end of the Collection Period in which
the events giving rise to the related substitution occurred is less than the
Loan Balance of the related Mortgage Loan being removed from the Trust Fund at
the end of such Collection Period (the "Substitution Adjustment Amount"). The
Seller will substitute any Eligible Substitute Mortgage Loan, and deposit any
such Substitution Adjustment Amount into the Collection Account, on the Business
Day next preceding the Distribution Date in the month following such Collection
Period. Upon substitution, an Eligible Substitute Mortgage Loan will be subject
to the terms of the Pooling and Servicing Agreement and the Seller will be
deemed to have made, with respect to such Eligible Substitute Mortgage Loan, as
of the date of substitution, the representations and warranties made by the
Seller with respect to all other Mortgage Loans in the Trust Fund. Upon receipt
by the Trustee of written notification of any such repurchase or substitution,
subject to certain conditions set forth in the Pooling and Servicing Agreement,
the Document Custodian will execute and deliver an instrument of transfer or
assignment necessary to vest in the Seller legal and beneficial ownership of
such Mortgage Loan (including any property acquired in respect thereof or
proceeds of any insurance policy with respect thereto). The obligation of the
Seller to repurchase or replace any such Mortgage Loan will be the sole remedy
against the Seller available to Certificateholders or the Trustee.
An Eligible Substitute Mortgage Loan is a Mortgage Loan that, as of the
substitution date, (i) has an outstanding Loan Balance not in excess of, and not
more than 10% less than, the Loan Balance of the Defective Mortgage Loan it
replaces as of the substitution date; (ii) has a Loan Rate not less than the
current Loan Rate of such Defective Mortgage Loan and not more than one percent
in excess thereof; (iii) complies with each representation and warranty set
forth in the Pooling and Servicing Agreement (deemed to be made as of the date
of substitution); (iv) has a remaining term to maturity not later than nor more
than six months earlier than the remaining term to maturity of such Defective
Mortgage Loan; (v) has a Combined Loan-to-Value Ratio not greater than that of
the Defective Mortgage Loan; (vi) has an original principal balance of not more
than $770,000; and (vii) has a Mortgage in a lien position of the same or higher
level of priority as the Mortgage of such Defective Mortgage Loan. More than one
Eligible Substitute Mortgage Loan may be substituted for a Defective Mortgage
Loan if such Eligible Substitute Mortgage Loans meet the foregoing attributes in
the aggregate and such substitution is approved in writing in advance by the
Rating Agencies.
In the event the Seller repurchases or substitutes a Mortgage Loan as
provided above, there will be delivered to the Trustee an opinion of counsel as
to whether the repurchase or substitution (i) will be subject to tax as a result
of being deemed a prohibited transaction under section 860F(a)(2) of the Code;
(ii) will be deemed a contribution to the REMIC after the startup day that would
give rise to the tax specified under section 860G(d)(1) of the Code; or (iii)
will cause the Trust Fund to fail to qualify as a REMIC at any time any
Certificate is outstanding. The Seller will not be required to repurchase or
replace any Defective Mortgage Loan in the event such repurchase or replacement,
as evidenced by such opinion, would result in the imposition of a prohibited
transaction tax or be deemed a contribution to the REMIC after the startup day,
unless the Master Servicer has determined that there is an actual or imminent
default by the borrower with respect to the affected Mortgage Loan. The Seller
will not be required or permitted to repurchase or replace any Defective
Mortgage Loan if such repurchase or replacement, as evidenced by such opinion,
will cause the Trust Fund to fail to qualify as a REMIC.
In the event any such repurchase results in a prohibited transaction tax,
such tax is required to be charged first against amounts otherwise distributable
to the Subordinated Certificateholders and second, to the extent such amounts
are insufficient, against amounts otherwise distributable to the Holders of the
Offered Certificates, in each case on a pro rata basis among Certificateholders
of the applicable Class.
Payments on Mortgage Loans; Deposits to Collection and Distribution Accounts
Collection Account. The Master Servicer will, upon the occurrence and
continuance of the failure of any of the events described in clauses (i) or (ii)
of the following paragraph, establish and maintain in the name of the Trustee
with an entity meeting the requirements of the definition of "Eligible Account,"
a separate trust account (the "Collection Account") for the benefit of the
holders of the Certificates. Upon receipt by the Master Servicer of amounts in
respect of the Mortgage Loans (excluding amounts representing unreimbursed
advances, the Servicing Fee, Foreclosure Profits, fees or late charge penalties
payable by Mortgagors, amounts received by the Master Servicer for the accounts
of Mortgagors for application towards the payment of taxes, insurance premiums,
assessments and similar items and Payaheads received during such Collection
Period intended for application in subsequent Collection Periods), the Master
Servicer will deposit such amounts in the Collection Account. Amounts so
deposited may be invested in Eligible Investments (as described in the Pooling
and Servicing Agreement) maturing no later than one Business Day prior to the
date on which the amount on deposit therein is required to be deposited in the
Distribution Account or on such Distribution Date if approved by the Rating
Agencies, the Trustee and the Certificate Insurer. The Master Servicer shall
retain all Foreclosure Profits.
S-33
<PAGE>
The Trustee will establish an account (the "Distribution Account") into
which will be deposited amounts withdrawn from the Collection Account for
distribution to Certificateholders on a Distribution Date or, if the Master
Servicer is not required to make deposits to the Collection Account, amounts
received from the Master Servicer. The Distribution Account will be an Eligible
Account.
An "Eligible Account" is an account that is (i) maintained with a
depository institution whose debt obligations at the time of any deposit therein
have the highest short-term debt rating by the S&P and are rated P-1 by Moody's,
(ii) one or more accounts with a depository institution which accounts are fully
insured by either the Savings Association Insurance Fund ("SAIF") or the Bank
Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation established
by such fund with a minimum long-term unsecured debt rating of Baa3 by Moody's
and BBB by S&P, (iii) a segregated trust account maintained with the corporate
trust departments of (A) the Trustee or an affiliate of the Trustee in its
fiduciary capacity or (B) an institution with capital and surplus of not less
than $50,000,000 and with a minimum long-term secured debt rating of Baa3 by
Moody's and BBB by S&P or (iv) otherwise acceptable to each Rating Agency and
the Certificate Insurer as evidenced by a letter from each Rating Agency and the
Certificate Insurer to the Trustee, without reduction or withdrawal of their
then current ratings of the Certificates.
Notwithstanding anything in the Pooling and Servicing Agreement to the
contrary, (i) for so long as (A) the Master Servicer remains an Affiliate of the
Seller, (B) no Event of Default shall have occurred and be continuing and (C)
the Seller maintains a short-term rating of at least A-1 by S&P and P-1 by
Moody's, and for five Business Days following any reduction in either such
rating, or (ii) following the occurrence and continuation of certain events
described in the Pooling and Servicing Agreement, an arrangement is established
that is satisfactory to the Rating Agencies and the Certificate Insurer and
which does not in itself result in any reduction of (I) any rating issued in
respect of the Offered Certificates or (II) any reduction below investment grade
of the Offered Certificates without the benefit of the Certificate Insurance
Policy, the Master Servicer need not establish or make the daily deposits to the
Collection Account as provided herein, but may make a single deposit in the
Distribution Account in immediately available funds not later than 12:00 noon,
New York City time, on the second Business Day immediately preceding a
Distribution Date in a net amount equal to the amount that would have been on
deposit with respect to the immediately preceding Collection Period in the
Collection Account.
Advances
Not later than two Business Days prior to each Distribution Date, the
Master Servicer will remit to the Trustee for deposit in the Distribution
Account an amount, to be distributed on the related Distribution Date, equal to
the sum of the interest accrued on each Mortgage Loan through the related Due
Date but not received by the Master Servicer as of the close of business on the
last day of the related Collection Period and not previously advanced (net of
the Servicing Fee) (the "Monthly Advance"). Such obligation of the Master
Servicer continues with respect to each Mortgage Loan until such Mortgage Loan
becomes a Liquidated Mortgage Loan.
In the course of performing its servicing obligations, the Master Servicer
will pay all reasonable and customary "out-of-pocket" costs and expenses
incurred in the performance of its servicing obligations, including, but not
limited to, the cost of (i) the preservation, restoration and protection of the
Mortgaged Properties, (ii) any enforcement or judicial proceedings, including
foreclosures, and (iii) the management and liquidation of Mortgaged Properties
acquired in satisfaction of the related Mortgage. Each such expenditure will
constitute a "Servicing Advance."
The Master Servicer's right to reimbursement for Servicing Advances is
limited to late collections on the related Mortgage Loan, including Liquidation
Proceeds, related Mortgaged Property proceeds, Insurance Proceeds and such other
amounts as may be collected by the Master Servicer from the related Mortgagor or
otherwise relating to the Mortgage Loan in respect of which such unreimbursed
amounts are owed. The Master Servicer's right to reimbursement for Monthly
Advances shall be limited to late collections of interest on any Mortgage Loan
and to Liquidation Proceeds and Insurance Proceeds on the related Mortgage Loan.
The Master Servicer's right to such reimbursements is prior to the rights of
Certificateholders.
Notwithstanding the foregoing, the Master Servicer is not required to make
any Monthly Advances or Servicing Advance if in the good faith judgment and sole
discretion of the Master Servicer, the Master Servicer determines that such
advance will not be ultimately recoverable from collections received from the
Mortgagor in respect of the related Mortgage Loan or other recoveries in respect
of such Mortgage Loan (a "Nonrecoverable Advance"). However, if any Servicing
Advance or Monthly Advance is determined by the Master Servicer to be
nonrecoverable from such sources, the amount of such Nonrecoverable Advance may
be reimbursed to the Master Servicer from other amounts on deposit in the
Collection Account.
S-34
<PAGE>
Deposits to the Distribution Account
No later than two Business Days prior to each Distribution Date, the
following amounts in respect of the previous Collection Period shall be
deposited into the Distribution Account and shall constitute the "Available
Funds" for such Distribution Date: (i) (a) payment of principal and interest on
the Mortgage Loans received during such Collection Period (net of amounts
representing the Servicing Fee with respect to each Mortgage Loan, reimbursement
for related Monthly Advances and Servicing Advances, and Payaheads received
during such Collection Period intended for application in subsequent Collection
Periods) and (b) Payaheads received in prior Collection Periods intended for
application in such Collection Period; (ii) Net Liquidation Proceeds received
during such Collection Period; (iii) the Purchase Price for repurchased
Defective Mortgage Loans and any Substitution Adjustments Amounts in respect of
such Collection Period; (iv) payments from the Master Servicer in connection
with (a) Monthly Advances and (b) the termination of the Trust Fund with respect
to the Mortgage Loans as provided in the Pooling and Servicing Agreement, and
(v) any amounts paid under the Certificate Insurance Policy.
A "Payahead" is a required monthly payment received by the Master Servicer
with the required monthly payment for the current Due Date, intended by the
related Mortgagor to be applied on a subsequent Due Date (for example, because
the Mortgagor intends to be on vacation the following month). Payaheads will be
held by the Master Servicer until deposited to the Distribution Account as part
of the Available Funds for the Collection Period in which the Due Date that the
Mortgagor designates for the application of such required monthly payment
occurs.
Statements to Certificateholders
Concurrently with each distribution to the Certificateholders, the Trustee
will forward to each Certificateholder a statement (based solely on information
received from the Master Servicer) setting forth among other items with respect
to each Distribution Date:
(i) the aggregate amount of the distribution to each Class of
Certificateholders on such Distribution Date;
(ii) the amount of distribution set forth in paragraph (i) above in
respect of interest and the amount thereof in respect of any Class Interest
Carryover Shortfall, and the amount of any Class Interest Carryover
Shortfall remaining;
(iii) the amount of distribution set forth in paragraph (i) above in
respect of principal and the amount thereof in respect of the Outstanding
Class A Principal Carryover Shortfall, and any remaining Outstanding Class
A Principal Carryover Shortfall;
(iv) the amount of Excess Spread and the amount applied as to a
distribution on the Certificates;
(v) the Class A Guaranteed Principal Distribution Amount for such
Distribution Date;
(vi) the amount paid under the Certificate Insurance Policy for such
Distribution Date in respect of the Class Interest Distribution to each
Class of Certificates;
(vii) the Servicing Fee;
(viii) the Aggregate Loan Balance, as of the close of business on the
last day of the preceding Collection Period;
(ix) the Aggregate Class A Principal Balance after giving effect to
payments allocated to principal above;
(x) the amount of overcollateralization as of the close of business on
the Distribution Date, after giving effect to distributions of principal on
such Distribution Date;
(xi) the number and aggregate Loan Balances of the Mortgage Loans as
to which the minimum monthly payment is delinquent for 30-59 days, 60-89
days and 90 or more days, respectively, as of the end of the preceding
Collection Period;
(xii) the book value of any real estate which is acquired by the Trust
Fund through foreclosure or grant of deed in lieu of foreclosure;
(xiii) the aggregate amount of Prepayments received on the Mortgage
Loans during the previous Collection Period; and
(xiv) the weighted average Loan Rate on the Mortgage Loans as of the
first day of the month prior to the Distribution Date.
S-35
<PAGE>
In the case of information furnished pursuant to clauses (ii) and (iii)
above, the amounts shall be expressed as a dollar amount per Certificate with a
$1,000 denomination.
Within 60 days after the end of each calendar year, the Trustee will
forward to each Person, if requested in writing by such Person, who was a
Certificateholder during the prior calendar year a statement containing the
information set forth in clauses (ii) and (iii) above aggregated for such
calendar year.
Distributions to Certificateholders
Priority of Distributions. On each Distribution Date the Trustee shall
withdraw from the Distribution Account the Available Funds, and make
distributions thereof as described below and to the extent of the Available
Funds:
A. With respect to the Offered Certificates, in the following order of
priority:
(i) to the Trustee, the Trustee fee for such Distribution Date;
(ii) to holders of each Class of Offered Certificates, an amount equal
to the related Class Interest Distribution for such Distribution Date;
(iii) sequentially to the Class A-1, Class A-2, Class A-3, Class A-4
and Class A-5 Certificateholders, in that order, until the respective Class
A Principal Balance of each such Class is reduced to zero, the related
Class A Principal Distribution (other than the portion constituting the
Distributable Excess Spread) for such Distribution Date; provided, however,
after the occurrence and continuance of a Certificate Insurer Default, such
portion of the Class A Principal Distribution for the Class A Certificates
will be distributed pro rata to the holders thereof based on the respective
Class A Principal Balances;
(iv) to the Certificate Insurer, the amount owing to the Certificate
Insurer under the Insurance Agreement for the premium payable; and
(v) sequentially to the Class A-1, the Class A-2, the Class A-3, the
Class A-4 and the Class A-5 Certificateholders, in that order, until the
respective Class A Principal Balance of each such Class is reduced to zero,
the related Distributable Excess Spread for such Distribution Date;
provided, however, after the occurrence and continuance of a Certificate
Insurer Default, such Distributable Excess Spread will be distributed pro
rata to the holders thereof based on the respective Class A Principal
Balances.
B. After making the distributions referred to in subclause A above, the
Trustee shall make distributions in the following order of priority:
(i) to the Certificate Insurer, amounts owing to the Certificate
Insurer for reimbursement for prior draws made on the Certificate Insurance
Policy;
(ii) to the Certificate Insurer, any other amounts owing to the
Certificate Insurer under the Insurance Agreement; and
(iii) to the Subordinated Certificateholders, the balance of Available
Funds, as specified in the Pooling and Servicing Agreement.
Certificate Rate
The "Certificate Rate" applicable to each of the Class A-1, Class A-2,
Class A-3, Class A-4 and Class A-5 Certificates on any Distribution Date is the
respective rate per annum set forth on the cover page hereof. Notwithstanding
the foregoing, in no event will the Certificate Rate in respect of the Class A-5
Certificates on any Distribution Date exceed the weighted average of the Loan
Rates applicable to interest due on the Mortgage Loans during the related
Collection Period, net of the Servicing Fee Rate and the Trustee fee rate and
the premium rate on the Certificate Insurance Policy.
Interest on the Offered Certificates in respect of any Distribution Date
will accrue from the first day of the calendar month preceding the month of such
Distribution Date through the last day of such calendar month on the basis of a
360-day year consisting of twelve 30-day months.
Interest
On each Distribution Date, to the extent of funds available therefor in
accordance with the priorities described above under " -- Distributions to
Certificateholders -- Priorities of Distributions," interest will be distributed
to each Class of
S-36
<PAGE>
Senior Certificates in an amount equal to the related Class Interest
Distribution. For each Distribution Date and each Class of Senior Certificates,
the "Class Interest Distribution" is the sum of (a) one month's interest at the
related Certificate Rate on the related Class A Principal Balance immediately
prior to such Distribution Date (the "Class Monthly Interest Distributable
Amount") and (b) any Class Interest Carryover Shortfall. As to any Distribution
Date and Class of Senior Certificates, the "Class Interest Carryover Shortfall"
is the sum of (a) the excess of the related Class Monthly Interest Distributable
Amount for the preceding Distribution Date and any outstanding Class Interest
Carryover Shortfall with respect to such Class on such preceding Distribution
Date, over the amount in respect of interest that is actually distributed to
such Class on such preceding Distribution Date plus (b) one month's interest on
such excess, to the extent permitted by law, at the related Certificate Rate.
On each Distribution Date, the Class Interest Distribution for each Class
of Senior Certificates will be distributed on an equal priority and any
shortfall in the amount required to be distributed as interest thereon to each
such Class will be allocated between such Classes pro rata based on the amount
each such Class would have been distributed in the absence of such shortfall.
Principal
On each Distribution Date, to the extent of funds available therefor, in
accordance with the priorities described above under " -- Distributions to
Certificateholders -- Priorities of Distributions," principal will be
distributed to the holders of Class A Certificates then entitled to
distributions of principal in an amount equal to the lesser of (A) the Aggregate
Class A Principal Balance and (B) the Class A Principal Distribution for such
Distribution Date. "Class A Principal Distribution" means, with respect to any
Distribution Date, the sum of the Class A Monthly Principal Distributable Amount
for such Distribution Date and any Outstanding Class A Principal Carryover
Shortfall as of the close of business on the preceding Distribution Date.
"Class A Monthly Principal Distributable Amount" means, with respect to any
Distribution Date, the amount equal to the sum of the following amounts (without
duplication) with respect to the immediately preceding Collection Period (as
defined below): (i) (a) each payment of principal on a Mortgage Loan received by
the Master Servicer during such Collection Period, including all full and
partial principal prepayments, other than Payaheads received during such
Collection Period intended for application in subsequent Collection Periods and
(b) the principal portion of Payaheads received by the Master Servicer in prior
Collection Periods intended for application in such Collection Period, (ii) the
Principal Balance as of the end of the immediately preceding Collection Period
of each Mortgage Loan that became a Liquidated Mortgage Loan for the first time
during the related Collection Period, (iii) the portion of the Purchase Price
allocable to principal of all repurchased Defective Mortgage Loans with respect
to such Collection Period, (iv) any Substitution Adjustment Amounts received on
or prior to the previous Determination Date and not yet distributed and (v)
related Excess Spread, if any, up to the overcollateralization requirement in
effect for such Distribution Date (the "Distributable Excess Spread").
"Outstanding Class A Principal Carryover Shortfall" means with respect to
any Distribution Date, the excess of the Class A Principal Distribution for the
preceding Distribution Date over the amount in respect of principal that is
actually distributed to the Class A Certificateholders on such preceding
Distribution Date.
If, on any Distribution Date, the required level of overcollateralization
is reduced below the then existing amount of overcollateralization (described
below) or if the required level of overcollateralization is satisfied, the
amount of the Class A Monthly Principal Distributable Amount distributed to the
Class A Certificates on the following Distribution Date will be correspondingly
reduced by the amount of such reduction or by the amount necessary such that the
overcollateralization will not exceed the required level of
overcollateralization after giving effect to the distribution in respect of
principal to be made on such Distribution Date.
So long as a Certificate Insurer Default has not occurred and is
continuing, distributions of the Class A Principal Distribution will be applied,
sequentially, to the distribution of principal to the Class A Certificates such
that no Class of Class A Certificates having a higher numerical designation is
entitled to distributions of principal until the Class A Principal Balance of
each such Class of Certificates having a lower numerical designation has been
reduced to zero. On any Distribution Date if a Certificate Insurer Default has
occurred and is continuing, the Class A Principal Distribution will be applied
to the distribution of principal of each such Class outstanding on a pro rata
basis in accordance with the Class A Principal Balance of each such Class.
On each Distribution Date following a Certificate Insurer Default, net
losses realized in respect of Liquidated Mortgage Loans (to the extent such
amount is not covered by Available Funds) will reduce the amount of
overcollateralization, if any.
S-37
<PAGE>
"Collection Period" means, with respect to any Determination Date or
Distribution Date, the calendar month immediately preceding such Determination
Date or Distribution Date, as the case may be.
A "Liquidated Mortgage Loan," as to any Distribution Date, is a Mortgage
Loan with respect to which the Master Servicer has determined, in accordance
with the servicing procedures specified in the Pooling and Servicing Agreement,
as of the end of the preceding Collection Period, that all Liquidation Proceeds
which it expects to recover with respect to such Mortgage Loan have been
recovered.
"Excess Spread" means, with respect to any Distribution Date, the positive
excess, if any, of (x) Available Funds for such Distribution Date over (y) the
amount required to be distributed pursuant to subclause A items (i) through
(iv), set forth under the heading " -- Distributions to
Certificateholders -- Priority of Distributions" on such Distribution Date.
A "Certificate Insurer Default" will occur in the event the Certificate
Insurer fails to make a payment required under the Certificate Insurance Policy
or if certain events of bankruptcy or insolvency occur with respect to the
Certificate Insurer.
Overcollateralization Provisions
The credit enhancement provisions of the Trust Fund result in a limited
acceleration of the Class A Certificates relative to the amortization of the
Mortgage Loans in the early months of the transaction. The accelerated
amortization is achieved by the application of Distributable Excess Spread to
principal distributions on the Class A Certificates. This acceleration feature
creates overcollateralization (i.e., the excess of the Aggregate Loan Balance of
the Mortgage Loans over the Aggregate Class A Principal Balance). Once the
required level of overcollateralization is reached, and subject to the
provisions described in the next paragraph, the acceleration feature will cease,
until necessary to maintain the required level of overcollateralization.
The Pooling and Servicing Agreement provides that, subject to certain
floors, caps and triggers, the required level of overcollateralization may
increase or decrease over time. An increase in the required level of
overcollateralization will result if the delinquency or default experience on
the Mortgage Loans exceeds certain levels set forth in the Pooling and Servicing
Agreement. In that event, amortization of the Class A Certificates would be
accelerated until the level of overcollateralization reaches its required level.
Any decrease in the required level of overcollateralization will occur only at
the sole discretion of the Certificate Insurer. Any such decrease will have the
effect of reducing the amortization of the Class A Certificates below what it
otherwise would have been.
Servicing and Other Compensation and Payment of Expenses
The principal servicing compensation to be paid to the Master Servicer with
respect to each Collection Period in respect of its servicing activities
relating to the Certificates (the "Servicing Fee") will be retained by it from
collections of interest on the Mortgage Loans in the Trust Fund at the time such
collections are required to be deposited into the Distribution Account (or the
Collection Account, if the Master Servicer is required to make deposits therein)
and will be equal to 0.50% (the "Servicing Fee Rate") per annum of the
outstanding Loan Balance of each such Mortgage Loan as of the first day of each
such Collection Period. In addition, the Master Servicer will receive any net
investment income from the investment of funds in the Collection Account, if
any, and the Master Servicer and the Trustee will be entitled to any net
investment income from the investment of funds in the Distribution Account. All
assumption fees and late payment charges, to the extent collected from borrowers
shall be retained by the Master Servicer.
The Master Servicer will pay certain ongoing expenses associated with the
Trust Fund and incurred by it in connection with its responsibilities under the
Pooling and Servicing Agreement, including, without limitation, payment of the
disbursements of the Trustee, any custodian appointed by the Trustee, the
Certificate Registrar and any paying agent. In addition, the Master Servicer
will be entitled to reimbursement for certain expenses incurred by it in
connection with defaulted Mortgage Loans and in connection with the restoration
of Mortgaged Properties, such right of reimbursement being prior to the rights
of Certificateholders to receive any Liquidation Proceeds.
Registration of Offered Certificates
The Offered Certificates will be book-entry Certificates (the "Book-Entry
Certificates"). Persons acquiring beneficial ownership interests in the Offered
Certificates ("Certificate Owners") will hold their Offered Certificates through
The Depository Trust Company ("DTC") in the United States, or CEDEL or Euroclear
(in Europe) if they are participants of such systems, or indirectly through
organizations which are participants in such systems. The Book-Entry
Certificates will be issued in one or more certificates which equal the
aggregate principal balance of the Offered Certificates and will initially be
registered in the name of Cede & Co., the nominee of DTC. CEDEL and Euroclear
will hold omnibus positions on behalf of
S-38
<PAGE>
their participants through customers' securities accounts in CEDEL's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank will act as depositary for CEDEL and Chase
will act as depositary for Euroclear (in such capacities, individually the
"Relevant Depositary" and collectively the "European Depositaries"). Investors
may hold such beneficial interests in the Book-Entry Certificates in minimum
denominations representing Certificate Principal Balances of $1,000 and in
multiples of $1 in excess thereof. Except as described below, no person
acquiring a Book-Entry Certificate (each, a "beneficial owner") will be entitled
to receive a physical certificate representing such Certificate (a "Definitive
Certificate"). Unless and until Definitive Certificates are issued, it is
anticipated that the only "Certificateholder" of the Offered Certificates will
be Cede & Co., as nominee of DTC. Certificate Owners will not be
Certificateholders as that term is used in the Agreement. Certificate Owners are
only permitted to exercise their rights indirectly through participants of DTC
("DTC Participants") and DTC.
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC Participant and on
the records of CEDEL or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of, and
interest on, the Offered Certificates from the Trustee through DTC and DTC
Participants. While the Offered Certificates 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 DTC Participants on whose behalf it acts with
respect to the Offered Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Offered Certificates.
Participants and indirect participants with whom Certificate Owners have
accounts with respect to Offered Certificates are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess certificates, the Rules provide a mechanism by which
Certificate Owners will receive distributions and will be able to transfer their
interest.
Certificate Owners will not receive or be entitled to receive certificates
representing their respective interests in the Offered Certificates, except
under the limited circumstances described below. Unless and until Definitive
Certificates are issued, Certificate Owners who are not DTC Participants may
transfer ownership of Offered Certificates only through DTC Participants and
indirect participants by instructing such DTC Participants and indirect
participants to transfer Offered Certificates, by book-entry transfer, through
DTC for the account of the purchasers of such Offered Certificates, which
account is maintained with their respective DTC Participants. Under the Rules
and in accordance with DTC's normal procedures, transfers of ownership of
Offered Certificates will be executed through DTC and the accounts of the
respective DTC Participants at DTC will be debited and credited. Similarly, the
DTC Participants and indirect participants will make debits or credits, as the
case may be, on their records on behalf of the selling and purchasing
Certificate Owners.
Because of time zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a DTC Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or CEDEL Participants on such business day. Cash received in CEDEL or
Euroclear as a result of sales of securities by or through a CEDEL Participant
(as defined below) or Euroclear Participant (as defined below) 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 "Global Clearance,
Settlement and Tax Documentation Procedures -- Certain U.S. Federal Income Tax
Documentation Requirements" in Annex I hereto.
Transfers between DTC Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective 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
Participants 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 the Relevant Depositary; however, such cross market
transactions will requie 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).
S-39
<PAGE>
The relevant European international clearing system will, if the transaction
meets its settlement requirements, deliver instructions to the Relevant
Depositary to take action to effect final settlement on its behalf by delivering
or receiving securities in DTC, and making or receiving payment in accordance
with normal procedures for same day funds settlement applicable to DTC. CEDEL
Participants and Euroclear Participants may not deliver instructions directly to
the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC Participant in the Book-Entry Certificates, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Certificates will be subject to the rules,
regulations and procedures governing DTC and DTC Participants as in effect from
time to time.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. 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.
Euroclear was created in 1968 to hold securities for its participants
("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 be settled in any of 32 currencies, including United
States dollars. Euroclear 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. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems 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 and
other professional financial intermediaries. 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 which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
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 on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC Participants
in accordance with DTC's normal procedures. Each DTC Participant will be
responsible for disbursing such payments to the beneficial owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the beneficial owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, beneficial owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede. Distributions with respect to Certificates
held
S-40
<PAGE>
through CEDEL or Euroclear will be credited to the cash accounts of CEDEL
Participants or Euroclear Participants in accordance with the relevant system's
rules and procedures, to the extent received by the Relevant Depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. Because DTC can only act on behalf of
Financial Intermediaries, the ability of a beneficial owner to pledge Book-Entry
Certificates to persons or entities that do not participate in the Depository
system, or otherwise take actions in respect of such Book-Entry Certificates,
may be limited due to the lack of physical certificates for such Book-Entry
Certificates. In addition, issuance of the Book-Entry Certificates in book-entry
form may reduce the liquidity of such Certificates in the secondary market since
certain potential investors may be unwilling to purchase Certificates for which
they cannot obtain physical certificates.
Monthly and annual reports on the Trust Fund will be provided to Cede &
Co., as nominee of DTC, and will be made available by Cede & Co. to beneficial
owners upon request, in accordance with the rules, regulations and procedures
creating and affecting the Depository, and to the Financial Intermediaries to
whose DTC accounts the Book-Entry Certificates of such beneficial owners are
credited.
DTC has advised the Trustee that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by the holders of the
Book-Entry Certificates under the Agreement only at the direction of one or more
Financial Intermediaries to whose DTC accounts the Book-Entry Certificates are
credited, to the extent that such actions are taken on behalf of Financial
Intermediaries whose holdings include such Book-Entry Certificates. CEDEL or the
Euroclear Operator, as the case may be, will take any other action permitted to
be taken by a Certificateholder under the Agreement on behalf of a CEDEL
Participant or Euroclear Participant only in accordance with its relevant rules
and procedures and subject to the ability of the Relevant Depositary to effect
such actions on its behalf through DTC. DTC may take actions, at the direction
of the related Participants, with respect to some Class A Certificates which
conflict with actions taken with respect to other Class A Certificates.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depository with respect to the Book-Entry Certificates and the Depositor or the
Trustee is unable to locate a qualified successor, (b) the Depositor, at its
sole option, with the consent of the Trustee, elects to terminate a book-entry
system through DTC or (c) after the occurrence of an Event of Default (as
defined herein), beneficial owners having Percentage Interests aggregating not
less than 51% of the aggregate Class A Principal Balance of the Book-Entry
Certificates advise the Trustee and DTC through the Financial Intermediaries and
the DTC Participants in writing that the continuation of a book-entry system
through DTC (or a successor thereto) is no longer in the best interests of
beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee. will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as
Certificateholders under the Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Class A Certificates among participants of
DTC, CEDEL and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
Neither the Seller, the Master Servicer nor the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Certificates held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
Last Scheduled Distribution Date
The last scheduled Distribution Date for each Class of Offered Certificates
is as follows: Class A-1 Certificates, November 25, 2009; Class A-2
Certificates, May 25, 2011; Class A-3 Certificates, May 25, 2011; Class A-4
Certificates, September 25, 2013; and Class A-5 Certificates, September 25,
2027. It is expected that the actual last Distribution Date for each Class of
Offered Certificates will occur significantly earlier than such scheduled
Distribution Dates. See "Prepayment and Yield Considerations".
Such last scheduled Distribution Dates are based on a 0% Prepayment
Assumption with no Distributable Excess Spread used to make accelerated payments
of principal to the holders of the Offered Certificates; provided that the last
scheduled
S-41
<PAGE>
Distribution Date for the Class A-5 Certificates has been calculated assuming
that the Mortgage Loan having the latest maturity amortizes according to its
term, plus one year.
Collection and Other Servicing Procedures on Mortgage Loans
The Master Servicer will make reasonable efforts to collect all payments
called for under the Mortgage Loans and will, consistent with the Pooling and
Servicing Agreement, follow such collection procedures as it follows from time
to time with respect to the home equity loans in its servicing portfolio
comparable to the Mortgage Loans. Consistent with the above, the Master Servicer
may in its discretion waive any late payment charge or any assumption or other
fee or charge that may be collected in the ordinary course of servicing the
Mortgage Loans.
With respect to the Mortgage Loans, the Master Servicer may arrange with a
borrower a schedule for the payment of interest due and unpaid for a period,
provided that any such arrangement is consistent with the Master Servicer's
policies with respect to the home equity mortgage loans it owns or services.
Hazard Insurance and Flood Insurance
The Master Servicer will cause to be maintained fire and hazard insurance
with extended coverage customary in the area where the Mortgaged Property is
located, in an amount which is at least equal to the lesser of (i) the
outstanding Loan Balance on the Mortgage Loan and any related senior lien(s),
(ii) the full insurable value of the premises securing the Mortgage Loan and
(iii) the minimum amount required to compensate for damage or loss on a
replacement cost basis in each case in an amount not less than such amount as is
necessary to avoid the application of any co-insurance clause contained in the
related hazard insurance policy. Generally, if the Mortgaged Property is in an
area identified in the Federal Register by the Flood Emergency Management Agency
as FLOOD ZONE "A", such flood insurance has been made available and the Master
Servicer determines that such insurance is necessary in accordance with accepted
second mortgage servicing practices of prudent lending institutions, the Master
Servicer will cause to be purchased a flood insurance policy with a generally
acceptable insurance carrier, in an amount representing coverage not less than
the least of (a) the outstanding Loan Balance of the Mortgage Loan and the first
lien, (b) the full insurable value of the Mortgaged Property, or (c) the maximum
amount of insurance available under the National Flood Insurance Act of 1968, as
amended. The Master Servicer will also maintain on REO, to the extent such
insurance is available, fire and hazard insurance in the applicable amounts
described above, liability insurance and, to the extent required and available
under the National Flood Insurance Act of 1968, as amended, and the Master
Servicer determines that such insurance is necessary in accordance with accepted
second mortgage servicing practices of prudent lending institutions, flood
insurance in an amount equal to that required above. 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 second mortgage servicing procedures)
will be deposited in the Collection Account, subject to retention by the Master
Servicer to the extent such amounts constitute servicing compensation or to
withdrawal pursuant to the Pooling and Servicing Agreement.
In the event that the Master Servicer obtains and maintains a blanket
policy as provided in the Pooling and Servicing Agreement insuring against fire
and hazards of extended coverage on all of the Mortgage Loans, then, to the
extent such policy names the Master Servicer as loss payee and provides coverage
in an amount equal to the aggregate unpaid principal balance of the Mortgage
Loans without coinsurance, and otherwise complies with the requirements of the
first paragraph of this subsection, the Master Servicer will be deemed
conclusively to have satisfied its obligations with respect to fire and hazard
insurance coverage.
Realization Upon Defaulted Mortgage Loans
The Master Servicer will foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Mortgage Loans as come into
default when, in accordance with applicable servicing procedures under the
Pooling and Servicing Agreement, no satisfactory arrangements can be made for
the collection of delinquent payments. In connection with such foreclosure or
other conversion, the Master Servicer will follow such practices as it deems
necessary or advisable and as are in keeping with its general mortgage servicing
activities, provided the Master Servicer will not be required to expend its own
funds in connection with foreclosure or other conversion, correction of default
on a related senior mortgage loan or restoration of any property unless, in its
sole judgment, such foreclosure, correction or restoration will increase Net
Liquidation Proceeds. The Master Servicer will be reimbursed out of Liquidation
Proceeds for advances of its own funds as liquidation expenses before any Net
Liquidation Proceeds are distributed to Certificateholders.
S-42
<PAGE>
"Insurance Proceeds" means any proceeds paid by any insurer (other than the
Certificate Insurer) pursuant to any insurance policy covering a Mortgage Loan,
net of any component thereof (i) covering any expenses incurred by or on behalf
of the Master Servicer in connection with obtaining such proceeds, (ii) that is
applied to the restoration or repair of the related Mortgaged Property, (iii)
released to the Mortgagor in accordance with the Master Servicer's normal
servicing procedures or (iv) required to be paid to any holder of a mortgage
senior to such Mortgage Loan.
"Liquidation Expenses" means all out-of-pocket expenses (exclusive of
overhead) which are incurred by the Master Servicer in connection with the
liquidation of any Mortgage Loan and not recovered under any insurance policy,
such expenses including, without limitation, legal fees and expenses, any
unreimbursed Servicing Advances (including, without limitation, amounts advanced
to correct defaults on any mortgage loan which is senior to such Mortgage Loan
and amounts advanced to keep current or pay off a mortgage loan that is senior
to such Mortgage Loan) respecting the related Mortgage Loan and any related and
unreimbursed expenditures for real estate property taxes or for property
restoration, preservation or insurance against casualty loss or damage.
"Liquidation Proceeds" means all proceeds (including Insurance Proceeds but
not including amounts drawn under the Certificate Insurance Policy) received in
connection with the liquidation of any Mortgage Loan or related REO or any
condemnation or taking by eminent domain, whether through trustee's sale,
foreclosure sale or otherwise (including rental income).
"Net Liquidation Proceeds" means, with respect to any Liquidated Mortgage
Loan, Liquidation Proceeds net of Liquidation Expenses.
"REO" means any Mortgaged Property that is acquired by the Trustee in
foreclosure or by deed in lieu of foreclosure.
"Foreclosure Profit" means, with respect to a Liquidated Mortgage Loan, the
amount, if any, by which (i) the aggregate of its Net Liquidation Proceeds
exceeds (ii) the related Loan Balance (plus accrued and unpaid interest thereon
at the applicable Loan Rate from the date interest was last paid through the
date of receipt of the final Liquidation Proceeds) of such Liquidated Mortgage
Loan immediately prior to the initial recovery of its Liquidation Proceeds.
Evidence as to Compliance
The Pooling and Servicing Agreement provides for delivery on or before the
last day of the fifth month following the end of the Master Servicer's fiscal
year, beginning in 1997, to the Trustee, the Depositor, the Certificate Insurer
and the Rating Agencies of an annual statement signed by an officer of the
Master Servicer to the effect that the Master Servicer has fulfilled its
material obligations under the Pooling and Servicing Agreement throughout the
preceding fiscal year, except as specified in such statement.
On or before the last day of the fifth month following the end of the
Master Servicer's fiscal year, beginning in 1997, the Master Servicer will
furnish a report prepared by a firm of nationally recognized independent public
accountants (who may also render other services to the Master Servicer or the
Depositor) to the Trustee, the Depositor, the Certificate Insurer and the Rating
Agencies to the effect that such firm has examined certain documents and the
records relating to servicing of the Mortgage Loans under the Uniform Single
Attestation Program for Mortgage Bankers and such firm's conclusion with respect
thereto.
The Master Servicer's fiscal year is the calendar year.
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, except in connection with
a permitted transfer of servicing, unless (i) such duties and obligations are no
longer permissible under applicable law or are in material conflict by reason of
applicable law with any other activities of a type and nature presently carried
on by it or its affiliate or (ii) upon the satisfaction of the following
conditions: (a) the Master Servicer has proposed a successor servicer to the
Trustee in writing and such proposed successor servicer is reasonably acceptable
to the Trustee; (b) the Rating Agencies have confirmed to the Trustee that the
appointment of such proposed successor servicer as the Master Servicer will not
result in the reduction or withdrawal of the then current rating of the
Certificates; and (c) such proposed successor servicer is reasonably acceptable
to the Certificate Insurer. No such resignation will become effective until the
Trustee or a successor servicer has assumed the Master Servicer's obligations
and duties under the Pooling and Servicing Agreement.
S-43
<PAGE>
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
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.
The Master Servicer may permit the placement of a subsequent senior
mortgage on any Mortgaged Property, provided that (a) the related Mortgage
succeeded to a first lien position after the Closing Date for such Mortgage Loan
and, immediately following the placement of such senior lien, such Mortgage is
in a second lien position and the outstanding principal amount of the mortgage
loan secured by such senior lien is no greater than the outstanding principal
amount of the first mortgage loan existing as of the Closing Date and the
recalculated combined loan-to-value ratio of the Mortgage Loan is not greater
than the Combined Loan-to-Value Ratio of such Mortgage Loan as of the Closing
Date; or (b) the Mortgage relating to the Mortgage Loan was in a second lien
position as of the related Closing Date; the new senior lien secures a mortgage
loan that refinances an existing first mortgage loan and the outstanding
principal amount of such refinanced mortgage loan is no greater than the
outstanding principal amount of the first mortgage loan existing as of the
Closing Date and the recalculated combined loan-to-value ratio of such Mortgage
Loan is not greater than the Combined Loan-to-Value Ratio of such Mortgage Loan
as of the Closing Date.
In addition, the Master Servicer may agree to changes in the terms of a
Mortgage Loan, provided, however, that such changes (i) will not cause the Trust
Fund to fail to qualify as a REMIC and do not adversely affect the interests of
the Certificateholders or the Certificate Insurer, (ii) are consistent with
prudent business practices and (iii) do not change the Loan Rate of such
Mortgage Loan or extend the maturity date of such Mortgage Loans in excess of
one year. Any changes to the terms of a Mortgage Loan that would cause the Trust
Fund to fail to qualify as a REMIC, however, may be agreed to by the Master
Servicer, provided the Master Servicer has determined such changes are necessary
to avoid a prepayment of such Mortgage Loans, such changes are in accordance
with prudent business practices and the Master Servicer purchases such Mortgage
Loan in accordance with the terms of the Pooling and Servicing Agreement.
The Pooling and Servicing Agreement provides that the Master Servicer will
indemnify the Trust Fund and the Trustee from and against any loss, liability,
expense, damage or injury suffered or sustained as a result of the Master
Servicer's actions or omissions in connection with the servicing and
administration of the Mortgage Loans which are not in accordance with the
provisions of the Pooling and Servicing Agreement. The Pooling and Servicing
Agreement provides that neither the Depositor nor the Master Servicer nor their
directors, officers, employees or agents will be under any other liability to
the Trust Fund, the Trustee, the Certificateholders or any other person for any
action taken or for refraining from taking any action pursuant to the Pooling
and Servicing Agreement. However, neither the Depositor nor the Master Servicer
will be protected against any liability which would otherwise be imposed by
reason of willful misconduct, bad faith or gross negligence of the Depositor or
the Master Servicer in the performance of its duties under the Pooling and
Servicing Agreement or by reason of reckless disregard of its obligations
thereunder. In addition, the Pooling and Servicing Agreement provides that the
Master Servicer will not be under any obligation to appear in, prosecute or
defend any legal action which is not incidental to its servicing
responsibilities under the Pooling and Servicing Agreement. The Master Servicer
may, in its sole discretion, undertake any such legal action which it may deem
necessary or desirable with respect to the Pooling and Servicing Agreement and
the rights and duties of the parties thereto and the interest of the
Certificateholders thereunder.
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 hereunder, without the execution or filing of any paper or any
further act on the part of any of the parties hereto, anything in the Pooling
and Servicing Agreement to the contrary notwithstanding.
Events of Default
"Events of Default" will consist of (i) (A) any failure by the Master
Servicer to make any required Monthly Advance or (B) any other failure of the
Master Servicer to deposit in the Collection Account or Distribution Account any
deposit required to be made under the Pooling and Servicing Agreement, which
failure continues unremedied for two Business Days after the giving of written
notice of such failure to the Master Servicer by the Trustee, or to the Master
Servicer and the Trustee by the Certificate Insurer or any Certificateholder;
(ii) any failure by the Master Servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the Pooling and
Servicing Agreement which, in each case, materially and adversely affects the
interests of the Certificateholders or the Certificate Insurer and continues
unremedied for 60 days after
S-44
<PAGE>
the giving of written notice of such failure to the Master Servicer by the
Trustee, or to the Master Servicer and the Trustee by the Certificate Insurer or
any Certificateholder; (iii) any failure by the Master Servicer to make any
required Servicing Advance, which failure continues unremedied for a period of
30 days after the giving of written notice of such failure to the Master
Servicer by the Trustee, or to the Master Servicer and the Trustee by the
Certificate Insurer or any Certificateholder; (iv) the loss and delinquency
experience with respect to the Mortgage Loans exceeds certain levels in the
Pooling and Servicing Agreement; or (v) certain events of insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings relating to the Master Servicer and certain actions by the Master
Servicer indicating insolvency, reorganization or inability to pay its
obligations (an "Insolvency Event").
Upon the occurrence and continuation beyond the applicable grace period of
the event described in clause (i)(A) above, if any Monthly Advance is not made
by 4:00 P.M. New York Time on the second Business Day following written notice
to the Master Servicer of such event, the Trustee or a successor Servicer will
immediately assume the duties of the Master Servicer.
Upon removal or resignation of the Master Servicer, the Trustee will be the
Successor Master Servicer (the "Successor Master Servicer"). The Trustee, as
Successor Master Servicer, will be obligated to make Monthly Advances and
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 of Certificateholders (with the consent of the Certificate Insurer) or
the Certificate Insurer so requests, the Trustee may appoint, or petition a
court of competent jurisdiction to appoint, subject to the approval of the
Certificate Insurer, any established mortgage loan servicing institution
acceptable to the Certificate Insurer having a net worth of not less than
$50,000,000 as the Successor Servicer in the assumption of all or any part of
the responsibilities, duties or liabilities of the Master Servicer.
Notwithstanding the foregoing, a delay in or failure of the performance
referred to under clause (i) above for a period of ten Business Days or referred
to under clause (ii) above for a period of 30 Business Days, shall not
constitute an Event of Default if such delay or failure could not be prevented
by the exercise of reasonable diligence by the Master Servicer and such delays
or failure was caused by an act of God or other similar occurrence. Upon the
occurrence of any such event the Master Servicer shall not be relieved from
using its best efforts to perform its obligations in a timely manner in
accordance with the terms of the Pooling and Servicing Agreement and the Master
Servicer shall provide the Trustee, the Depositor, the Certificate Insurer and
the Certificateholders prompt notice of such failure or delay by it, together
with a description of its efforts to so perform its obligations.
Rights Upon an Event of Servicing Termination
So long as an Event of Default remains unremedied, any of the Trustee, the
Certificate Insurer, or Certificateholders holding Certificates evidencing at
least 51% of the Percentage Interests in the Trust Fund, with the consent of the
Certificate Insurer, may terminate all of the rights and obligations of the
Master Servicer under the Pooling and Servicing Agreement and in and to the
Mortgage Loans, whereupon the Trustee will succeed to all the responsibilities,
duties and liabilities of the Master Servicer under the Pooling and Servicing
Agreement and will be entitled to similar compensation arrangements. In the
event that the Trustee would be obligated to succeed the Master Servicer but is
unwilling or unable so to act, it may appoint, or petition a court of competent
jurisdiction for the appointment of, a housing and home finance institution or
other mortgage loan or home equity loan servicer with all licenses and permits
required to perform its obligations under the Pooling and Servicing Agreement
and having a net worth of at least $50,000,000 and acceptable to the Certificate
Insurer to act as successor to the Master Servicer under the Pooling and
Servicing Agreement. Pending such appointment, the Trustee will be obligated to
act in such capacity unless prohibited by law. Such successor will be entitled
to receive the same compensation that the Master Servicer would otherwise have
received (or such lesser compensation as the Trustee and such successor may
agree). A receiver or conservator for the Master Servicer may be empowered to
prevent the termination and replacement of the Master Servicer if the only Event
of Default that has occurred is an Insolvency Event.
Amendment
The Pooling and Servicing Agreement may be amended from time to time by the
Document Custodian, the Seller, the Master Servicer, the Depositor and the
Trustee and with the consent of the Certificate Insurer, but without the consent
of the Certificateholders, to cure any ambiguity, to correct or supplement any
provisions therein which may be inconsistent with any other provisions of the
Pooling and Servicing Agreement, to add to the duties of the Depositor or the
Master Servicer to comply with any requirements imposed by the Internal Revenue
Code or any regulation thereunder, or to add or amend any provisions of the
Pooling and Servicing Agreement as required by the Rating Agencies in order to
maintain or improve any
S-45
<PAGE>
rating of the Offered Certificates (it being understood that, after obtaining
the ratings in effect on the Closing Date, neither the Depositor, the Trustee,
the Certificate Insurer nor the Master Servicer is obligated to obtain,
maintain, or improve any such rating) or to add 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 will not, as evidenced by an
opinion of counsel, materially and adversely affect the interests of any
Certificateholder or the Certificate Insurer; provided, that any such amendment
will not be deemed to materially and adversely affect the Certificateholders and
no such opinion will be required to be delivered if the person requesting such
amendment obtains a letter from the Rating Agencies stating that such amendment
would not result in a downgrading of the then current rating of the Offered
Certificates. The Pooling and Servicing Agreement may also be amended from time
to time by the Seller, the Master Servicer, the Depositor, the Document
Custodian and the Trustee, with the consent of Certificateholders evidencing at
least 51% of the Percentage Interests of each Class affected thereby and the
Certificate Insurer for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of the Pooling and Servicing
Agreement or of modifying in any manner the rights of the Certificateholders,
provided that no such amendment will (i) reduce in any manner the amount of, or
delay the timing of, collections of payments on the Certificates or
distributions or payments under the Certificate Insurance Policy which are
required to be made on any Certificate without the consent of the
Certificateholder or (ii) reduce the aforesaid percentage required to consent to
any such amendment, without the consent of the holders of all Offered
Certificates then outstanding.
Termination; Purchase of Mortgage Loans
The Trust Fund will terminate on the Distribution Date following the later
of (A) payment in full of all amounts owing to the Certificate Insurer unless
the Certificate Insurer shall otherwise consent and (B) the earliest of (i) the
Distribution Date on which the Aggregate Class A Principal Balance has been
reduced to zero, (ii) the final payment or other liquidation of the last
Mortgage Loan in the Trust Fund, (iii) the optional purchase by the Master
Servicer of the Mortgage Loans, as described below and (iv) the Distribution
Date in September, 2027, on which date the Certificate Insurance Policy will be
available to pay the outstanding Aggregate Class A Principal Balance.
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 date on which the Aggregate
Loan Balance is less than 5% of the Cut-Off Date Aggregate Loan Balance, by
purchasing, on the next succeeding Distribution Date, all of the outstanding
Mortgage Loans at a price equal to the sum of the outstanding Aggregate Class A
Principal Balance (subject to reduction as provided in the Pooling and Servicing
Agreement if the purchase price is based in part on the appraised value of any
REO Property included in the Trust Fund and such appraised value is less than
the Loan Balance of the related Mortgage Loan) and accrued and unpaid interest
thereon at the weighted average of the Loan Rates through the end of the
Collection Period preceding the final Distribution Date together with all
amounts due and owing to the Certificate Insurer.
Any such purchase shall be accomplished by deposit into the Certificate
Account of the purchase price specified above.
DESCRIPTION OF THE PURCHASE AGREEMENT
The Mortgage Loans to be transferred to the Trust Fund by the Depositor
will be purchased by the Depositor from First Union National Bank of North
Carolina (the "Seller") pursuant to the Mortgage Loan Purchase Agreement to be
entered into between the Depositor, as purchaser of the Mortgage Loans, and the
Seller, as seller of the Mortgage Loans (the "Mortgage Loan Purchase
Agreement"). Under the Mortgage Loan Purchase Agreement, the Seller will agree
to transfer the Mortgage Loans to the Depositor. Pursuant to the Pooling and
Servicing Agreement, the Mortgage Loans will be immediately transferred by the
Depositor to the Trust Fund, and the Depositor will assign its rights in, to and
under the Mortgage Loan Purchase Agreement, to the Trust Fund. The following
summary describes certain terms of the form of the Mortgage Loan Purchase
Agreement and is qualified in its entirety by reference to the form of Mortgage
Loan Purchase Agreement.
Transfer of Mortgage Loans
Pursuant to the Mortgage Loan Purchase Agreement, the Seller will transfer
and assign to the Depositor all of its right, title and interest in and to the
Mortgage Loans and the Mortgage Files. The purchase price of the Mortgage Loans
is a specified percentage of the face amount thereof as of the time of transfer
and is payable by the Depositor, as applicable, in cash.
S-46
<PAGE>
Representations and Warranties
The Seller will represent and warrant to the Depositor that, among other
things, as of the Closing Date, it is duly organized and in good standing and
that it has the authority to consummate the transactions contemplated by the
Mortgage Loan Purchase Agreement.
The Seller will also represent and warrant to the Depositor, that, among
other things, (a) the information with respect to the applicable Mortgage Loan
set forth in the schedule attached to the Mortgage Loan Purchase Agreement is
true and correct in all material respects, (b) immediately prior to the sale of
the Mortgage Loans to the Depositor, the Seller was the sole owner and holder of
the Mortgage Loans free and clear of any and all liens and security interests,
and (c) each Mortgage Loan complied at the time of origination, in all material
respects, with applicable state and federal laws. The Seller will make similar
representations and warranties in the Pooling and Servicing Agreement. The
Seller will also represent and warrant to the Depositor, that, among other
things, as of the Closing Date, the Mortgage Loan Purchase Agreement constitutes
a legal, valid and binding obligation of the Seller. In the event of a breach of
any such representations and warranties which has a material adverse effect on
the interests of the Certificateholders or the Certificate Insurer, the Seller
will repurchase or substitute for the Mortgage Loans as described herein under
"Description of the Certificates -- Assignment of Mortgage Loans."
The Seller has also agreed to indemnify the Depositor and the Trust Fund
from and against certain losses, liabilities and expenses (including reasonable
attorneys' fees) suffered or sustained pursuant to the Mortgage Loan Purchase
Agreement.
Assignment to the Trust Fund
The Seller expressly acknowledges and consents to the Depositor's transfer
of its rights relating to the Mortgage Loans under the Mortgage Loan Purchase
Agreement to the Trust Fund. The Seller also agrees to perform its obligations
under the Mortgage Loan Purchase Agreement for the benefit of the Trust Fund.
Termination
The Mortgage Loan Purchase Agreement will terminate upon the termination of
the Trust Fund.
THE TRUSTEE
Norwest Bank Minnesota, National Association, a national banking
association, has been named Trustee pursuant to the Pooling and Servicing
Agreement. The Trustee's "Corporate Trust Office" for purposes of the
presentment and surrender of the Offered Certificates for the final distribution
thereon and for all other purposes is located at Sixth Street and Marquette
Avenue, Minneapolis, Minnesota 55479, Attention: Corporate Trust Services (FURST
96-1), or such other address as the Trustee may designate from time to time by
notice to the Certificateholders, the Depositor and the Master Servicer.
The Trustee will at all times be required to be either a national banking
association or a corporation incorporated and doing business under the laws of
the United States of America or any state authorized under such laws to exercise
corporate trust powers, having a combined capital and surplus of at least
$50,000,000, subject to supervision by federal or state authority and if Moody's
is a Rating Agency, having (or in the case of a corporation including a bank
holding company system, the related bank holding company shall have) a rating
with respect to its long-term unsecured debt obligations of at least Baa1 (or
such lower rating as Moody's may from time to time agree). If at any time the
Trustee shall cease to be eligible in accordance with the provisions described
in this paragraph, it will be required to resign immediately in the manner
described below.
No resignation or removal of the Trustee and no appointment of a successor
trustee shall become effective until the acceptance of appointment by a
successor trustee.
In addition to being required to resign in the circumstances described
above, the Trustee, or any trustee or trustees hereafter appointed, may resign
at any time in the manner set forth in the Pooling and Servicing Agreement. Upon
receiving notice of resignation, the Seller is required promptly to appoint a
successor trustee or trustees acceptable to the Certificate Insurer and the
Master Servicer meeting the eligibility requirements in the manner to be set
forth in the Pooling and Servicing Agreement. If no successor trustee shall have
been appointed and have accepted appointment within 30 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.
If the Trustee shall cease to be eligible and fail to resign after written
request by the Seller or Certificate Insurer, or if the Trustee is legally
unable to act or becomes insolvent or a tax is imposed or threatened with
respect to the Trust Fund, the
S-47
<PAGE>
Seller or the Certificate Insurer may remove the Trustee. The Seller is required
to promptly appoint a successor trustee acceptable to the Certificate Insurer.
The Seller will be required to give notice of any removal of the Trustee to
the Certificateholders, which notice will be required to include the name of the
successor trustee and the address of its corporate trust office. The Seller also
will be required to give notice to the Certificateholders of the acceptance by a
successor of its appointment.
THE CERTIFICATE INSURER AND THE CERTIFICATE INSURANCE POLICY
Certificate Insurer
The information set forth in this section and in the financial statements
of the Certificate Insurer set forth in Appendix A and Appendix B hereto have
been provided by the Certificate Insurer. No representation is made by any
Underwriter, the Seller, the Servicer, the Depositor or any of their affiliates
as to the accuracy or completeness of any such information.
THE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND
SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
The Certificate Insurer, a New York stock insurance company, is a monoline
financial guaranty insurance company which, since January 1984, has been a
leading insurer of bonds issued by municipal governmental subdivisions and
agencies thereof. The Certificate Insurer also insures a variety of
non-municipal structured debt obligations. The Certificate Insurer is authorized
to write insurance in 50 states and the District of Columbia and is also
authorized to carry on general insurance business in the United Kingdom and to
write credit and guaranty insurance in France.
The Certificate Insurer is a wholly-owned subsidiary of FGIC Corporation
(the "Corporation"), a Delaware holding company. The Corporation is a subsidiary
of General Electric Capital Corporation ("GE Capital"). Neither the Corporation
nor GE Capital is obligated to pay the debts of or claims against the
Certificate Insurer.
The Certificate Insurer is subject to regulation by the State of New York
Insurance Department and by each jurisdiction in which the Certificate Insurer
is licensed to write insurance. These regulations vary from jurisdiction to
jurisdiction, but generally require insurance holding companies and their
insurance subsidiaries to register and file certain reports, including
information concerning their capital structure, ownership and financial
condition and require prior approval by the insurance department of their states
of domicile, of changes in control, of certain dividends and other
intercorporate transfers of assets and of transactions between insurance
companies, their parents and other affiliates. The Certificate Insurer is
required to file quarterly and annual statutory financial statements and is
subject to statutory restrictions concerning the types and quality of
investments, the use of policy forms, premium rates and the size of risk that it
may insure, subject to reinsurance. Additionally, the Certificate Insurer is
subject to triennial audits by the State of New York Insurance Department.
The Certificate Insurer considers its role in providing insurance to be
credit enhancement rather than credit substitution. The Certificate Insurer only
insures securities that the Certificate Insurer considers to be of investment
grade quality. With respect to each category of obligations considered for
insurance, the Certificate Insurer has established and maintains its own
underwriting standards that are based on those aspects of credit quality that
the Certificate Insurer deems important for the category and that take into
account criteria established for the category typically used by rating agencies.
Credit criteria for evaluating securities include economic and social trends,
debt management, financial management and legal and administrative factors, the
adequacy of anticipated cash flow, including the historical and expected
performance of assets pledged for payment of securities under varying economic
scenarios, underlying levels of protection such as insurance or
overcollateralization, and, particularly in the case of long-term municipal
securities, the importance of the project being financed.
The Certificate Insurer also reviews the security features and reserves
created by the financing documentation, as well as the financial and other
covenants imposed upon the credit backing the issue. In connection with the
underwriting of new issues, the Certificate Insurer sometimes requires, as a
condition to insuring an issue, that collateral be pledged or, in some
instances, that a third-party guarantee be provided for a term of the insured
obligation by a party of acceptable credit quality obligated to make payment
prior to any payment by the Certificate Insurer.
Insurance written by the Certificate Insurer insures the full and timely
payment of principal and interest on insured debt securities and timely interest
and ultimate principal payments due in respect of pass-through securities such
as the Offered Certificates. If the issuer of a security insured by the
Certificate Insurer defaults on its obligations to pay the insured amounts, or,
in the case of a pass-through security, available funds are insufficient to pay
the insured amounts, the Certificate Insurer will make the scheduled insured
payments, without regard to any acceleration of the securities which may have
occurred, and
S-48
<PAGE>
will be subrogated to the rights of security holders to the extent of its
payments. The claims paying ability of the Certificate Insurer is rated "AAA" by
S&P and Fitch Investors Service, L.P. and Aaa by Moody's.
In consideration for issuing its insurance, the Certificate Insurer
receives a premium which is generally paid in full upon issuance of the policy
or on an annual, semiannual or monthly basis. The premium rates charged depend
principally on the credit strength of the securities as judged by the
Certificate Insurer according to its internal credit rating system and the type
of issue.
As of June 30, 1996, December 31, 1995 and 1994 the Certificate Insurer had
written directly or assumed through reinsurance, guaranties of approximately
$190.7 billion, $180.0 billion and $160.2 billion par value of securities,
respectively (of which approximately 87 percent, 88 percent and 89 percent
constituted guaranties of municipal bonds), for which it had collected gross
premiums of approximately $1.99 billion, $1.95 billion and $1.78 billion,
respectively. As of June 30, 1996, the Certificate Insurer had reinsured
approximately 18 percent of the risks it had written, 36 percent through quota
share reinsurance and 64 percent through facultative arrangements.
Capitalization
The following table sets forth the capitalization of the Certificate
Insurer as of December 31, 1994, December 31, 1995 and June 30, 1996,
respectively, on the basis of generally accepted accounting principles. No
material adverse change in the capitalization of the Certificate Insurer has
occurred since June 30, 1996.
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1994 1995 1996
<S> <C> <C> <C>
(in millions) (unaudited)
Unearned Premiums.................................................................. $ 757 $ 728 $ 698
Other Liabilities.................................................................. 261 304 276
Stockholder's Equity
Common Stock..................................................................... 15 15 15
Additional Paid-in Capital....................................................... 334 334 334
Unrealized Gains (Losses)........................................................ (42) 64 (6)
Foreign currency translation adjustment.......................................... (1) (2) (2)
Retained Earnings................................................................ 974 1,137 1,229
Total Stockholder's Equity......................................................... 1,280 1,548 1,570
Total Liabilities and Stockholder's Equity......................................... $2,298 $2,580 $2,544
</TABLE>
For further financial information concerning the Certificate Insurer, see
the audited financial statements of the Certificate Insurer included as Appendix
A and the unaudited interim financial statements included as Appendix B of this
Prospectus Supplement.
Copies of the Certificate Insurer's quarterly and annual statutory
statements filed by the Certificate Insurer with the New York Insurance
Department are available upon request to Financial Guaranty Insurance Company,
115 Broadway, New York, New York 10006, Attention: Corporate Communications
Department. The Certificate Insurer's telephone number is (212) 312-3000.
The Certificate Insurer does not accept any responsibility for the accuracy
or completeness of this Prospectus Supplement or the Prospectus or any
information or disclosure contained herein, or omitted herefrom, other than with
respect to the accuracy of information in this Prospectus Supplement regarding
the Certificate Insurer and the Certificate Insurance Policy set forth herein
and in Appendix A and Appendix B.
Certificate Insurance Policy
On or before the Closing Date, the Certificate Insurance Policy will be
issued by the Certificate Insurer pursuant to the provisions of the Insurance
Agreement (the "Insurance Agreement"), dated as of the Cut-Off Date, among the
Seller, the Master Servicer, the Trustee, the Depositor and the Certificate
Insurer.
The Certificate Insurance Policy will unconditionally and irrevocably
guarantee the timely payment of interest due and the ultimate payment of
principal on the Class A Certificates. On each Distribution Date, a draw will be
made on the Certificate Insurance Policy equal to the sum of (a) the amount by
which the sum of interest accrued with respect to each Class of Class A
Certificates, at the applicable Certificate Rate on the related outstanding
Class A Principal Balance exceeds the
S-49
<PAGE>
amount on deposit in the Distribution Account available to be distributed
therefor on such Distribution Date and (b) the amount (each, a "Class A
Guaranteed Principal Distribution Amount"), if any, by which the Aggregate Class
A Principal Balance exceeds the Aggregate Loan Balance at the end of the
previous month (after giving effect to all amounts distributable and allocable
to principal on the related Class A Certificates on such Distribution Date). In
addition, the Certificate Insurance Policy will guarantee the payment in full of
the Aggregate Class A Principal Balance on the Distribution Date in September,
2027 (after giving effect to all other amounts distributable and allocable to
principal on such Classes on such Distribution Date).
Any Class A Guaranteed Principal Distribution Amount on any Distribution
Date will be distributed to the Class or Classes of Class A Certificates then
entitled to distributions of principal.
In addition, the Certificate Insurance Policy will provide for payment of
the amount of any distributions in respect of principal or interest previously
paid to a Class A Certificateholder that are subsequently recovered from such
Certificateholder pursuant to a final, nonappealable order of a court of
competent jurisdiction under the United States Bankruptcy Code. Any such
payments would be made under the Certificate Insurance Policy on the second
business day following receipt by the Certificate Insurer of a certified copy of
the order, assignment to the Certificate Insurer of such Certificateholder's
rights and appointment of the Certificate Insurer as such Certificateholder's
agent in respect of the recovered payment. No such Certificateholder shall be
entitled to reimbursement for any payment avoided as a preference as to which
the Certificate Insurer has made a payment under the Certificate Insurance
Policy.
The Certificate Insurer's obligations 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, Certificateholder does not include the Trust Fund, the Master
Servicer, the Seller or the Depositor. The Certificate Insurance Policy does not
guarantee any specified rate of prepayments of principal of the Mortgage Loans
or any specified return. The Certificate Insurance Policy is non-cancelable.
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 Fund.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
General -- Lien Priority
The Mortgage Loans will be secured by either deeds of trust, deeds to
secure debt or mortgages (each, a "Security Instrument"), depending upon the
prevailing practice in the state in which the Mortgaged Property is located. A
mortgage creates a lien upon the real property described in the mortgage. It is
not prior to the lien for real estate taxes and assessments. Priority between
mortgages depends on their terms and generally on the order of recording with a
state or county office. There are two parties to a mortgage, the mortgagor, who
is the 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. A deed of trust formally has three parties: the homeowner, called the
grantor (similar to a mortgagor), a lender (similar to the mortgagee), called
the beneficiary, and a third-party grantee, called the trustee. Under a deed of
trust, the grantor grants the property, irrevocably until the debt is paid, "in
trust, with the 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 the mortgage, and, in some cases under a deed of trust, the
direction of the beneficiary.
The security property encumbered by a Security Instrument also may be
encumbered by other liens. The priority of the liens is important because, among
other things, the foreclosure of a senior lien will extinguish a junior lien,
and because the holder of a senior lien generally will have a right to receive
insurance, condemnation or other proceeds before the holder of a junior lien.
See " -- Junior Liens; Rights of Senior Lienholders" below.
Priority between Security Instruments of record generally depends in the
first instance on the order of filing with the appropriate government records
office. Priority also may be affected by the express terms of the Security
Instrument or other documents, such as subordination agreements.
Although priority among liens on the same property generally depends in the
first instance on the order of filing there are a number of ways in which a lien
that is a senior lien when it is filed can become subordinate to a lien filed at
a later date. A lienholder's lien under a Security Instrument is not prior to
any liens for real estate taxes and assessments, certain federal liens
(including certain federal criminal liens, environmental liens and tax liens),
certain mechanics and materialmen's liens, and other liens given priority by
applicable law. In addition, in certain states, the priority of a mechanics lien
may relate back
S-50
<PAGE>
to the date construction of the property began, even though that date precedes
the date on which the mechanics lien is actually filed, and in Virginia, a
mechanics lien is given a superpriority over subsequent liens. Therefore, since
a title report or title policy only is accurate as of the date it is issued, it
provides no assurance that a Security Instrument will retain perpetually the
lien priority it had when it was filed. The Security Instruments securing the
Mortgage Loans include a requirement that each borrower maintain the lien
priority of each Security Instrument.
Foreclosure
If a borrower defaults under a loan secured by a Security Instrument the
lender generally may bring suit against the borrower. The lender generally also
may attempt to collect the loan by causing the Security Instrument to be
enforced against the property it encumbers.
Foreclosure of a deed of trust or a deed to secure debt is generally
accomplished by a non-judicial trustee's sale under a specific provision in the
deed of trust or security deed which authorizes the sale of the property to a
third party upon any 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-grantor and to any person who has
recorded a request for a copy of a notice of default and notice of sale. 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 through advertisements and other means,
notice of the sale be given to all parties having an interest in the real
property; in certain states such notice may include posting a copy of the notice
on the property.
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 sometimes not contested by any of the
parties defendant.
In the case of foreclosure under a Security Instrument, the sale by the
referee or other designated officer or by the trustee, as applicable, is a
public sale. It is not uncommon for the lender to purchase the property at
foreclosure. In many cases where the lender purchases at foreclosure, it usually
purchases the property for an amount equal to the principal amount of the
Security Instrument, accrued and unpaid interest and the expense of foreclosure.
Because (i) there may be no equity in the security property, (ii) there is
a requirement that the purchaser pay to bid for the property in cash or by
cashiers check, (iii) a potential buyer at the sale may find it difficult to
determine the exact status of title and other facts about the security property
and (iv) the physical condition of the security property may have deteriorated,
it generally is more common for the lender, rather than an unrelated third
party, to purchase the security property at foreclosure. The lender (or other
purchaser at the trustee's sale) will be subject to the burdens of ownership,
including the obligations to service any senior Security Instrument, to obtain
hazard insurance and to make such repairs at its own expense as are necessary to
render the security property suitable for resale. The lender commonly will
attempt to resell the security property and obtain the services of a real estate
broker and agree to pay the broker a commission in connection with the resale.
Depending upon market conditions, the ultimate proceeds of the resale of the
security property may not be high enough to equal the lender's investment.
Property securing a Mortgage Loan that is acquired through a trustee's sale or
judicial foreclosure must be sold by the Trustee within two years after the date
on which it is acquired, in order to satisfy certain federal income tax
requirements.
The proceeds received from the sale generally are applied first to the
costs, fees and expenses of sale and then in satisfaction of the indebtedness
secured by the Security Instrument under which the sale was conducted. Any
remaining proceeds generally are payable to the holders of junior Security
Instruments and other liens and claims in order of their priority. Any balance
remaining generally is payable to the grantor or mortgagor. Following the sale,
if there are insufficient proceeds to repay the secured debt, the beneficiary
under the foreclosed lien generally may obtain a deficiency judgment against the
grantor or mortgagor. See " -- Anti-Deficiency Legislation; Bankruptcy and
Consumer Protection Legislation" below.
Some courts have been faced with the issue of whether federal or state
constitutional due process requires that borrowers under deeds of trust receive
notices in addition to the statutorily prescribed minimum. For the most part,
the courts in these cases have upheld the notice provisions and procedures
described above.
S-51
<PAGE>
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 run.
Anti-Deficiency Legislation; Bankruptcy and Consumer Protection Legislation
Certain states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust or security deed or a mortgagee under a
mortgage. In some states, statutes limit the right of the beneficiary or
mortgagee to obtain, or prohibit the beneficiary or mortgagee from obtaining a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment would be a personal judgment against the
former borrower equal in most cases to the difference between the net amount
received 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 Security Instrument 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
former borrower following a judicial sale to the excess of the outstanding debt
over the fair market value of the property at the time of the public sale. The
purpose of these statutes is generally to prevent a beneficiary or a mortgagee
from obtaining a large deficiency judgment against the former borrower as a
result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws and state laws
affording relief to debtors, may interfere with or affect the ability of the
secured mortgage lender to realize upon the sale of the 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 such debtor's residence by paying
arrearages within a reasonable time period and reinstating the original mortgage
loan payment schedule even though the lender accelerated the mortgage loan and
final judgment of foreclosure had been entered in state court (provided no sale
of the residence had yet occurred) prior to the filing of the debtor's petition.
Some courts with federal bankruptcy jurisdiction have approved plans, based on
the particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have suggested that such modifications may include reducing the
amount of each monthly payment, changing the rate of interest, altering the
repayment schedule, and reducing the lender's security interest to the value of
the residence, thus leaving the lender as a general unsecured creditor for the
difference between the value of the residence and the outstanding balance of the
loan.
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 law. In some cases, this liability may affect assignees of such loans.
Junior Liens; Rights of Senior Lienholders
The rights of the Trust Fund (and therefore the Certificate Owners) as
beneficiary under a junior deed of trust or security deed or as mortgagee under
a junior mortgage are subordinate to those of the mortgagee or beneficiary under
the senior Security Instrument, including the prior rights of the senior
mortgagee or beneficiary to receive hazard insurance and condemnation proceeds
and to cause the property securing the second mortgage loan to be sold upon
default of the mortgagor or grantor, thereby extinguishing the junior
mortgagee's or junior beneficiary's lien unless the holders thereof assert their
subordinate interest in a property in foreclosure litigation or satisfy the
defaulted senior loan. As discussed more fully below,
S-52
<PAGE>
in many states a junior mortgagee or beneficiary may satisfy a defaulted senior
loan in full, or may cure such default and bring the senior loan current, in
either event adding the amounts expended to the balance due on the junior loan.
The standard form of Security Instrument used by most institutional lenders
confers on the mortgagee or beneficiary the right both to receive all proceeds
collected under any hazard insurance policy and all awards made in connection
with any condemnation proceedings, and to apply such proceeds and awards to any
indebtedness secured by the Security Instrument in such order as the mortgagee
or beneficiary may determine. Thus, in the event improvements on the property
are damaged or destroyed by fire or other casualty, or in the event the property
is taken by condemnation, the mortgagee or beneficiary under the underlying
first Security Instrument will have the prior right to collect any insurance
proceeds payable under a hazard insurance policy and any award of damages in
connection with the condemnation and to apply the same to the indebtedness
secured by the first priority Security Instrument. Proceeds in excess of the
amount of first Security Instrument indebtedness will, in most cases, be applied
to the indebtedness of a junior Security Instrument.
The form of Security Instrument by most institutional lenders typically
contains a "Future Advances" clause, which provides, in essence, that additional
amounts advanced to or on behalf of the mortgagor or grantor by the mortgagee or
beneficiary are to be secured by the Security Instrument. While such a clause is
valid under the laws of most states, the priority of any advance made under the
clause depends, in some states, on whether the advance was an "Obligatory" or
"Optional" advance. If the mortgagee or beneficiary is obligated to advance the
additional amounts, the advance is entitled to receive the same priority as
amounts initially made under the Security Instrument, notwithstanding that there
may be intervening junior mortgages or deeds of trust and other liens between
the date of recording of the Security Instrument and the date of the future
advance, and notwithstanding that the mortgagee or beneficiary had actual
knowledge of such intervening junior mortgages or deeds of trust and other liens
at the time of the advance. Where the mortgagee or beneficiary is not obligated
to advance the additional amounts and, in certain states, has actual knowledge
of the intervening junior Security Instrument and other liens, the advance will
be subordinate to such intervening junior Security Instrument and other liens.
Priority of advances under the clause rests, in many other states, on state
statutes giving priority to all advances made under the loan agreement to a
"Credit Limit" amount stated in the recorded mortgage.
Another provision typically found in the form of the Security Instrument
used by most institutional lenders obligates the mortgagor or grantor to pay
before delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
Security Instrument, to provide and maintain fire insurance on the property, to
maintain and repair the property and not to commit or permit any waste thereof,
and to appear in and defend any action or proceeding purporting to affect the
property or the rights of the mortgagee or beneficiary under the Security
Instrument. Upon a failure of the mortgagor or grantor to perform any of these
obligations, the mortgagee or beneficiary is given the right under the Security
Instrument to perform the obligation itself, at its election, with the mortgagor
or grantor agreeing to reimburse the mortgagee or beneficiary for any sums
expended by the mortgagee or beneficiary on behalf of the grantor. All sums so
expended by the mortgagee or beneficiary become part of the indebtedness secured
by the Security Instrument.
Enforceability of Certain Provisions
Upon foreclosure, courts have imposed general equitable principles. These
equitable principles are generally designed to relieve the borrower from the
legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right of
the lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower failing adequately to maintain the property or
the borrower executing a second Security Instrument affecting the property.
Finally, some courts have been faced with the issue of whether or not federal or
state constitutional provisions reflecting due process concerns for adequate
notice require that borrowers under deeds of trust or mortgages receive notices
in addition to the statutory prescribed minimum. For the most part, these cases
have upheld the notice provisions as being reasonable or have found that the
sale by a trustee under a deed of trust, or under a mortgage having a power of
sale, does not involve sufficient state action to afford constitutional
protections to the borrower.
To the extent that the Mortgage Loans contain due-on-sale clauses, the
Master Servicer may declare the unpaid amounts thereof due and payable upon the
sale or transfer of all or any part of the underlying Property without the
Master Servicer's prior written consent. The enforceability of due-on-sale
clauses in certain situations has been restricted by the laws of some states.
However, federal law now preempts state statutory and case law which prohibits
enforcement of due-on-sale clauses
S-53
<PAGE>
and permits the enforcement of due-on-sale clauses, subject to certain
exceptions. The Master Servicer intends to enforce the due-on-sale clause
contained in any Mortgage Loan to the extent that it has knowledge of the
conveyance or proposed transfer of the underlying Mortgaged Property and it
believes that it is entitled to do so under applicable federal laws and
regulations.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1990. The statute authorized any
state to reimpose interest rate limits by adopting, before April 1, 1983, a law
or constitutional provision which expressly rejects application of the federal
law. In addition, even where Title V is not so rejected, any state is authorized
by the law to adopt a provision limiting discount points or other charges on
mortgage loans covered by Title V. Certain states have taken action to reimpose
interest rate limits and/or to limit discount points or other charges. In the
Pooling and Servicing Agreement, the Seller will represent and warrant that each
Mortgage Loan was originated in compliance with applicable state law in all
material respects.
Environmental Legislation
Certain states impose a statutory lien for certain 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 Security Instrument. 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 or acquires a security property at a
foreclosure sale 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 Trust Fund) without the presence of
certain other facts.
Soldiers' and Sailors' Civil Relief Act of 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of all
branches of the military on active duty, including draftees and reservists in
military service, (i) are entitled to have interest rates reduced and capped at
6.00% per annum, on obligations (including mortgage loans) incurred prior to the
commencement of military service for the duration of military service, (ii) may
be entitled to a stay of proceedings on any kind of foreclosure or repossession
action in the case of defaults on such obligations entered into prior to
military service and (iii) may have the maturity of such obligations incurred
prior to military service extended, the payments lowered and the payment
schedule readjusted for a period of time after the completion of military
service. However, the benefits of (i), (ii), or (iii) above are subject to
challenge by creditors and if, in the opinion of the court, the ability of a
person to comply with such obligations is not materially impaired by military
service, the court may apply equitable principles accordingly.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the material anticipated federal
income tax consequences of the purchase, ownership and disposition of the
Offered Certificates prepared by Moore & Van Allen, PLLC, counsel to the Seller
("Tax Counsel"). The discussion is based upon laws, regulations, rulings and
decisions now in effect, all of which are subject to change possibly with
retroactive effect. The discussion below does not purport to deal with all
federal tax consequences applicable to all categories of investors, some of
which may be subject to special rules. Investors should consult their own tax
advisors in determining the particular federal, state, local and any other tax
consequences to them of the purchase, ownership and disposition of the Offered
Certificates.
This discussion is based upon certain representations of the Depositor, the
Seller and the Master Servicer. It should be noted that the opinion of Tax
Counsel is not binding upon the Internal Revenue Service or any court;
accordingly, no assurance can be given that the status of the Trust Fund as a
REMIC for federal income tax purposes and the characterization of the
Certificates as regular and residual interests in the Trust Fund, respectively,
will not be challenged by the Internal Revenue Service or that a court would not
sustain any such challenge.
REMIC Election
Pursuant to the Pooling and Servicing Agreement the Trustee will elect to
treat certain assets of the Trust Fund as a REMIC. Qualification as a REMIC
requires ongoing compliance with certain conditions. Tax Counsel will advise the
Seller
S-54
<PAGE>
that, in its opinion, for federal income tax purposes, assuming (i) the REMIC
election is properly made and (ii) the Pooling and Servicing Agreement is
complied with, the Trust Fund will be treated as a REMIC, the Class A
Certificates and the Subordinated Certificates other than the Class R
Certificates (collectively, the "Regular Certificates") will be treated as
"Regular Interests" in the REMIC and the Class R Certificates will be treated as
the sole "Residual Interest" in the REMIC. Except as indicated below, for
federal income tax purposes, regular interests in a REMIC are treated as debt
instruments issued by the REMIC on the date on which those interests are
created, and not as ownership interests in the REMIC or its assets. Certificate
Owners of Regular Certificates that otherwise report income under the cash
method of accounting will be required to report income with respect to such
Regular Certificates under the accrual method of accounting.
As a result of the qualification of the Trust Fund, as a REMIC, the Trust
Fund will not be subject to federal income tax except with respect to (i) any
income from prohibited transactions, (ii) any "Net Income from Foreclosure
Property" and (iii) certain contributions, if any, to the Trust Fund after the
Startup Day (see "Taxes That May be Imposed on the Trust Fund" below).
Special Rules
In general, as a result of the qualification of the Trust Fund, as a REMIC,
(i) Regular Certificates held by a thrift institution taxed as a "Mutual Savings
Bank" or "Domestic Building and Loan Association" will represent an interest in
"Qualifying Real Property Loans" within the meaning of Section 593(d) of the
Code, (ii) Regular Certificates held by a thrift institution taxed as a
"Domestic Building and Loan Association" will constitute assets described in
Section 7701(a)(19)(C) of the Code and (iii) Regular Certificates held by a real
estate investment trust will constitute "Real Estate Assets" within the meaning
of Section 856(c)(5)(A) of the Code. If less than 95% of the assets comprising
the REMIC are assets qualifying under any of the foregoing sections of the Code,
then the Regular Certificates will be qualifying assets only to the extent that
the assets comprising the REMIC are qualifying assets. Certificate Owners of
Regular Certificates should be aware that Regular Certificates held by certain
financial institutions will be "Evidences of Indebtedness" within the meaning of
Section 582(c) of the Code. Interest on the Regular Certificates will be
interest described in Section 856(c)(3)(B) of the Code to the extent that the
Regular Certificates are treated as "Real Estate Assets" within the meaning of
Section 856(c)(5)(A) of the Code.
Original Issue Discount
The Regular Certificates may be issued with "Original Issue Discount"
within the meaning of Section 1273(a) of the Code. Certificate Owners of the
Regular Certificates that are issued with "Original Issue Discount" should be
aware that for federal income tax purposes they must include in gross income
original issue discount as it accrues under a method that takes account of the
compounding of interest, generally in advance of the receipt of the cash
attributable to such income. The Trustee will report annually (or more often, if
required) to the Internal Revenue Service ("IRS") and will supply, at the time
and in the manner required by the IRS to Certificate Owners of Regular
Certificates, brokers and middlemen information with respect to the original
issue discount accruing on the Regular Certificates.
Rules governing original issue discount are set forth in Sections 1271-1275
of the Code and the Treasury regulations promulgated thereunder (the "OID
Regulations"). Section 1272(a)(6) of the Code contains special original issue
discount rules applicable to the Regular Certificates.
Section 1272(a)(6)(B) (iii) of the Code requires that the prepayment
assumption used to calculate original issue discount be determined in the manner
prescribed in Treasury regulations. The legislative history of this Code
provision indicates that the regulations will provide that the assumed
prepayment rate must be the rate used by the parties in pricing the particular
transaction. The OID Regulations affirm that the assumptions should be based
upon the payment schedule most likely to occur. The Seller believes that 105% of
the Prepayment Assumption for the Regular Certificates is consistent with this
standard. No representation is made, however, that the Mortgage Loans will
prepay at this rate or at any other rate. Each investor must make its own
decision as to the appropriate prepayment assumption to be used in deciding
whether or not to purchase a Regular Certificate.
Each Regular Certificate may be issued with original issue discount equal
to the excess of its "Stated Redemption Price at Maturity" over its "Issue
Price." Under the OID Regulations, the issue price of a Regular Certificate is
the first price at which a substantial amount of the Regular Certificates have
been sold (ignoring sales to bond houses, brokers and underwriters). The issue
price also will include any accrued interest attributable to the period between
the Cut-Off Date and the date the Regular Certificates were issued within the
meaning of Section 1275(a)(2) of the Code (i.e., the Startup Day). The stated
redemption price at maturity of a Regular Certificate is equal to the total of
all payments to be made on such Certificate, other
S-55
<PAGE>
than "Qualified Stated Interest." "Qualified Stated Interest" includes interest
that is unconditionally payable at least annually at a single fixed rate.
Notwithstanding the general definition, original issue discount will be
considered to be zero in the case of a Regular Certificate if such discount is
less than 0.25 percent of the stated redemption price at maturity of such
Certificate multiplied by its weighted average life. The weighted average life
of a Regular Certificate is computed for this purpose as the sum, for all
distributions included in the stated redemption price at maturity of the
Certificate, of the amounts determined by multiplying (i) the number of complete
years (rounding down for partial years) from the Startup Day until the date on
which each such distribution is expected to be made under the Prepayment
Assumption by (ii) a fraction, the numerator of which is the amount of such
distribution and the denominator of which is the Regular Certificate's stated
redemption price at maturity. If original issue discount is treated as zero
under this rule, the actual amount of original issue discount must be allocated
to the principal distributions on the Regular Certificate and, when each such
distribution is received, gain equal to the discount allocated to such
distribution will be recognized.
Each Certificate Owner of a Regular Certificate must include in gross
income the sum of the "Daily Portions" of original issue discount on its Regular
Certificate for each day during its taxable year on which it held such Regular
Certificate. For this purpose, in the case of an original Certificate Owner of a
Regular Certificate, the daily portions of original issue discount will be
determined as follows. A calculation will first be made of the portion of the
original issue discount that accrued during each "accrual period." An accrual
period is a period of one year or less that ends on a Distribution Date and
begins on the day immediately following the preceding accrual period. Because
the period from the Startup Day to the first Distribution Date is shorter than
the interval between Distribution Dates, such period can constitute a short
first accrual period. The interest distributable to a Certificate Owner on the
first Distribution Date in excess of the interest that accrued during the short
first accrual period will not be treated as interest for tax purposes. Instead,
such amount is included in the stated redemption price at maturity of the
Regular Certificate and taken into account in determining the amount of original
issue discount (or premium) with respect to the Regular Certificate.
The portion of original issue discount treated as accruing for any accrual
period will equal the excess of (i) the sum of (A) the present values of all the
payments remaining to be made on the Regular Certificates as of the end of the
accrual period and (B) the payments made on such Regular Certificates during the
accrual period of amounts included in the stated redemption price at maturity,
over (ii) the adjusted issue price of such Regular Certificates at the beginning
of the accrual period. The present value of the remaining payments referred to
in the preceding sentence will be calculated based on (i) the yield to maturity
of the Regular Certificates, calculated as of the Startup Day, giving effect to
the Prepayment Assumption, (iii) events (including actual prepayments) that have
occurred prior to the end of the accrual period, and (iii) the Prepayment
Assumption. The adjusted issue price of a Regular Certificate at the beginning
of any accrual period will equal the issue price of such Regular Certificate,
increased by the aggregate amount of original issue discount with respect to
such Regular Certificate that accrued in prior accrual periods, and reduced by
the amount of any payments made on such Regular Certificate in prior accrual
periods that were included in the stated redemption price at maturity. The
original issue discount accruing during any accrual period will then be
allocated ratably to each day during the period to determine the daily portion
of original issue discount for each day. With respect to the short final accrual
period, the daily portion of original issue discount must be determined
according to an appropriate allocation under any reasonable method.
A subsequent purchaser of a Regular Certificate that purchases such Regular
Certificate at a cost less than its remaining stated redemption price at
maturity also will be required to include in gross income, for each day on which
it holds such Regular Certificate, the daily portion of original issue discount
with respect to such Regular Certificate (but reduced, if the cost of such
Regular Certificate to such purchaser exceeds its "Revised Issue Price," by an
amount equal to the product of (i) such daily portion and (ii) a constant
fraction, the numerator of which is such excess and the denominator of which is
the sum of the daily portions of original issue discount on such Regular
Certificate for all days on or after the day of purchase). The revised issue
price of a Regular Certificate on any given day is equal to the sum of the
adjusted issue price of the Regular Certificate at the beginning of the accrual
period during which such day occurs and the daily portions of original issue
discount for all days during such accrual period prior to such day.
Premium
A purchaser of a Regular Certificate that purchases such Certificate at a
cost greater than its remaining stated redemption price at maturity will be
considered to have purchased such Certificate at a premium. Such a purchaser
will not be required to include in income any remaining original issue discount
and may elect, under Section 171(c)(2) of the Code, to
S-56
<PAGE>
treat such premium as "Amortizable Bond Premium." If the Certificate Owner of a
Regular Certificate makes such an election, the amount of any interest payment
that must be included in such Certificate Owner's income for each period ending
on a Distribution Date will be reduced by the portion of the premium allocable
to such period based on the Regular Certificate's yield to maturity. The
legislative history of the Tax Reform Act of 1986 states that such premium
amortization should be made under principles analogous to those governing the
accrual of market discount (as discussed below under "Market Discount"). If such
election is made by the Certificate Owner, the election will also apply to all
bonds (as well as all REMIC regular interests) the interest on which is not
excludable from gross income ("Fully Taxable Bonds") held by the Certificate
Owner at the beginning of the first taxable year to which the election applies
and to all such fully taxable bonds thereafter acquired by it, and is
irrevocable without the consent of the IRS. If such an election is not made, (i)
such a Certificate Owner must include the full amount of each interest payment
in income as it accrues, and (ii) the premium must be allocated to the principal
distributions on the Regular Certificate and, when each such distribution is
received, a loss equal to the premium allocated to such distribution will be
recognized. Any tax benefit from the premium not previously recognized will be
taken into account in computing gain or loss upon the sale or disposition of the
Regular Certificate.
Market Discount
A Certificate Owner of a Regular Certificate that purchases a Regular
Certificate subsequent to its original issuance for an amount that is less than
the remaining stated redemption price at maturity of such Certificate or, in the
case of a Regular Certificate issued with original issue discount, less than the
revised issue price of such Regular Certificate will be treated for federal
income tax purposes as having acquired the Regular Certificate at a market
discount. If the amount of such market discount is not less than a de minimis
amount (i.e., 0.25% of the stated redemption price at maturity times the
weighted average remaining life of the Regular Certificates), a portion of such
market discount must be included as ordinary income by such Certificate Owner
during each monthly period in which such Certificate Owner owns the Regular
Certificate and receives a principal distribution. In particular, the
Certificate Owner will be required to allocate that principal distribution first
to the portion of the market discount on such Certificate that has accrued but
has not previously been includable in income. In general, the amount of market
discount that must be included for each month is equal to the lesser of (i) the
amount of market discount accruing during such month (plus any accrued market
discount for prior months not previously taken into account) or (ii) the amount
of the principal payment with respect to such month. Market discount may be
treated as accruing on a constant yield method (i.e., taking into account such
Certificate Owner's basis in the Regular Certificate and yield to maturity) or
in proportion to accruals of original issue discount on the Regular
Certificates, or, if the original issue discount is treated as zero in
proportion to interest payments on the Regular Certificates. If the amount of
such market discount is less than a de minimis amount, such discount must be
allocated to the remaining principal distributions on the Regular Certificates
and, when each such distribution is received, gain equal to the discount
allocated to such distribution will be recognized. A Certificate Owner that
incurs or continues indebtedness to acquire a Regular Certificate at a market
discount may be required to defer the deduction of all or a portion of the
interest on such indebtedness until the corresponding amount of market discount
is included in income. The Trust Fund will make available information necessary
to compute the accrual of market discount as required by the IRS.
Sales
If a Regular Certificate is sold, the seller will recognize gain or loss
equal to the difference between the amount realized in the sale and its adjusted
basis in the Regular Certificate. Such adjusted basis generally will equal the
cost of such Regular Certificate to the seller, increased by any original issue
discount or market discount included in the seller's gross income with respect
to such Regular Certificate and reduced (but not below zero) by the portion of
the adjusted basis of such Regular Certificate allocable to distributions of
amounts included in the stated redemption price at maturity of such Regular
Certificate previously received by the seller and by any amortized premium.
Except as provided in the following paragraph or Section 582(c) of the Code, any
such gain or loss will be capital gain or loss provided such Regular Certificate
is held as a "Capital Asset" (generally, property held for investment) within
the meaning of Section 1221 of the Code.
Gain from the sale of a Regular Certificate that might otherwise be capital
gain will be treated as ordinary income to the extent that such gain does not
exceed the excess, if any, of (i) the amount that would have been includable in
such Certificate Owner's income had income accrued at a rate equal to 110% of
the "Applicable Federal Rate" (generally, an average of current yields on
Treasury securities) as of the date of purchase over (ii) the amount actually
includable in such Certificate Owner's income. In addition, gain recognized on
such a sale by a Certificate Owner of a Regular Certificate who purchased a
Regular Certificate at a market discount would also be taxable as ordinary
income in an amount not exceeding the portion of such discount that accrued
during the period such Regular Certificate was held by such a Certificate Owner
of a Regular
S-57
<PAGE>
Certificate, reduced by any market discount previously included in income under
the rules described above under "Market Discount."
Reporting and Backup Withholding
The Trustee will be required to furnish with each distribution to each
Certificate Owner of a Regular Certificate a statement setting forth the amount
of such distribution allocable to principal and to interest. In addition, the
Trustee will be required to furnish or make available to certain beneficial
owners, within a reasonable time after the end of each calendar year (as
required by the IRS), a statement setting forth such beneficial owner's share of
interest received and original issue discount accrued for such calendar year,
information that will assist such owner in computing its premium or market
discount, if any, certain information concerning the character of the Regular
Certificates as described above under "Special Rules," and certain additional
information as the IRS may require. The Trustee will make available the same
information on a quarterly basis to certain other beneficial owners, middlemen
and nominees.
Payments of interest and principal, as well as payments of proceeds from
the sale of Regular Certificates, to Certificate Owners of Certificate who are
not exempt recipients may be subject to the "Backup Withholding" tax under
Section 3406 of the Code at a rate of 31 percent if such Certificate Owners fail
to furnish certain information, including their taxpayer identification numbers,
to the Trustee, its agent or the broker who effected the sale of the Regular
Certificate, or otherwise fail to establish an exemption from such tax. Any
amounts deducted and withheld from a distribution to a Certificate Owner would
be allowed as a credit against such Certificate Owner's federal income tax.
Furthermore, certain penalties may be imposed by the IRS on a Certificate Owner
who is required to supply information but who does not do so in the proper
manner.
Taxes That May be Imposed on the Trust Fund
The Code imposes a tax on the Trust Fund equal to 100 percent of the net
income derived from "Prohibited Transactions." In general, a prohibited
transaction means the disposition of a Mortgage Loan other than pursuant to
certain specified exceptions, the receipt of investment income from a source
other than a Mortgage Loan or certain other permitted investments, the receipt
of compensation for services or the disposition of an asset purchased with the
payments on the Mortgage Loans for temporary investment pending distribution
with respect to the Certificates. The Pooling and Servicing Agreement requires
that the Trust Fund not engage in any prohibited transactions.
The Code also imposes a tax on the Trust Fund equal to 100 percent of the
value of any property contributed to the Trust Fund after the Startup Day,
subject to certain specified exceptions. The Pooling and Servicing Agreement
does not permit contributions that would be subject to this tax.
The Trust Fund will be subject to federal income tax at the highest
corporate rate on "Net Income from Foreclosure Property," determined by
reference to the rules applicable to real estate investment trusts. It is not
anticipated that the Trust Fund will have any net income from foreclosure
property.
Foreign Investors
Distributions made on a Regular Certificate to, or on behalf of, a
Certificate Owner of a Regular Certificate that is not a U.S. Person (a
"Non-U.S. Person") generally will be exempt from U.S. federal income and
withholding taxes, provided (a) the Certificate Owner of a Regular Certificate
is not subject to U.S. tax as a result of a connection to the United States
other than ownership of the Regular Certificate, (b) the Certificate Owner of a
Regular Certificate signs a statement under penalties of perjury that certifies
that such Certificate Owner is a Non-U.S. Person and provides the name and
address of such Certificate Owner, and (c) the last U.S. Person in the chain of
payment to the Certificate Owner of a Regular Certificate receives such
statement from such Certificate Owner or a financial institution holding on its
behalf and does not have actual knowledge that such statement is false.
Certificate Owners of Regular Certificates should be aware that the IRS might
take the position that this exemption does not apply to a Certificate Owner of a
Regular Certificate that is a "Controlled Foreign Corporation" described in
Section 881(c)(3)(C) of the Code.
In addition, gain realized on the sale, exchange, or other disposition of a
Regular Certificate by a Non-U.S. person generally will not be subject to U.S.
federal income tax, provided (i) such gain is not effectively connected with a
trade or business carried on by the Certificate Owner in the U.S., (ii) in the
case of a Certificate Owner who is an individual, such Certificate Owner is not
present in the U.S. for 183 days or more during the taxable year in which such
sale, exchange, or other disposition occurs, and (iii) in the case of gain
attributable to accrued but unpaid interest, the conditions described in the
immediately preceding paragraph are satisfied.
S-58
<PAGE>
"U.S. 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 that is subject to U.S. federal income tax regardless of the source of its
income.
STATE TAXES
The Depositor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Offered Certificates under the tax
laws of any state. Investors considering an investment in the Certificates
should consult their own tax advisors regarding such tax consequences.
All investors should consult their own tax advisors regarding the
particular federal, state, local or foreign income tax consequences of the
purchase, ownership and disposition of the Certificates.
ERISA CONSIDERATIONS
General
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain restrictions on employee benefit plans subject to ERISA ("ERISA
Plans") and on persons who have certain specified relationships with respect to
such Plans. Certain employee benefit plans, such as governmental plans (as
defined in Section 3(32) of ERISA) and church plans (as defined in Section 3(33)
of ERISA, provided no election has been made under Section 410(b) of the Code),
are not subject to the restrictions of ERISA, and assets of such plans may be
invested in the Certificates without regard to the ERISA considerations
described below, subject to any restrictions imposed under other applicable
federal and state law. However, any such governmental or church plan which is
qualified under Section 401(a) of the Code 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.
INVESTMENTS BY ERISA PLANS ARE SUBJECT TO ERISA'S GENERAL FIDUCIARY
REQUIREMENTS. ACCORDINGLY, BEFORE INVESTING IN AN OFFERED CERTIFICATE, AN ERISA
PLAN FIDUCIARY SHOULD DETERMINE WHETHER SUCH AN INVESTMENT IS PERMITTED IN
ACCORDANCE WITH THE DOCUMENTS GOVERNING THE ERISA PLAN AND IS PRUDENT FOR THE
ERISA PLAN IN VIEW OF ITS OVERALL INVESTMENT POLICY AND THE COMPOSITION AND
DIVERSIFICATION OF ITS PORTFOLIO.
Prohibited Transactions
In addition, provisions of ERISA, and the corresponding provisions of the
Code, prohibit a broad range of transactions involving assets of ERISA Plans,
individual retirement accounts, Keogh plans covering only a sole proprietor or
partners (collectively, the "Plans") and persons having certain specified
relationships to such a Plan ("parties in interest" and "disqualified persons").
Such transactions are treated as "prohibited transactions" under Sections 406
and 407 of ERISA and excise taxes are imposed on such persons under Section 4975
of the Code (and, in some cases, a civil penalty may be assessed pursuant to
Section 502 (i) of ERISA) unless a statutory or administrative exemption applies
to the transaction.
The Department of Labor ("DOL") has issued a final regulation (29 C.F.R.
Section 2510.3-101) concerning the definition of what constitutes the assets of
a Plan. This regulation provides that, as a general rule, the underlying assets
and properties of corporations, partnerships, trusts, and certain other entities
in which a Plan makes an "equity investment" will be deemed for purposes of
ERISA to be assets of the investing Plan unless certain exceptions apply.
Under the terms of the regulation, the Trust Fund may be deemed to hold
plan assets by reason of a Plan's investment in an Offered Certificate, and such
plan assets would include an undivided interest in the Mortgage Loans and any
other assets held by the Trust Fund. In such an event, the Seller, Master
Servicer, Certificate Insurer, Trustee, and other persons or affiliates, might
be considered parties in interest with respect to a Plan, subject to the
fiduciary responsibility provisions of Title I of ERISA, including the
prohibited transaction provisions of Section 406 of ERISA (and of Section 4975
of the Code), with respect to transactions involving the assets of the Trust
Fund unless a statutory or administrative exemption is available.
The regulation provides that the underlying assets of an entity will not be
considered plan assets if the aggregate equity participation in the entity by
Plans is not "significant" (i.e., less than 25% of the value of each class of
equity interest is held in the aggregate by "benefit plan investors," which
includes Plans and certain other employee benefit plans not subject to ERISA).
Plan investors should be aware, however, that the Pooling and Servicing
Agreement contains no restrictions on the ownership of Offered Certificates by
benefit plan investors.
S-59
<PAGE>
Whether or not a Plan's assets would be deemed to include an undivided
ownership interest in the Mortgage Loans and any other assets held by the Trust
Fund, the DOL has issued an administrative exemption, Prohibited Transaction
Class Exemption 83-1 (48 Fed. Reg. 895, January 7, 1983) ("PTCE 83-1") which
exempts from the application of the prohibited transaction rules certain
transactions relating to (1) the creation, maintenance, and termination of
certain residential mortgage pool investment trusts, (2) the acquisition and
holding of certain residential mortgage pool pass-through certificates, and (3)
the servicing, operation, and management of such residential mortgage pool
investment trusts; provided that the general conditions and certain other
conditions set forth in PTCE 83-1 are satisfied. Although the Seller believes
that the certificates and the residential mortgage pool investment trust
described in PTCE 83-1 would include the Offered Certificates and the Trust
Fund, respectively, there can be no assurances that the exemptive relief of PTCE
83-1 will apply to protect a Plan investor from the unfavorable application of
the prohibited transaction rules of ERISA and the Code.
Review by Plan Fiduciaries
Any Plan fiduciary considering whether to purchase any Offered Certificates
on behalf of a Plan should consult with its counsel regarding the applicability
of the fiduciary responsibility and prohibited transaction provisions of ERISA
and the Code to such investment. Among other things, before purchasing any
Offered Certificates, a fiduciary of a Plan subject to the fiduciary
responsibility provisions of ERISA or an employee benefit plan subject to the
prohibited transaction provisions of the Code should make its own determination
as to the availability of the exemptive relief provided in PTCE 83-1, and also
consider the availability of any other prohibited transaction exemptions. THERE
CAN BE NO ASSURANCE THAT ANY EXEMPTION FROM THE UNFAVORABLE APPLICATION OF THE
PROHIBITED TRANSACTION RULES WILL BE AVAILABLE TO A PLAN INVESTOR.
Exemption
The DOL has granted to First Union Corporation, the parent of First Union
Capital Markets Corp., an administrative exemption (the "Exemption") from
certain of the prohibited transaction provisions of Sections 406(a) and (b) and
407(a) of ERISA, and the excise taxes imposed on such prohibited transactions
pursuant to Sections 4975(a) and (b) of the Code with respect to the initial
purchase, the holding and the subsequent resale by Plans of certificates
representing interests in asset-backed pass-through trusts that consist of
certain receivables, loans, and other obligations that meet the conditions and
requirements of the Exemption. The receivables covered by the Exemption apply to
mortgage loans such as the Mortgage Loans in the Trust Fund. The Exemption will
apply to the acquisition, holding and resale of the Class A Certificates,
underwritten by an "Underwriter," as hereinafter defined, provided that certain
conditions set forth in the Exemption application are satisfied. For purposes of
this discussion, the term "Underwriter" shall include (a) First Union Capital
Markets Corp. ("FCMC") and Lehman Brothers Inc., (b) any person directly or
indirectly, through one or more intermediaries, controlling, controlled by, or
under common control with FCMC or Lehman Brothers Inc. and (c) any member of the
underwriting syndicate or selling group of which FCMC or Lehman Brothers Inc. or
a person described in (b) is a manager or co-manager with respect to the Class A
Certificates.
The Exemption sets forth six general conditions which must be satisfied for
a transaction involving the purchase, sale, and holding of Class A Certificates
to be eligible for exemptive relief under the Exemption. First, the acquisition
of Class A Certificates by a Plan must be on terms that are at least as
favorable to the Plan as they would be in an arm's length transaction with an
unrelated party. Second, the rights and interests evidenced by the Class A
Certificates must not be subordinated to the rights and interests evidenced by
the other certificates of the same trust. Third, the Class A Certificates at the
time of acquisition by the Plan must be rated in one of the three highest
generic rating categories by S&P, Moody's, Duff & Phelps, Inc. or Fitch
Investors Service, Inc. Fourth, the Trustee cannot be an affiliate of any other
member of the "restricted group," which consists of any Underwriter, the
Depositor, the Master Servicer, any subservicer, the Trustee, the provider of
any credit enhancement, any borrower with respect to Mortgage Loans constituting
more than 5% of the Cut-Off Date Aggregate Loan Balance of the Class A
Certificates and their affiliates. Fifth, the sum of all payments made to and
retained by the Underwriter must represent not more than reasonable compensation
for underwriting or placing the Class A Certificates; the sum of all payments
made to and retained by the Depositor pursuant to the assignment of the Mortgage
Loans to the Trust Fund must represent not more than the fair market value of
such Mortgage Loans; and the sum of all payments made to and retained by the
Master Servicer and any subservicer must represent not more than reasonable
compensation for such person's services under the Pooling and Servicing
Agreement and reimbursement of such person's reasonable expenses in connection
therewith. Sixth, 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.
S-60
<PAGE>
Because the Class A Certificates are not subordinated to any other class of
Certificates, the second general condition set forth above is satisfied with
respect to the Class A Certificates. It is a condition of the issuance of the
Class A Certificates that they be rated not lower than "AAA" and "Aaa" by S&P
and Moody's, respectively; thus, the third general condition set forth above is
satisfied with respect to the Class A Certificates as of the Closing Date. In
addition, the fourth general condition set forth above concerning the Trustee
not being an affiliate of any other member of the restricted group is also
satisfied as of the Closing Date. A fiduciary of a Plan contemplating purchasing
a Class A Certificate in the secondary market must make its own determination
that, at the time of such purchase, the Class A Certificates continue to satisfy
the third and fourth general conditions set forth above. A fiduciary of a Plan
contemplating any purchase of a Class A Certificate must make its own
determination that the first, fifth and sixth general conditions set forth above
will be satisfied with respect to such Class A Certificate as of the date of
such purchase.
Employee benefit plans that are governmental plans (as defined in Section
3(32) of ERISA) and church plans (as defined in Section 3(33) of ERISA, provided
no election has been made under Section 410(b) of the Code) are not subject to
ERISA requirements. Accordingly, assets of such plans may be invested in the
Class A Certificates without regard to the ERISA restrictions described above,
subject to applicable provisions of other federal and state laws.
Any Plan fiduciary who proposes to cause a Plan to purchase Class A
Certificates should consult with its own counsel with respect to the potential
consequences under ERISA and the Code of the Plan's acquisition and ownership of
Class A Certificates. Assets of a Plan or individual retirement account should
not be invested in the Class A Certificates unless it is clear that the assets
of the Trust Fund will not be plan assets or unless it is clear that the
Exemption or another prohibited transaction exemption will apply and exempt all
potential prohibited transactions.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of the
Offered Certificates will be applied by the Seller to the purchase price of the
Mortgage Loans and expenses connected with pooling the Mortgage Loans and
issuing the Certificates.
LEGAL INVESTMENT CONSIDERATIONS
The Offered Certificates will not constitute "Mortgage Related Securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA")
because, among other things, some of the mortgages securing the Mortgage Loans
are not first mortgages. Accordingly, many institutions with legal authority to
invest in comparably rated securities based on first mortgage loans (i.e.,
"Mortgage Related Securities" under SMMEA) may not be legally authorized to
invest in the Offered Certificates. No representation is made as to whether the
Offered Certificates constitute legal investments for any entity under any
applicable statute, law, rule, regulation or order. Prospective purchasers are
urged to consult with their counsel concerning the status of the Offered
Certificates as legal investments for such purchasers prior to investing in the
Offered Certificates.
UNDERWRITING
First Union Capital Markets Corp. and Lehman Brothers Inc. (the
"Underwriters") have agreed, on the terms and conditions of the Underwriting
Agreement (the "Underwriting Agreement") relating to the Offered Certificates,
to purchase the principal amount of the Class A Certificates set forth opposite
its name.
<TABLE>
<CAPTION>
Class A-1 Class A-2 Class A-3 Class A-4 Class A-5
Underwriter Certificates Certificates Certificates Certificates Certificates
<S> <C> <C> <C> <C> <C>
First Union Capital Markets Corp................. $ 34,004,000 $ 17,063,000 $ 13,078,500 $ 5,716,500 $ 8,767,500
Lehman Brothers Inc.............................. $ 34,004,000 $ 17,063,000 $ 13,078,500 $ 5,716,500 $ 8,767,500
Total..................................... $ 68,008,000 $ 34,126,000 $ 26,157,000 $ 11,433,000 $ 17,535,000
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all the Offered Certificates
offered hereby if any Offered Certificates are purchased.
The distribution of the Offered Certificates by the Underwriters may be
effected from time to time in one or more negotiated transactions, or otherwise,
at varying prices to be determined, in each case, at the time of sale. This
Prospectus Supplement and the Prospectus may be used by First Union Capital
Markets Corp. in connection with offers and sales related
S-61
<PAGE>
to market-making transactions in the Offered Certificates. First Union Captial
Markets Corp. may act as principal or agent in such transactions.
The Underwriters may effect such transactions by selling the Offered
Certificates to or through dealers, and such dealers may receive compensation in
the form of underwriting discounts, concessions or commissions from the
Underwriters. In connection with the sale of the Offered Certificates, the
Underwriters may be deemed to have received compensation from the Depositor in
the form of underwriting compensation. The Underwriters and any dealers that
participate with the Underwriters in the distribution of the Offered
Certificates may be deemed to be underwriters and any commissions received by
them and any profit on the resale of the Offered Certificates positioned by them
may be deemed to be underwriting discounts and commissions under the Securities
Act of 1933, as amended.
The Depositor has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
Upon receipt of a request by an investor who has received an electronic
Prospectus Supplement and Prospectus from the Underwriters or by such investor's
representative within the period during which there is an obligation to deliver
a Prospectus Supplement and Prospectus, the applicable Underwriter will promptly
deliver to such investor a paper copy of the Prospectus Supplement and
Prospectus.
The Depositor, the Seller, the Master Servicer and the Document Custodian
are all affiliates of First Union Capital Markets Corp. The Underwriters or
agents and their associates may be customers of (including borrowers from),
engage in transactions with, and/or perform services for the Depositor, its
affiliates, and the Trustee in the ordinary course of business.
EXPERTS
The financial statements of Financial Guaranty Insurance Company included
in this Prospectus Supplement in Appendix A and the registration statement
relating to the Class A Certificates, as of December 31, 1995 and 1994 and for
each of the years in the three year period ended December 31, 1995, have been
included in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing in Appendix A and the registration
statement relating to the Class A Certificates, upon the authority of such firm
as experts in accounting and auditing.
The report of KPMG Peat Marwick LLP refers to changes, in 1993, in
accounting methods for multiple-year retrospectively rated reinsurance
contracts, and for the adoption of the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
LEGAL MATTERS
Certain legal matters with respect to the Offered Certificates will be
passed upon for the Depositor by Moore & Van Allen, PLLC, Charlotte, North
Carolina. Certain legal matters will be passed upon for First Union Capital
Markets Corp. by Petree Stockton, L.L.P., Charlotte, North Carolina. Certain
legal matters will be passed upon for Lehman Brothers Inc. by Brown & Wood LLP,
New York, New York.
CERTIFICATE RATING
It is a condition to the issuance of the Offered Certificates that they be
rated "AAA" by S&P, and "Aaa" by Moody's. 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. The ratings assigned to
the Offered Certificates address the likelihood of the receipt of distributions
due on the Offered Certificates according to their terms. The ratings take into
consideration, among other things, the credit quality of the Mortgage Loans, the
structural and legal aspects associated with the Offered Certificates, and the
claims-paying ability of the Certificate Insurer. An adverse change in any of
such factors or in other factors may be a basis for the downward revision or
withdrawal of the rating of the Offered Certificates affected by such change.
The ratings assigned to the Offered Certificates do not represent any assessment
of the likelihood that principal prepayments might differ from those originally
anticipated. The rating does not address the possibility that the holders of the
Offered Certificates might suffer a lower than anticipated yield. There can be
no assurance as to whether any other rating agency will rate the Offered
Certificates, or if it does, what rating it will assign to the Offered
Certificates.
S-62
<PAGE>
INDEX OF PRINCIPAL TERMS
<TABLE>
<S> <C>
1934 Act............................................................................................................... S-3
Aggregate Class A Principal Balance.................................................................................... S-2
Aggregate Loan Balance................................................................................................. S-4
Appraised Values....................................................................................................... S-17
Assignment Event....................................................................................................... S-15
Available Funds........................................................................................................ S-35
Balloon Payment........................................................................................................ S-12
BIF.................................................................................................................... S-34
Book-Entry Certificates................................................................................................ S-38
Cede................................................................................................................... S-11
CEDEL.................................................................................................................. S-11
CEDEL Participants..................................................................................................... S-40
Certificate Insurance Policy........................................................................................... S-2
Certificate Insurer.................................................................................................... S-2
Certificate Insurer Default............................................................................................ S-38
Certificate Owners..................................................................................................... S-11
Certificate Rate....................................................................................................... S-5
Certificateholders..................................................................................................... S-2
Certificates........................................................................................................... S-1
Chase.................................................................................................................. S-11
Citibank............................................................................................................... S-11
Class.................................................................................................................. S-1
Class A Certificates................................................................................................... S-1
Class A Guaranteed Principal Distribution Amount....................................................................... S-50
Class A Monthly Principal Distributable Amount......................................................................... S-8
Class A Principal Distribution......................................................................................... S-7
Class A Principal Balance.............................................................................................. S-2
Class Interest Carryover Shortfall..................................................................................... S-7
Class Interest Distribution............................................................................................ S-7
Class Monthly Interest Distributable Amount............................................................................ S-7
Class R Certificates................................................................................................... S-1
Closing Date........................................................................................................... S-1
Code................................................................................................................... S-10
Collection Account..................................................................................................... S-33
Collection Period...................................................................................................... S-8
Combined Loan-to-Value Ratio........................................................................................... S-19
Cooperative............................................................................................................ S-40
Corporation............................................................................................................ S-48
CPR.................................................................................................................... S-27
Cut-Off Date........................................................................................................... S-1
Cut-Off Date Aggregate Loan Balance.................................................................................... S-1
Date-of-Payment Loans.................................................................................................. S-24
Definitive Certificate................................................................................................. S-39
Depositor.............................................................................................................. S-2
Distributable Excess Spread............................................................................................ S-8
Distribution Account................................................................................................... S-34
Distribution Date...................................................................................................... S-2
Document Custodian..................................................................................................... S-2
DOL.................................................................................................................... S-59
DTC.................................................................................................................... S-11
DTC Participants....................................................................................................... S-39
Due Date............................................................................................................... S-24
Eligible Account....................................................................................................... S-34
ERISA.................................................................................................................. S-10
ERISA Plans............................................................................................................ S-59
Euroclear.............................................................................................................. S-11
Euroclear Operator..................................................................................................... S-40
Euroclear Participants................................................................................................. S-40
European Depositories.................................................................................................. S-11
Events of Default...................................................................................................... S-44
Excess Spread.......................................................................................................... S-8
</TABLE>
S-63
<PAGE>
<TABLE>
<S> <C>
Exemption.............................................................................................................. S-60
Financial Intermediary................................................................................................. S-39
FCMC................................................................................................................... S-60
FDIC................................................................................................................... S-16
Foreclosure Profit..................................................................................................... S-43
Fully Taxable Bonds.................................................................................................... S-57
FURST.................................................................................................................. S-4
GE Capital............................................................................................................. S-48
Holders................................................................................................................ S-2
Insolvency Event....................................................................................................... S-45
Insurance Agreement.................................................................................................... S-49
Insurance Proceeds..................................................................................................... S-43
IRS.................................................................................................................... S-55
Liquidated Mortgage Loan............................................................................................... S-38
Liquidation Expenses................................................................................................... S-43
Liquidation Proceeds................................................................................................... S-43
Loan Balance........................................................................................................... S-4
Loan Rate.............................................................................................................. S-4
Master Servicer........................................................................................................ S-2
Monthly Advance........................................................................................................ S-34
Moody's................................................................................................................ S-11
Mortgage Files......................................................................................................... S-32
Mortgage Loan Purchase Agreement....................................................................................... S-46
Mortgage Loans......................................................................................................... S-1
Mortgage Notes......................................................................................................... S-17
Mortgaged Property..................................................................................................... S-31
Net Liquidation Proceeds............................................................................................... S-43
Non-U.S. Person........................................................................................................ S-58
Nonrecoverable Advance................................................................................................. S-34
Offered Certificates................................................................................................... S-1
OID Regulations........................................................................................................ S-55
Outstanding Class A Principal Carryover Shortfall...................................................................... S-8
Payahead............................................................................................................... S-35
Plan................................................................................................................... S-10
Pooling and Servicing Agreement........................................................................................ S-2
Prepayment Assumption.................................................................................................. S-27
Prepayments............................................................................................................ S-14
Prospectus............................................................................................................. S-2
PTCE 83-1.............................................................................................................. S-60
Rating Agencies........................................................................................................ S-11
Record Date............................................................................................................ S-7
Regular Certificates................................................................................................... S-55
Related Documents...................................................................................................... S-30
Relevant Depositary.................................................................................................... S-39
REMIC.................................................................................................................. S-2
REO.................................................................................................................... S-43
Rules.................................................................................................................. S-39
SAIF................................................................................................................... S-34
S&P.................................................................................................................... S-11
Security Instrument.................................................................................................... S-50
Seller................................................................................................................. S-2
Senior Certificates.................................................................................................... S-1
Servicing Advance...................................................................................................... S-34
Servicing Fee.......................................................................................................... S-10
Servicing Fee Rate..................................................................................................... S-38
SMMEA.................................................................................................................. S-10
Startup Day............................................................................................................ S-17
Subordinated Certificates.............................................................................................. S-1
Subservicer............................................................................................................ S-24
Substitution Adjustment Amount......................................................................................... S-33
Successor Master Servicer.............................................................................................. S-45
Tax Counsel............................................................................................................ S-54
</TABLE>
S-64
<PAGE>
<TABLE>
<S> <C>
Terms and Conditions................................................................................................... S-40
Title V................................................................................................................ S-54
Trust Fund............................................................................................................. S-1
Trustee................................................................................................................ S-2
U.S. Person............................................................................................................ S-59
Underwriters........................................................................................................... S-1
Underwriting Agreement................................................................................................. S-61
Weighted Average Life.................................................................................................. S-5
</TABLE>
S-65
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, a class of Book-Entry Certificates
(the "Global Securities") will be available only in book-entry form. Investors
in the Global Securities may hold such Global Securities through any of DTC,
CEDEL or Euroclear. The Global Securities will be tradeable 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 and prior Residential Mortgage Pass-Through
Certificates issues.
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.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to prior Residential Mortgage Pass-Through
Certificates issues. Investor securities custody accounts will be credited with
their holdings against 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 "lock-up" 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 using the procedures applicable to prior
Residential Mortgage Pass-Through Certificates issues 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.
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, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
A-1
<PAGE>
excluding the first day of the following month. Payment will then be made by the
respective Depositary of 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 debt 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 debt
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 preposition 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 or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon the 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 European 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 Participants 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 Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of the actual
number of days in such accrual period and a year assumed to consist of 360 days.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. 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 will be back-valued to
the value date (which would be the preceding 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 debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that 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 were 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.
A-2
<PAGE>
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 (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-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption For Non-U.S. Persons With Actively 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 Certificate Owners 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 W-8. Form 1001 may be filed by the Certificate Owners
or his agent.
Exemption For U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner 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 W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
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 or any political subdivision thereof or (iii) an estate or trust
the income of which is includable 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.
A-3
<PAGE>
APPENDIX A
AUDITED FINANCIAL STATEMENTS FOR THE CERTIFICATE INSURER
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Financial Guaranty Insurance Company:
We consent to the use of our report dated January 19, 1996 on the financial
statements of Financial Guaranty Insurance Company as of December 31, 1995 and
1994, and for each of the years in the three-year period ended December 31, 1995
included in the Form 8-K of First Union Residential Securitization Transactions,
Inc., and to the reference to our firm under the heading "Experts" in the
Prospectus Supplement.
Our report refers to changes, in 1993, in accounting methods for multiple-year
retrospectively rated reinsurance contracts and for the adoption of the
provisions of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities.
/s/ KPMG Peat Marwick LLP
New York, New York
August 23, 1996
<PAGE>
KPMG Peat Marwick LLP
FINANCIAL GUARANTY INSURANCE COMPANY
Financial Statements
December 31, 1995 and 1994
(With Independent Auditors' Report Thereon)
<PAGE>
FINANCIAL GUARANTY INSURANCE COMPANY
================================================================================
AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 1995
Report of Independent Auditors.......................1
Balance Sheets.......................................2
Statements of Income.................................3
Statements of Stockholder's Equity...................4
Statements of Cash Flows.............................5
Notes to Financial Statements........................6
<PAGE>
KPMG Peat Marwick LLP
345 Park Avenue
New York, NY 10154
Report of Independent Auditors'
The Board of Directors and Stockholder
Financial Guaranty Insurance Company:
We have audited the accompanying balance sheets of Financial Guaranty Insurance
Company as of December 31, 1995 and 1994, and the related statements of income,
stockholder's equity, and cash flows for each of the years in the three year
period then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
we conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Financial Guaranty Insurance
Company as of December 31, 1995 and 1994 and the results of its operations and
its cash flows for each of the years in the three year period then ended in
conformity with generally accepted accounting principles.
As described in notes 6 and 2, respectively, in 1993, the Company changed its
methods of accounting for multiple-year retrospectively rated reinsurance
contracts and for the adoption of the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities.
/s/ KPMG Peat Marwick LLP
January 19, 1996
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
($ in Thousands, except per share amounts)
DECEMBER 31, DECEMBER 31,
ASSETS 1995 1994
--------------- ----------
<S> <C> <C>
Fixed maturity securities available-for-sale
(amortized cost of $2,043,453 in 1995 and $1,954,177 in 1994) $2,141,584 $1,889,910
Short-term investments, at cost, which approximates market 91,032 75,674
Cash 199 1,766
Accrued investment income 37,347 40,637
Reinsurance recoverable 7,672 14,472
Prepaid reinsurance premiums 162,087 164,668
Deferred policy acquisition costs 94,868 90,928
Property and equipment, net of accumulated depreciation
($12,861 in 1995 and $10,512 in 1994) 6,314 7,912
Receivable for securities sold 26,572 -
Prepaid expenses and other assets 12,627 12,243
------------ -----------
Total assets $2,580,302 $2,298,210
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Unearned premiums $ 727,535 $ 757,425
Loss and loss adjustment expenses 77,808 98,746
Ceded reinsurance balances payable 1,942 2,258
Accounts payable and accrued expenses 32,811 28,489
Payable to Parent 1,647 18,600
Current federal income taxes payable 51,296 82,123
Deferred federal income taxes 99,171 22,640
Payable for securities purchased 40,211 8,206
------------ ------------
Total liabilities 1,032,421 1,018,487
---------- ---------
Stockholder's Equity:
Common stock, par value $1,500 per share;
10,000 shares authorized, issued and outstanding 15,000 15,000
Additional paid-in capital 334,011 334,011
Net unrealized gains (losses) on fixed maturity securities available-
for-sale, net of tax 63,785 (41,773)
Foreign currency translation adjustment (1,499) (1,221)
Retained earnings 1,136,584 973,706
---------- ----------
Total stockholder's equity 1,547,881 1,279,723
---------- ----------
Total liabilities and stockholder's equity $2,580,302 $2,298,210
========== ==========
</TABLE>
See accompanying notes to financial statements.
-2-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF INCOME
================================================================================
<TABLE>
<CAPTION>
($ in Thousands)
FOR THE YEAR ENDED DECEMBER 31,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Gross premiums written $ 97,288 $ 161,940 $ 291,052
Ceded premiums (19,319) (46,477) (49,914)
---------- ---------- ---------
Net premiums written 77,969 115,463 241,138
Decrease (increase) in net unearned premiums 27,309 53,364 (74,902)
-------- ---------- ---------
Net premiums earned 105,278 168,827 166,236
Net investment income 120,398 109,828 99,920
Net realized gains 30,762 5,898 35,439
------- ---------- ---------
Total revenues 256,438 284,553 301,595
------- --------- ---------
EXPENSES:
Loss and loss adjustment expenses (8,426) 3,646 42,894
Policy acquisition costs 13,072 15,060 19,592
(Increase) decrease in deferred policy acquisition costs (3,940) 3,709 2,658
Other underwriting expenses 19,100 21,182 21,878
-------- --------- ---------
Total expenses 19,806 43,597 87,022
-------- --------- ---------
Income before provision for Federal income taxes 236,632 240,956 214,573
-------- --------- ---------
Federal income tax expense (benefit):
Current 28,913 43,484 59,505
Deferred 19,841 7,741 (7,284)
--------- ---------- ----------
Total Federal income tax expense 48,754 51,225 52,221
--------- --------- ---------
Net income before cumulative effect of
change in accounting principle 187,878 189,731 162,352
-------- --------- --------
Net cumulative effect of change in
accounting principle - - 3,008
------------ ------------- ----------
Net income $187,878 $189,731 $165,360
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
-3-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF STOCKHOLDER'S EQUITY
================================================================================
($ in Thousands)
<TABLE>
<CAPTION>
NET UNREALIZED
GAINS (LOSSES) ON
ADDITIONAL FIXED MATURITY FOREIGN
COMMON PAID-IN SECURITIES AVAILABLE- CURRENCY RETAINED
STOCK CAPITAL FOR-SALE, NET OF TAX ADJUSTMENT EARNINGS
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1993 $2,500 $324,639 $7,267 $(1,597) $618,615
Net income - - - - 165,360
Capital contribution - 21,872 - - -
Adjustment to common stock par value 12,500 (12,500) - - -
Unrealized gains on fixed maturity securities
previously held at market, net of tax of ($713) - - (1,325) - -
Implementation of change in accounting for
adoption of SFAS 115, net of tax of $45,643 - - 84,766 - -
Foreign currency translation adjustment - - - (668) -
--------- ----------- ----------- --------- -----------
Balance, December 31, 1993 15,000 334,011 90,708 (2,265) 783,975
Net income - - - - 189,731
Unrealized losses on fixed maturity securities
available-for-sale, net of tax of ($71,336) - - (132,481) - -
Foreign currency translation adjustment - - - 1,044 -
--------- ----------- ----------- -------- -----------
Balance, December 31, 1994 15,000 334,011 (41,773) (1,221) 973,706
Net income - - - - 187,878
Dividend paid - - - - (25,000)
Unrealized gains on fixed maturity securities
available for sale, net of tax of $56,839 - - 105,558 - -
Foreign currency translation adjustment - - - (278) -
--------- ----------- ----------- --------- ------------
Balance, December 31, 1995 $15,000 $334,011 $63,785 $(1,499) $1,136,584
======= ======== ======= ======== ==========
</TABLE>
See accompanying notes to financial statements.
-4-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF CASH FLOWS
================================================================================
($ in Thousands)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $187,878 $189,731 $165,360
Adjustments to reconcile net income
to net cash provided by operating activities:
Cumulative effect of change in accounting principle, net of tax - - (3,008)
Change in unearned premiums (29,890) (45,927) 90,429
Change in loss and loss adjustment expense reserves (20,938) 2,648 51,264
Depreciation of property and equipment 2,348 2,689 2,012
Change in reinsurance receivable 6,800 (304) (9,040)
Change in prepaid reinsurance premiums 2,581 (7,437) (15,527)
Change in foreign currency translation adjustment (427) 1,607 (1,029)
Policy acquisition costs deferred (16,219) (18,306) (19,592)
Amortization of deferred policy acquisition costs 12,279 22,015 22,250
Change in accrued investment income, and prepaid
expenses and other assets 2,906 (5,150) (9,048)
Change in other liabilities (12,946) 2,577 7,035
Change in deferred income taxes 19,841 7,741 (7,284)
Amortization of fixed maturity securities 1,922 5,112 8,976
Change in current income taxes payable (30,827) 33,391 30,089
Net realized gains on investments (30,762) (5,898) (35,439)
---------- ------------- -------------
Net cash provided by operating activities 94,546 184,489 277,448
---------- ------------ -----------
INVESTING ACTIVITIES:
Sales and maturities of fixed maturity securities 836,103 550,534 789,036
Purchases of fixed maturity securities (891,108) (721,908) (1,090,550)
Purchases, sales and maturities of short-term investments, net (15,358) (11,486) 4,164
Purchases of property and equipment, net (750) (1,290) (985)
------------ -------------- --------------
Net cash used in investing activities (71,113) (184,150) (298,335)
---------- ------------- ------------
FINANCING ACTIVITIES:
Dividends paid (25,000) - -
Capital contribution - - 21,872
-------------- ---------------- ------------
Net cash provided by financing activities (25,000) - 21,872
---------- ---------------- ------------
(Decrease) Increase in cash (1,567) 339 985
Cash at beginning of year 1,766 1,427 442
---------- -------------- --------------
Cash at end of year $ 199 $ 1,766 $ 1,427
=========== ============= ============
</TABLE>
See accompanying notes to financial statements.
-5-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
================================================================================
<PAGE>
(1) BUSINESS
Financial Guaranty Insurance Company (the "Company"), a wholly-owned
insurance subsidiary of FGIC Corporation (the "Parent"), provides
financial guaranty insurance on newly issued municipal bonds and
municipal bonds trading in the secondary market, the latter including
bonds held by unit investment trusts and mutual funds. The Company also
insures structured debt issues outside the municipal market.
Approximately 88% of the business written since inception by the
Company has been municipal bond insurance.
The Company insures only those securities that, in its judgment, are of
investment grade quality. Municipal bond insurance written by the
Company insures the full and timely payment of principal and interest
when due on scheduled maturity, sinking fund or other mandatory
redemption and interest payment dates to the holders of municipal
securities. The Company's insurance policies do not provide for
accelerated payment of the principal of, or interest on, the bond
insured in the case of a payment default. If the issuer of a
Company-insured bond defaults on its obligation to pay debt service,
the Company will make scheduled interest and principal payments as due
and is subrogated to the rights of bondholders to the extent of
payments made by it.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(2) SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been prepared on the basis
of generally accepted accounting principles ("GAAP") which differ in
certain respects from the accounting practices prescribed or permitted
by regulatory authorities (see Note 3). The prior years financial
statements have been reclassified to conform to the 1995 presentation.
Significant accounting policies are as follows:
INVESTMENTS
As of December 31, 1993, the Company adopted Statement of Financial
Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain
Investments in Debt and Equity Securities." The Statement defines three
categories for classification of debt securities and the related
accounting treatment for each respective category. The Company has
determined that its fixed maturity securities portfolio should be
classified as available-for-sale. Under SFAS 115, securities held as
available-for-sale are recorded at fair value and unrealized holding
gains/losses are recorded as a separate component of stockholder's
equity, net of applicable income taxes.
Short-term investments are carried at cost, which approximates fair
value. Bond discounts and premiums are amortized over the remaining
terms of the securities. Realized gains or losses on the sale of
investments are determined on the basis of specific identification.
-6-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<PAGE>
PREMIUM REVENUE RECOGNITION
Premiums are earned over the period at risk in proportion to the amount
of coverage provided which, for financial guaranty insurance policies,
generally declines according to predetermined schedules.
When unscheduled refundings of municipal bonds occur, the related
unearned premiums, net of premium credits allowed against the premiums
charged for insurance of refunding issues and applicable acquisition
costs, are earned immediately. Unearned premiums represent the portion
of premiums written related to coverage yet to be provided on policies
in force.
POLICY ACQUISITION COSTS
Policy acquisition costs include only those expenses that relate
directly to premium production. Such costs include compensation of
employees involved in underwriting, marketing and policy issuance
functions, rating agency fees, state premium taxes and certain other
underwriting expenses, offset by ceding commission income on premiums
ceded to reinsurers (see Note 6). Net acquisition costs are deferred
and amortized over the period in which the related premiums are earned.
Anticipated loss and loss adjustment expenses are considered in
determining the recoverability of acquisition costs.
LOSS AND LOSS ADJUSTMENT EXPENSES
Provision for loss and loss adjustment expenses is made in an amount
equal to the present value of unpaid principal and interest and other
payments due under insured risks at the balance sheet date for which,
in management's judgment, the likelihood of default is probable. Such
reserves amounted to $77.8 million and $98.7 million at December 31,
1995 and 1994, respectively. As of December 31, 1995 and 1994, such
reserves included $28.8 million and $71.0 million, respectively,
established based on an evaluation of the insured portfolio in light of
current economic conditions and other relevant factors. Loss and loss
adjustment expenses include amounts discounted at an interest rate of
5.5% in 1995 and 7.8% in 1994. The reserve for loss and loss adjustment
expenses is necessarily based upon estimates, however, in management's
opinion the reserves for loss and loss adjustment expenses is adequate.
However, actual results will likely differ from those estimates.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. These temporary differences relate principally to
unrealized gains (losses) on fixed maturity securities
available-for-sale, premium revenue recognition, deferred acquisition
costs and deferred compensation. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Financial guaranty insurance companies are permitted to deduct from
taxable income, subject to certain limitations, amounts added to
statutory contingency reserves (see Note 3). The amounts deducted must
be included in taxable income upon their release from the reserves or
upon earlier release of such amounts from such reserves to cover excess
losses as permitted by insurance regulators. The amounts deducted are
allowed as deductions from taxable income only to the extent that U.S.
government non-interest bearing tax and loss bonds are purchased and
held in an amount equal to the tax benefit attributable to such
deductions.
-7-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
<PAGE>
PROPERTY AND EQUIPMENT
Property and equipment consists of furniture, fixtures, equipment and
leasehold improvements which are recorded at cost and are charged to
income over their estimated service lives. Office furniture and
equipment are depreciated straight-line over five years. Leasehold
improvements are amortized over their estimated service life or over
the life of the lease, whichever is shorter. Computer equipment and
software are depreciated over three years. Maintenance and repairs are
charged to expense as incurred.
FOREIGN CURRENCY TRANSLATION
The Company has established foreign branches in France and the United
Kingdom and determined that the functional currencies of these branches
are local currencies. Accordingly, the assets and liabilities of these
foreign branches are translated into U.S. dollars at the rates of
exchange existing at December 31, 1995 and 1994 and revenues and
expenses are translated at average monthly exchange rates. The
cumulative translation loss at December 31, 1995 and 1994 was $1.5
million and $1.2 million, respectively, net of tax, and is reported as
a separate component of stockholder's equity.
(3) STATUTORY ACCOUNTING PRACTICES
The financial statements are prepared on the basis of GAAP, which
differs in certain respects from accounting practices prescribed or
permitted by state insurance regulatory authorities. The following are
the significant ways in which statutory-basis accounting practices
differ from GAAP:
(a) premiums are earned in proportion to the reduction of the
related risk rather than in proportion to the coverage
provided;
(b) policy acquisition costs are charged to current operations
as incurred rather than as related premiums are earned;
(c) a contingency reserve is computed on the basis of
statutory requirements for the security of all
policyholders, regardless of whether loss contingencies
actually exist, whereas under GAAP, a reserve is
established based on an ultimate estimate of exposure;
(d) certain assets designated as non-admitted assets are
charged directly against surplus but are reflected as
assets under GAAP, if recoverable;
(e) federal income taxes are only provided with respect to
taxable income for which income taxes are currently
payable, while under GAAP taxes are also provided for
differences between the financial reporting and the tax
bases of assets and liabilities;
(f) purchases of tax and loss bonds are reflected as admitted
assets, while under GAAP they are recorded as federal
income tax payments; and
(g) all fixed income investments are carried at amortized cost
rather than at fair value for securities classified as
available-for-sale under GAAP.
-8-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
The following is a reconciliation of net income and stockholder's equity
presented on a GAAP basis to the corresponding amounts reported on a
statutory-basis for the periods indicated below (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994 1993
------------------------- -------------------------- ----------------------
NET STOCKHOLDER'S NET STOCKHOLDER'S NET STOCKHOLDER'S
INCOME EQUITY INCOME EQUITY INCOME EQUITY
<S> <C> <C> <C> <C> <C> <C>
GAAP basis amount $187,878 $1,547,881 $189,731 $1,279,723 $165,360 $1,221,429
Premium revenue recognition (22,555) (166,927) (4,970) (144,372) (16,054) (139,401)
Deferral of acquisition costs (3,940) (94,868) 3,709 (90,928) 2,658 (94,637)
Contingency reserve - (386,564) - (328,073) - (252,542)
Non-admitted assets - (5,731) - (7,566) - (8,951)
Case basis loss reserves 4,048 (52) (3,340) (4,100) 1,626 (759)
Portfolio loss reserves (22,100) 24,000 (11,050) 46,100 43,650 57,150
Deferral of income taxes (benefits) 19,842 64,825 7,741 45,134 (7,284) 35,209
Unrealized gains (losses) on fixed maturity
securities held at fair value, net of tax - (63,785) - 41,773 - (90,708)
Recognition of profit commission 3,096 (5,744) (2,410) (8,840) (4,811) (4,811)
Provision for unauthorized reinsurance - - - (266) - -
Contingency reserve tax deduction (see Note 2) - 78,196 - 55,496 - 45,402
Allocation of tax benefits due to
Parent's net operating loss to the
Company (see Note 5) 637 10,290 (63) 9,653 - 9,716
---------- ----------- ----------- --------- ----------- ---------
Statutory-basis amount $166,906 $1,001,521 $179,348 $893,734 $185,145 $ 777,097
======== ========== ======== ======== ======== =========
</TABLE>
-9-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
(4) INVESTMENTS
Investments in fixed maturity securities carried at fair value of $3.2
million and $3.0 million as of December 31, 1995 and 1994,
respectively, were on deposit with various regulatory authorities as
required by law.
The amortized cost and fair values of short-term investments and of
investments in fixed maturity securities classified as
available-for-sale are as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
1995 COST GAINS LOSSES VALUE
----
--------------- ----------------- ----------------- --------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 71,182 $ 1,696 - $ 72,878
Obligations of states and political
subdivisions 1,942,001 98,458 $1,625 2,038,834
Debt securities issued by foreign
governments 30,270 152 550 29,872
--------------- --------------- ------------- ----------------
Investments available-for-sale 2,043,453 100,306 2,175 2,141,584
Short-term investments 91,032 - - 91,032
--------------- --------------- ------------- ----------------
Total $2,134,485 $100,306 $2,175 $2,232,616
=============== =============== ============= ================
</TABLE>
The amortized cost and fair values of short-term investments and of
investments in fixed maturity securities available-for-sale at December
31, 1995, by contractual maturity date, are shown below. Expected
maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED FAIR
1995 COST VALUE
<S> <C> <C>
Due in one year or less $ 99,894 $ 99,984
Due after one year through five years 137,977 141,235
Due after five years through ten years 287,441 300,560
Due after ten years through twenty years 1,406,219 1,476,261
Due after twenty years 202,954 214,576
----------- -----------
Total $2,134,485 $2,232,616
========== ==========
</TABLE>
-10-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
1994 COST GAINS LOSSES VALUE
----
-------------- --------------- -------------- -----------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 10,945 $ 8 $ (519) $ 10,434
Obligations of states and political
subdivisions 1,839,566 25,809 (85,200) 1,780,175
Debt securities issued by foreign
governments 103,666 400 (4,765) 99,301
-------------- -------------- -------------- ----------------
Investments available-for-sale 1,954,177 26,217 (90,484) 1,889,910
Short-term investments 75,674 - - 75,674
--------------- --------------- -------------- -----------------
Total $2,029,851 $ 26,217 $ (90,484) $ 1,965,584
=============== =============== ============== =================
</TABLE>
In 1995, 1994 and 1993, proceeds from sales of investments in fixed
maturity securities available-for-sale carried at fair value were
$836.1 million, $550.5 million, and $789.0 million, respectively. For
1995, 1994 and 1993 gross gains of $36.3 million, $18.2 million and
$36.1 million respectively, and gross losses of $5.5 million, $12.3
million and $1.0 million respectively, were realized on such sales.
Net investment income of the Company is derived from the following
sources (in thousands):
YEAR ENDED DECEMBER 31,
1995 1994 1993
-------- ------- -----
Income from fixed maturity securities $112,684 $108,519 $ 97,121
Income from short-term investments 8,450 2,479 3,914
--------- -------- ---------
Total investment income 121,134 110,998 101,035
Investment expenses 736 1,170 1,115
---------- -------- ---------
Net investment income $120,398 $109,828 $ 99,920
======== ======== ========
As of December 31, 1995, the Company did not have more than 10% of its
investment portfolio concentrated in a single issuer or industry.
-11-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
(5) INCOME TAXES
The Company files a federal tax return as part of the consolidated
return of General Electric Capital Corporation ("GE Capital"). Under a
tax sharing agreement with GE Capital, taxes are allocated to the
Company and the Parent based upon their respective contributions to
consolidated net income. The Company's effective federal corporate tax
rate (20.6 percent in 1995, 21.3 percent in 1994 and 24.3 percent in
1993) is less than the corporate tax rate on ordinary income of 35
percent in 1995, 1994 and 1993.
Federal income tax expense (benefit) relating to operations of the Company for
1995, 1994 and 1993 is comprised of the following (in thousands):
YEAR ENDED DECEMBER 31,
1995 1994 1993
Current tax expense $28,913 $43,484 $59,505
Deferred tax expense 19,841 7,741 (7,284)
------ ------- ---------
Federal income tax expense $48,754 $51,225 $52,221
======= ======= =======
The following is a reconciliation of federal income taxes computed at
the statutory rate and the provision for federal income taxes (in thousands):
YEAR ENDED DECEMBER 31,
1995 1994 1993
-------- --------- -------
Income taxes computed on income
before provision for federal
income taxes, at the statutory rate $82,821 $84,334 $75,101
Tax effect of:
Tax-exempt interest (30,630) (30,089) (27,185)
Other, net (3,437) (3,020) 4,305
--------- --------- --------
Provision for income taxes $48,754 $51,225 $52,221
======= ======= =======
-12-
<PAGE>
FINANCIAL GUARANTY INSURANCE NOTES TO FINANCIAL STATEMENTS (CONTINUED)
COMPANY
================================================================================
The tax effects of temporary differences that give rise to
significant portions of the deferred tax liabilities at December 31,
1995 and 1994 are presented below (in thousands):
1995 1994
----------- ----------
Deferred tax assets:
Unrealized losses on fixed maturity
securities, available-for-sale - $22,493
Loss reserves $8,382 16,136
Deferred compensation 5,735 9,685
Tax over book capital gains 1,069 365
Other 3,248 3,760
----------- ----------
Total gross deferred tax assets 18,434 52,439
----------- ----------
Deferred tax liabilities:
Unrealized gains on fixed maturity
securities, available-for-sale 34,346 -
Deferred acquisition costs 33,204 31,825
Premium revenue recognition 32,791 24,674
Rate differential on tax and loss bonds 9,454 9,454
Other 7,810 9,126
----------- ----------
Total gross deferred tax liabilities 117,605 75,079
----------- ----------
Net deferred tax liability $ 99,171 $22,640
=========== ==========
Based upon the level of historical taxable income, projections of
future taxable income over the periods in which the deferred tax assets
are deductible and the estimated reversal of future taxable temporary
differences, the Company believes it is more likely than not that it
will realize the benefits of these deductible differences and has not
established a valuation allowance at December 31, 1995 and 1994. The
company anticipates that the related deferred tax asset will be
realized.
Total federal income tax payments during 1995, 1994 and 1993 were
$59.8 million, $10.1 million, and $29.4 million, respectively.
-13-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
(6) REINSURANCE
The Company reinsures portions of its risk with other insurance
companies through quota share reinsurance treaties and, where
warranted, on a facultative basis. This process serves to limit the
Company's exposure on risks underwritten. In the event that any or all
of the reinsuring companies were unable to meet their obligations, the
Company would be liable for such defaulted amounts. The Company
evaluates the financial condition of its reinsurers and monitors
concentrations of credit risk arising from activities or economic
characteristics of the reinsurers to minimize its exposure to
significant losses from reinsurer insolvencies. The Company holds
collateral under reinsurance agreements in the form of letters of
credit and trust agreements in various amounts with various reinsurers
totaling $33.7 million that can be drawn on in the event of default.
Effective January 1, 1993, the Company adopted the Emerging Issues Task
Force Issue 93-6, "Accounting for Multiple-Year Retrospectively-Rated
Contracts by Ceding and Assuming Enterprises" ("EITF 93-6"). EITF 93-6
requires that an asset be recognized by a ceding company to the extent
a payment would be received from the reinsurer based on the contract's
experience to date, regardless of the outcome of future events. To
reflect the adoption of EITF 93-6 in the accompanying financial
statements, an initial adjustment of $4.6 million, before applicable
income taxes, has been reflected in the 1993 income statement.
Net premiums earned are presented net of ceded earned premiums of $21.9
million, $39.0 million and $34.4 million for the years ended December
31, 1995, 1994 and 1993, respectively. Loss and loss adjustment
expenses incurred are presented net of ceded losses of $1.1 million,
$0.3 million and $9.1 million for the years ended December 31, 1995,
1994 and 1993, respectively.
-14-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
(7) LOSS AND LOSS ADJUSTMENT EXPENSES
Activity in the reserve for loss and loss adjustment expenses is
summarized as follows (in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
------------- ----------- -----------
Balance at January 1, $98,746 $96,098 $44,834
Less reinsurance recoverable 14,472 14,168 5,128
------ -------- --------
Net balance at January 1, 84,274 81,930 39,706
Incurred related to:
Current year 26,681 15,133 -
Prior years (1,207) (437) (756)
Portfolio reserves (33,900) (11,050) 43,650
-------- -------- --------
Total Incurred (8,426) 3,646 42,894
------- -------- --------
Paid related to:
Current year (197) (382) -
Prior years (5,515) (920) (670)
------- --------- ---------
Total Paid (5,712) (1,302) (670)
------- --------- ---------
Net balance at December 31, 70,136 84,274 81,930
Plus reinsurance recoverable 7,672 14,472 14,168
-------- -------- --------
Balance at December 31, $77,808 $98,746 $96,098
======= ======= =======
The changes in incurred portfolio reserves principally relate to
business written in prior years. The changes are based upon an
evaluation of the insured portfolio in light of current economic
conditions and other relevant factors.
-15-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
(8) RELATED PARTY TRANSACTIONS
The Company has various agreements with subsidiaries of General
Electric Company ("GE") and GE Capital. These business transactions
include appraisal fees and due diligence costs associated with
underwriting structured finance mortgage-backed security business;
payroll and office expenses incurred by the Company's international
branch offices but processed by a GE subsidiary; investment fees
pertaining to the management of the Company's investment portfolio; and
telecommunication service charges. Approximately $3.2 million, $3.2
million and $1.0 million in expenses were incurred in 1995, 1994 and
1993, respectively, related to such transactions.
The Company also insured certain non-municipal issues with GE Capital
involvement as sponsor of the insured securitization and/or servicer of
the underlying assets. For some of these issues, GE Capital also
provides first loss protection in the event of default. Gross premiums
written on these issues amounted to $1.3 million in 1995, $2.5 million
in 1994, and $3.3 million in 1993.
The Company insures bond issues and securities in trusts that were
sponsored by affiliates of GE (approximately 1 percent of gross
premiums written in 1995 and 1994 and 2 percent in 1993).
(9) COMPENSATION PLANS
Officers and other key employees of the Company participate in the
Parent's incentive compensation, deferred compensation and profit
sharing plans. Expenses incurred by the Company under compensation
plans and bonuses amounted to $7.5 million, $12.2 million and $16.7
million in 1995, 1994 and 1993, respectively, before deduction for
related tax benefits.
(10) DIVIDENDS
Under New York insurance law, the Company may pay a dividend only from
earned surplus subject to the following limitations: (a) statutory
surplus after such dividend may not be less than the minimum required
paid-in capital, which was $2.1 million in 1995 and 1994, and (b)
dividends may not exceed the lesser of 10 percent of its surplus or 100
percent of adjusted net investment income, as defined by New York
insurance law, for the 12 month period ending on the preceding December
31, without the prior approval of the Superintendent of the New York
State Insurance Department. At December 31, 1995 and 1994, the amount
of the Company's surplus available for dividends was approximately
$100.2 million and $89.3 million, respectively.
During 1995, the company paid dividends of $25 million. No dividends
were paid during 1994 or 1993.
-16-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
(11) FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating fair values of financial instruments:
FIXED MATURITY SECURITIES: Fair values for fixed maturity securities
are based on quoted market prices, if available. If a quoted market
price is not available, fair values is estimated using quoted market
prices for similar securities. Fair value disclosure for fixed
maturity securities is included in the balance sheets and in Note 4.
SHORT-TERM INVESTMENTS: Short-term investments are carried at cost,
which approximates fair value.
CASH, RECEIVABLE FOR SECURITIES SOLD, AND PAYABLE FOR SECURITIES
PURCHASED: The carrying amounts of these items approximate their fair
values.
The estimated fair values of the Company's financial instruments at
December 31, 1995 and 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
------------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
Financial Assets
Cash
On hand and in demand accounts $ 199 $ 199 $1,766 $1,766
Short-term investments 91,032 91,032 75,674 75,674
Fixed maturity securities 2,141,584 2,141,584 1,889,910 1,889,910
</TABLE>
FINANCIAL GUARANTIES: The carrying value of the Company's financial
guaranties is represented by the unearned premium reserve, net of
deferred acquisition costs, and loss and loss adjustment expense
reserves. Estimated fair values of these guaranties are based on
amounts currently charged to enter into similar agreements (net of
applicable ceding commissions), discounted cash flows considering
contractual revenues to be received adjusted for expected prepayments,
the present value of future obligations and estimated losses, and
current interest rates. The estimated fair values of such financial
guaranties range between $412.8 million and $456.2 million compared to
a carrying value of $540.6 million as of December 31, 1995 and between
$518.1 million and $565.9 million compared to a carrying value of
$585.1 million as of December 31, 1994.
-17-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
CONCENTRATIONS OF CREDIT RISK
The Company considers its role in providing insurance to be credit
enhancement rather than credit substitution. The Company insures only
those securities that, in its judgment, are of investment grade
quality. The Company has established and maintains its own underwriting
standards that are based on those aspects of credit that the Company
deems important for the particular category of obligations considered
for insurance. Credit criteria include economic and social trends, debt
management, financial management and legal and administrative factors,
the adequacy of anticipated cash flows, including the historical and
expected performance of assets pledged for payment of securities under
varying economic scenarios and underlying levels of protection such as
insurance or overcollateralization.
In connection with underwriting new issues, the Company sometimes
requires, as a condition to insuring an issue, that collateral be
pledged or, in some instances, that a third-party guarantee be provided
for a term of the obligation insured by a party of acceptable credit
quality obligated to make payment prior to any payment by the Company.
The types and extent of collateral pledged varies, but may include
residential and commercial mortgages, corporate debt, government debt
and consumer receivables.
As of December 31, 1995, the Company's total insured principal exposure
to credit loss in the event of default by bond issuers was $98.7
billion, net of reinsurance of $20.7 billion. The Company's insured
portfolio as of December 31, 1995 was broadly diversified by geography
and bond market sector with no single debt issuer representing more
than 1% of the Company's principal exposure outstanding, net of
reinsurance.
As of December 31, 1995, the composition of principal exposure by type
of issue, net of reinsurance, was as follows (in millions):
NET
PRINCIPAL
OUTSTANDING
Municipal:
General obligation $43,308.2
Special revenue 38,137.9
Industrial revenue 2,480.0
Non-municipal 14,734.2
----------
Total $98,660.3
==========
-18-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
The Company is authorized to do business in 50 states, the District of
Columbia, and in the United Kingdom and France. Principal exposure outstanding
at December 31, 1995 by state, net of reinsurance, was as follows (in millions):
NET
PRINCIPAL
OUTSTANDING
California $ 10,440.2
Florida 8,869.3
Pennsylvania 8,653.4
New York 7,706.7
Illinois 5,697.5
Texas 5,478.7
New Jersey 4,181.9
Michigan 3,385.9
Arizona 2,776.9
Ohio 2,327.7
-------
Sub-total 59,518.2
Other states and International 39,142.1
---------
Total $98,660.3
=========
(12) COMMITMENTS
Total rent expense was $2.2 million, $2.6 million and $2.4 million in
1995, 1994 and 1993, respectively. For each of the next five years and
in the aggregate as of December 31, 1995, the minimum future rental
payments under noncancellable operating leases having remaining terms
in excess of one year approximate (in thousands):
YEAR AMOUNT
1996 $ 2,297
1997 2,909
1998 2,909
1999 2,909
2000 2,909
Subsequent to 2000 2,911
-----
Total minimum future rental payments $16,844
=======
-19-
<PAGE>
APPENDIX B
UNAUDITED FINANCIAL STATEMENTS FOR THE CERTIFICATE INSURER
<PAGE>
FINANCIAL GUARANTY INSURANCE COMPANY
===============================================================================
Unaudited Interim Financial Statements
June 30, 1996
Balance Sheets 1
Statements of Income 2
Statements of Cash Flows. 3
Notes to Unaudited Interim Financial Statements. 4
<PAGE>
Financial Guaranty Insurance
Company Balance Sheets
($ in Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---------------- -------------------
(Unaudited)
<S> <C> <C>
Assets
Fixed maturity securities, available for sale, at fair value
(amortized cost of $2,066,231 in 1996 and $2,043,453 in 1995) $2,057,812 $2,141,584
Short-term investments, at cost, which approximates market 133,832 91,032
Cash 1,294 199
Accrued investment income 37,753 37,347
Reinsurance receivable 7,358 7,672
Deferred policy acquisition costs 93,100 94,868
Property, plant and equipment net of
accumulated depreciation of $14,094 in
1996 and $12,861 in 1995 5,573 6,314
Prepaid reinsurance premiums 156,055 162,088
Prepaid expenses and other assets 50,908 39,198
--------------- ---------------
Total assets $2,543,685 $2,580,302
=============== ===============
Liabilities and Stockholder's Equity
Liabilities:
Unearned premiums 698,149 727,535
Losses and loss adjustment expenses 71,034 77,808
Ceded reinsurance payable 2,777 1,942
Accounts payable and accrued expenses 38,035 32,811
Due to parent 267 1,647
Current federal income taxes payable 67,077 51,296
Deferred federal income taxes payable 63,850 99,171
Payable for securities purchased 32,186 40,211
--------------- ---------------
Total liabilities 973,375 1,032,421
--------------- ---------------
Stockholder's Equity:
Common stock, par value $1,500 per share at June 30,
1996 and at December 31, 1995: 10,000 shares authorized,
issued and outstanding 15,000 15,000
Additional paid-in capital 334,011 334,011
Net unrealized (losses) gains on fixed maturity securities
available for sale, net of tax (5,472) 63,785
Foreign currency translation adjustment (2,296) (1,499)
Retained earnings 1,229,067 1,136,584
--------------- ---------------
Total stockholder's equity 1,570,310 1,547,881
--------------- ---------------
Total liabilities and stockholder's equity $2,543,685 $2,580,302
=============== ===============
</TABLE>
See accompanying notes to interim financial statements
-1-
<PAGE>
Financial Guaranty Insurance
Company Statements Of Income
($ in Thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1996 1995
(Unaudited)
<S> <C> <C>
Revenues:
Gross premiums written $ 45,481 $ 42,773
Ceded premiums (6,643) (5,965)
-------------- ------------
Net premiums written 38,838 36,808
Decrease in net unearned premiums 23,353 18,136
-------------- ------------
Net premiums earned 62,191 54,944
Net investment income 61,513 59,327
Net realized gains 8,348 17,446
-------------- ------------
Total revenues 132,052 131,717
-------------- ------------
Expenses:
Losses and loss adjustment expenses (2,702) 815
Policy acquisition costs 9,637 5,308
Other underwriting expenses 7,561 8,662
-------------- ------------
Total expenses 14,496 14,785
-------------- ------------
Income before provision for federal income
taxes 117,556 116,932
Provision for federal income taxes 25,071 25,066
-------------- ------------
Net income $ 92,485 $ 91,866
============== ============
</TABLE>
See accompanying notes to interim financial statements
-2-
<PAGE>
Financial Guaranty Insurance
Company Statements Of Cash Flow
($ in Thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1996 1995
(Unaudited)
(Unaudited)
Operating activities:
<S> <C> <C>
Net income $ 92,485 $ 91,866
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for deferred income taxes 2,400 11,991
Amortization of fixed maturity securities 398 1,096
Policy acquisition costs deferred (8,565) (10,254)
Amortization of deferred policy acquisition costs 10,333 5,308
Depreciation of fixed assets 1,233 1,167
Change in reinsurance receivable 314 4,569
Change in prepaid reinsurance premiums 6,033 5,877
Foreign currency translation adjustment (1,226) 972
Change in accrued investment income, prepaid
expenses and other assets (12,116) (3,483)
Change in unearned premiums (29,386) (24,013)
Change in losses and loss adjustment expense
reserves (6,774) (4,617)
Change in other liabilities 4,678 (11,076)
Change in current income taxes payable 15,781 (9,625)
Net realized gains on investments (8,348) (17,446)
------------ ------------
Net cash provided by operating activities 67,240 42,332
------------ ------------
Investing activities:
Sales or maturities of fixed maturity securities 406,676 478,328
Purchases of fixed maturity securities (429,529) (413,181)
Sales or maturities (purchases) of short-term
investments, net (42,800) (102,414)
Purchases of property and equipment, net (492) (354)
------------ ------------
Net cash used for investing activities (66,145) (37,621)
------------ ------------
Increase (decrease) in cash 1,095 4,711
Cash at beginning of period 199 1,766
------------ ------------
Cash at end of period $ 1,294 $ 477
============ ============
</TABLE>
See accompanying notes to interim financial statements
-3-
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements
June 30, 1996 and 1995
(Unaudited)
(1) Basis of Presentation
The interim financial statements of Financial Guaranty
Insurance Company (the Company) in this report reflect all
adjustments necessary, in the opinion of management, for a
fair statement of (a) results of operations for the six months
ended June 30, 1996 and 1995, (b) the financial position at
June 30, 1996 and December 31, 1995, and (c) cash flows for
the six months ended June 30, 1996 and 1995.
These interim financial statements should be read in
conjunction with the financial statements and related notes
included in the 1995 audited financial statements. The 1995
financial statements have been reclassified to conform to the
1996 presentation.
The preparation of financial statements in conformity with
generally accepted accounting principles ("GAAP") requires
management to make estimates and assumptions that effect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
(2) Statutory Accounting Practices
The financial statements are prepared on the basis of GAAP,
which differs in certain respects from accounting practices
prescribed or permitted by state insurance regulatory
authorities. The following are the significant ways in which
statutory basis accounting practices differ from GAAP:
(a) premiums are earned in proportion to the reduction of
the related risk rather than in proportion to the
coverage provided;
(b) policy acquisition costs are charged to current
operations as incurred rather than as related premiums
are earned;
(c) a contingency reserve is computed on the basis of
statutory requirements for the security of all
policyholders, regardless of whether loss contingencies
actually exist, whereas under GAAP, a reserve is
established based on an ultimate estimate of exposure;
(d) certain assets designated as "non-admitted assets" are
charged directly against surplus but are reflected as
assets under GAAP, if recoverable;
(e) federal income taxes are only provided with respect to
taxable income for which income taxes are currently
payable, while under GAAP taxes are also provided for
differences between the financial reporting and tax
bases of assets and liabilities;
(f) purchases of tax and loss bonds are reflected as
admitted assets, while under GAAP they are recorded as
federal income tax payments; and
(g) all fixed income investments are carried at amortized
cost, rather than at fair value for securities
classified as "Available for Sale" under GAAP.
-4 -
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements
================================================================================
The following is a reconciliation of the net income and stockholder's equity of
Financial Guaranty prepared on a GAAP basis to the corresponding amounts
reported on a statutory basis for the periods indicated below:
<TABLE>
<CAPTION>
Six Months Ended June 30,
1996 1995
Net Stockholder's Net Stockholder's
Income Equity Income Equity
<S> <C> <C> <C> <C>
GAAP basis amount $92,485 $1,570,310 $ 91,866 $1,441,820
Premium revenue recognition (4,061) (170,988) (9,905) (154,322)
Deferral of acquisition costs 1,768 (93,100) (4,946) (95,874)
Contingency reserve - (415,603) - (357,817)
Non-admitted assets - (4,837) - (6,579)
Case-basis losses incurred and salvage recoverable
(3,394) (3,446) 6,631 2,531
Portfolio loss reserves - 24,000 (10,900) 35,200
Deferral of income tax 2,400 66,796 11,991 57,466
Unrealized gains on fixed maturity securities held at
fair value, net of taxes - 5,472 - (27,827)
Profit commission 1,273 (4,471) 4,909 (3,931)
Contingency reserve tax deduction - 85,176 - 78,196
Provision for unauthorized reinsurance - - - (266)
Allocation of tax benefits due to Parent's net
operating loss to the Company (4) 10,287 244 9,898
------------- ------------- ---------- -----------
Statutory basis amount $ 90,467 $1,069,596 $89,845 $978,495
======== ========== ======= ========
</TABLE>
-5-
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements
June 30, 1996 and 1995
(Unaudited)
(3) Dividends
Under New York Insurance Law, the Company may pay a dividend
only from earned surplus subject to the following limitations:
(bullet) Statutory surplus after dividends may not be less than
the minimum required paid-in capital, which was
$2,100,000 in 1996.
(bullet) Dividends may not exceed the lesser of 10 percent of
its surplus or 100 percent of adjusted net investment
income, as defined therein, for the twelve month
period ending on the preceding December 31, without
the prior approval of the Superintendent of the New
York State Insurance Department.
The amount of the Company's surplus available for dividends
during 1996 is approximately $106.2 million.
(4) Income Taxes
The Company's effective Federal corporate tax rate (21.3
percent and 21.4 percent for the six months ended June 30,
1996 and 1995, respectively) is less than the statutory
corporate tax rate (35 percent in 1996 and 1995) on ordinary
income due to permanent differences between financial and
taxable income, principally tax-exempt interest.
(5) Reinsurance
In accordance with Statement of Financial Accounting Standards
No. 113 ("SFAS 113"), "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts",
adopted in 1993, the Company reports assets and liabilities
relating to reinsured contracts gross of the effects of
reinsurance. Net premiums earned are shown net of premiums
ceded of $12.7 million and $11.6 million, respectively, for
the six months ended June 30, 1996 and 1995.
- 6 -
<PAGE>
8
<PAGE>
PROSPECTUS
First Union Residential Securitization Transactions, Inc.,
Depositor
Residential Mortgage Pass-Through Certificates
(Issuable in Series)
This Prospectus relates to Residential Mortgage Pass-Through Certificates
(the "Certificates"), which may be sold from time to time in one or more Series
(each, a "Series") by First Union Residential Securitization Transactions, Inc.
(the "Depositor") on terms determined at the time of sale and described in this
Prospectus and the related Prospectus Supplement. The Certificates of a Series
will evidence interests in a trust fund (a "Trust Fund"). As specified in the
related Prospectus Supplement, the Trust Fund for a Series of Certificates will
include certain mortgage related assets (the "Mortgage Assets") consisting of
(i) promissory notes or other evidences of indebtedness secured by first, second
or more junior liens on fee simple or leasehold interests in one- to four-family
properties, including participations in any of the foregoing ("Mortgage Loans"),
(ii) mortgage pass-through securities (the "Agency Securities") issued or
guaranteed by the Government National Mortgage Association ("GNMA"), the Federal
National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage
Corporation ("FHLMC") or (iii) mortgage-backed securities that are not
guaranteed by GNMA, FNMA or FHLMC ("Private Mortgage-Backed Securities").
Private Mortgage-Backed Securities will have been previously offered and sold
pursuant to an effective registration statement under the Securities Act of
1933. The Mortgage Assets will be acquired by the Depositor from one or more
institutions (each, a "Seller"), which may be affiliates of the Depositor, and
conveyed by the Depositor to the related Trust Fund. A Trust Fund also may
include insurance policies, cash accounts, reserve funds, reinvestment income,
guaranties, letters of credit or other forms of credit enhancement described
herein and in the related Prospectus Supplement, or any combination thereof. In
addition, if so specified in the related Prospectus Supplement, the property of
the Trust Fund will include monies on deposit in a trust account (the
"Pre-Funding Account") to be established with the Trustee, which will be used to
purchase at a predetermined price additional Mortgage Assets (the "Subsequent
Mortgage Assets") from the Depositor from time to time within three months after
the issuance of the Certificates.
Each Series of Certificates will be issued in one or more classes. Each
class of Certificates of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Mortgage Assets in the related Trust Fund. A Series of
Certificates may include one or more classes that are senior or subordinate in
right of payment to one or more other classes of Certificates of such Series.
One or more classes of Certificates of a Series may be entitled to receive
principal distributions with disproportionate, nominal or no interest
distributions or interest distributions with disproportionate, nominal or no
principal distributions or any combination thereof prior to one or more other
classes of Certificates of such Series or after the occurrence of specified
events, in each case as specified in the related Prospectus Supplement.
Distributions among classes of Certificates in a Series may differ as to timing,
sequential order and priority.
(Continued on next page)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS OR THE RELATED PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prior to issuance there will have been no market for the Certificates of
any Series, and there can be no assurance that a secondary market for any
Certificates will develop or, if it does develop, that it will continue. This
Prospectus may not be used to consummate sales of a Series of Certificates
unless accompanied by a Prospectus Supplement.
Offers of the Certificates may be made through one or more different
methods, including offerings through underwriters, including First Union Capital
Markets Corp., an affiliate of the Depositor, as more fully described under
"Method of Distribution" herein and in the related Prospectus Supplement.
The date of this Prospectus is August 19, 1996.
<PAGE>
Distributions to Certificateholders will be made monthly, quarterly,
semi-annually or at such other intervals and on the dates specified in the
related Prospectus Supplement. Distributions on the Certificates of a Series
will be made from the assets of the related Trust Fund or Funds or other assets
pledged for the benefit of the Certificateholders as specified in the related
Prospectus Supplement.
The Certificates of any Series will not represent an obligation of or
interest in the Depositor or any affiliate thereof, including, without
limitation, First Union National Bank of North Carolina, and will not be insured
or guaranteed by any governmental agency or instrumentality or, unless otherwise
specified in the related Prospectus Supplement, by any other person. Unless
otherwise specified in the related Prospectus Supplement, the only obligations
of the Depositor with respect to a Series of Certificates will be to obtain
certain representations and warranties from each Seller and to assign to the
Trustee for the related Series of Certificates the Depositor's rights with
respect to such representations and warranties. The principal obligations of the
Master Servicer named in the related Prospectus Supplement with respect to the
related Series of Certificates will be limited to obligations pursuant to
certain representations and warranties and to its contractual servicing
obligations, including any obligation it may have to advance delinquent payments
on the Mortgage Assets in the related Trust Fund.
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 Mortgage Assets in the related Trust Fund and the timing of receipt of such
payments as described herein and in the related Prospectus Supplement. A Trust
Fund may be subject to early termination under the circumstances described
herein and in the related Prospectus Supplement.
If specified in a Prospectus Supplement, an election may be made to treat a
Trust Fund or specified portion thereof as a "real estate mortgage investment
conduit" ("REMIC") for federal income tax purposes. See "Certain Federal Income
Tax Consequences."
This Prospectus and the related Prospectus Supplements may be used by First
Union Capital Markets Corp. in connection with offers and sales related to
market-making transactions in any Series of the Certificates. First Union
Capital Markets Corp. may act as principal or agent in such transactions. Such
sales will be made at prices related to prevailing market prices at the time of
the sale.
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the securities covered by such Prospectus Supplement,
whether or not participating in the distribution thereof, may be required to
deliver such Prospectus Supplement and this Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus and Prospectus Supplement when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
2
<PAGE>
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to the Certificates of each Series to be
offered hereunder will, among other things, set forth with respect to such
Certificates, as appropriate: (i) a description of the class or classes of
Certificates and the related Pass-Through Rate or method of determining the
amount of interest, if any, to be passed through to each such class; (ii) the
initial aggregate Certificate Balance (which may be a notional principal amount)
of each class of Certificates included in such Series, Distribution Dates
relating to such Series and, if applicable, the initial and final scheduled
Distribution Dates for each class; (iii) information as to the assets comprising
the Trust Fund, including the general characteristics of the Mortgage Assets
included therein and, if applicable, the insurance, surety bonds, guaranties,
letters of credit or other instruments or agreements included in the Trust Fund,
and the amount and source of any Reserve Fund; (iv) the circumstances, if any,
under which the Trust Fund may be subject to early termination; (v) the method
used to calculate the amount of principal, if any, to be distributed with
respect to each class of Certificates; (vi) the order of application of
distributions to each of the classes within such Series, whether sequential, pro
rata, or otherwise; (vii) the Distribution Dates with respect to such Series;
(viii) additional information with respect to the plan of distribution of such
Certificates; (ix) whether one or more REMIC elections will be made and
designation of the regular interests and residual interests; (x) the aggregate
original percentage ownership interest in the Trust Fund to be evidenced by each
class of Certificates; (xi) information as to the nature and extent of
subordination with respect to any class of Certificates that is subordinate in
right of payment to any other class; and (xii) information as to the Seller, the
Master Servicer and the Trustee.
AVAILABLE INFORMATION
The Depositor 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, and the Prospectus Supplement relating to each
Series of Certificates contains summaries of the material terms of the documents
referred to herein and therein, but do not contain all of the information set
forth in the Registration Statement pursuant to the Rules and Regulations of the
Commission. For further information, reference is made to such Registration
Statement and the exhibits thereto. Such Registration Statement and exhibits can
be inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at its Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at its Regional Offices located as follows:
Chicago Regional Office, Northwest Atrium Center, 500 West Madison Street,
Chicago, Illinois 60661; and New York Regional Office, Seven World Trade Center,
New York, New York 10048.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Certificates
offered hereby and thereby nor an offer of the Certificates to any person in any
state or other jurisdiction in which such offer would be unlawful. The delivery
of this Prospectus at any time does not imply that information herein is correct
as of any time subsequent to its date.
REPORTS TO CERTIFICATEHOLDERS
Periodic and annual reports concerning the related Trust Fund for a Series
of Securities are required under the related Agreement to be forwarded to
Certificateholders. Unless otherwise specified in the related Prospectus
Supplement, such reports will not be examined and reported on by an independent
public accountant. See "Description of the Certificates -- Reports to
Certificateholders."
3
<PAGE>
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports filed
or caused to be filed by the Depositor with respect to a Trust Fund pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the termination
of an offering of Certificates evidencing interests therein. The Depositor will
provide or cause to be provided without charge to each person to whom this
Prospectus is delivered in connection with the offering of one or more classes
of Certificates, a list identifying all filings with respect to the related
Trust Fund pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act,
since the Depositor's latest fiscal year covered by its annual report on Form
10-K and a copy of any or all documents or reports incorporated herein by
reference, in each case to the extent such documents or reports relate to one or
more of such classes of such Certificates, other than the exhibits to such
documents (unless such exhibits are specifically incorporated by reference in
such documents). Requests to the Depositor should be directed to: First Union
Residential Securitization Transactions, Inc., 301 South College Street,
Charlotte, North Carolina 28202-0600, telephone number (704) 383-3624.
4
<PAGE>
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the related Prospectus
Supplement with respect to the Series offered thereby. The Prospectus Supplement
for each Series will specify the extent (if any) to which the terms of such
Series or the related Trust Fund vary from the general description of the
Certificates and Trust Funds which is contained in this Prospectus. Capitalized
terms used herein shall have the respective meanings assigned them in the "Index
to Defined Terms."
<TABLE>
<S> <C>
Title of Securities................................... Residential Mortgage Pass-Through Certificates (the "Certificates"),
issuable in series (each, a "Series"). Each Series will be issued
under a separate Pooling and Servicing Agreement (each, an
"Agreement") to be entered into with respect to each such Series.
Depositor............................................. First Union Residential Securitization Transactions, Inc., a North
Carolina corporation. The Depositor is a wholly-owned, limited
purpose subsidiary of First Union National Bank of North Carolina
("FUNB"), a national banking association (a wholly-owned subsidiary
of First Union Corporation, a North Carolina corporation). Neither
First Union Corporation nor any of its affiliates, including the
Depositor, has guaranteed, or is or will be otherwise obligated with
respect to, the Certificates of any Series.
Trustee............................................... The trustee (the "Trustee") for each Series of Certificates will be
specified in the related Prospectus Supplement. See "The Pooling and
Servicing Agreement" herein for a description of the Trustee's rights
and obligations.
Master Servicer....................................... The entity or entities named as Master Servicer (the "Master
Servicer") in the related Prospectus Supplement, one of which may be
an affiliate of the Depositor. See "The Pooling and Servicing
Agreement -- Certain Matters Regarding the Master Servicer and the
Depositor."
Sub-Servicer.......................................... A "Sub-Servicer" may be specified in the related Prospectus
Supplement, which may be an affiliate of the Depositor.
Closing Date.......................................... The date (the "Closing Date") of initial issuance of a Series of
Certificates, as specified in the related Prospectus Supplement.
Trust Fund Assets..................................... The Trust Fund for a Series of Certificates will include certain
mortgage related assets (the "Mortgage Assets") consisting of (a) a
pool (a "Mortgage Pool") of Mortgage Loans, (b) Agency Securities or
(c) Private Mortgage-Backed Securities, together with payments in
respect of such Mortgage Assets and certain other accounts,
obligations or agreements, in each case as specified in the related
Prospectus Supplement. To the extent provided in the related
Prospectus Supplement, the Depositor will be obligated (subject only
to the availability thereof) to sell at a predetermined price, and
the Trust Fund for a Series of Certificates will be obligated to
purchase (subject to the satisfaction of certain conditions described
in the applicable Agreement), additional Mortgage Assets (the
"Subsequent Mortgage Assets") from time to time (as frequently as
daily) within three months after the issuance of the Certificates
having an aggregate principal balance approximately equal to the
amount on deposit in the Pre-Funding Account (the "Pre-Funded
Amount") on such Closing Date.
A. Single Family Loans................................ Unless otherwise specified in the related Prospectus Supplement,
Mortgage Loans will be secured by first, second or more junior liens
on fee simple or leasehold interests in one-to four-family
properties.
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
If so specified, the Mortgage Loans may include cooperative apartment
loans ("Cooperative Loans") secured by security interests in shares
issued by private, nonprofit, cooperative housing corporations
("Cooperatives") and in the related proprietary leases or occupancy
agreements granting exclusive rights to occupy specific dwelling
units in such Cooperatives' buildings. If so specified in the related
Prospectus Supplement, the Mortgage Assets of the related Trust Fund
may include mortgage participation certificates evidencing interests
in Mortgage Loans. Such Mortgage Loans may be conventional loans
(i.e., loans that are not insured or guaranteed by any governmental
agency), insured by the Federal Housing Authority ("FHA") or
partially guaranteed by the Veterans' Administration ("VA") as
specified in the related Prospectus Supplement. If specified in the
related Prospectus Supplement, the Mortgage Loans may be comprised of
home equity loans ("Home Equity Loans"). Such Home Equity Loans will
be secured by first or second or more junior liens on fee simple or
leasehold interests in one- to four-family properties. See "Mortgage
Loan Program -- Underwriting Standards."
The payment terms of the Mortgage Loans to be included in a Trust
Fund will be described in the related Prospectus Supplement and may
include any of the following features or combinations thereof or
other features described in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable from
time to time in relation to an index (which will be specified in the
related Prospectus Supplement), a rate that is fixed for a period of
time or under certain circumstances and is followed by an adjustable
rate, a rate that otherwise varies from time to time, or a rate that
is convertible from an adjustable rate to a fixed rate or to a
different adjustable rate. Changes to an adjustable rate may be
subject to periodic limitations, maximum rates, minimum rates or a
combination of such limitations. Accrued interest may be deferred and
added to the principal of a loan for such periods and under such
circumstances as may be specified in the related Prospectus
Supplement. Mortgage Loans may provide for the payment of interest at
a rate lower than the specified Mortgage Rate for a period of time or
for the life of the loan, and the amount of any difference may be
contributed from funds supplied by a third party.
(b) Principal may be payable on a level debt service basis to fully
amortize the loan over its term, may be calculated on the basis of an
assumed amortization schedule that is significantly longer than the
original term to maturity or on an interest rate that is different
from the interest rate on the Mortgage Loan or may not be amortized
during all or a portion of the original term. Payment of all or a
substantial portion of the principal may be due on maturity ("balloon
payments"). Principal may include interest that has been deferred and
added to the principal balance of the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed for the
life of the loan, may increase over a specified period of time or may
change from period to period. Mortgage Loans may include limits on
periodic increases or decreases in the amount of monthly payments and
may include maximum or minimum amounts of monthly payments.
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
(d) The Mortgage Loans generally may be prepaid at any time without
payment of any prepayment fee. If so specified in the related
Prospectus Supplement, prepayments of principal may be subject to a
prepayment fee, which may be fixed for the life of any such Mortgage
Loan or may decline over time, and may be prohibited for the life of
any such Mortgage Loan or for certain periods ("lockout periods").
Certain Mortgage Loans may permit prepayments after expiration of the
applicable lockout period and may require the payment of a prepayment
fee in connection with any such subsequent prepayment. Other Mortgage
Loans may permit prepayments without payment of a fee unless the
prepayment occurs during specified time periods.
(e) The Mortgage Loans may include "due-on-sale" clauses which permit
the mortgagee to demand payment of the entire Mortgage Loan in
connection with the sale or certain transfers of the related
Mortgaged Property. Other Mortgage Loans may be assumable by persons
meeting the then applicable underwriting standards of the Seller.
(f) Certain Mortgage Loans may be originated or acquired in
connection with employee relocation programs. The real property
constituting security for repayment of a Mortgage Loan may be located
in any one of the fifty states, the District of Columbia, Guam,
Puerto Rico or any other territory of the United States.
(g) Unless otherwise specified in the related Prospectus Supplement,
all of the Mortgage Loans will be covered by standard hazard
insurance policies insuring against losses due to fire and various
other causes. The Mortgage Loans will be covered by primary mortgage
insurance policies to the extent provided in the related Prospectus
Supplement.
All Mortgage Loans will have been purchased by the Depositor, either
directly or through an affiliate, from one or more Sellers.
B. Agency Securities.................................. The Agency Securities evidenced by a Series of Certificates will
consist of (i) mortgage participation certificates issued and
guaranteed as to timely payment of interest and, unless otherwise
specified in the related Prospectus Supplement, ultimate payment of
principal by the Federal Home Loan Mortgage Corporation ("FHLMC
Certificates"), (ii) Guaranteed Mortgage Pass-Through Certificates
issued and guaranteed as to timely payment of principal and interest
by the Federal National Mortgage Association ("FNMA Certificates"),
(iii) fully modified pass-through mortgage-backed certificates
guaranteed as to timely payment of principal and interest by the
Government National Mortgage Association ("GNMA Certificates"), (iv)
stripped mortgage-backed securities representing an undivided
interest in all or a part of either the principal distributions (but
not the interest distributions) or the interest distributions (but
not the principal distributions) or in some specified portion of the
principal and interest distributions (but not all of such
distributions) on certain FHLMC, FNMA or GNMA Certificates and,
unless otherwise specified in the related Prospectus Supplement,
guaranteed to the same extent as the underlying securities, (v)
another type of pass-through certificate issued or guaranteed by
GNMA, FNMA or FHLMC and described in the related Prospectus
Supplement, or (vi) a combination of such
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
Agency Securities. All GNMA Certificates will be backed by the full
faith and credit of the United States. No FHLMC or FNMA Certificates
will be backed, directly or indirectly, by the full faith and credit
of the United States.
The Agency Securities may consist of pass-through securities issued
under FHLMC's Cash or Guarantor Program, the GNMA I Program, the GNMA
II Program or another program specified in the related Prospectus
Supplement. The payment characteristics of the Mortgage Loans
underlying the Agency Securities will be described in the related
Prospectus Supplement.
C. Private Mortgage-Backed Securities................. Private Mortgage-Backed Securities may include (a) mortgage pass-
through certificates representing beneficial interests in a Mortgage
Pool or (b) collateralized mortgage obligations secured by Mortgage
Loans. Private Mortgage-Backed Securities may include stripped
mortgage-backed securities representing an undivided interest in all
or a part of either the principal distributions (but not the interest
distributions) or the interest distributions (but not the principal
distributions) or in some specified portion of the principal and
interest distributions (but not all of such distributions) on certain
Mortgage Loans. Although individual Mortgage Loans underlying a
Private Mortgage-Backed Security may be insured or guaranteed by the
United States or an agency or instrumentality thereof, they need not
be, and the Private Mortgage-Backed Securities themselves will not be
so insured or guaranteed. Private Mortgage-Backed Securities will
have been previously offered and sold pursuant to an effective
registration statement under the Securities Act of 1933, as amended,
or were exempt from registration thereunder. Unless otherwise
specified in the related Prospectus Supplement relating to a Series
of Certificates, payments on the Private Mortgage-Backed Securities
will be distributed directly to the Trustee as registered owner of
such Private Mortgage-Backed Securities. See "The Trust Fund --
Private Mortgage-Backed Securities" herein.
Description of the Certificates....................... Each Certificate will represent the interest specified in the related
Prospectus Supplement in a Trust Fund created by the Depositor
pursuant to an Agreement among the Depositor, the Master Servicer and
the Trustee for the related Series. The Certificates of any Series
may be issued in one or more classes as specified in the related
Prospectus Supplement. A Series of Certificates may include one or
more classes of senior Certificates (collectively, the "Senior
Certificates") and one or more classes of subordinate Certificates
(collectively, the "Subordinated Certificates"). Certain Series or
classes of Certificates may be covered by insurance policies or other
forms of credit enhancement, in each case as described herein and in
the related Prospectus Supplement.
One or more classes of Certificates of each Series (i) may be
entitled to receive distributions allocable only to principal, only
to interest or to any combination thereof; (ii) may be entitled to
receive distributions only of prepayments of principal throughout the
lives of the Certificates or during specified periods; (iii) may be
subordinated in the right to receive distributions of scheduled
payments of principal, prepayments of principal, interest or any
combination thereof to one or more other classes of Certificates of
such Series throughout the lives of the Certificates or during
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
specified periods; (iv) may be entitled to receive such distributions
only after the occurrence of events specified in the related
Prospectus Supplement; (v) may be entitled to receive distributions
in accordance with a schedule or formula or on the basis of
collections from designated portions of the assets in the related
Trust Fund; (vi) as to Certificates entitled to distributions
allocable to interest, may be entitled to receive interest at a fixed
rate or a rate that is subject to change from time to time; and (vii)
as to Certificates entitled to distributions allocable to interest,
may be entitled to distributions allocable to interest only after the
occurrence of events specified in the related Prospectus Supplement
and may accrue interest until such events occur, in each case as
specified in the related Prospectus Supplement. The timing, amounts,
sequential order and priority of such distributions may vary among
classes, over time, or otherwise as specified in the related
Prospectus Supplement.
Distributions on the Certificates..................... Distributions on the Certificates entitled thereto will be made
monthly, quarterly, semi-annually or at such other intervals and on
the dates specified in the related Prospectus Supplement (each, a
"Distribution Date") out of the payments received in respect of the
assets of the related Trust Fund or other assets pledged for the
benefit of the Certificates as specified in the related Prospectus
Supplement. The amount allocable to payments of principal and
interest on any Distribution Date will be determined as specified in
the related Prospectus Supplement. Unless otherwise specified in the
related Prospectus Supplement, all distributions will be made pro
rata to Certificateholders of the class entitled thereto.
Unless otherwise specified in the related Prospectus Supplement, the
aggregate original Certificate Balance of the Certificates will equal
the aggregate distributions allocable to principal that such
Certificates will be entitled to receive. If specified in the related
Prospectus Supplement, the Certificates will have an aggregate
original Certificate Balance equal to the aggregate unpaid principal
balance of the Mortgage Assets as of the first day of the month of
creation of the Trust Fund and will bear interest in the aggregate at
a rate equal to the interest rate borne by the underlying Mortgage
Loans (the "Mortgage Rate"), Agency Securities or Private
Mortgage-Backed Securities, net of the aggregate servicing fees and
any other amounts specified in the related Prospectus Supplement (the
"Pass-Through Rate").
The rate at which interest will be passed through to holders of each
class of Certificates entitled thereto may be a fixed rate or a rate
that is subject to change from time to time from the time and for the
periods, in each case, as specified in the related Prospectus
Supplement. Any such rate may be calculated on a loan-by-loan,
weighted average or other basis, in each case as described in the
related Prospectus Supplement.
Credit Enhancement.................................... The assets in a Trust Fund or the Certificates of one or more classes
in the related Series may have the benefit of one or more types of
credit enhancement described herein and in the related Prospectus
Supplement. The protection against losses afforded by any such credit
support may be limited. The type, characteristics and amount of
credit enhancement will be determined based on the
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
characteristics of the Mortgage Loans underlying or comprising the
Mortgage Assets and other factors and will be established on the
basis of requirements of each Rating Agency rating the Certificates
of such Series. One or more forms of credit enhancement may be
provided by an affiliate or affiliates of the Depositor. See "Credit
Enhancement" herein. Credit enhancement for a Series may include one
or more of the following types or such other credit enhancement
specified in the related Prospectus Supplement:
A. Subordination...................................... A Series of Certificates may consist of one or more classes of Senior
Certificates and one or more classes of Subordinated Certificates.
The rights of the holders of the Subordinated Certificates of a
Series to receive distributions with respect to the assets in the
related Trust Fund will be subordinated to such rights of the holders
of the Senior Certificates of the same Series to the extent described
in the related Prospectus Supplement. This subordination is intended
to enhance the likelihood of regular receipt by holders of Senior
Certificates of the full amount of their scheduled monthly payments
of principal and interest. The protection afforded to the holders of
Senior Certificates of a Series by means of the subordination feature
will be accomplished by (i) the preferential right of such holders to
receive, prior to any distribution being made in respect of the
related Subordinated Certificates, the amounts of principal and
interest due them on each Distribution Date out of the funds
available for distribution on such date in the related Collection
Account and, to the extent described in the related Prospectus
Supplement, by the right of such holders to receive future
distributions on the assets in the related Trust Fund that would
otherwise have been payable to the holders of Subordinated
Certificates; (ii) reducing the ownership interest of the related
Subordinated Certificates; (iii) a combination of clauses (i) and
(ii) above; or (iv) as otherwise described in the related Prospectus
Supplement. If so specified in the related Prospectus Supplement,
subordination may apply only in the event of certain types of losses
not covered by other forms of credit support, such as hazard losses
not covered by standard hazard insurance policies or losses due to
the bankruptcy or fraud of the borrower. The related Prospectus
Supplement will set forth information concerning, among other things,
the amount of subordination of a class or classes of Subordinated
Certificates in a Series, the circumstances in which such
subordination will be applicable, and the manner, if any, in which
the amount of subordination will decrease over time.
B. Reserve Fund....................................... One or more reserve funds (each, a "Reserve Fund") may be established
and maintained for each Series. The related Prospectus Supplement
will specify whether or not any such Reserve Fund will be included in
the corpus of the Trust Fund for such Series and will also specify
the manner of funding the related Reserve Fund and the conditions
under which the amounts in any such Reserve Fund will be used to make
distributions to holders of Certificates of a particular class or
released from the related Trust Fund.
C. Mortgage Pool Insurance Policy..................... A mortgage pool insurance policy or policies ("Mortgage Pool
Insurance Policy") may be obtained and maintained for a Series, which
shall be limited in scope, covering defaults on the related Mortgage
Loans in an initial amount equal to a specified percentage of the
aggregate principal balance of all Mortgage Loans included in
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
the Mortgage Pool as of the first day of the month of issuance of the
related Series of Certificates or such other date as is specified in
the related Prospectus Supplement (the "Cut-off Date").
D. Special Hazard Insurance Policy.................... A special hazard insurance policy or policies ("Special Hazard
Insurance Policy") may be obtained and maintained for a Series,
covering certain physical risks that are not otherwise insured
against by standard hazard insurance policies. Each Special Hazard
Insurance Policy will be limited in scope and will cover losses
pursuant to the provisions of each such Special Hazard Insurance
Policy as described in the related Prospectus Supplement.
E. Bankruptcy Bond.................................... A bankruptcy bond or bonds ("Bankruptcy Bonds") may be obtained
covering certain losses resulting from action that may be taken by a
bankruptcy court in connection with a Mortgage Loan. The level of
coverage and the limitations in scope of each Bankruptcy Bond will be
specified in the related Prospectus Supplement.
F. FHA Insurance and VA Guarantee..................... All or a portion of the Mortgage Loans in a Mortgage Pool may be
insured by FHA insurance ("FHA Insurance") and may be partially
guaranteed by the VA ("VA Insurance").
G. Cross Support...................................... If specified in the related Prospectus Supplement, the beneficial
ownership of separate groups of assets included in a Trust Fund may
be evidenced by separate classes of the related Series of
Certificates. In such case, credit support may be provided by a
cross-support feature which requires that distributions be made with
respect to Certificates evidencing beneficial ownership of one or
more asset groups prior to distributions to Subordinated Certificates
evidencing a beneficial ownership interest in other asset groups
within the same Trust Fund.
H. Limited Guarantee.................................. If specified in the related Prospectus Supplement, credit enhancement
may be provided in the form of a limited financial guarantee
("Limited Guarantee") issued by a guarantor named therein.
I. Letter of Credit................................... Alternative credit support with respect to a Series of Certificates
may be provided by the issuance of a letter of credit ("Letter of
Credit") by the bank or financial institution specified in the
related Prospectus Supplement. The coverage, amount and frequency of
any reduction in coverage provided by a Letter of Credit issued with
respect to a Series of Certificates will be set forth in the related
Prospectus Supplement.
J. Surety Bonds....................................... If specified in the related Prospectus Supplement, credit support
with respect to one or more classes of Certificates of a Series may
be provided by the issuance of a surety bond ("Surety Bond") issued
by a financial guarantee insurance company specified in the related
Prospectus Supplement. The coverage, amount and frequency of any
reduction in coverage provided by a Surety Bond will be set forth in
the related Prospectus Supplement.
K. Overcollateralization.............................. If specified in the related Prospectus Supplement, credit support may
consist of overcollateralization whereby the aggregate principal
amount of the Mortgage Assets, including any Subsequent Mortgage
Assets, exceeds the aggregate Certificate Balance of the
Certificates. Such overcollateralization may exist on the Closing
Date or develop thereafter as a result of the application of certain
interest collections, in excess of amounts necessary to pay the
Pass-Through Rate on the
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
Certificates, received in connection with the Mortgage Assets,
including any Subsequent Mortgage Assets. The existence of any
overcollateralization and the manner, if any, by which it increases
or decreases, will be set forth in the related Prospectus Supplement.
Advances.............................................. Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer and, if applicable, each mortgage servicing
institution that services a Mortgage Loan in a Mortgage Pool on
behalf of the Master Servicer (a "Sub-Servicer") will be obligated to
advance amounts (each, an "Advance") corresponding to delinquent
principal and interest payments (or, in the case of Home Equity
Loans, interest payments only) on such Mortgage Loan (including, in
the case of Cooperative Loans, unpaid maintenance fees or other
charges under the related proprietary lease) until the first day of
the month following the date on which the related Mortgaged Property
is sold at a foreclosure sale or the related Mortgage Loan is
otherwise liquidated, or until such other time as specified in the
related Prospectus Supplement. Any obligation to make Advances may be
subject to limitations as specified in the related Prospectus
Supplement. Advances will be reimbursable to the extent described
herein and in the related Prospectus Supplement.
Optional Termination.................................. The Master Servicer or, if specified in the related Prospectus
Supplement, the holder of the residual interest in a REMIC may have
the option to effect early retirement of a Series of Certificates
through the purchase of the Mortgage Assets and other assets in the
related Trust Fund under the circumstances and in the manner
described in "The Pooling and Servicing Agreement -- Termination;
Optional Termination" herein and in the related Prospectus
Supplement. In addition, if the related Prospectus Supplement
provides that the property of a Trust Fund will include a Pre-Funding
Account (as such term is defined in the related Prospectus
Supplement, the "Pre-Funding Account"), a portion of a Series of
Certificates will be subject to early retirement on or immediately
following the end of the Funding Period (as such term is defined in
the related Prospectus Supplement, the "Funding Period") in an amount
and manner specified in the related Prospectus Supplement.
Legal Investment...................................... The Prospectus Supplement for each series of Certificates will
specify which, if any, of the Classes of Certificates offered thereby
will constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"). Classes
of Certificates that qualify as "mortgage related securities" will be
legal investments for certain types of institutional investors to the
extent provided in SMMEA, subject, in any case, to any other
regulations that may govern investments by such institutional
investors. Institutions whose investment activities are subject to
review by federal or state authorities should consult with their
counsel or the applicable authorities to determine whether an
investment in a particular class of Certificates (whether or not such
class constitutes a "mortgage related security") complies with
applicable guidelines, policy statements or restrictions. See "Legal
Investment."
Certain Federal Income Tax Consequences............... The federal income tax consequences to Certificateholders will vary
depending on whether one or more elections are made to treat the
Trust Fund or specified portions thereof as a "real estate mortgage
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
investment conduit" ("REMIC") under the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"). The Prospectus
Supplement for each Series of Certificates will specify whether such
an election will be made. See "Certain Federal Income Tax
Consequences."
ERISA Considerations.................................. A fiduciary of any employee benefit plan or other retirement plan or
arrangement subject to the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or the Code should carefully review with
its legal advisors whether the purchase or holding of Certificates
could give rise to a transaction prohibited or not otherwise
permissible under ERISA or the Code. See "ERISA Considerations."
Certain classes of Certificates may not be transferred unless the
Trustee and the Depositor are furnished with a letter of
representations or an opinion of counsel to the effect that such
transfer will not result in a violation of the prohibited transaction
provisions of ERISA and the Code and will not subject the Trustee,
the Depositor or the Master Servicer to additional obligations. See
"Description of the Certificates -- General" and "ERISA
Considerations."
Rating................................................ It is a condition to the issuance of the Certificates of any Series
offered hereby that they be rated in one of the four highest rating
categories by at least one nationally recognized statistical rating
organization (a "Rating Agency").
</TABLE>
13
<PAGE>
RISK FACTORS
Limited Liquidity. Although the Prospectus Supplement for a Series of
Certificates may indicate that the underwriter intends to make a market in such
Certificates, it is under no obligation to do so. There can be no assurance that
a secondary market will develop or, if a secondary market does develop, that it
will provide holders of such Certificates with liquidity of investment or that
it will continue for the lives of such Certificates. The Certificates will not
be listed on any securities exchange.
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
Mortgage Loan (a "Mortgagor"), it is possible that the holders of the related
Certificates could experience a loss with respect to such Mortgagor's Mortgage
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 Mortgage Loan, thus delaying or reducing the amount received by the
holders of the related Certificates with respect to such Mortgage Loan.
Moreover, if a bankruptcy court prevents the transfer of the related Mortgaged
Property to the related Trust Fund, any remaining balance on such Mortgage Loan
may not be recoverable. See "Mortgage Loan Program" herein and "FUNB and Its
Mortgage Program -- Delinquency and Loan Loss Experience" in the related
Prospectus Supplement for further information regarding the rates of delinquency
and net losses experienced on the mortgage loans included in FUNB's servicing
portfolio.
Local Real Estate Markets. An overall decline in the residential real
estate markets in the states in which the Mortgaged Properties are located could
adversely affect the values of the Mortgaged Properties such that the aggregate
outstanding balance of the Mortgage Loans equals or exceeds the value of the
Mortgaged Properties. The Depositor can neither predict such declines nor
quantify the impact of such declines in property values nor predict how long and
in which states such declines may occur. During a period of such declines, the
rates of delinquencies, foreclosures and losses on the Mortgage Loans would be
expected to be higher than those experienced in the mortgage lending industry in
general.
Yield and Prepayment Considerations. The yield on the Certificates of each
Series will depend on the rate of principal payment (including prepayments,
liquidations due to defaults and repurchases) on the Mortgage Loans and the
price paid by Certificateholders. Such yield may be adversely affected by a
higher or lower than anticipated rate of prepayments on the related Mortgage
Loans. In addition, unless otherwise specified in the related Prospectus
Supplement, the yield to investors may be adversely affected by shortfalls which
may result from the timing of the receipt of partial prepayments or liquidations
as well as shortfalls not covered by the Master Servicing Fee related to a
particular Distribution Date and which shortfalls result from the timing of the
receipt of full prepayments. The yield on Certificates entitling the holders
thereof primarily or exclusively to payments of interest on the Mortgage Loans
will be extremely sensitive to the rate of prepayments on the related Mortgage
Loans. In addition, the yield on certain other types of classes of Certificates
may be relatively more sensitive to the rate of prepayment of the related
Mortgage Loans than other classes of Certificates. Prepayments are influenced by
a number of factors, including prevailing mortgage market interest rates, local
and national economic conditions and homeowner mobility. See "Yield and
Prepayment Considerations."
Limited Obligations. Except for any related insurance policies and any
reserve fund or credit enhancement described in the applicable Prospectus
Supplement, the Mortgage Assets included in the related Trust Fund will be the
sole source of payments on the Certificates of a Series. The Certificates of any
Series will not represent an interest in or obligation of the Depositor, the
Master Servicer, the Trustee or any of their affiliates, except for the
Depositor's and the Master Servicer's limited obligations with respect to
certain breaches of their respective representations and warranties. The
Certificates of any Series will not be guaranteed or insured by any governmental
agency or instrumentality, the Depositor, the Master Servicer, the Trustee, any
of their affiliates or any other person. Consequently, in the event that
payments on the Mortgage Assets are insufficient or otherwise unavailable to
make all payments required on the Certificates, there will be no recourse to the
Depositor, the Master Servicer, the Trustee or, except as specified in the
applicable Prospectus Supplement, any other entity.
Limitations, Reduction and Substitution of Credit Enhancement. With respect
to each Series of Certificates, credit enhancement may be provided in limited
amounts to cover certain types of losses on the underlying Mortgage Loans.
Credit enhancement will be provided in one or more of the forms referred to
herein, including, but not limited to: subordination of other classes of
Certificates of the same Series; a limited guarantee; a letter of credit; a pool
insurance policy; a special hazard insurance policy; a mortgagor bankruptcy
bond; a reserve fund; cross support; FHA Insurance and VA Guarantee; a surety
bond; and any combination thereof. See "Credit Enhancement" herein. Regardless
of the form of credit enhancement provided, the amount of coverage will be
limited in amount and in most cases will be subject to periodic reduction in
accordance with a schedule or formula. Furthermore, such credit enhancements may
provide only very limited coverage as to
14
<PAGE>
certain types of losses, and may provide no coverage as to certain other types
of losses. All or a portion of the credit enhancement for any Series of
Certificates will generally be permitted to be reduced, terminated or
substituted for, if each applicable rating agency confirms that the then current
rating thereof will not be adversely affected. See "Credit Enhancement."
Realization Upon Nonperforming Loans; Delays and Expenses Associated With
Legal Actions. An action to foreclose a Mortgage Loan is regulated by statutes
and rules and is subject to a court's equitable powers. A foreclosure action is
subject to many of the delays and expenses of other lawsuits if defenses or
counterclaims are interposed, sometimes requiring several years to complete.
Furthermore, an action to obtain a deficiency judgment also is regulated by
statutes and rules, and the amount of a deficiency judgment may be limited by
law. In the event of a default by a borrower, these restrictions, among others,
may impede the ability of the Master Servicer to foreclose on or to sell the
Mortgaged Property or to obtain a deficiency judgment in connection therewith.
If the protection afforded the Certificateholders of a Series by the credit
enhancement, if any, for such Series is exhausted, such restrictions may delay
distributions to such Certificateholders and may ultimately limit the amounts
distributed with respect to such defaulted Mortgage Loans and result in a loss
to such Certificateholders on their investments. See "Certain Legal Aspects of
the Mortgage Loans."
Junior Liens. Mortgages securing Home Equity Loans are often junior liens
subordinate to the rights of the mortgagee under the related senior mortgage or
mortgages. The proceeds from any liquidation, insurance or condemnation
proceedings will be available to satisfy the outstanding balance of such junior
mortgage only to the extent that the claims of such senior mortgagees have been
satisfied in full, including any related foreclosure costs. In addition, a
junior mortgagee may not foreclose on the property securing a junior mortgage
unless it forecloses subject to the senior mortgages, in which case it must
either pay the entire amount due on the senior mortgages to the senior
mortgagees at or prior to the foreclosure sale or undertake the obligation to
make payments on the senior mortgages in the event the mortgagor is in default
thereunder. The Trust Fund will not have any source of funds to satisfy the
senior mortgages to make payments due to the senior mortgagees.
Subordinated Certificates. A Series of Certificates may consist of one or
more classes of Senior Certificates and one or more classes of Subordinated
Certificates. The rights of the holders of Subordinated Certificates to receive
distributions from the related Trust Fund will be subordinated to the rights of
the holders of Senior Certificates of the same Series to receive such
distributions. The effect of such subordination generally is that holders of
Subordinated Certificates may experience losses on the underlying Mortgage
Assets before or to a greater extent than holders of Senior Certificates. The
Prospectus Supplement for each Series will specify the rights of holders of
Subordinated Certificates in relation to the holders of Senior Certificates as
well as the extent and circumstances of any such subordination. See "Credit
Enhancement -- Subordination."
Other Legal Considerations. Applicable state laws generally regulate
interest rates and other charges, and require certain disclosures to borrowers.
In addition, many states have other laws, such as consumer protection laws,
unfair and deceptive practices acts and debt collection practices acts which may
apply to the origination or collection of the Mortgage Loans. Depending on the
provisions of the applicable law, violations of these laws may limit the ability
of the Master Servicer to collect all or part of the principal of, or interest
on, the Mortgage Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the Master Servicer to damages
and administrative enforcement. See "Certain Legal Aspects of the Mortgage
Loans."
THE TRUST FUND*
The Trust Fund for each Series will be held by the Trustee for the benefit
of the related Certificateholders. Each Trust Fund will consist of certain
mortgage-related assets (the "Mortgage Assets") consisting of (A) a mortgage
pool (a "Mortgage Pool") comprised of Mortgage Loans, (B) Agency Securities or
(C) Private Mortgage-Backed Securities, in each case as specified in the related
Prospectus Supplement, together with payments in respect of such Mortgage Assets
and certain other accounts, obligations or agreements, in each case as specified
in the related Prospectus Supplement.
The Certificates will be entitled to payment from the assets of the related
Trust Fund or Funds or other assets pledged for the benefit of the
Certificateholders as specified in the related Prospectus Supplement and will
not be entitled to payments in respect of the assets of any other trust fund
established by the Depositor. Unless otherwise specified in the related
Prospectus
* Whenever the terms "Mortgage Pool" and "Certificates" are used in this
Prospectus, such terms will be deemed to apply, unless the context indicates
otherwise, to one specific Mortgage Pool and the Certificates relating to a
single trust fund (the "Trust Fund") consisting primarily of the Mortgage
Loans in such Mortgage Pool. Similarly, the term "Pass-Through Rate" will
refer to the Pass-Through Rate borne by the Certificates of one specific
Series and the term "Trust Fund" will refer to one specific Trust Fund.
15
<PAGE>
Supplement, the Mortgage Assets of any Trust Fund will consist of Mortgage
Loans, Agency Securities or Private Mortgage-Backed Securities but not a
combination thereof.
The Mortgage Assets may be acquired by the Depositor, either directly or
through affiliates, in the open market or in privately negotiated transactions,
from originators or sellers that may be affiliates of the Depositor (the
"Sellers") and conveyed by the Depositor to the related Trust Fund. The Sellers
may have originated the Mortgage Assets or acquired the Mortgage Assets from the
originators or other entities. See "Mortgage Loan Program -- Underwriting
Standards."
The following is a brief description of the Mortgage Assets expected to be
included in the Trust Funds. If specific information respecting the Mortgage
Assets is not known at the time the related Series of Certificates initially is
offered, more general information of the nature described below will be provided
in the related Prospectus Supplement, and final specific information will be set
forth in a Current Report on Form 8-K to be available to investors on the date
of issuance thereof and to be filed with the Securities and Exchange Commission
within fifteen days after the initial issuance of such Certificates (the
"Detailed Description"). A schedule of the Mortgage Assets relating to such
Series will be attached to the Agreement delivered to the Trustee upon delivery
of the Certificates.
The Mortgage Loans -- General
For purposes hereof, the real property that secures repayment of the
Mortgage Loans are collectively referred to as "Mortgaged Properties." The
Mortgaged Properties may be located in any one of the fifty states, the District
of Columbia, Guam, Puerto Rico or any other territory of the United States.
Mortgage Loans with certain Loan-to-Value Ratios and/or certain principal
balances may be covered wholly or partially by primary mortgage guaranty
insurance policies (each, a "Primary Mortgage Insurance Policy"). The existence,
extent and duration of any such coverage will be described in the applicable
Prospectus Supplement. No Primary Mortgage Insurance Policy will be required for
any home equity loan.
The Mortgage Loans in a Mortgage Pool will have monthly payment dates as
set forth in the related Prospectus Supplement. The payment terms of the
Mortgage Loans to be included in a Trust Fund will be described in the related
Prospectus Supplement and may include any of the following features or
combination thereof or other features described in the related Prospectus
Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable from
time to time in relation to an index (which will be specified in the
related Prospectus Supplement), a rate that is fixed for a period of time
or under certain circumstances and is followed by an adjustable rate, a
rate that otherwise varies from time to time, or a rate that is convertible
from an adjustable rate to a fixed rate. Changes to an adjustable rate may
be subject to periodic limitations, maximum rates, minimum rates or a
combination of such limitations. Accrued interest may be deferred and added
to the principal of a loan for such periods and under such circumstances as
may be specified in the related Prospectus Supplement. Mortgage Loans may
provide for the payment of interest at a rate lower than the specified
interest rate borne by such Mortgage Loan for a period of time or for the
life of the loan, and the amount of any difference may be contributed from
funds supplied by the seller of the Mortgaged Property or another source.
(b) Principal may be payable on a level debt service basis to fully
amortize the loan over its term, may be calculated on the basis of an
assumed amortization schedule that is significantly longer than the
original term to maturity or on an interest rate that is different from the
interest rate on the Mortgage Loan or may not be amortized during all or a
portion of the original term. Payment of all or a substantial portion of
the principal may be due on maturity ("balloon payments"). Principal may
include interest that has been deferred and added to the principal balance
of the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed for the
life of the loan, may increase over a specified period of time or may
change from period to period. Loans may include limits on periodic
increases or decreases in the amount of monthly payments and may include
maximum or minimum amounts of monthly payments.
(d) The Mortgage Loans generally may be prepaid at any time without
the payment of any prepayment fee. If so specified in the related
Prospectus Supplement, some prepayments of principal may be subject to a
prepayment fee, which may be fixed for the life of any such Mortgage Loan
or may decline over time, and may be prohibited for the life of any such
Mortgage Loan or for certain periods ("lockout periods"). Certain Mortgage
Loans may permit prepayments after expiration of the applicable lockout
period and may require the payment of a prepayment fee in connection with
any such subsequent prepayment. Other Mortgage Loans may permit prepayments
without payment of a fee unless the prepayment occurs during specified time
periods.
16
<PAGE>
(e) The loans may include "due-on-sale" clauses which permit the
mortgagee to demand payment of the entire mortgage loan in connection with
the sale or certain transfers of the related Mortgaged Property. Other
Mortgage Loans may be assumable by persons meeting the then applicable
underwriting standards of the Seller.
A Trust Fund may contain certain Mortgage Loans, which include provisions
whereby a third party partially subsidizes the borrower's monthly payments
during the early years of the Mortgage Loan ("Buydown Loans"), the difference to
be made up from a fund (a "Buydown Fund") contributed by such third party at the
time of origination of the Mortgage Loan. A Buydown Fund will be in an amount
equal either to the discounted value or full aggregate amount of future payment
subsidies. The underlying assumption of buydown plans is that the income of the
borrower will increase during the buydown period as a result of normal increases
in compensation and of inflation, so that the borrower will be able to meet the
full mortgage payments at the end of the buydown period. To the extent that this
assumption as to increased income is not fulfilled, the possibility of defaults
on Buydown Loans is increased. The related Prospectus Supplement will contain
information with respect to any Buydown Loan concerning limitations on the
interest rate paid by the borrower initially, on annual increases in the
interest rate and on the length of the buydown period.
Each Prospectus Supplement will contain information, as of the date of such
Prospectus Supplement and to the extent then specifically known to the
Depositor, with respect to the Mortgage Loans contained in the related Mortgage
Pool, including (i) the aggregate outstanding principal balance and the average
outstanding principal balance of the Mortgage Loans as of the applicable Cut-off
Date, (ii) the type of property securing the Mortgage Loans (e.g., separate
residential properties, individual units in condominiums in buildings owned by
cooperative housing corporations, vacation and second homes, or other similar
real property), (iii) the original terms to maturity of the Mortgage Loans, (iv)
the largest principal balance and the smallest principal balance of any of the
Mortgage Loans, (v) the earliest origination date and latest maturity date of
any of the Mortgage Loans, (vi) the aggregate principal balance of Mortgage
Loans having Loan-to-Value Ratios or Combined Loan-to-Value Ratios at
origination exceeding 80%, (vii) the maximum and minimum per annum rates at
which the related Mortgage Notes accrue interest (the "Mortgage Rate"), and
(viii) the geographical distribution of the Mortgage Loans.
The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is the
fraction, expressed as a percentage, the numerator of which is the original
principal balance of the related Mortgage Loan and the denominator of which is
the Collateral Value of the related Mortgaged Property. Unless otherwise
specified in the related Prospectus Supplement, the "Collateral Value" of a
Mortgaged Property is the lesser of (a) the appraised value determined in an
appraisal obtained by the originator at origination of such Mortgage Loan and
(b) the sales price for such property.
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 Mortgage Loan at the date of origination (which for purposes of the
related Prospectus Supplement includes certain financed fees and insurance
premiums) plus (b) the outstanding balance of the senior liens, if any, divided
by (ii) the lesser of (a) the value of the related Mortgaged Property, based
upon the appraisal, if any, or drive-by evaluation made at the time of
origination of the Mortgage Loan and (b) the purchase price of the Mortgaged
Property if the Mortgage Loan proceeds were used to purchase the Mortgaged
Property. For Mortgage Loans having low original principal balances, the
Combined Loan-to-Value Ratios of the Mortgage Loans will reflect certain
judgments of the Seller's underwriters with respect to the value of the
Mortgaged Property made at the time the Mortgage Loans were originated or
acquired. See "Mortgage Loan Program -- Underwriting Standards."
The Depositor will cause the Mortgage Loans comprising each Mortgage Pool
to be assigned to the Trustee named in the related Prospectus Supplement for the
benefit of the holders of the Certificates of the related Series. Unless
otherwise specified in the related Prospectus Supplement, the only obligations
of the Depositor with respect to a Series of Certificates will be to obtain
certain representations and warranties from the Sellers and to assign to the
Trustee for such Series of Certificates the Depositor's rights with respect to
such representations and warranties. See "The Pooling and Servicing
Agreement -- Assignment of Mortgage Assets."
The Master Servicer named in the related Prospectus Supplement will service
the Mortgage Loans, either directly or through other mortgage servicing
institutions (each, a "Sub-Servicer"), pursuant to a Pooling and Servicing
Agreement (each, an "Agreement"). The Master Servicer and any Sub-Servicers will
each receive a fee for such services. See "Mortgage Loan Program" and "The
Pooling and Servicing Agreement." With respect to Mortgage Loans serviced by the
Master Servicer through a Sub-Servicer, the Master Servicer will remain liable
for its servicing obligations under the related Agreement as if the Master
Servicer alone were servicing such Mortgage Loans. The obligations of the Master
Servicer with respect to the Mortgage Loans will consist principally of its
contractual servicing obligations under the related Agreement (including its
obligation to enforce the obligations of the Sub-Servicers or Sellers, or both,
as more fully described herein under "Mortgage Loan Program -- Representations
by Sellers; Repurchases" and "The Pooling and Servicing Agreement -- Assignment
of
17
<PAGE>
Mortgage Assets") and its obligation to make certain cash advances in the event
of delinquencies in payments on or with respect to the Mortgage Loans in the
amounts described herein under "Description of the Certificates -- Advances."
The obligations of the Master Servicer to make advances may be subject to
limitations, to the extent provided herein and in the related Prospectus
Supplement.
Single Family and Cooperative Loans. Unless otherwise specified in the
related Prospectus Supplement, Mortgage Loans will consist of mortgage loans,
deeds of trust or participations or other beneficial interests therein, secured
by first, second or more junior liens on single family (i.e., one- to
four-family) residential properties. If so specified, the Mortgage Loans may
include cooperative apartment loans ("Cooperative Loans") secured by security
interests in shares issued by private, non-profit, cooperative housing
corporations ("Cooperatives") and in the related proprietary leases or occupancy
agreements granting exclusive rights to occupy specific dwelling units in such
Cooperatives' buildings. If so specified in the related Prospectus Supplement,
the Mortgage Assets of the related Trust Fund may include mortgage participation
certificates evidencing interests in Mortgage Loans. Such loans may be
conventional loans (i.e., loans that are not insured or guaranteed by any
governmental agency) or loans insured by the FHA or partially guaranteed by the
VA, as specified in the related Prospectus Supplement.
The Mortgaged Properties relating to single family Mortgage Loans will
consist of detached or semi-detached one-family dwelling units, two- to
four-family dwelling units, townhouses, rowhouses, individual condominium units,
individual units in planned unit developments, and certain other dwelling units.
Such Mortgaged Properties may include vacation and second homes, investment
properties and leasehold interests. In the case of leasehold interests, the term
of the leasehold will exceed the scheduled maturity of the Mortgage Loan by at
least five years, unless otherwise specified in the related Prospectus
Supplement. Certain Mortgage Loans may be originated or acquired in connection
with corporate programs, including employee relocation programs. In limited
instances, a borrower who uses the dwelling unit as a primary residence may also
make some business use of the property.
Home Equity Loans. As described more fully in the related Prospectus
Supplement, the Mortgage Loans constituting a Trust Fund may comprise a pool of
home equity loans ("Home Equity Loans"). Home Equity Loans are mortgage loans
made for purposes that include: purchase money transactions, refinancings (both
cash-out and no-cash-out), home improvements and construction-to-permanent
financing. Unless otherwise specified in the related Prospectus Supplement, Home
Equity Loans will generally be secured by a lien on the related Mortgaged
Property of a first or second priority. Unless otherwise specified in the
related Prospectus Supplement, Home Equity Loans are generally made to
Mortgagors with credit grades (as determined by the Seller from time to time) A2
and below. The Mortgaged Properties securing the Home Equity Loans may
constitute single-family dwellings, mobile and manufactured housing and, in
limited cases, other types of residential property as described in the related
Prospectus Supplement.
Agency Securities
Government National Mortgage Association. GNMA is a wholly-owned corporate
instrumentality of the United States with the United States Department of
Housing and Urban Development. Section 306(g) of Title II of the National
Housing Act of 1934, as amended (the "Housing Act"), authorizes GNMA to
guarantee the timely payment of the principal of and interest on certificates
which represent an interest in a pool of mortgage loans insured by the Federal
Housing Authority ("FHA") under the Housing Act, or Title V of the Housing Act
of 1949 ("FHA Loans"), or partially guaranteed by the VA under the Servicemen's
Readjustment Act of 1944, as amended, or Chapter 37 of Title 38, United States
Code ("VA Loans").
Section 306(g) of the Housing Act provides that "the full faith and credit
of the United States is pledged to the payment of all amounts which may be
required to be paid under any guaranty under this subsection." In order to meet
its obligations under any such guarantee, GNMA may, under Section 306(d) of the
Housing Act, borrow from the United States Treasury in an unlimited amount which
is at any time sufficient to enable GNMA to perform its obligations under its
guarantee.
GNMA Certificates. Each GNMA Certificate held in a Trust Fund (which may be
issued under either the GNMA I program or the GNMA II program) will be a "fully
modified pass-through" mortgage-backed certificate issued and serviced by a
mortgage banking company or other financial concern ("GNMA Issuer") approved by
GNMA or approved by FNMA as a seller-servicer of FHA Loans and/or VA Loans. The
mortgage loans underlying the GNMA Certificates will consist of FHA Loans and/or
VA Loans. Each such mortgage loan is secured by a one- to four-family
residential property. GNMA will approve the issuance of each such GNMA
Certificate in accordance with a guaranty agreement (a "Guaranty Agreement")
between GNMA and the GNMA Issuer. Pursuant to its Guaranty Agreement, a GNMA
Issuer will be required to advance its own funds in order to make timely
payments of all amounts due on each such GNMA Certificate, even if the payments
18
<PAGE>
received by the GNMA Issuer on the FHA Loans or VA Loans underlying each such
GNMA Certificate are less than the amounts due on each such GNMA Certificate.
The full and timely payment of principal of and interest on each GNMA
Certificate will be guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States. Each such GNMA Certificate will have an
original maturity of not more than 40 years (but may have original maturities of
substantially less than 40 years). Each such GNMA Certificate will be based on
and backed by a pool of FHA Loans or VA Loans secured by one- to four-family
residential properties and will provide for the payment by or on behalf of the
GNMA Issuer to the registered holder of such GNMA Certificate of scheduled
monthly payments of principal and interest equal to the registered holder's
proportionate interest in the aggregate amount of the monthly principal and
interest payment on each FHA Loan or VA Loan underlying such GNMA Certificate,
less the applicable servicing and guarantee fee which together equal the
difference between the interest on the FHA Loan or VA Loan and the pass-through
rate on the GNMA Certificate. In addition, each payment will include
proportionate pass-through payments of any prepayments of principal on the FHA
Loans or VA Loans underlying such GNMA Certificate and liquidation proceeds in
the event of a foreclosure or other disposition of any such FHA Loans or VA
Loans.
If a GNMA Issuer is unable to make the payments on a GNMA Certificate as it
becomes due, it must promptly notify GNMA and request GNMA to make such payment.
Upon notification and request, GNMA will make such payments directly to the
registered holder of such GNMA Certificate. In the event no payment is made by a
GNMA Issuer and the GNMA Issuer fails to notify and request GNMA to make such
payment, the holder of such GNMA Certificate will have recourse only against
GNMA to obtain such payment. The Trustee or its nominee, as registered holder of
the GNMA Certificates held in a Trust Fund, will have the right to proceed
directly against GNMA under the terms of the Guaranty Agreements relating to
such GNMA Certificates for any amounts that are not paid when due.
All mortgage loans underlying a particular GNMA I Certificate must have the
same interest rate (except for pools of mortgage loans secured by manufactured
homes) over the term of the loan. The interest rate on such GNMA I Certificate
will equal the interest rate on the mortgage loans included in the pool of
mortgage loans underlying such GNMA I Certificate, less one-half percentage
point per annum of the unpaid principal balance of the mortgage loans.
Mortgage loans underlying a particular GNMA II Certificate may have per
annum interest rates that vary from each other by up to one percentage point.
The interest rate on each GNMA II Certificate will be between one-half
percentage point and one and one-half percentage points lower than the highest
interest rate on the mortgage loans included in the pool of mortgage loans
underlying such GNMA II Certificate (except for pools of mortgage loans secured
by manufactured homes).
Regular monthly installment payments on each GNMA Certificate held in a
Trust Fund will be comprised of interest due as specified on such GNMA
Certificate plus the scheduled principal payments on the FHA Loans or VA Loans
underlying such GNMA Certificate due on the first day of the month in which the
scheduled monthly installments on such GNMA Certificate are due. Such regular
monthly installments on each such GNMA Certificate are required to be paid to
the Trustee as registered holder by the 15th day of each month in the case of a
GNMA I Certificate and are required to be mailed to the Trustee by the 20th day
of each month in the case of a GNMA II Certificate. Any principal prepayments on
any FHA Loans or VA Loans underlying a GNMA Certificate held in a Trust Fund or
any other early recovery of principal on such loan will be passed through to the
Trustee as the registered holder of such GNMA Certificate.
GNMA Certificates may be backed by graduated payment mortgage loans or by
"buydown" mortgage loans for which funds will have been provided (and deposited
into escrow accounts) for application to the payment of a portion of the
borrowers' monthly payments during the early years of such mortgage loan.
Payments due the registered holders of GNMA Certificates backed by pools
containing "buydown" mortgage loans will be computed in the same manner as
payments derived from other GNMA Certificates and will include amounts to be
collected from both the borrower and the related escrow account. The graduated
payment mortgage loans will provide for graduated interest payments that, during
the early years of such mortgage loans, will be less than the amount of stated
interest on such mortgage loans. The interest not so paid will be added to the
principal of such graduated payment mortgage loans and, together with interest
thereon, will be paid in subsequent years. The obligations of GNMA and of a GNMA
Issuer will be the same irrespective of whether the GNMA Certificates are backed
by graduated payment mortgage loans or "buydown" mortgage loans. No statistics
comparable to the FHA's prepayment experience on level payment, non-"buydown"
mortgage loans are available in respect of graduated payment or "buydown"
mortgages. GNMA Certificates related to a Series of Certificates may be held in
book-entry form.
19
<PAGE>
As described above, the GNMA Certificates included in a Trust Fund, and the
related underlying mortgage loans, may have characteristics and terms different
from those described above. Any such different characteristics and terms will be
described in the related Prospectus Supplement.
Federal Home Loan Mortgage Corporation. FHLMC is a corporate
instrumentality of the United States created pursuant to Title III of the
Emergency Home Finance Act of 1970, as amended (the "FHLMC Act"). The common
stock of FHLMC is owned by the Federal Home Loan Banks and its preferred stock
is owned by stockholders of the Federal Home Loan Banks. FHLMC was established
primarily for the purpose of increasing the availability of mortgage credit for
the financing of urgently needed housing. It seeks to provide an enhanced degree
of liquidity for residential mortgage investments primarily by assisting in the
development of secondary markets for conventional mortgages. The principal
activity of FHLMC currently consists of the purchase of first lien conventional
mortgage loans or participation interests in such mortgage loans and the sale of
the mortgage loans or participations so purchased in the form of mortgage
securities, primarily FHLMC Certificates. FHLMC is confined to purchasing, so
far as practicable, mortgage loans that it deems to be of such quality, type and
class as to meet generally the purchase standards imposed by private
institutional mortgage investors.
FHLMC Certificates. Each FHLMC Certificate represents an undivided interest
in a pool of mortgage loans that may consist of first lien conventional loans,
FHA Loans or VA Loans (a "FHLMC Certificate Group"). FHLMC Certificates are sold
under the terms of a Mortgage Participation Certificate Agreement. A FHLMC
Certificate may be issued under either FHLMC's Cash Program or Guarantor
Program.
Mortgage loans underlying the FHLMC Certificates held by a Trust Fund will
consist of mortgage loans with original terms to maturity of between 10 and 30
years. Each such mortgage loan must meet the applicable standards set forth in
the FHLMC Act. A FHLMC Certificate Group may include whole loans, participation
interests in whole loans and undivided interests in whole loans and/or
participations comprising another FHLMC Certificate Group. Under the Guarantor
Program, any such FHLMC Certificate Group may include only whole loans or
participation interests in whole loans.
FHLMC guarantees to each registered holder of a FHLMC Certificate the
timely payment of interest on the underlying mortgage loans to the extent of the
applicable Certificate rate on the registered holder's pro rata share of the
unpaid principal balance outstanding on the underlying mortgage loans in the
FHLMC Certificate Group represented by such FHLMC Certificate, whether or not
received. FHLMC also guarantees to each registered holder of a FHLMC Certificate
collection by such holder of all principal on the underlying mortgage loans,
without any offset or deduction, to the extent of such holder's pro rata share
thereof, but does not, except if and to the extent specified in the related
Prospectus Supplement for a Series of Certificates, guarantee the timely payment
of scheduled principal. Under FHLMC's Gold PC Program, FHLMC guarantees the
timely payment of principal based on the difference between the pool factor,
published in the month preceding the month of distribution and the pool factor
published in such month of distribution. Pursuant to its guarantees, FHLMC
indemnifies holders of FHLMC Certificates against any diminution in principal by
reason of charges for property repairs, maintenance and foreclosure. FHLMC may
remit the amount due on account of its guaranty of collection of principal at
any time after default on an underlying mortgage loan, but not later than (i) 30
days following foreclosure sale, (ii) 30 days following payment of the claim by
any mortgage insurer or (iii) 30 days following the expiration of any right of
redemption, whichever occurs later, but in any event no later than one year
after demand has been made upon the mortgagor for accelerated payment of
principal. In taking actions regarding the collection of principal after default
on the mortgage loans underlying FHLMC Certificates, including the timing of
demand for acceleration, FHLMC reserves the right to exercise its judgment with
respect to the mortgage loans in the same manner as for mortgage loans that it
has purchased but not sold. The length of time necessary for FHLMC to determine
that a mortgage loan should be accelerated varies with the particular
circumstances of each mortgagor, and FHLMC has not adopted standards which
require that the demand be made within any specified period.
FHLMC Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of FHLMC under its
guarantee are obligations solely of FHLMC and are not backed by, or entitled to,
the full faith and credit of the United States. If FHLMC were unable to satisfy
such obligations, distributions to holders of FHLMC Certificates would consist
solely of payments and other recoveries on the underlying mortgage loans and,
accordingly, monthly distributions to holders of FHLMC Certificates would be
affected by delinquent payments and defaults on such mortgage loans.
Registered holders of FHLMC Certificates are entitled to receive their
monthly pro rata share of all principal payments on the underlying mortgage
loans received by FHLMC, including any scheduled principal payments, full and
partial repayments of principal and principal received by FHLMC by virtue of
condemnation, insurance, liquidation or foreclosure, and repurchases of the
mortgage loans by FHLMC or the seller thereof. FHLMC is required to remit each
registered FHLMC Certificateholder's pro rata share of principal payments on the
underlying mortgage loans, interest at the FHLMC pass-
20
<PAGE>
through rate and any other sums such as prepayment fees, within 60 days of the
date on which such payments are deemed to have been received by FHLMC.
Under FHLMC's Cash Program, there is no limitation on the amount by which
interest rates on the mortgage loans underlying a FHLMC Certificate may exceed
the pass-through rate on the FHLMC Certificate. Under such program, FHLMC
purchases groups of whole mortgage loans from sellers at specified percentages
of their unpaid principal balances, adjusted for accrued or prepaid interest,
which when applied to the interest rate of the mortgage loans and participations
purchased results in the yield (expressed as a percentage) required by FHLMC.
The required yield, which includes a minimum servicing fee retained by the
servicer, is calculated using the outstanding principal balance. The range of
interest rates on the mortgage loans and participations in a FHLMC Certificate
Group under the Cash Program will vary since mortgage loans and participations
are purchased and assigned to a FHLMC Certificate Group based upon their yield
to FHLMC rather than on the interest rate on the underlying mortgage loans.
Under FHLMC's Guarantor Program, the pass-through rate on a FHLMC Certificate is
established based upon the lowest interest rate on the underlying mortgage
loans, minus a minimum servicing fee and the amount of FHLMC's management and
guaranty income as agreed upon between the seller and FHLMC.
FHLMC Certificates duly presented for registration of ownership on or
before the last business day of a month are registered effective as of the first
day of the month. The first remittance to a registered holder of a FHLMC
Certificate will be distributed so as to be received normally by the 15th day of
the second month following the month in which the purchaser became a registered
holder of the FHLMC Certificates. Thereafter, such remittance will be
distributed monthly to the registered holder so as to be received normally by
the 15th day of each month. The Federal Reserve Bank of New York maintains
book-entry accounts with respect to FHLMC Certificates sold by FHLMC on or after
January 2, 1985, and makes payments of principal and interest each month to the
registered holders thereof in accordance with such holders' instructions.
Federal National Mortgage Association. FNMA is a federally chartered and
privately owned corporation organized and existing under the Federal National
Mortgage Association Charter Act, as amended (the "Charter Act"). FNMA was
originally established in 1938 as a United States government agency to provide
supplemental liquidity to the mortgage market and was transformed into a
stockholder-owned and privately managed corporation by legislation enacted in
1968.
FNMA provides funds to the mortgage market primarily by purchasing mortgage
loans from lenders, thereby replenishing their funds for additional lending.
FNMA acquires funds to purchase mortgage loans from many capital market
investors that may not ordinarily invest in mortgages, thereby expanding the
total amount of funds available for housing. Operating nationwide, FNMA helps to
redistribute mortgage funds from capital-surplus to capital-short areas.
FNMA Certificates. FNMA Certificates are Guaranteed Mortgage Pass-Through
Certificates representing fractional undivided interests in a pool of mortgage
loans formed by FNMA. Each mortgage loan must meet the applicable standards of
the FNMA purchase program. Mortgage loans comprising a pool are either provided
by FNMA from its own portfolio or purchased pursuant to the criteria of the FNMA
purchase program.
Mortgage loans underlying FNMA Certificates held by a Trust Fund will
consist of conventional mortgage loans, FHA Loans or VA Loans. Original
maturities of substantially all of the conventional, level payment mortgage
loans underlying a FNMA Certificate are expected to be between either 8 to 15
years or 20 to 30 years. The original maturities of substantially all of the
fixed rate level payment FHA Loans or VA Loans are expected to be 30 years.
Mortgage loans underlying a FNMA Certificate may have annual interest rates
that vary by as much as two percentage points from each other. The rate of
interest payable on a FNMA Certificate is equal to the lowest interest rate of
any mortgage loan in the related pool, less a specified minimum annual
percentage representing servicing compensation and FNMA's guaranty fee. Under a
regular servicing option (pursuant to which the mortgagee or each other servicer
assumes the entire risk of foreclosure losses), the annual interest rates on the
mortgage loans underlying a FNMA Certificate will be between 50 basis points and
250 basis points greater than its annual pass-through rate and under a special
servicing option (pursuant to which FNMA assumes the entire risk for foreclosure
losses), the annual interest rates on the mortgage loans underlying a FNMA
Certificate will generally be between 55 basis points and 255 basis points
greater than the annual FNMA Certificate pass-through rate. If specified in the
related Prospectus Supplement, FNMA Certificates may be backed by adjustable
rate mortgages.
FNMA guarantees to each registered holder of a FNMA Certificate that it
will distribute amounts representing such holder's proportionate share of
scheduled principal and interest payments at the applicable pass-through rate
provided for by such FNMA Certificate on the underlying mortgage loans, whether
or not received, and such holder's proportionate share of the full principal
amount of any foreclosed or other finally liquidated mortgage loan, whether or
not such principal amount is actually recovered. The obligations of FNMA under
its guarantees are obligations solely of FNMA and are not backed by, or
21
<PAGE>
entitled to, the full faith and credit of the United States. Although the
Secretary of the Treasury of the United States has discretionary authority to
lend FNMA up to $2.25 billion outstanding at any time, neither the United States
nor any agency thereof is obligated to finance FNMA's operations or to assist
FNMA in any other manner. If FNMA were unable to satisfy its obligations,
distributions to holders of FNMA Certificates would consist solely of payments
and other recoveries on the underlying mortgage loans and, accordingly, monthly
distributions to holders of FNMA Certificates would be affected by delinquent
payments and defaults on such mortgage loans.
FNMA Certificates evidencing interests in pools of mortgage loans formed on
or after May 1, 1985 (other than FNMA Certificates backed by pools containing
graduated payment mortgage loans or mortgage loans secured by multifamily
projects) are available in book-entry form only. Distributions of principal and
interest on each FNMA Certificate will be made by FNMA on the 25th day of each
month to the persons in whose name the FNMA Certificate is entered in the books
of the Federal Reserve Banks (or registered on the FNMA Certificate register in
the case of fully registered FNMA Certificates) as of the close of business on
the last day of the preceding month. With respect to FNMA Certificates issued in
book-entry form, distributions thereon will be made by wire, and with respect to
fully registered FNMA Certificates, distributions thereon will be made by check.
As described above, the FNMA Certificates included in a Trust Fund, and the
related underlying mortgage loans, may have characteristics and terms different
from those described above. Any such different characteristics and terms will be
described in the related Prospectus Supplement.
Stripped Mortgage-Backed Securities. Agency Securities may consist of one
or more stripped mortgage-backed securities, each as described herein and in the
related Prospectus Supplement. Each such Agency Security will represent an
undivided interest in all or part of either the principal distributions (but not
the interest distributions) or the interest distributions (but not the principal
distributions), or in some specified portion of the principal and interest
distributions (but not all of such distributions) on certain FHLMC, FNMA or GNMA
Certificates. The underlying securities will be held under a trust agreement by
FHLMC, FNMA or GNMA, each as trustee, or by another trustee named in the related
Prospectus Supplement. FHLMC, FNMA or GNMA will guaranty each stripped Agency
Security to the same extent as such entity guarantees the underlying securities
backing such stripped Agency Security, unless otherwise specified in the related
Prospectus Supplement.
Other Agency Securities. If specified in the related Prospectus Supplement,
a Trust Fund may include other mortgage pass-through certificates issued or
guaranteed by GNMA, FNMA or FHLMC. The characteristics of any such mortgage
pass-through certificates will be described in such Prospectus Supplement. If so
specified, a combination of different types of Agency Securities may be held in
a Trust Fund.
Private Mortgage-Backed Securities
General. Private Mortgage-Backed Securities may consist of (a) mortgage
pass-through certificates or participation certificates evidencing an undivided
interest in a Mortgage Pool or (b) collateralized mortgage obligations secured
by Mortgage Loans. Private Mortgage-Backed Securities may include stripped
mortgage-backed securities representing an undivided interest in all or a part
of either the principal distributions (but not the interest distributions) or
the interest distributions (but not the principal distributions) or in some
specified portion of the principal and interest distributions (but not all of
such distributions) on certain Mortgage Loans. Private Mortgage-Backed
Securities will have been publicly issued pursuant to a pooling and servicing
agreement, an indenture or similar agreement (a "PMBS Agreement"). Unless
otherwise specified in the related Prospectus Supplement, the seller/servicer of
the underlying Mortgage Loans will have entered into the PMBS Agreement with the
trustee under such PMBS Agreement (the "PMBS Trustee"). The PMBS Trustee or its
agent, or a custodian, will possess the Mortgage Loans underlying such Private
Mortgage-Backed Securities. Mortgage Loans underlying a Private Mortgage-Backed
Security will be serviced by a servicer (the "PMBS Servicer") directly or by one
or more subservicers who may be subject to the supervision of the PMBS Servicer.
The issuer of the Private Mortgage-Backed Securities (the "PMBS Issuer")
will be a financial institution or other entity engaged generally in the
business of mortgage lending, a public agency or instrumentality of a state,
local or federal government, or a limited purpose corporation organized for the
purpose of, among other things, establishing trusts and acquiring and selling
housing loans to such trusts and selling beneficial interests in such trusts. If
so specified in the related Prospectus Supplement, the PMBS Issuer may be an
affiliate of the Depositor. The obligations of the PMBS Issuer will generally be
limited to certain representations and warranties with respect to the assets
conveyed by it to the related trust. Unless otherwise specified in the related
Prospectus Supplement, the PMBS Issuer will not have guaranteed any of the
assets conveyed to the related trust or any of the Private Mortgage-Backed
Securities issued under the PMBS Agreement. Additionally, although
22
<PAGE>
the Mortgage Loans underlying the Private Mortgage-Backed Securities may be
guaranteed by an agency or instrumentality of the United States, the Private
Mortgage-Backed Securities themselves will not be so guaranteed.
Distributions of principal and interest will be made on the Private
Mortgage-Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Mortgage-Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the Private Mortgage-Backed
Securities by the PMBS Trustee or the PMBS Servicer. The PMBS Issuer or the PMBS
Servicer may have the right to repurchase assets underlying the Private
Mortgage-Backed Securities after a certain date or under other circumstances
specified in the related Prospectus Supplement.
Underlying Loans. The Mortgage Loans underlying the Private Mortgage-Backed
Securities may consist of fixed rate, level payment, fully amortizing loans or
graduated payment mortgage loans, Buydown Loans, adjustable rate mortgage loans,
or loans having balloon or other special payment features. Such Mortgage Loans
may be secured by single family property or by an assignment of the proprietary
lease or occupancy agreement relating to a specific dwelling within a
Cooperative and the related shares issued by such Cooperative.
Additional Information. The Prospectus Supplement for a Series for which
the Trust Fund includes Private Mortgage-Backed Securities will specify, to the
extent known to the Depositor, (i) the aggregate approximate principal amount
and type of the Private Mortgage-Backed Securities to be included in the Trust
Fund, (ii) certain characteristics of the Mortgage Loans which comprise the
underlying assets for the Private Mortgage-Backed Securities including (A) the
payment features of such Mortgage Loans, (B) the approximate aggregate principal
balance of underlying Mortgage Loans insured or guaranteed by a governmental
entity, (C) the servicing fee or range of servicing fees with respect to the
Mortgage Loans and (D) the minimum and maximum stated maturities of the
underlying Mortgage Loans at origination, (iii) the maximum original term-to-
stated maturity of the Private Mortgage-Backed Securities, (iv) the weighted
average term-to-stated maturity of the Private Mortgage-Backed Securities, (v)
the pass-through or certificate rate of the Private Mortgage-Backed Securities,
(vi) the weighted average pass-through or certificate rate of the Private
Mortgage-Backed Securities, (vii) the PMBS Issuer, the PMBS Servicer (if other
than the PMBS Issuer) and the PMBS Trustee for such Private Mortgage-Backed
Securities, (viii) certain characteristics of credit support, if any, such as
reserve funds, insurance policies, surety bonds, letters of credit or guaranties
relating to the Mortgage Loans underlying the Private Mortgage-Backed Securities
or to such Private Mortgage-Backed Securities themselves, (ix) the term on which
the underlying Mortgage Loans for such Private Mortgage-Backed Securities may,
or are required to, be purchased prior to their stated maturity or the stated
maturity of the Private Mortgage-Backed Securities and (x) the terms on which
Mortgage Loans may be substituted for those originally underlying the Private
Mortgage-Backed Securities.
Substitution of Mortgage Assets
Substitution of Mortgage Assets will be permitted in the event of breaches
of representations and warranties with respect to any original Mortgage Asset or
in the event the documentation with respect to any Mortgage Asset is determined
by the Trustee or a custodian appointed by the Trustee to be incomplete. The
period during which such substitution will be permitted generally will be
indicated in the related Prospectus Supplement. The related Prospectus
Supplement will describe any other conditions upon which Mortgage Assets may be
substituted for Mortgage Assets initially included in the Trust Fund.
USE OF PROCEEDS
Unless otherwise specified in the applicable Prospectus Supplement,
substantially all of the net proceeds from the sale of each Series of
Certificates will be used by the Depositor for the purchase of the Mortgage
Assets represented by the Certificates of such Series or to reimburse amounts
previously used to effect such a purchase, the costs of carrying the related
Mortgage Assets until the sale of the Certificates and other expenses connected
with pooling the related Mortgage Assets and issuing the Certificates. The
Depositor expects to sell Certificates in Series from time to time, but the
timing and amount of offerings of Certificates will depend on a number of
factors, including, among others, the volume of Mortgage Assets acquired by the
Depositor, prevailing interest rates, availability of funds and general market
conditions.
THE DEPOSITOR
First Union Residential Securitization Transactions, Inc. (the "Depositor")
was incorporated in the State of North Carolina on February 27, 1996, as a
wholly-owned, limited purpose subsidiary of First Union National Bank of North
Carolina, a
23
<PAGE>
national banking association (a subsidiary of First Union Corporation, a North
Carolina corporation). The Depositor maintains its principal executive office at
301 South College Street, Charlotte, North Carolina 28202-0600. Its telephone
number is (704) 383-3624.
As described herein under "Mortgage Loan Program -- Representations by
Sellers; Repurchases," the only obligations, if any, of the Depositor with
respect to a Series of Certificates may be pursuant to certain limited
representations and warranties and limited undertakings to repurchase or
substitute Mortgage Loans under certain circumstances. The Depositor will have
no ongoing servicing obligations or responsibilities with respect to any
Mortgage Pool. The Depositor does not have, nor is it expected in the future to
have, any significant assets.
As specified in the related Prospectus Supplement, the Master Servicer with
respect to any Series of Certificates evidencing interests in Mortgage Loans may
be an affiliate of the Depositor. As described under "The Trust Fund -- The
Mortgage Loans -- General," " -- Agency Securities" and " -- Private
Mortgage-Backed Securities," the Depositor anticipates that it will acquire
Mortgage Loans, Agency Securities and Private Mortgage-Backed Securities in the
open market or in privately negotiated transactions, which may be through or
from an affiliate.
Neither the Depositor nor First Union Corporation nor any of its
affiliates, including First Union Capital Markets Corp. and First Union National
Bank of North Carolina, will insure or guarantee the Certificates of any Series.
MORTGAGE LOAN PROGRAM
The Mortgage Loans will have been purchased by the Depositor, either
directly or through affiliates, from one or more Sellers, which may be
affiliates of the Depositor. Unless otherwise specified in the related
Prospectus Supplement, the Mortgage Loans so acquired by the Depositor will have
been originated in accordance with the underwriting criteria specified below
under "Underwriting Standards." See the Prospectus Supplement for each Series of
Certificates for a more detailed description of the mortgage loan program of the
Sellers.
Underwriting Standards
Unless otherwise specified in the related Prospectus Supplement, each
Seller will represent and warrant that all Mortgage Loans originated or acquired
by it and sold to the Depositor will have been underwritten in accordance with
standards consistent with those utilized by mortgage lenders generally during
the period of origination for similar types of loans. As to any Mortgage Loan
insured by the FHA or partially guaranteed by the VA, the Seller will represent
that it has complied with underwriting policies of the FHA or the VA, as the
case may be.
Underwriting standards are applied by or on behalf of a lender to evaluate
the borrower's credit standing and repayment ability, and the value and adequacy
of the Mortgaged Property as collateral. In general, a prospective borrower
applying for a Mortgage Loan is required to fill out a detailed application
designed to provide to the underwriting officer pertinent credit information. As
part of the description of the borrower's financial condition, the borrower
generally is required to provide a current list of assets and liabilities and a
statement of income and expenses, as well as an authorization to apply for a
credit report which summarizes the borrower's credit history. In addition, an
employment verification may be requested from an independent source (typically
the borrower's employer) or, in lieu thereof, verbal verification is obtained if
the applicant has supplied a copy of a current pay stub along with personal tax
returns. In the case of Home Equity Loans, a pay stub is required of the
borrower and either independent employment verification, tax returns or verbal
confirmation of employment is obtained. Self-employed applicants typically
submit the last two years' employment history and business tax returns. Upon
receipt of the application package, a Seller usually conducts its own review of
the application package and may, in some instances, obtain additional
information concerning the prospective borrower prior to approving the loan.
Along with obtaining a credit report, such Seller may solicit a written
verification of the applicant's existing first mortgage balance, if any, and
payment history from the first mortgage lender, if appropriate. If such lender
does not respond in writing, verbal verification is attempted and the applicant
generally is required to submit the prior year's mortgage statements which
generally reflect a monthly payment history. In the case of those Home Equity
Loans which are subordinate to a first lien mortgage loan, the Seller also
obtains one of the following: (i) a credit report covering the preceding twelve
months, (ii) written or verbal verification of the applicant's first mortgage
balance, if any, (iii) written confirmation from a first mortgagee, if any, of
the prospective borrower's most recent twelve-month payment history, (iv)
canceled mortgage payment checks for the preceding twelve months, (v) a
combination of items from clauses (i) through (iv) above that establish a
payment history on the first mortgage for the prior twelve months, or (vi) if
the first mortgage is privately held, twelve cancelled payment checks and a copy
of the executed first mortgage note.
24
<PAGE>
In determining the adequacy of the Mortgaged Property as collateral, an
appraisal is made of each property considered for financing (except in the case
of low balance Home Equity Loans). The appraiser is required to inspect the
property and verify that it is in good repair and that construction, if new, has
been completed. The appraisal is based on the market value of comparable homes,
the estimated rental income (if considered applicable by the appraiser) and the
cost of replacing the home.
Once all applicable employment, credit and property information is
received, a determination generally is made as to whether the prospective
borrower has sufficient monthly income available (i) to meet the borrower's
monthly obligations on the proposed mortgage loan, and on any senior mortgage
loan, in the case of a proposed Home Equity Loan (generally determined on the
basis of the monthly payments due in the year of origination), and other
expenses related to the Mortgaged Property (such as property taxes and hazard
insurance) and (ii) to meet monthly housing expenses and other financial
obligations and monthly living expenses. In connection with the origination of a
Mortgage Loan, the Seller evaluates each obligor's credit quality and assigns a
credit grade of A, B, C or D to each such borrower. Certain credit grades may
have sub-grades. The obligors of Home Equity Loans have generally been assigned
credit grades of A2 or lower. Mortgage Loans other than Home Equity Loans
generally have a credit grade of A. The underwriting standards applied by
Sellers, particularly with respect to the level of loan documentation and the
mortgagor's income and credit history, may be varied in appropriate cases where
factors such as low Loan-to-Value Ratios or other favorable credit exist.
Unless otherwise specified in the related Prospectus Supplement, the
Mortgage Loans are secured by a mortgage on property located in any of the 50
states or the District of Columbia. Mortgage Loans may be secured by leases on
real property under guidelines that a Seller determines in its discretion are
acceptable to institutional mortgage investors. Generally, a loan will be
secured by a lease only if the use of leasehold estates as security for mortgage
loans is common and customary in the area, the lease is not subject to any prior
lien that could result in termination of the lease and the term of the lease
ends five years beyond the maturity date of the related Mortgage Loan.
Unless otherwise provided in the applicable Prospectus Supplement, all
Mortgage Loans will be covered by an appropriate standard form American Land
Title Association ("ALTA") title insurance policy, or a substantially similar
policy or form of insurance acceptable to the Federal National Mortgage
Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"), or
an attorney's title opinion.
If so specified in the applicable Prospectus Supplement, Mortgage Loans may
be subject to temporary interest subsidy agreements ("Subsidy Loans") pursuant
to which the monthly payments made by the related mortgagors will be less than
the scheduled monthly payments on such Mortgage Loans with the present value of
the resulting difference in payment ("Subsidy Payments") being provided by the
employer of the mortgagor generally on an annual basis. Unless otherwise
specified in the applicable Prospectus Supplement, Subsidy Payments will be
placed in a custodial account ("Subsidy Account") by the Master Servicer.
Despite the existence of a subsidy program, a mortgagor remains primarily liable
for making all scheduled payments on a Subsidy Loan and for all other
obligations provided for in the related Mortgage Note and Mortgage Loan.
If so specified in the applicable Prospectus Supplement, the Trust Fund may
contain Mortgage Loans subject to temporary Buydown Loans pursuant to which the
monthly payments made by the mortgagor during the early years of the Mortgage
Loan will be less than the scheduled monthly payments on the Mortgage Loan. The
resulting difference in payment will be compensated for from an amount
contributed by the seller of the related Mortgaged Property or another source,
including the originator of the Mortgage Loan (generally on a present value
basis) and, if so specified in the related Prospectus Supplement, placed in a
Buydown Fund by the Master Servicer.
If so specified in the applicable Prospectus Supplement, the Trust Fund may
include Mortgage Loans which are amortized over 30 years but which have shorter
terms to maturity (each such Mortgage Loan, a "Balloon Loan") that causes the
outstanding principal balance of the related Mortgage Loan to be due and payable
at the end of a certain specified period (the "Balloon Period"). Unless
otherwise specified in the applicable Prospectus Supplement, the borrower of
such Balloon Loan will be obligated to pay the entire outstanding principal
balance of the Balloon Loan at the end of the related Balloon Period.
Certain of the types of Mortgage Loans that may be included in a Trust Fund
are recently developed and may involve additional uncertainties not present in
traditional types of loans. For example, certain of such Mortgage Loans may
provide for escalating or variable payments by the mortgagor or obligor. These
types of Mortgage Loans are underwritten on the basis of a judgment that
mortgagors or obligors will have the ability to make monthly payments required
initially. In some instances, however, a mortgagor's or obligor's income may not
be sufficient to permit continued loan payments as such payments increase. These
types of Mortgage Loans may also be underwritten primarily upon the basis of
Loan-to-Value Ratios or other favorable credit factors.
25
<PAGE>
Qualifications of Sellers
Unless otherwise specified in the related Prospectus Supplement, each
Seller will be required to satisfy the qualifications set forth herein. Each
Seller must be an institution experienced in originating and servicing Mortgage
Loans of the type contained in the related Mortgage Pool in accordance with
accepted practices and prudent guidelines, and must maintain satisfactory
facilities to originate and service those Mortgage Loans. Each Seller must be a
seller/servicer approved by either FNMA or FHLMC. Each Seller must be a
mortgagee approved by the FHA or an institution the deposit accounts in which
are insured by the Federal Deposit Insurance Corporation (the "FDIC").
Representations by Sellers; Repurchases
Each Seller will have made representations and warranties in respect of the
Mortgage Loans sold by such Seller and evidenced by a Series of Certificates.
Such representations and warranties unless otherwise provided in the related
Prospectus Supplement generally include, among other things, that (i)
immediately prior to the transfer and assignment of the Mortgage Loans, the
seller had good title to, and was the sole owner of, each Mortgage Loan and
there had been no other sale or assignment thereof, (ii) as of the date of such
transfer, the Mortgage Loans are subject to no offsets, defenses or
counterclaims, (iii) each Mortgage Loan at the time it was made complied in all
material respects with applicable state and federal laws, including usury, equal
credit opportunity and disclosure laws, (iv) a lender's policy of title
insurance or an attorney's title opinion was issued on the date of the
origination of each Mortgage Loan and each such policy is valid and remains in
full force and effect, (v) as of the date of such transfer, each Mortgage
subject to the Agreement is a valid lien on the related Mortgaged Property
(subject only to (a) permitted senior liens on such Mortgaged Property and (b)
the exceptions to title set forth in the related title insurance policy or
attorney's opinion, which exceptions are generally acceptable to 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), and to the best knowledge of the Seller, such property is free
of material damage and is in good repair, (vi) as of the date of such transfer,
no Mortgage Loan is more than 30 days delinquent in payment and there are no
delinquent tax or assessment liens against the related Mortgaged Property, and
(vii) with respect to each Mortgage Loan, if the Mortgaged Property is located
in an area identified by the Federal Emergency Management Agency as having
special flood hazards and subject in certain circumstances to the availability
of flood insurance under the National Flood Insurance Act of 1968, as amended,
such Mortgaged Property is covered by flood insurance.
If so specified in the related Prospectus Supplement, the representations
and warranties of a Seller in respect of a Mortgage Loan will be made not as of
the Cut-off Date but as of the date on which such Seller sold the Mortgage Loan
to the Depositor or one of its affiliates. Under such circumstances, a
substantial period of time may have elapsed between such date and the date of
initial issuance of the Series of Certificates evidencing an interest in such
Mortgage Loan. Since the representations and warranties of a Seller do not
address events that may occur following the sale of a Mortgage Loan by such
Seller, its repurchase obligation described below will not arise if the relevant
event that would otherwise have given rise to such an obligation with respect to
a Mortgage Loan occurs after the date of sale of such Mortgage Loan by such
Seller to the Depositor or its affiliates. If the Master Servicer is also a
Seller of Mortgage Loans with respect to a particular Series, such
representations will be in addition to the representations and warranties made
by the Master Servicer in its capacity as a Master Servicer.
The Master Servicer or the Trustee, if the Master Servicer is the Seller,
will promptly notify the relevant Seller of any breach of any representation or
warranty made by it in respect of a Mortgage Loan which materially and adversely
affects the interests of the Certificateholders in such Mortgage Loan. Unless
otherwise specified in the related Prospectus Supplement, if such Seller cannot
cure such breach within 90 days after notice from the Master Servicer or the
Trustee, as the case may be, then such Seller will be obligated to repurchase
such Mortgage Loan from the Trust Fund at a price (the "Purchase Price") equal
to 100% of the Principal Balance thereof as of the date of the repurchase plus
accrued interest thereon to the first day of the month in which the Purchase
Price is to be distributed at the Mortgage Rate (less any unreimbursed Advances
or amount payable as related servicing compensation if the Seller is the Master
Servicer with respect to such Mortgage Loan). If a REMIC election is to be made
with respect to a Trust Fund, unless otherwise provided in the related
Prospectus Supplement, holders of Subordinated Certificates or a holder of the
related residual certificate will be obligated to pay any prohibited transaction
tax which may arise in connection with any such repurchase. If the Master
Servicer advances any such payment, it will be entitled to reimbursement from
the assets of the related Trust Fund or from any holder of the related residual
certificate, unless otherwise specified in the related Prospectus Supplement.
See "Description of the Certificates -- General." Except in those cases in which
the Master Servicer is the Seller, the Master Servicer will be required under
the applicable Agreement to enforce this obligation for the benefit of the
Trustee and the holders of the Certificates, following the practices
26
<PAGE>
it would employ in its good faith business judgment were it the owner of such
Mortgage Loan. This repurchase obligation will constitute the sole remedy
available to holders of Certificates or the Trustee for a breach of
representation by a Seller.
Neither the Depositor nor the Master Servicer (unless the Master Servicer
is the Seller) will be obligated to purchase a Mortgage Loan if a Seller
defaults on its obligation to do so, and no assurance can be given that Sellers
will carry out their respective repurchase obligations with respect to Mortgage
Loans. See "The Trust Fund -- Substitution of Mortgage Assets."
DESCRIPTION OF THE CERTIFICATES
Each Series of Certificates will be issued pursuant to an Agreement, dated
as of the related Cut-off Date, among the Depositor, the Master Servicer and the
Trustee for the benefit of the holders of the Certificates of such Series. The
provisions of each Agreement will vary depending upon the nature of the
Certificates to be issued thereunder and the nature of the related Trust Fund.
Forms of Agreements are exhibits to the Registration Statement of which this
Prospectus is a part. The following summaries describe certain provisions that
may appear in each Agreement. The Prospectus Supplement for a Series of
Certificates will describe any provision of the Agreement relating to such
Series that materially differs from the description thereof contained in this
Prospectus. The summaries do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, all of the provisions of the
Agreement for each Series of Certificates and the applicable Prospectus
Supplement. The Depositor will provide a copy of the Agreement (without
exhibits) relating to any Series without charge upon written request of a holder
of record of a Certificate of such Series addressed to First Union Residential
Securitization Transactions, Inc., 301 South College Street, Charlotte, North
Carolina 28202-0600.
General
Unless otherwise specified in the Prospectus Supplement, the Certificates
of each Series will be issued in either fully registered or book-entry form, in
the authorized denominations specified in the related Prospectus Supplement,
will evidence specified beneficial ownership interests in the related Trust Fund
created pursuant to each Agreement and will not be entitled to payments in
respect of the assets included in any other Trust Fund established by the
Depositor. The Certificates will not represent obligations of the Depositor or
any affiliate of the Depositor. The Mortgage Loans will not be insured or
guaranteed by any governmental entity or other person, unless otherwise
specified in the related Prospectus Supplement. Each Trust Fund will consist of,
to the extent provided in the Agreement, (i) the Mortgage Assets, that from time
to time are subject to the related Agreement (exclusive of any amounts specified
in the related Prospectus Supplement ("Retained Interest")); (ii) such assets as
from time to time are required to be deposited in the related Collection
Account, as defined below under "The Pooling and Servicing Agreement -- Payments
on Mortgage Loans; Deposits to Collection Account"; (iii) property which secured
a Mortgage Loan and which is acquired on behalf of the Certificateholders by
foreclosure or deed in lieu of foreclosure; and (iv) any Primary Mortgage
Insurance Policies, FHA Insurance and VA Guarantees, and any other insurance
policies or other forms of credit enhancement required to be maintained pursuant
to the Agreement. If so specified in the related Prospectus Supplement, a Trust
Fund may also include one or more of the following: reinvestment income on
payments received on the Mortgage Assets, a reserve fund, a mortgage pool
insurance policy, a special hazard insurance policy, a bankruptcy bond, one or
more letters of credit, a surety bond, guaranties or similar instruments or
other agreements.
Each Series of Certificates will be issued in one or more classes. Each
class of Certificates of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Mortgage Assets in the related Trust Fund. A Series of
Certificates may include one or more classes that are senior or subordinate in
right to payment to one or more other classes of Certificates of such Series.
Certain Series or classes of Certificates may be covered by insurance policies,
surety bonds or other forms of credit enhancement, in each case as described
herein and in the related Prospectus Supplement. One or more classes of
Certificates of a Series may be entitled to receive principal distributions,
with disproportionate, nominal or no interest distributions or to interest
distributions, with disproportionate, nominal or no principal distributions or
any combination thereof. Distributions on one or more classes of a Series of
Certificates may be made prior to one or more other classes, after the
occurrence of specified events, in accordance with a schedule or formula, on the
basis of collections from designated portions of the Mortgage Assets in the
related Trust Fund, or on a different basis, in each case as specified in the
related Prospectus Supplement. The timing, amounts, sequential order and
priority of payment of such distributions may vary among classes or over time as
specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement,
distributions of principal and interest (or, where applicable, of principal only
or interest only) on the related Certificates will be made by the Trustee on
each Distribution Date
27
<PAGE>
(i.e., monthly, quarterly, semi-annually or at such other intervals and on the
dates as are specified in the Prospectus Supplement) in proportion to the
percentages specified in the related Prospectus Supplement. Distributions will
be made to the persons in whose names the Certificates are registered at the
close of business on the dates specified in the related Prospectus Supplement
(each, a "Record Date"). Distributions will be made by check or money order
mailed to the persons entitled thereto at the address appearing in the register
maintained for holders of Certificates (the "Certificate Register") or, if
specified in the related Prospectus Supplement, in the case of Certificates that
are of a certain minimum denomination, upon written request by the
Certificateholder, by wire transfer or by such other means as are described
therein; provided, however, that the final distribution in retirement of the
Certificates will be made only upon presentation and surrender of the
Certificates at the office or agency of the Trustee or other person specified in
the notice to Certificateholders of such final distribution.
The Certificates will be freely transferable and exchangeable at the
Corporate Trust Office of the Trustee as set forth in the related Prospectus
Supplement. No service charge will be made for any registration of exchange or
transfer of Certificates of any Series but the Trustee may require payment of a
sum sufficient to cover any related tax or other governmental charge.
Under current law the purchase and holding by or on behalf of any employee
benefit plan or other retirement arrangement (including individual retirement
accounts and annuities, Keogh plans and collective investment funds in which
such plans, accounts or arrangements are invested) subject to provisions of
ERISA or the Code of a class of Certificates entitled only to a specified
percentage of payments of either interest or principal or a notional amount of
either interest or principal on the related Mortgage Loans or a class of
Certificates entitled to receive payments of interest and principal on the
Mortgage Loans only after payments to other classes or after the occurrence of
certain specified events may result in "prohibited transactions" within the
meaning of ERISA and the Code. See "ERISA Considerations." Unless otherwise
specified in the related Prospectus Supplement, transfer of Certificates of such
a class will not be registered unless the transferee (i) represents that it is
not, and is not purchasing on behalf of, any such plan, account or arrangement
or (ii) provides an opinion of counsel satisfactory to the Trustee and the
Depositor that the purchase of Certificates of such a class by or on behalf of
such plan, account or arrangement is permissible under applicable law and will
not subject the Trustee, the Master Servicer or the Depositor to any obligation
or liability in addition to those undertaken in the Agreement.
As to each Series, an election may be made to treat the related Trust Fund
or designated portions thereof as one or more "real estate mortgage investment
conduits" (each, a "REMIC") as defined in the Code. The related Prospectus
Supplement will specify whether a REMIC election is to be made. Alternatively,
the Agreement for a Series may provide that a REMIC election may be made at the
discretion of the Depositor or the Seller and may be made only if certain
conditions are satisfied. As to any such Series, the terms and provisions
applicable to the making of a REMIC election, as well as any material federal
income tax consequences to Certificateholders not otherwise described herein,
will be set forth in the related Prospectus Supplement. If such an election is
made with respect to a Series, one of the classes will be designated as
evidencing the sole class of "residual interests" in the related REMIC, as
defined in the Code. All other classes of Certificates in such a Series will
constitute "regular interests" in the related REMIC, as defined in the Code. As
to each Series with respect to which a REMIC election is to be made, holders of
Subordinated Certificates or a holder of the related residual certificate will
be obligated to take all actions required in order to comply with applicable
laws and regulations and will be obligated to pay any prohibited transaction
taxes. The Master Servicer, unless otherwise specified in the related Prospectus
Supplement, will be entitled to reimbursement for any such payment from the
assets of the Trust Fund or from any holder of the related residual certificate.
Unless otherwise specified in the related Prospectus Supplement, upon the
conversion of such Mortgage Loan from an adjustable interest rate to a fixed
interest rate, the Seller or its successor will be obligated to purchase such
related Mortgage Loan from the related Trust Fund.
Distributions on Certificates
General. In general, the method of determining the amount of distributions
on a particular Series of Certificates will depend on the type of credit
support, if any, that is used with respect to such Series. See "Credit
Enhancement." Set forth below are descriptions of various methods that may be
used to determine the amount of distributions on the Certificates of a
particular Series. The Prospectus Supplement for each Series of Certificates
will describe the method to be used in determining the amount of distributions
on the Certificates of such Series. Distributions allocable to principal of and
interest on the Certificates will be made by the Trustee out of, and only to the
extent of, funds in the related Collection Account, including any funds
transferred from any Reserve Fund. As between Certificates of different classes
and as between distributions of principal (and, if applicable, between
distributions of Principal Prepayments, as defined below, and scheduled payments
of
28
<PAGE>
principal) and interest, distributions made on any Distribution Date will be
applied as specified in the related Prospectus Supplement. Unless otherwise
specified in the related Prospectus Supplement, distributions to any class of
Certificates will be made pro rata to all Certificateholders of that class.
Available Distribution Amount. Unless otherwise specified in the related
Prospectus Supplement, all distributions on the Certificates of each Series on
each Distribution Date will be made from the Available Distribution Amount
described below, in accordance with the terms described in the related
Prospectus Supplement and specified in the Agreement. Unless otherwise provided
in the related Prospectus Supplement, the "Available Distribution Amount" for
each Distribution Date will equal the sum of the following amounts:
(i) the aggregate of all previously undistributed payments on account
of principal (including Principal Prepayments, if any, and prepayment
penalties, if so provided in the related Prospectus Supplement) and
interest on the Mortgage Loans in the related Trust Fund (including
Liquidation Proceeds and Insurance Proceeds and amounts drawn under letters
of credit or other credit enhancement instruments as permitted thereunder
and as specified in the related Agreement) received by the Master Servicer
after the Cut-off Date and on or prior to the day of the month of the
related Distribution Date specified in the related Prospectus Supplement
(the "Determination Date") except:
(a) all payments that were due on or before the Cut-off Date;
(b) all Liquidation Proceeds and all Insurance Proceeds, all
Principal Prepayments and all other proceeds of any Mortgage Loan
purchased by the Depositor, any Sub-Servicer or any Seller pursuant to
the Agreement that were received after the prepayment period specified
in the related Prospectus Supplement and all related payments of
interest representing interest for any period after such prepayment
period;
(c) all scheduled payments of principal and interest due on a date
or dates subsequent to the first day of the month of distribution;
(d) amounts received on particular Mortgage Loans as late payments
of principal or interest or other amounts required to be paid by
Mortgagors, but only to the extent of any unreimbursed advance in
respect thereof made by the Master Servicer (including the related
Sub-Servicers);
(e) amounts representing reimbursement, to the extent permitted by
the Agreement and as described under "Advances" below, for advances made
by the Master Servicer or Sub-Servicers that were deposited into the
Collection Account, and amounts representing reimbursement for certain
other losses and expenses incurred by the Master Servicer or the
Depositor and described below;
(f) that portion of each collection of interest on a particular
Mortgage Loan in such Trust Fund that represents credit enhancement fees
or servicing compensation payable to the Master Servicer or any
Sub-Servicer or Retained Interest that is to be retained from such
collection or is permitted to be retained from related Insurance
Proceeds, Liquidation Proceeds or proceeds of Mortgage Loans purchased
pursuant to the Agreement;
(ii) the amount of any advance made by the Master Servicer or
Sub-Servicer as described under "Advances" below and deposited by it in the
Collection Account; and
(iii) if applicable, amounts withdrawn from a Reserve Fund.
Distributions of Interest. Unless otherwise specified in the related
Prospectus Supplement, interest will accrue on the aggregate Certificate Balance
(or, in the case of Certificates entitled only to distributions allocable to
interest, the aggregate notional amount) of each class of Certificates entitled
to interest at the Pass-Through Rate (which may be a fixed rate or rate
adjustable as specified in such Prospectus Supplement) from the date, and for
the periods, specified in such Prospectus Supplement. To the extent funds are
available therefor, interest accrued during each such specified period on each
class of Certificates entitled to interest (other than a class of Certificates
that provides for interest that accrues, but is not currently payable, referred
to hereafter as "Accrual Certificates") will be distributable on the
Distribution Dates specified in the related Prospectus Supplement until the
aggregate Certificate Balance of the Certificates of such class has been
distributed in full or, in the case of Certificates entitled only to
distributions allocable to interest, until the aggregate notional amount of such
Certificates is reduced to zero or for the period of time designated in the
related Prospectus Supplement. The original Certificate Balance of each
Certificate will equal the aggregate distributions allocable to principal to
which such Certificate is
29
<PAGE>
entitled. Unless otherwise specified in the related Prospectus Supplement,
distributions allocable to interest on each Certificate that is not entitled to
distributions allocable to principal will be calculated based on the notional
amount of such Certificate. The notional amount of a Certificate will not
evidence an interest in or entitlement to distributions allocable to principal
but will be used solely for convenience in expressing the calculation of
interest and for certain other purposes.
With respect to any class of Accrual Certificates, if specified in the
related Prospectus Supplement, any interest that has accrued but is not paid on
a given Distribution Date will be added to the aggregate Certificate Balance of
such class of Certificates on that Distribution Date. Unless otherwise specified
in the related Prospectus Supplement, distributions of interest on each class of
Accrual Certificates will commence only after the occurrence of the events
specified in such Prospectus Supplement. Unless otherwise specified in the
related Prospectus Supplement, prior to such time, the beneficial ownership
interest of such class of Accrual Certificates in the Trust Fund, as reflected
in the aggregate Certificate Balance of such class of Accrual Certificates, will
increase on each Distribution Date by the amount of interest that accrued on
such class of Accrual Certificates during the preceding interest accrual period
but that was not required to be distributed to such class on such Distribution
Date. Any such class of Accrual Certificates will thereafter accrue interest on
its outstanding Certificate Balance as so adjusted.
Distributions of Principal. Unless otherwise specified in the related
Prospectus Supplement, the aggregate "Certificate Balance" of any class of
Certificates entitled to distributions of principal will be the aggregate
original Certificate Balance of such class of Certificates specified in such
Prospectus Supplement, reduced by all distributions reported to the holders of
such Certificates as allocable to principal and (i) in the case of Accrual
Certificates, if so specified in the related Prospectus Supplement, increased by
all interest accrued but not then distributable on such Accrual Certificates and
(ii) in the case of adjustable rate Certificates, if so specified in the related
Prospectus Supplement, subject to the effect of negative amortization. The
related Prospectus Supplement will specify the method by which the amount of
principal to be distributed on the Certificates on each Distribution Date will
be calculated and the manner in which such amount will be allocated among the
classes of Certificates entitled to distributions of principal. A class of
interest-only Certificates will not be entitled to distributions of principal
and will have a notional principal balance on which interest will accrue.
If so provided in the related Prospectus Supplement, one or more classes of
Senior Certificates will be entitled to receive all or a disproportionate
percentage of the payments of principal that are received from borrowers in
advance of their scheduled due dates and are not accompanied by amounts
representing scheduled interest due after the month of such payments ("Principal
Prepayments") in the percentages and under the circumstances or for the periods
specified in such Prospectus Supplement. Any such allocation of Principal
Prepayments to such class or classes of Certificateholders will have the effect
of accelerating the amortization of such Senior Certificates while increasing
the interests evidenced by the Subordinated Certificates in the Trust Fund.
Increasing the interests of the Subordinated Certificates relative to that of
the Senior Certificates is intended to preserve the availability of the
subordination provided by the Subordinated Certificates. See "Credit
Enhancement -- Subordination."
Unscheduled Distributions. To the extent specified in the related
Prospectus Supplement relating to a Series of Certificates which have less
frequent than monthly Distribution Dates, the Certificates will be subject to
receipt of distributions before the next scheduled Distribution Date under the
circumstances and in the manner described below and in such Prospectus
Supplement. If applicable, the Trustee will be required to make such unscheduled
distributions on the day and in the amount specified in the related Prospectus
Supplement if, due to substantial payments of principal (including Principal
Prepayments) on the Mortgage Assets, the Trustee or the Master Servicer
determines that the funds available or anticipated to be available from the
Collection Account and, if applicable, any Reserve Fund, may be insufficient to
make required distributions on the Certificates on such Distribution Date.
Unless otherwise specified in the related Prospectus Supplement, the amount of
any such unscheduled distribution that is allocable to principal will not exceed
the amount that would otherwise have been required to be distributed as
principal on the Certificates on the next Distribution Date. Unless otherwise
specified in the related Prospectus Supplement, all unscheduled distributions
will include interest at the applicable Pass-Through Rate (if any) on the amount
of the unscheduled distribution allocable to principal for the period and to the
date specified in such Prospectus Supplement. See "Yield and Prepayment
Considerations."
Unless otherwise specified in the related Prospectus Supplement, all
distributions allocable to principal in any unscheduled distribution will be
made in the same priority and manner as distributions of principal on the
Certificates would have been made on the next Distribution Date, and with
respect to Certificates of the same class, unscheduled distributions of
principal will be made on a pro rata basis.
Notice of any unscheduled distribution will be given by the Trustee prior
to the date of such distribution.
30
<PAGE>
Advances
Generally, the Master Servicer will be required to advance on or before
each Distribution Date (from its own funds, funds advanced by Sub-Servicers or
funds held in the Collection Account for future distributions to the holders of
such Certificates), an amount equal to the aggregate of payments of principal
and interest (or, in the case of Home Equity Loans, payments of interest only)
that were delinquent on the related Determination Date, subject to the Master
Servicer's determination that such advances will be recoverable out of late
payments by Mortgagors, Liquidation Proceeds, Insurance Proceeds or otherwise,
and net of applicable servicing compensation. In the case of Cooperative Loans,
the Master Servicer also will be required to advance any unpaid maintenance fees
and other charges under the related proprietary leases as specified in the
related Prospectus Supplement. The Prospectus Supplement for a Series of
Certificates will specify the nature and timing of amounts to be advanced to the
holders of such Certificates and the manner in which Advances may be recovered
by the Master Servicer. Funds so advanced are reimbursable to the Master
Servicer to the extent permitted by the related Agreement. The Master Servicer's
obligation to make Advances will not guarantee or insure against losses to
holders of the Certificates.
Reports to Certificateholders
Prior to or concurrently with each distribution on a Distribution Date and
except as otherwise set forth in an applicable Prospectus Supplement, the Master
Servicer or the Trustee will furnish to each Certificateholder of record of the
related Series a statement setting forth, to the extent applicable to such
Series of Certificates, among other things:
(i) the amount of such distribution allocable to principal, separately
identifying the aggregate amount of any Principal Prepayments and if so
specified in the related Prospectus Supplement, prepayment penalties
included therein;
(ii) the amount of such distribution allocable to interest;
(iii) the amount of any Advance;
(iv) the outstanding Certificate Balance or notional amount of each
class of the related Series after giving effect to the distribution of
principal on such Distribution Date;
(v) the related amount of the servicing compensation retained or
withdrawn from the Collection Account by the Master Servicer;
(vi) the number and aggregate principal balances of Mortgage Loans (A)
delinquent (exclusive of Mortgage Loans in foreclosure) and (B) in
foreclosure as of the close of business on the last day of the calendar
month preceding such Distribution Date;
(vii) the book value of any real estate acquired through foreclosure
or grant of a deed in lieu of foreclosure;
(viii) if applicable, the amount remaining in any Reserve Fund at the
close of business on the Distribution Date;
(ix) the Pass-Through Rate as of the day prior to the immediately
preceding Distribution Date; and
(x) any amounts remaining under letters of credit, pool policies or
other forms of credit enhancement.
Where applicable, any amount set forth above may be expressed as a dollar
amount per single Certificate of the relevant class having the Percentage
Interest specified in the related Prospectus Supplement. The report to
Certificateholders for any Series of Certificates may include additional or
other information of a similar nature to that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the Trustee will mail to each
Certificateholder of record at any time during such calendar year a report (a)
as to the aggregate of amounts reported pursuant to (i) and (ii) for such
calendar year or, in the event such person was a Certificateholder of record
during a portion of such calendar year, for the applicable portion of such year
and (b) such other customary information as may be deemed necessary or desirable
for Certificateholders to prepare their tax returns.
Book-Entry Registration
If so specified in the related Prospectus Supplement, a class of
Certificates may be book-entry Certificates (the "Book-Entry Certificates").
Persons acquiring beneficial ownership interests in such Certificates
("Certificate Owners") will hold their Certificates through the Depository Trust
Company ("DTC") in the United States, or Centrale de Livraison de Valeurs
Mobilieres S.A. ("CEDEL") or the Euroclear System ("Euroclear") in Europe if
they are participants of such systems, or indirectly through organizations which
are participants in such systems (each, a "Participant"). The Book-Entry
Certificates
31
<PAGE>
will be issued in one or more certificates which equal the aggregate principal
balance of such class of Certificates and will initially be registered in the
name of Cede & Co. ("Cede"), the nominee of DTC. CEDEL and Euroclear will hold
omnibus positions on behalf of their participants through customers' securities
accounts in CEDEL's and Euroclear's names on the books of their respective
depositaries, which in turn will hold such positions in customers' securities
accounts in the depositaries' names on the books of DTC. Citibank N.A. will act
as depositary for CEDEL, and Morgan Guaranty Trust Company of New York
("Morgan") will act as depositary for Euroclear (in such capacities,
individually the "Relevant Depositary" and collectively, the "European
Depositaries"). Except as described below, no person acquiring a Book-Entry
Certificate (each, a "beneficial owner") will be entitled to receive a physical
certificate representing such Certificate (a "Definitive Certificate"). Unless
and until Definitive Certificates are issued, it is anticipated that the only
"Certificateholder" of such Certificates will be Cede, as nominee of DTC.
Certificate Owners will not be Certificateholders as that term is used in the
Agreement. Certificate Owners are only permitted to exercise their rights
indirectly through Participants and DTC.
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC participant, and on
the records of CEDEL or Euroclear, as appropriate).
Certificate Owners of a class of Book-Entry Certificates will receive all
distributions of principal of, and interest on, such Certificates from the
Trustee through DTC and DTC participants. While such Certificates 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 such class of Certificates and is required
to receive and transmit distributions of principal of, and interest on, such
Certificates. Participants and indirect participants with whom Certificate
Owners have accounts with respect to such Certificates are similarly required to
make book-entry transfers and receive and transmit such distributions on behalf
of their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess certificates, the Rules provide a mechanism by which
Certificate Owners will receive distributions and will be able to transfer their
interest.
Certificate Owners will not receive or be entitled to receive certificates
representing their respective interests in such Certificates, except under the
limited circumstances described below. Unless and until Definitive Certificates
are issued, Certificate Owners who are not Participants may transfer ownership
of such Certificates only through Participants and indirect participants by
instructing such Participants and indirect participants to transfer such
Certificates, by book-entry transfer, through DTC for the account of the
purchasers of such Certificates, which account is maintained with their
respective Participants. Under the Rules and in accordance with DTC's normal
procedures, transfers of ownership of a class 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 Participants and indirect
participants will make debits or credits, as the case may be, on their records
on behalf of the selling and purchasing Certificate Owners.
Because of time zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as
a result of sales of securities by or through a CEDEL participant (as defined
below) or Euroclear Participant (as defined below) 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 -- Non-U.S. Persons" and " -- Information Reporting and Backup
Withholding" herein and "Global Clearance, Settlement and Tax Documentation
Procedures -- Certain U.S. Federal Income Tax Documentation Requirements" in
Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective 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
Participants 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 the Relevant 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).
32
<PAGE>
The relevant European international clearing system will, if the transaction
meets its settlement requirements, deliver instructions to the Relevant
Depositary to take action to effect final settlement on its behalf by delivering
or receiving securities in DTC, and making or receiving payment in accordance
with normal procedures for same day funds settlement applicable to DTC. CEDEL
Participants and Euroclear Participants may not deliver instructions directly to
the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the Book-Entry Certificates, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Certificates will be subject to the rules,
regulations and procedures governing DTC and DTC participants as in effect from
time to time.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. 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.
Euroclear was created in 1968 to hold securities for its participants
("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 be settled in any of 32 currencies, including United
States dollars. Euroclear 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. Euroclear is operated by the Brussels, Belgium, office of
Morgan (the "Euroclear Operator"), under contract with Euroclear Clearance
Systems 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 and other professional
financial intermediaries. 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 which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
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 on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC Participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial intermediary will be responsible
for disbursing funds to the beneficial owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, beneficial owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede. Distributions with respect to Certificates
held
33
<PAGE>
through CEDEL or Euroclear will be credited to cash accounts of CEDEL
Participants or Euroclear Participants in accordance with the relevant system's
rules and procedures, to the extent received by the Relevant 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 -- Non-U.S. Persons" and " -- Information Reporting and Backup
Withholding" herein. Because DTC can only act on behalf of Financial
Intermediaries, the ability of a beneficial owner to pledge Book-Entry
Certificates to persons or entities that do not participate in the Depository
system, or otherwise take actions in respect of such Book-Entry Certificates,
may be limited due to the lack of physical certificates for such Book-Entry
Certificates. In addition, issuance of the Book-Entry Certificates in book-entry
form may reduce the liquidity of such Certificates in the secondary market since
certain potential investors may be unwilling to purchase Certificates for which
they cannot obtain physical certificates.
Monthly and annual reports on the Trust will be provided to Cede, as
nominee of DTC, and may be made available by Cede to beneficial owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such beneficial owners are credited.
With respect to each class of Book-Entry Certificates, DTC will advise the
Trustee that, unless and until Definitive Certificates are issued, DTC will take
any action permitted to be taken by the holders of such Book-Entry Certificates
under the related Agreement only at the direction of one or more Financial
Intermediaries to whose DTC accounts the Book-Entry Certificates are credited,
to the extent that such actions are taken on behalf of Financial Intermediaries
whose holdings include such Book-Entry Certificates. CEDEL or the Euroclear
Operator, as the case may be, will take any other action permitted to be taken
by a Certificateholder under such Agreement on behalf of a CEDEL Participant or
Euroclear Participant only in accordance with its relevant rules and procedures
and subject to the ability of the Relevant Depositary to effect such actions on
its behalf through DTC. DTC may take actions, at the direction of the related
Participants, with respect to some Certificates of a class of Book-Entry
Certificates which conflict with actions taken with respect to other
Certificates of such class.
Definitive Certificates will be issued to beneficial owners of Book-Entry
Certificates, or their nominees, rather than to DTC, only if (a) DTC or the
Depositor advises the related Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depository with respect to such Book-Entry Certificates and the Depositor or
such Trustee is unable to locate a qualified successor, (b) the Depositor, at
its sole option, with the consent of such Trustee, elects to terminate a
book-entry system through DTC, or (c) after the occurrence of an Event of
Default (as defined in the related Prospectus Supplement), beneficial owners
having Percentage Interests aggregating not less than 50% of the aggregate
Current Principal Amount of such Book-Entry Certificates advise the Trustee and
DTC through the Financial Intermediaries and the DTC Participants in writing
that the continuation of a book-entry system through DTC (or a successor
thereto) is no longer in the best interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee for such a Series will be required to notify
all beneficial owners of the occurrence of such event and the availability
through DTC of Definitive Certificates. Upon surrender by DTC of the global
certificate or certificates representing the Book-Entry Certificates and
instructions for re-registration, the Trustee will issue Definitive
Certificates, and thereafter the Trustee will recognize the holders of such
Definitive Certificates as Certificateholders of such Series under the related
Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Certificates among participants of DTC,
CEDEL and Euroclear, they are under no obligation to perform or continue to
perform such procedures, and such procedures may be discontinued at any time.
Neither the Depositor, the Master Servicer nor the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of any class of Book-Entry
Certificates held by Cede, as nominee for DTC, or for maintaining, supervising
or reviewing any records relating to such beneficial ownership interests.
34
<PAGE>
CREDIT ENHANCEMENT
General
Credit enhancement may be provided with respect to one or more classes of a
Series of Certificates or with respect to the Mortgage Assets in the related
Trust Fund. Credit enhancement may be in the form of a limited financial
guaranty policy issued by an entity named in the related Prospectus Supplement,
the subordination of one or more classes of the Certificates of such Series, the
establishment of one or more reserve funds, the use of a cross-support feature,
use of a mortgage pool insurance policy, bankruptcy bond, special hazard
insurance policy, surety bond or letters of credit described herein and in the
related Prospectus Supplement, or any combination of the foregoing. Unless
otherwise specified in the related Prospectus Supplement, any credit enhancement
will not provide protection against all risks of loss and will not guarantee
repayment of the entire principal balance of the Certificates and interest
thereon. If losses occur which exceed the amount covered by credit enhancement
or which are not covered by the credit enhancement, Certificateholders will bear
their allocable share of deficiencies.
Subordination
If so specified in the related Prospectus Supplement, protection afforded
to holders of one or more classes of Certificates of a Series (the "Subordinated
Certificates") by means of the subordination feature will be accomplished by the
preferential right of holders of one or more other classes of such Series (the
"Senior Certificates") to distributions in respect of scheduled principal,
Principal Prepayments, interest or any combination thereof that otherwise would
have been payable to holders of Subordinated Certificates under the
circumstances and to the extent specified in the related Prospectus Supplement.
If specified in the related Prospectus Supplement, delays in receipt of
scheduled payments on the Mortgage Loans and losses on defaulted Mortgage 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 related
Prospectus Supplement. The aggregate distributions in respect of delinquent
payments on the Mortgage Loans over the lives of the Certificates or at any
time, the aggregate losses in respect of defaulted Mortgage Loans which must be
borne by the Subordinated Certificates by virtue of subordination and the amount
of the distributions otherwise distributable to the Subordinated
Certificateholders that will be distributable to Senior Certificateholders on
any Distribution Date may be limited as specified in the related Prospectus
Supplement. If aggregate distributions in respect of delinquent payments on the
Mortgage Loans or aggregate losses in respect of such Mortgage Loans were to
exceed an amount specified in the related Prospectus Supplement, holders of
Senior Certificates would experience losses on the Certificates.
In addition to or in lieu of the foregoing, if so specified in the related
Prospectus Supplement, all or any portion of distributions otherwise payable to
holders of Subordinated Certificates on any Distribution Date may instead be
deposited into one or more Reserve Funds established with the Trustee. If so
specified in the related Prospectus Supplement, such deposits may be made on
each Distribution Date, for specified periods or until the balance in the
Reserve Funds has reached a specified amount and, following payments from the
Reserve Fund to holders of Senior Certificates or otherwise, thereafter to the
extent necessary to restore the balance in the Reserve Fund to required levels,
in each case as specified in the related Prospectus Supplement. If so specified
in the related Prospectus Supplement, amounts on deposit in the Reserve Fund may
be released to the holders of the class of Certificates specified in such
Prospectus Supplement at the times and under the circumstances specified in such
Prospectus Supplement.
If specified in the related Prospectus Supplement, various classes of
Senior Certificates and Subordinated Certificates may themselves be subordinate
in their right to receive certain distributions to other classes of Senior and
Subordinated Certificates, respectively, through a cross support mechanism or
otherwise.
As between classes of Senior Certificates and as between classes of
Subordinated Certificates, distributions may be allocated among such classes (i)
in the order of their scheduled final distribution dates, (ii) in accordance
with a schedule or formula, (iii) in relation to the occurrence of events, or
(iv) otherwise, in each case as specified in the related Prospectus Supplement.
As between classes of Subordinated Certificates, payments to holders of Senior
Certificates on account of delinquencies or losses and payments to any Reserve
Fund will be allocated as specified in the related Prospectus Supplement.
Mortgage Pool Insurance Policies
If specified in the related Prospectus Supplement relating to a Mortgage
Pool, a separate mortgage pool insurance policy ("Mortgage Pool Insurance
Policy") will be obtained for the Mortgage Pool and issued by the insurer (the
"Pool Insurer") named in such Prospectus Supplement. Each Mortgage Pool
Insurance Policy will, subject to the limitations described below, cover loss by
reason of default in payment on Mortgage Loans in the Mortgage Pool in an amount
equal to a percentage
35
<PAGE>
specified in such Prospectus Supplement of the aggregate principal balance of
such Mortgage Loans on the Cut-off Date which are not covered as to their entire
outstanding principal balances by Primary Mortgage Insurance Policies. As more
fully described below, the Master Servicer will present claims thereunder to the
Pool Insurer on behalf of itself, the Trustee and the holders of the
Certificates. The Mortgage Pool Insurance Policies, however, are not blanket
policies against loss, since claims thereunder may be made only respecting
particular defaulted Mortgage Loans and only upon satisfaction of certain
conditions precedent described below. Unless otherwise specified in the related
Prospectus Supplement, the Mortgage Pool Insurance Policies will not cover
losses due to a failure to pay or denial of a claim under a Primary Mortgage
Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Pool Insurance Policy will provide that no claims may be validly
presented unless (i) any required Primary Mortgage Insurance Policy is in effect
for the defaulted Mortgage Loan and a claim thereunder has been submitted and
settled; (ii) hazard insurance on the related Mortgaged Property has been kept
in force and real estate taxes and other protection and preservation expenses
have been paid; (iii) if there has been physical loss or damage to the Mortgaged
Property, it has been restored to its physical condition (reasonable wear and
tear excepted) at the time of issuance of the policy; and (iv) the insured has
acquired good and merchantable title to the Mortgaged Property free and clear of
liens except certain permitted encumbrances. Upon satisfaction of these
conditions, the Pool Insurer will have the option either (a) to purchase the
property securing the defaulted Mortgage Loan at a price equal to the principal
balance thereof plus accrued and unpaid interest at the Mortgage Rate to the
date of purchase and certain expenses incurred by the Master Servicer on behalf
of the Trustee and Certificateholders or (b) to pay the amount by which the sum
of the principal balance of the defaulted Mortgage Loan plus accrued and unpaid
interest at the Mortgage Rate to the date of payment of the claim and the
aforementioned expenses exceeds the proceeds received from an approved sale of
the Mortgaged Property, in either case net of certain amounts paid or assumed to
have been paid under the related Primary Mortgage Insurance Policy. If any
property securing a defaulted Mortgage Loan is damaged and proceeds, if any,
from the related hazard insurance policy or the applicable Special Hazard
Insurance Policy are insufficient to restore the damaged property to a condition
sufficient to permit recovery under the Mortgage Pool Insurance Policy, the
Master Servicer will not be required to expend its own funds to restore the
damaged property unless it determines that (i) such restoration will increase
the proceeds to Certificateholders on liquidation of the Mortgage Loan after
reimbursement of the Master Servicer for its expenses and (ii) such expenses
will be recoverable by it through proceeds of the sale of the property or
proceeds of the related Mortgage Pool Insurance Policy or any related Primary
Mortgage Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, no
Mortgage Pool Insurance Policy will insure (and many Primary Mortgage Insurance
Policies do not insure) against loss sustained by reason of a default arising
from, among other things, (i) fraud or negligence in the origination or
servicing of a Mortgage Loan, including misrepresentation by the Mortgagor, the
originator or persons involved in the origination thereof or (ii) failure to
construct a Mortgaged Property in accordance with plans and specifications. A
failure of coverage attributable to one of the foregoing events might result in
a breach of the related Seller's representations described above and, in such
event, might give rise to an obligation on the part of such Seller to purchase
the defaulted Mortgage Loan if the breach cannot be cured by such Seller. No
Mortgage Pool Insurance Policy will cover (and many Primary Mortgage Insurance
Policies do not cover) a claim in respect of a defaulted Mortgage Loan occurring
when the servicer of such Mortgage Loan, at the time of default or thereafter,
was not approved by the applicable insurer.
Unless otherwise specified in the related Prospectus Supplement, the
original amount of coverage under each Mortgage Pool Insurance Policy will be
reduced over the life of the related Certificates by the aggregate dollar amount
of claims paid less the aggregate of the net amounts realized by the Pool
Insurer upon disposition of all foreclosed properties. The amount of claims paid
will include certain expenses incurred by the Master Servicer as well as accrued
interest on delinquent Mortgage Loans to the date of payment of the claim,
unless otherwise specified in the related Prospectus Supplement. Accordingly, if
aggregate net claims paid under any Mortgage Pool Insurance Policy reach the
original policy limit, coverage under that Mortgage Pool Insurance Policy will
be exhausted and any further losses will be borne by the Certificateholders.
Special Hazard Insurance Policies
If specified in the related Prospectus Supplement, a separate Special
Hazard Insurance Policy will be obtained for the Mortgage Pool and will be
issued by the insurer (the "Special Hazard Insurer") named in such Prospectus
Supplement. Each Special Hazard Insurance Policy will, subject to limitations
described below, protect holders of the related Certificates from (i) loss by
reason of damage to Mortgaged Properties caused by certain hazards (including
earthquakes and, to a limited extent, tidal waves and related water damage or as
otherwise specified in the related Prospectus Supplement) not insured against
under the standard form of hazard insurance policy for the respective states in
which the Mortgaged Properties are
36
<PAGE>
located or under a flood insurance policy if the Mortgaged Property is located
in a federally designated flood area, and (ii) loss caused by reason of the
application of the coinsurance clause contained in hazard insurance policies.
See "The Pooling and Servicing Agreement -- Hazard Insurance." Each Special
Hazard Insurance Policy will not cover losses occasioned by fraud or conversion
by the Trustee or Master Servicer, war, insurrection, civil war, certain
governmental action, errors in design, faulty workmanship or materials (except
under certain circumstances), nuclear or chemical reaction, flood (if the
Mortgaged Property is located in a federally designated flood area), nuclear or
chemical contamination and certain other risks. The amount of coverage under any
Special Hazard Insurance Policy will be specified in the related Prospectus
Supplement. Each Special Hazard Insurance Policy will provide that no claim may
be paid unless hazard and, if applicable, flood insurance on the property
securing the Mortgage Loan have been kept in force and other protection and
preservation expenses have been paid.
Subject to the foregoing limitations, and unless otherwise specified in the
related Prospectus Supplement, each Special Hazard Insurance Policy will provide
that where there has been damage to property securing a foreclosed Mortgage Loan
(title to which has been acquired by the insured) and to the extent such damage
is not covered by the hazard insurance policy or flood insurance policy, if any,
maintained by the Mortgagor or the Master Servicer, the Special Hazard Insurer
will pay the lesser of (i) the cost of repair or replacement of such property or
(ii) upon transfer of the property to the Special Hazard Insurer, the unpaid
principal balance of such Mortgage Loan at the time of acquisition of such
property by foreclosure or deed in lieu of foreclosure, plus accrued interest to
the date of claim settlement and certain expenses incurred by the Master
Servicer with respect to such property. If the unpaid principal balance of a
Mortgage Loan plus accrued interest and certain expenses is paid by the Special
Hazard Insurer, the amount of further coverage under the related Special Hazard
Insurance Policy will be reduced by such amount less any net proceeds from the
sale of the property. Any amount paid as the cost of repair of the property will
further reduce coverage by such amount. So long as a Mortgage Pool Insurance
Policy remains in effect, the payment by the Special Hazard Insurer of the cost
of repair or of the unpaid principal balance of the related Mortgage Loan plus
accrued interest and certain expenses will not affect the total insurance
proceeds paid to Certificateholders, but will affect the relative amounts of
coverage remaining under the related Special Hazard Insurance Policy and
Mortgage Pool Insurance Policy.
To the extent and in the manner specified in an applicable Prospectus
Supplement, the Master Servicer may deposit cash, an irrevocable letter of
credit or any other instrument acceptable to each nationally recognized rating
agency rating the Certificates of the related Series in a special trust account
to provide protection in lieu of or in addition to that provided by a Special
Hazard Insurance Policy. The amount of any Special Hazard Insurance Policy or of
the deposit to the special trust account relating to such Certificates in lieu
thereof may be reduced so long as any such reduction will not result in a
downgrading of the rating of such Certificates by any such rating agency.
Bankruptcy Bonds
If specified in the related Prospectus Supplement, a bankruptcy bond
("Bankruptcy Bond") for proceedings under the federal Bankruptcy Code will be
issued by an insurer named in such Prospectus Supplement. Each Bankruptcy Bond
will cover, to the extent specified in the related Prospectus Supplement,
certain losses resulting from a reduction by a bankruptcy court of scheduled
payments of principal and interest on a Mortgage Loan or a reduction by such
court of the principal amount of a Mortgage Loan and will cover certain unpaid
interest on the amount of such a principal reduction from the date of the filing
of a bankruptcy petition. The required amount of coverage under each Bankruptcy
Bond will be set forth in the related Prospectus Supplement. Coverage under a
Bankruptcy Bond may be cancelled or reduced if such cancellation or reduction
would not adversely affect the then current rating or ratings of the related
Certificates. See "Certain Legal Aspects of the Mortgage
Loans -- Anti-Deficiency Legislation and Other Limitations on Lenders."
To the extent specified in an applicable Prospectus Supplement, the Seller
may deposit cash, an irrevocable letter of credit or any other instrument
acceptable to each nationally recognized rating agency rating the Certificates
of the related Series in a special trust account to provide protection in lieu
of or in addition to that provided by a Bankruptcy Bond. The amount of any
Bankruptcy Bond or of the deposit to the special trust account relating to such
Certificates in lieu thereof may be reduced so long as any such reduction will
not result in a downgrading of the rating of such Certificates by any such
rating agency.
Reserve Funds
If so specified in the related Prospectus Supplement, credit support with
respect to a Series of Certificates may be provided by the establishment and
maintenance with the Trustee for such Series of Certificates, in trust, of one
or more
37
<PAGE>
Reserve Funds for such Series. The related Prospectus Supplement will specify
whether or not such Reserve Funds will be included in the Trust Fund for such
Series.
The Reserve Fund for a Series will be funded (i) by the deposit therein of
cash, U.S. Treasury securities, instruments evidencing ownership of principal or
interest payments thereon, letters of credit, demand notes, certificates of
deposit or a combination thereof in the aggregate amount specified in the
related Prospectus Supplement, (ii) by the deposit therein from time to time of
certain amounts, as specified in the related Prospectus Supplement to which the
Subordinated Certificateholders, if any, would otherwise be entitled or (iii) in
such other manner as may be specified in the related Prospectus Supplement.
Any amounts on deposit in the Reserve Fund and the proceeds of any other
instrument upon maturity will be held in cash or will be invested in Permitted
Investments which, unless otherwise specified in the related Prospectus
Supplement, will include obligations of the United States and certain agencies
thereof, certificates of deposit, certain commercial paper, time deposits and
bankers acceptances sold by eligible commercial banks and certain repurchase
agreements of United States government securities with eligible commercial
banks. If a letter of credit is deposited with the Trustee, such letter of
credit will be irrevocable. Unless otherwise specified in the related Prospectus
Supplement, any instrument deposited therein will name the Trustee, in its
capacity as trustee for the holders of the Certificates, as beneficiary and will
be issued by an entity acceptable to each rating agency that rates the
Certificates. Additional information with respect to such instruments deposited
in the Reserve Funds will be set forth in the related Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will be
available for withdrawal from the Reserve Account for distribution to the
holders of Certificates for the purposes, in the manner and at the times
specified in the related Prospectus Supplement.
Cross Support
If specified in the related Prospectus Supplement, the beneficial ownership
of separate groups of assets included in a Trust Fund may be evidenced by
separate classes of the related Series of Certificates. In such case, credit
support may be provided by a cross support feature which requires that
distributions be made with respect to Certificates evidencing a beneficial
ownership interest in other asset groups within the same Trust Fund. The related
Prospectus Supplement for a Series which includes a cross-support feature will
describe the manner and conditions for applying such cross support feature.
If specified in the related Prospectus Supplement, the coverage provided by
one or more forms of credit support may apply concurrently to two or more
related Trust Funds. If applicable, the related Prospectus Supplement will
identify the Trust Funds to which such credit support relates and the manner of
determining the amount of the coverage provided thereby and of the application
of such coverage to the identified Trust Funds.
Limited Guarantee
If specified in the Prospectus Supplement with respect to a Series of
Certificates, credit enhancement may be provided in the form of a Limited
Guarantee issued by a guarantor named therein. If specified in the related
Prospectus Supplement, a Limited Guarantee may be provided by an affiliate or
affiliates of the Depositor.
Letter of Credit
Alternative credit support with respect to a Series of Certificates may be
provided by the issuance of a Letter of Credit by the bank or financial
institution specified in the applicable Prospectus Supplement. The coverage,
amount and frequency of any reduction in coverage provided by a Letter of Credit
issued with respect to a Series of Certificates will be set forth in the related
Prospectus Supplement.
Surety Bonds
If specified in the Prospectus Supplement relating to a Series of
Certificates, credit support with respect to one or more Classes of Certificates
of a Series may be provided by the issuance of a Surety Bond issued by a
financial guarantee insurance company specified in the applicable Prospectus
Supplement. The coverage, amount and frequency of any reduction in coverage
provided by a Surety Bond will be set forth in the related Prospectus
Supplement.
38
<PAGE>
Overcollateralization
If specified in the related Prospectus Supplement, credit support may
consist of overcollateralization whereby the aggregate principal amount of the
Mortgage Assets, including any Subsequent Mortgage Assets, exceeds the aggregate
Certificate Balance of the Certificates. Such overcollateralization may exist on
the Closing Date or develop thereafter as a result of the application of certain
interest collections, in excess of amounts necessary to pay the Pass-Through
Rate on the Certificates, received in connection with the Mortgage Assets,
including any Subsequent Mortgage Assets. The existence of any
overcollateralization and the manner, if any, by which it increases or
decreases, will be set forth in the related Prospectus Supplement.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity and weighted average lives of the Certificates will
be affected primarily by the amount and timing of principal payments received on
or in respect of the Mortgage Assets included in the related Trust Fund. The
original terms to maturity of the Mortgage Loans in a given Mortgage Pool will
vary depending upon the type of Mortgage Loans included therein. Each Prospectus
Supplement will contain information with respect to the type and maturities of
the Mortgage Loans in the related Mortgage Pool. Unless otherwise specified in
the related Prospectus Supplement, Mortgage Loans may be prepaid without penalty
in full or in part at any time. The prepayment experience on the Mortgage Loans
in a Mortgage Pool will affect the life of the related Series of Certificates.
A number of factors, including, but not limited to, homeowner mobility,
economic conditions, the presence and enforceability of due-on-sale clauses,
mortgage market interest rates and the availability of mortgage funds, may
affect prepayment experience of Mortgage Loans.
Unless otherwise provided in the related Prospectus Supplement, all
conventional Mortgage Loans will contain due-on-sale provisions permitting the
mortgagee to accelerate the maturity of the loan upon sale or certain transfers
by the mortgagor of the underlying Mortgaged Property. Mortgage Loans insured by
the FHA, and Mortgage Loans partially guaranteed by the VA, are assumable with
the consent of the FHA and the VA, respectively. Thus, the rate of prepayments
on such Mortgage Loans may be lower than that of conventional Mortgage Loans
bearing comparable interest rates. Unless otherwise provided in the related
Prospectus Supplement, the Master Servicer generally will enforce any
due-on-sale or due-on-encumbrance clause, to the extent it has knowledge of the
conveyance or further encumbrance or the proposed conveyance or proposed further
encumbrance of the Mortgaged Property and reasonably believes that it is
entitled to do so under applicable law; provided, however, the Master Servicer
will not take any enforcement action that would impair or threaten to impair any
recovery under any related insurance policy. See "The Pooling and Servicing
Agreement -- Collection Procedures" and "Certain Legal Aspects of the Mortgage
Loans" for a description of certain provisions of each Agreement and certain
legal developments that may affect the prepayment experience on the Mortgage
Loans.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing rates fall
significantly below the Mortgage Rates borne by the Mortgage Loans, such
Mortgage Loans are likely to be subject to higher prepayment rates than if
prevailing interest rates remain at or above such Mortgage Rates. Conversely, if
prevailing interest rates rise appreciably above the Mortgage Rates borne by the
Mortgage Loans, such Mortgage Loans are likely to experience a lower prepayment
rate than if prevailing rates remain at or below such Mortgage Rates. However,
there can be no assurance that such will be the case.
When a full prepayment is made on a Mortgage Loan, the Mortgagor is charged
interest on the principal amount of the Mortgage Loan so prepaid only for the
number of days in the month actually elapsed up to the date of the prepayment
rather than for a full month. Unless otherwise specified in the related
Prospectus Supplement, the effect of prepayments in full will be to reduce the
amount of interest passed through in the following month to holders of
Certificates because interest on the principal amount of any Mortgage Loan so
prepaid will be paid only to the date of prepayment. Partial prepayments in a
given month may be applied to the outstanding principal balances of the Mortgage
Loans so prepaid on the first day of the month of receipt or the month following
receipt. In the latter case, partial prepayments will not reduce the amount of
interest passed through in such month. Unless otherwise specified in the related
Prospectus Supplement, both full and partial prepayments will not be passed
through until the month following receipt.
The effective yield to Certificateholders will be slightly lower than the
yield otherwise produced by the applicable Pass-Through Rate and purchase price
because while interest will accrue on each Mortgage Loan from the first day of
the month (unless otherwise provided in the related Prospectus Supplement), the
distribution of such interest will not be made earlier than the Distribution
Date in the month following the month of accrual.
39
<PAGE>
Under certain circumstances, the Master Servicer or the holder(s) of the
residual interest(s) in a REMIC may have the option to purchase the assets of a
Trust Fund thereby effecting earlier retirement of the related Series of
Certificates. See "The Pooling and Servicing Agreement -- Termination; Optional
Termination."
If so specified in the related Prospectus Supplement, upon notification
from a Mortgagor of such Mortgagor's intent to convert from an adjustable
interest rate to a fixed interest rate, and prior to the conversion of such
Mortgage Loan, the Seller will be obligated to purchase such related Mortgage
Loan. Any such purchase of a Mortgage Loan would have the effect of a prepayment
in full of the Mortgage Loan.
From time to time, a Seller or its affiliates may solicit the refinancing
of loans (including the Mortgage Loans) by offering a new loan to the borrower.
Any such refinancing of a Mortgage Loan would have the effect of a prepayment in
full of the Mortgage Loan.
Factors other than those identified herein and in the related Prospectus
Supplement could significantly affect principal prepayments at any time and over
the lives of the Certificates. The relative contribution of the various factors
affecting prepayment may also vary from time to time. There can be no assurance
as to the rate of payment of principal of the Mortgage Assets at any time or
over the lives of the Certificates.
The Prospectus Supplement relating to a Series of Certificates will discuss
in greater detail the effect of the rate and timing of principal payments
(including prepayments), delinquencies and losses on the yield, weighted average
lives and maturities of such Certificates.
THE POOLING AND SERVICING AGREEMENT
Set forth below is a summary of certain provisions of each Agreement which
are not described elsewhere in this Prospectus. Where particular provisions or
terms used in the Agreements are referred to, such provisions or terms are as
specified in the Agreements.
Assignment of Mortgage Assets
Assignment of the Mortgage Loans. At the time of issuance of the
Certificates of a Series, the Depositor will cause the Mortgage Loans comprising
the related Trust Fund to be assigned to the Trustee, together with all
principal and interest received by or on behalf of the Depositor on or with
respect to such Mortgage Loans after the Cut-off Date, other than principal and
interest due on or before the Cut-off Date and other than any Retained Interest
specified in the related Prospectus Supplement. The Trustee will, concurrently
with such assignment, deliver the Certificates to the Depositor in exchange for
the Mortgage Loans. Each Mortgage Loan will be identified in a schedule
appearing as an exhibit to the related Agreement. Such schedule will include
information as to the outstanding principal balance of each Mortgage Loan after
application of payments due on the Cut-off Date, as well as information
regarding the Mortgage Rate, the current scheduled monthly payment of principal
and interest, the maturity of the loan, the Loan-to-Value Ratio (or, in the case
of Home Equity Loans, the Combined Loan-to-Value Ratio) at origination and
certain other information. If specified in the related Prospectus Supplement,
the Depositor will deliver or cause to be delivered to the Trustee loans at a
predetermined price for inclusion in the Trust Fund within three months after
the issuance of the Certificates. The related Prospectus Supplement for the
Trust Fund will specify whether, and the terms, conditions and manner under
which Subsequent Mortgage Assets will be sold to the Trust Fund within such
three month period.
In addition, the Depositor will deliver or cause to be delivered to the
Trustee (or to the custodian hereinafter referred to) as to each Mortgage Loan,
among other things, (i) the mortgage note (the "Mortgage Note") endorsed without
recourse in blank or to the order of the Trustee, (ii) the mortgage, deed of
trust or similar instrument (a "Mortgage") with evidence of recording indicated
thereon (except for any Mortgage not returned from the public recording office,
in which case the Depositor will unless otherwise specified in the related
Prospectus Supplement, deliver or cause to be delivered a copy of such Mortgage
together with a certificate that the original of such Mortgage was delivered to
such recording office), (iii) an assignment of the Mortgage to the Trustee,
which assignment will be in recordable form, and (iv) such other security
documents as may be specified in the related Prospectus Supplement or the
related Agreement. Unless otherwise specified in the related Prospectus
Supplement, the Depositor will promptly cause the assignments of the related
loans to be recorded in the appropriate public office for real property records,
except in states in which, in the opinion of counsel acceptable to the Trustee,
such recording is not required to protect the Trustee's interest in such loans
against the claim of any subsequent transferee or any successor to or creditor
of the Depositor or the originator of such loans.
40
<PAGE>
With respect to any Mortgage Loans which are Cooperative Loans, the
Depositor will cause to be delivered to the Trustee, the related original
cooperative note endorsed without recourse in blank or to the order of the
Trustee, the original security agreement, the proprietary lease or occupancy
agreement, the recognition agreement, an executed financing agreement and the
relevant stock certificate, related blank stock powers and any other document
specified in the related Prospectus Supplement. The Depositor will cause to be
filed in the appropriate office an assignment and a financing statement
evidencing the Trustee's security interest in each Cooperative Loan.
The Trustee (or the custodian hereinafter referred to) will review such
Mortgage Loan documents within the time period specified in the related
Prospectus Supplement after receipt thereof, and the Trustee will hold such
documents in trust for the benefit of the Certificateholders. Unless otherwise
specified in the related Prospectus Supplement, if any such document is found to
be missing or defective in any material respect, the Trustee (or such custodian)
will notify the Master Servicer and the Depositor, and the Master Servicer will
notify the related Seller. If the Seller cannot cure the omission or defect
within the time period specified in the related Prospectus Supplement after
receipt of such notice, the Seller will be obligated to purchase the related
Mortgage Loan from the Trustee at the Purchase Price or, if so specified in the
related Prospectus Supplement, replace such Mortgage Loan with another mortgage
loan that meets certain requirements set forth therein. There can be no
assurance that a Seller will fulfill this purchase obligation. Although the
Master Servicer may be obligated to enforce such obligation to the extent
described above under "Mortgage Loan Program -- Representations by Sellers;
Repurchases," neither the Master Servicer nor the Depositor will be obligated to
purchase such Mortgage Loan if the Seller defaults on its purchase obligation,
unless such breach also constitutes a breach of the representations or
warranties of the Seller or the Depositor, as the case may be. Unless otherwise
specified in the related Prospectus Supplement, this purchase obligation
constitutes the sole remedy available to the Certificateholders or the Trustee
for omission of, or a material defect in, a constituent document.
A custodian may maintain possession of, and, if applicable, review the
documents relating to, the Mortgage Loans as agent of the Trustee pursuant
either to the terms of an Agreement or a separate custodial agreement.
Notwithstanding the foregoing provisions, with respect to a Trust Fund for
which a REMIC election is to be made, unless the related Prospectus Supplement
otherwise provides, no purchase of a Mortgage Loan will be made if such purchase
would result in a prohibited transaction tax under the Code.
Assignment of Agency Securities. The Depositor will cause the Agency
Securities to be registered in the name of the Trustee or its nominee, and the
Trustee concurrently will execute, countersign and deliver the Certificates.
Each Agency Security will be identified in a schedule appearing as an exhibit to
the Agreement, which will specify as to each Agency Security the original
principal amount and outstanding principal balance as of the Cut-off Date, the
annual pass-through rate (if any) and the maturity date.
Assignment of Private Mortgage-Backed Securities. The Depositor will cause
Private Mortgage-Backed Securities to be registered in the name of the Trustee.
The Trustee (or the custodian) will have possession of any certificated Private
Mortgage-Backed Securities. Unless otherwise specified in the related Prospectus
Supplement, the Trustee will not be in possession of or be assignee of record of
any underlying assets for a Private Mortgage-Backed Security. See "The Trust
Fund -- Private Mortgage-Backed Securities" herein. Each Private Mortgage-Backed
Security will be identified in a schedule appearing as an exhibit to the related
Agreement which will specify the original principal amount, outstanding
principal balance as of the Cut-off Date, annual pass-through rate or interest
rate and maturity date and certain other pertinent information for each Private
Mortgage-Backed Security conveyed to the Trustee.
Payments on Mortgage Loans; Deposits to Collection Account
The Master Servicer will establish and maintain or cause to be established
and maintained with respect to the related Trust Fund a separate account or
accounts for the collection of payments on the related Mortgage Assets in the
Trust Fund (the "Collection Account"), which unless otherwise specified in the
related Prospectus Supplement, must be either (i) maintained with a depository
institution the short-term debt obligations of which (or in the case of a
depository institution that is the principal subsidiary of a holding company,
the short-term debt obligations of which) are rated in the highest short-term
rating category by the nationally recognized statistical rating organization(s)
that rated one or more classes of the related Series of Certificates (each, a
"Rating Agency"), (ii) an account or accounts the deposits in which are fully
insured by either the BIF or SAIF, (iii) an account or accounts the deposits in
which are insured by the BIF or SAIF (to the limits established by the FDIC),
and the uninsured deposits in which are otherwise secured such that, as
evidenced by an opinion of counsel, the Certificateholders have a claim with
respect to the funds in the Collection Account or a perfected first priority
security interest against any collateral securing such funds that is superior to
the claims of any other depositors or general creditors of
41
<PAGE>
the depository institution with which the Collection Account is maintained, (iv)
a trust account or accounts maintained with the trust department of a federal or
a state chartered depository institution or trust company, acting in a fiduciary
capacity or (v) an account or accounts otherwise acceptable to each Rating
Agency. The Collection Account may be maintained at FUNB so long as it maintains
a long-term unsecured rating of at least A by Standard & Poor's Ratings Group
and A2 by Moody's Investor's Service, Inc., and a short-term rating of at least
A-1 by Standard & Poor's Ratings Group and P-1 by Moody's Investor's Service,
Inc. Investments in which amounts in the Collection Account may be invested are
limited to United States government securities and other high-quality
investments ("Eligible Investments"). A Collection Account may be maintained as
an interest bearing account or the funds held therein may be invested pending
each succeeding Distribution Date in Eligible Investments. Unless otherwise
specified in the related Prospectus Supplement, the Master Servicer or its
designee will be entitled to receive any such interest or other income earned on
funds in the Collection Account as additional compensation and will be obligated
to deposit in the Collection Account the amount of any loss immediately as
realized. The Collection Account may be maintained with the Master Servicer or
with a depository institution that is an affiliate of the Master Servicer,
provided it meets the standards set forth above.
The Master Servicer will deposit or cause to be deposited in the Collection
Account for each Trust Fund on a daily basis, to the extent applicable and
unless otherwise specified in the related Prospectus Supplement and provided in
the Agreement, the following payments and collections received or advances made
by or on behalf of it subsequent to the Cut-off Date (other than payments due on
or before the Cut-off Date and exclusive of any amounts representing Retained
Interest):
(i) all payments on account of principal, including Principal
Prepayments and, if specified in the related Prospectus Supplement,
prepayment penalties, on the Mortgage Loans;
(ii) all payments on account of interest on the Mortgage Loans, net of
applicable servicing compensation;
(iii) (a) all proceeds (net of unreimbursed payments of property
taxes, insurance premiums and similar items ("Insured Expenses") incurred,
and unreimbursed advances made, if any, by the Master Servicer or any
Sub-Servicer) of the hazard insurance policies and any Primary Mortgage
Insurance Policies, to the extent such proceeds are not applied to the
restoration of the property or released to the Mortgagor in accordance with
the Master Servicer's normal servicing procedures (collectively, "Insurance
Proceeds") and (b) "Net Liquidation Proceeds" consisting of all other cash
amounts received and retained in connection with the liquidation of
defaulted Mortgage Loans, by foreclosure or otherwise ("Liquidation
Proceeds") net of unreimbursed expenses incurred in connection with
liquidation or foreclosure ("Liquidation Expenses") and unreimbursed
advances made, if any, by the Master Servicer or any Sub-Servicer, and (c)
any net proceeds received on a monthly basis with respect to any properties
acquired on behalf of the Certificateholders by foreclosure or deed in lieu
of foreclosure;
(iv) all proceeds of any Mortgage Loan or property in respect thereof
purchased by any Seller as described under "Mortgage Loan
Program -- Representations by Sellers; Repurchases" or " -- Assignment of
Mortgage Assets" above and all proceeds of any Mortgage Loan repurchased as
described under " -- Termination; Optional Termination" below;
(v) all payments required to be deposited in the Collection Account
with respect to any deductible clause in any blanket insurance policy
described under " -- Hazard Insurance" below;
(vi) any amount required to be deposited by the Master Servicer in
connection with losses realized on investments for the benefit of the
Master Servicer of funds held in the Collection Account and, to the extent
specified in the related Prospectus Supplement, any payments required to be
made by the Master Servicer in connection with prepayment interest
shortfalls; and
(vii) all other amounts required to be deposited in the Collection
Account pursuant to the Agreement.
The Master Servicer (or the Depositor, as applicable) may from time to time
direct the institution which maintains the Collection Account, unless otherwise
specified in the related Prospectus Supplement, to withdraw funds from the
Collection Account for the following purposes:
(i) to pay to the Master Servicer the servicing fees described in the
related Prospectus Supplement, the Master Servicing Fee and, as additional
servicing compensation, earnings on or investment income with respect to
funds in the amounts in the Collection Account credited thereto;
(ii) to reimburse the Master Servicer for Advances;
(iii) to reimburse the Master Servicer for any Advances previously
made which the Master Servicer has determined to be nonrecoverable;
42
<PAGE>
(iv) to reimburse the Master Servicer from Insurance Proceeds for
expenses incurred by the Master Servicer and covered by the related
insurance policies;
(v) to reimburse the Master Servicer for unpaid Master Servicing Fees
and unreimbursed out-of-pocket costs and expenses incurred by the Master
Servicer in the performance of its servicing obligations, such right of
reimbursement being limited to amounts received representing late
recoveries of the payments for which such advances were made;
(vi) to pay to the Master Servicer, with respect to each Mortgage Loan
or property acquired in respect thereof that has been purchased by the
Master Servicer pursuant to the Agreement, all amounts received thereon and
not taken into account in determining the related Principal Balance of such
repurchased Mortgage Loan;
(vii) to reimburse the Master Servicer or the Depositor for expenses
incurred and reimbursable pursuant to the Agreement;
(viii) to withdraw any amount deposited in the Collection Account and
not required to be deposited therein; and
(ix) to clear and terminate the Collection Account upon termination of
the Agreement.
In addition, unless otherwise specified in the related Prospectus
Supplement, on or prior to the Business Day immediately preceding each
Distribution Date, the Master Servicer shall withdraw from the Collection
Account the amount of Available Distribution Amount, to the extent on deposit,
for deposit in an account maintained by the Trustee for the related Series of
Certificates.
Pre-Funding Account
If so specified in the Prospectus Supplement, the related Agreement may
provide for the transfer by the Depositor of additional Mortgage Assets (the
"Subsequent Mortgage Assets") to the related Trust Fund after the Closing Date
for the related Certificates. Such Subsequent Mortgage Assets will be required
to conform to the requirements set forth in the related Agreement providing for
such transfer. As specified in the related Prospectus Supplement, such transfer
may be funded by the establishment of a Pre-Funding Account (a "Pre-Funding
Account"). If a Pre-Funding Account is established, all or a portion of the
proceeds of the sale of one or more classes of Certificates of the related
Series will be deposited in such account (the "Pre-Funded Amount") to be
released as additional Mortgage Assets are transferred to the Trust Fund. The
related Agreement will establish a period of time (which will be no longer than
three months following the related Closing Date) within which such transfers
must be made (the "Funding Period"). Unless otherwise specified in the related
Prospectus Supplement, amounts set aside to fund such transfers (whether in a
Pre-Funding Account or otherwise) and not so applied within the Funding Period
will be deemed to be principal prepayments and applied in the manner set forth
in the Prospectus Supplement.
Collection Procedures
The Master Servicer, directly or through one or more Sub-Servicers, will
make reasonable efforts to collect all payments called for under the Mortgage
Loans and will, consistent with each Agreement and any Mortgage Pool Insurance
Policy, Primary Mortgage Insurance Policy, FHA Insurance, VA Guaranty Policy and
Bankruptcy Bond or alternative arrangements, follow such collection procedures
as are customary with respect to mortgage loans that are comparable to the
Mortgage Loans. Consistent with the above, the Master Servicer may, in its
discretion, (i) waive any assumption fee, late payment or other charge in
connection with a Mortgage Loan and (ii) to the extent not inconsistent with the
coverage of such Mortgage Loan by a Mortgage Pool Insurance Policy, Primary
Mortgage Insurance Policy, FHA Insurance, VA Guaranty or Bankruptcy Bond or
alternative arrangements, if applicable, arrange with a Mortgagor a schedule for
the liquidation of delinquencies in a manner that is determined by the Master
Servicer to be customary with respect to comparable mortgage loans. Such
schedules for liquidation of delinquencies for Mortgage Loans other than Home
Equity Loans generally do not exceed 180 days. To the extent the Master Servicer
is obligated to make or to cause to be made Advances, such obligation will
remain during the period of any such arrangement.
Unless otherwise specified in the related Prospectus Supplement, in any
case in which property securing a Mortgage Loan has been, or is about to be,
conveyed by the mortgagor or obligor, the Master Servicer will, to the extent it
has knowledge of such conveyance or proposed conveyance, exercise or cause to be
exercised its rights to accelerate the maturity of such Mortgage Loan under any
due-on-sale clause applicable thereto, but only if the exercise of such rights
is permitted by applicable law; provided, however, the Master Servicer will not
take any enforcement action that would impair or threaten to impair any recovery
under any related insurance policy. If these conditions are not met or if the
Master Servicer reasonably
43
<PAGE>
believes it is unable under applicable law to enforce such due-on-sale clause,
or if such Mortgage Loan is insured by the FHA or partially guaranteed by the
VA, the Master Servicer will enter into or cause to be entered into an
assumption agreement or a substitution agreement with the person to whom such
property has been or is about to be conveyed, pursuant to which such person
becomes liable for repayment of the Mortgage Loan.
Any fee collected by or on behalf of the Master Servicer for entering into
an assumption agreement will be retained by or on behalf of the Master Servicer
as additional servicing compensation. See "Certain Legal Aspects of the Mortgage
Loans -- Due-on-Sale Clauses." In connection with any such assumption, the terms
of the related Mortgage Loan may not be changed.
Hazard Insurance
The Master Servicer will require the mortgagor or obligor on each Mortgage
Loan to maintain a hazard insurance policy providing for no less than the
coverage of the standard form of fire insurance policy with extended coverage
customary for the type of Mortgaged Property in the state in which such
Mortgaged Property is located. Such coverage will be in an amount not less than
the replacement value of the improvements securing such Mortgage Loan or the
principal balance owing on such Mortgage Loan, whichever is less. All amounts
collected by the Master Servicer under any hazard policy (except for amounts to
be applied to the restoration or repair of the Mortgaged Property or released to
the mortgagor or obligor in accordance with the Master Servicer's normal
servicing procedures) will be deposited in the related Collection Account. In
the event that the Master Servicer maintains a blanket policy insuring against
hazard losses on all the Mortgage Loans comprising part of a Trust Fund, it will
conclusively be deemed to have satisfied its obligation relating to the
maintenance of hazard insurance. Such blanket policy may contain a deductible
clause, in which case the Master Servicer will be required to deposit from its
own funds into the related Collection Account the amounts which would have been
deposited therein but for such clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements securing a Mortgage Loan
by fire, lightning, explosion, smoke, windstorm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Mortgage Loans may have been
underwritten by different insurers under different state laws in accordance with
different applicable forms and therefore may 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 the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mud flows),
nuclear reactions, wet or dry rot, vermin, 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. If
the Mortgaged Property securing a Mortgage Loan is located in a federally
designated special flood area, the Master Servicer will require the mortgagor or
obligor to obtain and maintain flood insurance, to the extent such insurance is
available.
The hazard insurance policies covering properties securing the Mortgage
Loans typically contain a clause which in effect requires the insured at all
times to carry insurance of a specified percentage (generally 80% to 90%) of the
full replacement value of the insured property in order to recover the full
amount of any partial loss. If the insured's coverage falls below this specified
percentage, then the insurer's liability in the event of partial loss will not
exceed the larger of (i) the actual cash value (generally defined as replacement
cost at the time and place of loss, less physical depreciation) of the
improvements damaged or destroyed or (ii) such proportion of the loss as the
amount of insurance carried bears to the specified percentage of the full
replacement cost of such improvements. Since the amount of hazard insurance the
Master Servicer may cause to be maintained on the improvements securing the
Mortgage Loans declines as the principal balances owing thereon decrease, and
since improved real estate generally has appreciated in value over time in the
past, the effect of this requirement in the event of partial loss may be that
hazard insurance proceeds will be insufficient to restore fully the damaged
property. If specified in the related Prospectus Supplement, a special hazard
insurance policy will be obtained to insure against certain of the uninsured
risks described above. See "Credit Enhancement -- Special Hazard Insurance
Policies."
The Master Servicer will not require that a standard hazard or flood
insurance policy be maintained on the cooperative dwelling relating to any
Cooperative Loan. Generally, the Cooperative itself is responsible for
maintenance of hazard insurance for the property owned by the Cooperative and
the tenant-stockholders of that Cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a Cooperative and the related
borrower on a Cooperative Loan do not maintain such insurance or do not maintain
adequate coverage or any insurance proceeds are not applied to the restoration
of damaged property, any damage to such borrower's cooperative dwelling or such
Cooperative's building could significantly reduce the value of the collateral
securing such Cooperative Loan to the extent not covered by other credit
support.
44
<PAGE>
Realization Upon Defaulted Mortgage Loans
Primary Mortgage Insurance Policies. The Master Servicer will maintain or
cause to be maintained, as the case may be, in full force and effect, to the
extent specified in the related Prospectus Supplement, a Primary Mortgage
Insurance Policy with regard to each Mortgage Loan for which such coverage is
required. Primary Mortgage Insurance Policies are not required for Home Equity
Loans. The Master Servicer will not cancel or refuse to renew any such Primary
Mortgage Insurance Policy in effect at the time of the initial issuance of a
Series of Certificates that is required to be kept in force under the applicable
Agreement unless the replacement Primary Mortgage Insurance Policy for such
cancelled or nonrenewed policy is maintained with an insurer whose claims-paying
ability is sufficient to maintain the current rating of the classes of
Certificates of such Series that have been rated.
Although the terms and conditions of primary mortgage insurance vary, the
amount of a claim for benefits under a Primary Mortgage Insurance Policy
covering a Mortgage Loan will consist of the insured percentage of the unpaid
principal amount of the covered Mortgage Loan and accrued and unpaid interest
thereon and reimbursement of certain expenses, less (i) all rents or other
payments collected or received by the insured (other than the proceeds of hazard
insurance) that are derived from or in any way related to the Mortgaged
Property, (ii) hazard insurance proceeds in excess of the amount required to
restore the Mortgaged Property and which have not been applied to the payment of
the Mortgage Loan, (iii) amounts expended but not approved by the issuer of the
related Primary Mortgage Insurance Policy (the "Primary Insurer"), (iv) claim
payments previously made by the Primary Insurer and (v) unpaid premiums.
Primary Mortgage Insurance Policies reimburse certain losses sustained by
reason of defaults in payments by borrowers. Primary Mortgage Insurance Policies
will not insure against, and exclude from coverage, a loss sustained by reason
of a default arising from or involving certain matters, including (i) fraud or
negligence in origination or servicing of the Mortgage Loans, including
misrepresentation by the originator, borrower or other persons involved in the
origination of the Mortgage Loan; (ii) failure to construct the Mortgaged
Property subject to the Mortgage Loan in accordance with specified plans; (iii)
physical damage to the Mortgaged Property; and (iv) the related Servicer not
being approved as a servicer by the Primary Insurer.
Recoveries Under a Primary Mortgage Insurance Policy. As conditions
precedent to the filing of or payment of a claim under a Primary Mortgage
Insurance Policy covering a Mortgage Loan, the insured will be required to (i)
advance or discharge (a) all hazard insurance policy premiums and (b) as
necessary and approved in advance by the Primary Insurer, (1) real estate
property taxes, (2) all expenses required to maintain the related Mortgaged
Property in at least as good a condition as existed at the effective date of
such Primary Mortgage Insurance Policy, ordinary wear and tear excepted, (3)
Mortgaged Property sales expenses, (4) any outstanding liens (as defined in such
Primary Mortgage Insurance Policy) on the Mortgaged Property and (5) foreclosure
costs, including court costs and reasonable attorneys' fees; (ii) in the event
of any physical loss or damage to the Mortgaged Property, have the Mortgaged
Property restored and repaired to at least as good a condition as existed at the
effective date of such Primary Mortgage Insurance Policy, ordinary wear and tear
excepted; and (iii) tender to the Primary Insurer good and merchantable title to
and possession of the Mortgaged Property.
The Master Servicer, on behalf of itself, the Trustee and the
Certificateholders, will present claims to the insurer under each Primary
Mortgage Insurance Policy, and will take such reasonable steps as are necessary
to receive payment or to permit recovery thereunder with respect to defaulted
Mortgage Loans. As set forth above, all collections by or on behalf of the
Master Servicer under any Primary Mortgage Insurance Policy and, when the
Mortgaged Property has not been restored, the hazard insurance policy, are to be
deposited in the Collection Account, subject to withdrawal as heretofore
described.
If the Mortgaged Property securing a defaulted Mortgage Loan is damaged and
proceeds, if any, from the related hazard insurance policy are insufficient to
restore the damaged Mortgaged Property to a condition sufficient to permit
recovery under the related Primary Mortgage Insurance Policy, if any, the Master
Servicer is not required to expend its own funds to restore the damaged
Mortgaged Property unless it determines (i) that such restoration will increase
the proceeds to Certificateholders on liquidation of the Mortgage Loan after
reimbursement of the Master Servicer for its expenses and (ii) that such
expenses will be recoverable by it from related Insurance Proceeds or
Liquidation Proceeds.
If recovery on a defaulted Mortgage Loan under any related Primary Mortgage
Insurance Policy is not available for the reasons set forth in the preceding
paragraph, or if the defaulted Mortgage Loan is not covered by a Primary
Mortgage Insurance Policy, the Master Servicer will be obligated to follow or
cause to be followed such normal practices and procedures as it deems necessary
or advisable to realize upon the defaulted Mortgage Loan. If the proceeds of any
liquidation of the Mortgaged Property securing the defaulted Mortgage Loan are
less than the principal balance of such Mortgage Loan plus interest accrued
thereon that is payable to Certificateholders, the Trust Fund will realize a
loss in the amount of such difference plus the aggregate of any unpaid servicing
compensation and expenses incurred by the Master Servicer in connection
45
<PAGE>
with such proceedings and which are reimbursable under the Agreement. In the
unlikely event that any such proceedings result in a total recovery which is,
after reimbursement to the Master Servicer of its expenses and any unpaid
servicing compensation, in excess of the principal balance of such Mortgage Loan
plus interest accrued thereon that is payable to Certificateholders, the Master
Servicer will be entitled to withdraw or retain from the Collection Account,
unless otherwise specified in the related Prospectus Supplement, amounts
representing the balance of such excess, exclusive of any amount required by law
to be forwarded to the related Mortgagor, as additional servicing compensation.
If the Master Servicer or its designee recovers Insurance Proceeds which,
when added to any related Liquidation Proceeds and after deduction of certain
expenses reimbursable to the Master Servicer, exceed the principal balance of
such Mortgage Loan plus interest accrued thereon that is payable to
Certificateholders, the Master Servicer will be entitled to withdraw or retain
from the Collection Account amounts representing its normal servicing
compensation with respect to such Mortgage Loan. In the event that the Master
Servicer has expended its own funds to restore the damaged Mortgaged Property
and such funds have not been reimbursed under the related hazard insurance
policy, it will be entitled to withdraw from the Collection Account out of
related Liquidation Proceeds or Insurance Proceeds an amount equal to such
expenses incurred by it, in which event the Trust Fund may realize a loss up to
the amount so charged. Since Insurance Proceeds cannot exceed deficiency claims
and certain expenses incurred by the Master Servicer, no such payment or
recovery will result in a recovery to the Trust Fund which exceeds the principal
balance of the defaulted Mortgage Loan together with accrued interest thereon.
See "Credit Enhancement."
Junior Mortgages. The Mortgage Loans underlying the Certificates of a
Series will be secured by mortgages or deeds of trust which may be second or
more junior mortgages to other mortgages held by other lenders or institutional
investors. The rights of the Trust Fund (and therefore the holders of the
related Certificates), as mortgagee under a junior mortgage, are subordinate to
those of the mortgagee under the senior mortgage, including the prior rights of
the senior mortgagee to receive hazard insurance and condemnation proceeds and
to cause the property securing the mortgage loan to be sold upon default of the
mortgagor. If the property is sold, the junior mortgagee's lien will be
extinguished unless the junior mortgagee asserts its subordinate interest in the
property in foreclosure litigation and, possibly, satisfies the defaulted senior
mortgage. A junior mortgagee may satisfy a defaulted senior loan in full and, in
some states, may cure such default and bring the senior loan current, in either
event adding the amounts expended to the balance due on the junior loan. In most
states, absent a provision in the mortgage or deed of trust, no notice of
default is required to be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage, in such order as the mortgagee may determine. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, the mortgagee
or beneficiary under underlying senior mortgages will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages. Proceeds in excess of the
amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
FHA Insurance; VA Guarantees. Mortgage Loans designated in the related
Prospectus Supplement as insured by the FHA will be insured by the FHA as
authorized under the United States Housing Act of 1937, as amended. Such
Mortgage Loans will be insured under various FHA programs including the standard
FHA 203(b) program to finance the acquisition of one- to four-family housing
units and the FHA 245 graduated payment mortgage program. These programs
generally limit the principal amount and interest rates of the mortgage loans
insured. Mortgage Loans insured by the FHA generally require a minimum down
payment of approximately 5% of the original principal amount of the loan. No
FHA-insured Mortgage Loans relating to a Series may have an interest rate or
original principal amount exceeding the applicable FHA limits at the time of
origination of such loan.
The insurance premiums for Mortgage Loans insured by the FHA are collected
by lenders approved by the Department of Housing and Urban Development ("HUD")
or by the Master Servicer or any Sub-Servicers and are paid to the FHA. The
regulations governing FHA single-family mortgage insurance programs provide that
insurance benefits are payable either upon foreclosure (or other acquisition of
possession) and conveyance of the mortgaged premises to HUD or upon assignment
of the defaulted Mortgage Loan to HUD. With respect to a defaulted FHA-insured
Mortgage Loan, the Master Servicer or any Sub-Servicer is limited in its ability
to initiate foreclosure proceedings. When it is determined, either by the Master
Servicer or any Sub-Servicer or HUD, that default was caused by circumstances
beyond the mortgagor's control, the Master Servicer or any Sub-Servicer is
expected to make an effort to avoid foreclosure by entering, if feasible, into
one of a number of available forms of forbearance plans with the mortgagor. Such
plans may involve the reduction or suspension of regular mortgage payments for a
specified period, with such payments to be made up on or before the maturity
date of the mortgage,
46
<PAGE>
or the recasting of payments due under the mortgage up to or beyond the maturity
date. In addition, when a default caused by such circumstances is accompanied by
certain other criteria, HUD may provide relief by making payments to the Master
Servicer or any Sub-Servicer in partial or full satisfaction of amounts due
under the Mortgage Loan (which payments are to be repaid by the mortgagor to
HUD) or by accepting assignment of the loan from the Master Servicer or any
Sub-Servicer. With certain exceptions, at least three full monthly installments
must be due and unpaid under the Mortgage Loan, and HUD must have rejected any
request for relief from the mortgagor before the Master Servicer or any
Sub-Servicer may initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debentures interest rate.
The amount of insurance benefits generally paid by the FHA is equal to the
entire unpaid principal amount of the defaulted Mortgage Loan adjusted to
reimburse the Master Servicer or Sub-Servicer for certain costs and expenses and
to deduct certain amounts received or retained by the Master Servicer or
Sub-Servicer after default. When entitlement to insurance benefits results from
foreclosure (or other acquisition of possession) and conveyance to HUD, the
Master Servicer or Sub-Servicer is compensated for no more than two-thirds of
its foreclosure costs, and is compensated for interest accrued and unpaid prior
to such date but in general only to the extent it was allowed pursuant to a
forbearance plan approved by HUD. When entitlement to insurance benefits results
from assignment of the Mortgage Loan to HUD, the insurance payment includes full
compensation for interest accrued and unpaid to the assignment date. The
insurance payment itself, upon foreclosure of an FHA-insured Mortgage Loan,
bears interest from a date 30 days after the mortgagor's first uncorrected
failure to perform any obligation to make any payment due under the Mortgage
and, upon assignment, from the date of assignment to the date of payment of the
claim, in each case at the same interest rate as the applicable HUD debenture
interest rate as described above.
Mortgage Loans designated in the related Prospectus Supplement as
guaranteed by the VA will be partially guaranteed by the VA under the
Serviceman's Readjustment Act of 1944, as amended (a "VA Guaranty Policy"). The
Serviceman's Readjustment Act of 1944, as amended, permits a veteran (or in
certain instances the spouse of a veteran) to obtain a mortgage loan guarantee
by the VA covering mortgage financing of the purchase of a one-to four-family
dwelling unit at interest rates permitted by the VA. The program has no mortgage
loan limits, requires no down payment from the purchaser and permits the
guarantee of mortgage loans of up to 30 years' duration.
The maximum guarantee that may be issued by the VA under a VA guaranteed
mortgage loan depends upon the original principal amount of the mortgage loan,
as further described in 38 United States Code Section 3703(a), as amended. As of
January 1, 1996, the maximum guarantee that may be issued by the VA under a VA
guaranteed mortgage loan of more than $144,000 is the lesser of 25% of the
original principal amount of the mortgage loan and $50,750. The liability on the
guarantee is reduced or increased pro rata with any reduction or increase in the
amount of indebtedness, but in no event will the amount payable on the guarantee
exceed the amount of the original guarantee. The VA may, at its option and
without regard to the guarantee, make full payment to a mortgage holder of
unsatisfied indebtedness on a mortgage upon its assignment to the VA.
With respect to a defaulted VA guaranteed Mortgage Loan, the Master
Servicer or Sub-Servicer is, absent exceptional circumstances, authorized to
announce its intention to foreclose only when the default has continued for
three months. Generally, a claim for the guarantee is submitted after
liquidation of the Mortgaged Property.
The amount payable under the guarantee will be the percentage of the
VA-insured Mortgage Loan originally guaranteed applied to indebtedness
outstanding as of the applicable date of computation specified in the VA
regulations. Payments under the guarantee will be equal to the unpaid principal
amount of the loan, interest accrued on the unpaid balance of the loan to the
appropriate date of computation and limited expenses of the mortgagee, but in
each case only to the extent that such amounts have not been recovered through
liquidation of the Mortgaged Property. The amount payable under the guarantee
may in no event exceed the amount of the original guarantee.
Servicing and Other Compensation and Payment of Expenses
The principal servicing compensation to be paid to the Master Servicer in
respect of its master servicing activities for each series of Certificates will
be equal to the percentage per annum described in the related Prospectus
Supplement (which may vary under certain circumstances) of the outstanding
principal balance of each Mortgage Loan, and such compensation will be retained
by it from collections of interest on such Mortgage Loan in the related Trust
Fund (the "Master Servicing Fee"). Unless otherwise specified in the related
Prospectus Supplement, as compensation for its servicing duties, the Master
47
<PAGE>
Servicer will be entitled to a monthly servicing fee as described in the related
Prospectus Supplement. In addition, the Master Servicer or a Sub-Servicer will
retain all prepayment charges, assumption fees and late payment charges, to the
extent collected from Mortgagors, and any benefit which may accrue as a result
of the investment of funds in the applicable Collection Account (unless
otherwise specified in the related Prospectus Supplement). The Master Servicer
will be responsible for the payment of any fees owing to any Sub-Servicer.
The Master Servicer will pay or cause to be paid certain ongoing expenses
associated with each Trust Fund and incurred by it in connection with its
responsibilities under the related Agreement, including, without limitation,
payment of any fee or other amount payable in respect of any credit enhancement
arrangements, payment of the fees and disbursements of the Trustee, any
custodian appointed by the Trustee, the Certificate Registrar and any Paying
Agent, and payment of expenses incurred in enforcing the obligations of
Sub-Servicers and Sellers. The Master Servicer will be entitled to reimbursement
of certain of these expenses. In addition, as indicated in the preceding
section, the Master Servicer will be entitled to reimbursements for certain
expenses incurred by it in connection with Liquidated Mortgage Loans and in
connection with the restoration of Mortgaged Properties, such right of
reimbursement being prior to the rights of Certificateholders to receive any
related Liquidation Proceeds (including Insurance Proceeds).
Evidence as to Compliance
Each Agreement will provide that on or before a specified date in each
year, the Master Servicer will cause a firm of independent public accountants to
furnish a statement to the Trustee to the effect that, on the basis of the
examination by such firm conducted substantially in compliance with the audit
program applicable to the Master Servicer, the servicing by or on behalf of the
Master Servicer of mortgage loans, private mortgage-backed securities or agency
securities, under pooling and servicing agreements substantially similar to each
other (including the related Agreement) was conducted in compliance with such
agreements except for any significant exceptions or errors in records that, in
the opinion of the firm, such audit program requires it to report.
Each Agreement will also provide for delivery to the Trustee, on or before
a specified date in each year, of an annual statement signed by an officer or
officers of the Master Servicer to the effect that the Master Servicer has
fulfilled its obligations under the Agreement in all material respects
throughout the preceding year or specifying any known failure to do so.
Copies of the annual accountants' statement and the statement of officers
of the Master Servicer may be obtained by Certificateholders of the related
Series without charge upon written request to the Master Servicer or the Trustee
at the address set forth in the related Prospectus Supplement.
Certain Matters Regarding the Master Servicer and the Depositor
The Master Servicer under each Agreement will be named in the related
Prospectus Supplement. An entity serving as Master Servicer or Sub-Servicer may
have normal business relationships with the Depositor or the Depositor's
affiliates.
Each Agreement will provide that, subject to the Master Servicer's right to
assign its rights and delegate its duties as described below, the Master
Servicer may not resign from its obligations and duties under the Agreement
unless its duties thereunder are no longer permissible under applicable law or
are in material conflict by reason of applicable law with any other activities
of a type and nature presently carried on by it, except in connection with a
permitted transfer of servicing. 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.
Each Agreement will further provide that neither the Master Servicer, the
Depositor nor any director, officer, employee, or agent of the Master Servicer
or the Depositor will be under any liability to the related Trust Fund or
Certificateholders for any action taken or for refraining from the taking of any
action in good faith pursuant to the Agreement, or for errors in judgment;
provided, however, neither the Master Servicer, the Depositor nor any such
person will be protected against any liability which would otherwise be imposed
by reason of any such breach of the terms and conditions of the Agreement. Each
Agreement will further provide that the Master Servicer, the Depositor and any
director, officer, employee or agent of the Master Servicer or the Depositor
will be entitled to indemnification by the related Trust Fund and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the Agreement or the Certificates, other than any loss,
liability or expense related to any specific Mortgage Loan or Mortgage Loans
(except any such loss, liability or expense otherwise reimbursable pursuant to
the Agreement) and any loss, liability or expense incurred by reason of any
breach of the terms and conditions of the Agreement. In addition, each Agreement
will provide that neither the Master Servicer nor the Depositor will be under
any obligation to appear in, prosecute or defend any legal action which is not
incidental to its respective responsibilities under the Agreement and which in
its opinion may involve it in any expense or liability. The Master Servicer or
the Depositor may, however, in its discretion undertake any such action which it
may deem
48
<PAGE>
necessary or desirable with respect to the Agreement and the rights and duties
of the parties thereto and the interests of the Certificateholders thereunder.
In such event, the legal expenses and costs of such action and any liability
resulting therefrom will be expenses, costs and liabilities of the Trust Fund
and the Master Servicer or the Depositor, as the case may be, will be entitled
to be reimbursed therefor out of funds otherwise distributable to
Certificateholders.
Any person into which the Master Servicer may be merged or consolidated, or
any person resulting from any merger or consolidation to which the Master
Servicer is a party, or any person succeeding to the business of the Master
Servicer, will be the successor of the Master Servicer under each Agreement. In
addition, the Master Servicer may assign its rights, and delegate its duties,
pursuant to the terms of the Agreement.
Events of Default
Unless otherwise specified in the related Prospectus Supplement, Events of
Default under each Agreement will generally consist of (i) any failure by the
Master Servicer to distribute or cause to be distributed to Certificateholders
of any class any required payment (other than an Advance) which continues
unremedied for five business days after the giving of written notice of such
failure to the Master Servicer by the Trustee or the Depositor, or to the Master
Servicer, the Depositor and the Trustee by the holders of Certificates of such
class evidencing not less than 25% of the related Trust Fund (based on the
outstanding principal balances of the Certificates); (ii) any failure by the
Master Servicer to make an Advance as required under the Agreement, unless cured
as specified therein; (iii) any failure by the Master Servicer duly to observe
or perform in any material respect any of its other covenants or agreements in
the Agreement which continues unremedied for sixty days after the giving of
written notice of such failure to the Master Servicer by the Trustee or the
Depositor, or to the Master Servicer, the Depositor and the Trustee by the
holders of Certificates evidencing not less than 25% of the related Trust Fund
(based on the outstanding principal balances of the Certificates); and (iv)
certain events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceeding and certain actions by or on behalf of the
Master Servicer indicating its insolvency, reorganization or inability to pay
its obligations.
If specified in the related Prospectus Supplement, the Agreement will
permit the Trustee to sell the Mortgage Assets and the other assets of the Trust
Fund in the event that payments in respect thereto are insufficient to make
payments required in the Agreement. The assets of the Trust Fund will be sold
only under the circumstances and in the manner specified in the related
Prospectus Supplement.
Rights Upon Event of Default
So long as an Event of Default under an Agreement remains unremedied, the
Trustee may, and at the direction of holders of Certificates having not less
than 25% of the related Trust Fund (based on the outstanding principal balances
of the Certificates) and under such other circumstances as may be specified in
such Agreement, the Trustee shall, terminate all of the rights and obligations
of the Master Servicer under the Agreement relating to such Trust Fund and in
and to the Mortgage Loans, whereupon the Trustee will succeed to all of the
responsibilities, duties and liabilities of the Master Servicer under the
Agreement, including, if specified in the related Prospectus Supplement, the
obligation to make advances, and will be entitled to similar compensation
arrangements. In the event that the Trustee is unwilling or unable so to act, it
may appoint, or petition a court of competent jurisdiction for the appointment
of, a Mortgage Loan servicing institution with a net worth of at least
$10,000,000 to act as successor to the Master Servicer under the Agreement.
Pending such appointment, the Trustee is obligated to act in such capacity. The
Trustee and any such successor may agree upon the servicing compensation to be
paid, which in no event may be greater than the compensation payable to the
Master Servicer under the Agreement.
No Certificateholder, solely by virtue of such holder's status as a
Certificateholder, will have any right under any Agreement to institute any
proceeding with respect to such Agreement, unless such holder previously has
given to the Trustee written notice of default and unless the holders of
Certificates of any Class of such Series evidencing not less than 25% of the
related Trust Fund (based on the outstanding principal balances of the
Certificates) have made written request upon the Trustee to institute such
proceeding in its own name as Trustee thereunder and have offered to the Trustee
reasonable indemnity, and the Trustee for 60 days has neglected or refused to
institute any such proceeding.
Amendment
Unless otherwise specified in the related Prospectus Supplement, each
Agreement may be amended by the Depositor, the Master Servicer and the Trustee,
without the consent of any of the Certificateholders, (i) to cure any ambiguity
or mistake; (ii) to correct or supplement any provision therein which may be
defective or inconsistent with any other provision therein or with the related
Prospectus Supplement or Prospectus or to correct any error or mistake; (iii) to
obtain, maintain or improve the rating of any class of Certificates (it being
understood that after obtaining any rating required at the initial issuance of
the related Series, none of the Depositor, Master Servicer or Trustee is
obligated to obtain, maintain or improve
49
<PAGE>
the rating of any class of Certificates of such Series); or (iv) to make any
other revisions with respect to matters or questions arising under the Agreement
which are not materially inconsistent with the provisions thereof, provided
that, in the case of clause (iv), such action will not adversely affect in any
material respect the interests of any Certificateholder. An amendment will be
deemed not to adversely affect in any material respect the interests of the
Certificateholders if the person requesting such amendment obtains a letter from
each rating agency requested to rate the class or classes of Certificates of
such Series stating that such amendment will not result in the downgrading or
withdrawal of the respective ratings then assigned to such Certificates. In
addition, to the extent provided in the related Agreement, an Agreement may be
amended without the consent of any of the Certificateholders, to change the
manner in which the Collection Account is maintained, provided that any such
change does not adversely affect the then current rating on the class or classes
of Certificates of such Series that have been rated. In addition, if a REMIC
election is made with respect to a Trust Fund, the related Agreement may be
amended to modify, eliminate or add to any of its provisions to such extent as
may be necessary to maintain the qualification of the related Trust Fund as a
REMIC, provided that the Trustee has received an opinion of counsel to the
effect that such action is necessary or helpful to maintain such qualification.
Unless otherwise specified in the related Prospectus Supplement, each Agreement
may also be amended by the Depositor, the Master Servicer and the Trustee with
consent of holders of Certificates of such Series evidencing not less than 51%
of the aggregate Percentage Interests of each class affected thereby for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of the Agreement or of modifying in any manner the rights of
the holders of the related Certificates; provided, however, no such amendment
may (i) reduce in any manner the amount of or delay the timing of, payments
received on Mortgage Loans which are required to be distributed on any
Certificate without the consent of the holder of such Certificate, or (ii)
reduce the aforesaid percentage of Certificates of any class of holders which
are required to consent to any such amendment without the consent of the holders
of all Certificates of such class covered by such Agreement then outstanding. If
a REMIC election is made with respect to a Trust Fund, the Trustee will not be
entitled to consent to an amendment to the related Agreement without having
first received an opinion of counsel to the effect that such amendment will not
cause such Trust Fund to fail to qualify as a REMIC.
Termination; Optional Termination
Unless otherwise specified in the related Agreement, the obligations
created by each Agreement for each Series of Certificates will terminate upon
the payment to the related Certificateholders of all amounts held in the
Collection Account or by the Master Servicer and required to be paid to them
pursuant to such Agreement following the later of (i) the final payment or other
liquidation of the last of the Mortgage Assets subject thereto or the
disposition of all property acquired upon foreclosure of any such Mortgage
Assets remaining in the Trust Fund and (ii) the purchase by the Master Servicer,
the Depositor or, if REMIC treatment has been elected and if specified in the
related Prospectus Supplement, by the holder of the residual interest in the
REMIC (see "Certain Federal Income Tax Consequences" below), from the related
Trust Fund of all of the remaining Mortgage Assets and all property acquired in
respect of such Mortgage Assets.
Unless otherwise specified in the related Prospectus Supplement, any such
purchase of Mortgage Assets and property acquired in respect of Mortgage Assets
evidenced by a Series of Certificates will be made at the option of the Master
Servicer, the Depositor or, if applicable, such holder of the REMIC residual
interest, at a price, and in accordance with the procedures, specified in the
related Prospectus Supplement. The exercise of such right will effect early
retirement of the Certificates of that Series, but the right of the Master
Servicer, the Depositor or, if applicable, such holder of the REMIC residual
interest, to so purchase is subject to the principal balance of the related
Mortgage Assets being less than the percentage specified in the related
Prospectus Supplement of the aggregate principal balance of the Mortgage Assets
at the Cut-off Date for the Series. The foregoing is subject to the provision
that if a REMIC election is made with respect to a Trust Fund, any repurchase
pursuant to clause (ii) above will be made only in connection with a "qualified
liquidation" of the REMIC within the meaning of Section 860F(g)(4) of the Code.
The Trustee
The Trustee under each Agreement will be named in the applicable Prospectus
Supplement. The commercial bank or trust company serving as Trustee may have
normal banking relationships with the Depositor, the Master Servicer and any of
their respective affiliates.
50
<PAGE>
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
The following discussion contains summaries, which are general in nature,
of certain legal matters relating to the Mortgage Loans. Because such legal
aspects are governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the Mortgage Loans is situated. The summaries are qualified in
their entirety by reference to the appropriate laws of the states in which
Mortgage Loans may be originated.
General
The Mortgage Loans will be secured by deeds of trust, mortgages, security
deeds or deeds to secure debt, depending upon the prevailing practice in the
state in which the property subject to the loan is located. Deeds of trust are
used almost exclusively in California instead of mortgages. A mortgage creates a
lien upon the real property encumbered by the mortgage, which lien is generally
not prior to the lien for real estate taxes and assessments. Priority between
mortgages depends on their terms and generally on the order of recording with a
state or county office. There are two parties to a mortgage, the mortgagor, who
is the borrower and owner of the mortgaged property, 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 formally has three parties, the borrower-property
owner called the grantor/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. A security deed and a deed to secure debt
are special types of deeds which indicate on their face that they are granted to
secure an underlying debt. By executing a security deed or deed to secure debt,
the grantor conveys title to, as opposed to merely creating a lien upon, the
subject property to the grantee until such time as the underlying debt is
repaid. The trustee's authority under a deed of trust, the mortgagee's authority
under a mortgage and the grantee's authority under a security deed or deed to
secure debt are governed by law and, with respect to some deeds of trust, the
directions of the beneficiary.
Home Ownership and Equity Protection Act of 1994
Violations of certain provisions of these federal laws may limit the
ability of the Master Servicer to collect all or part of the principal of or
interest on the Mortgage Loans and in addition could subject the Trust Fund to
damages and administrative enforcement. The Mortgage Loans may be subject to the
Home Ownership and Equity Protection Act of 1994 ("Act") which amended the
Truth-in-Lending Act as it applies to mortgages subject to the Act. The Act
requires certain additional disclosures, specifies the timing of such
disclosures and limits or prohibits inclusion of certain provisions in mortgages
subject to the Act. The Act also provides that any purchaser or assignee of a
mortgage covered by the Act is subject to all of the claims and defenses which
the borrower could assert against the original lender. The maximum damages that
may be recovered under the Act from an assignee is the remaining amount of
indebtedness plus the total amount paid by the borrower in connection with the
mortgage loan. If the Trust Fund includes Mortgage Loans subject to the Act, it
will be subject to all of the claims and defenses which the borrower could
assert against a Seller. Any violation of the Act which would result in such
liability would be a breach of such Seller's representations and warranties, and
such Seller would be obligated to cure, repurchase or, if permitted by the
Agreement, substitute for the Mortgage Loan in question.
Prepayment Charges
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following the origination of Mortgage Loans with respect
to prepayments on loans secured by liens encumbering owner-occupied residential
properties. Since many of the Mortgaged Properties will be owner-occupied, it is
anticipated that prepayment charges may not be imposed with respect to many of
the Mortgage Loans. The absence of such a restraint on prepayment, particularly
with respect to fixed rate Mortgage Loans having higher Mortgage Rates or APRs,
may increase the likelihood of refinancing or other early retirement of such
loans or contracts.
Cooperatives
Certain of the Mortgage Loans may be Cooperative Loans. The Cooperative
owns all the real property that comprises the project, including the land,
separate dwelling units and all common areas. The Cooperative is directly
responsible for project management and, in most cases, payment of real estate
taxes and hazard and liability insurance. If there is a blanket mortgage on the
Cooperative and/or underlying land, as is generally the case, the Cooperative,
as project mortgagor, is also
51
<PAGE>
responsible for meeting these mortgage obligations. A blanket mortgage is
ordinarily incurred by the Cooperative in connection with the construction or
purchase of the Cooperative's apartment building. The interest of the occupant
under proprietary leases or occupancy agreements to which that Cooperative is a
party are generally subordinate to the interest of the holder of the blanket
mortgage in that building. If the Cooperative is unable to meet the payment
obligations arising under its blanket mortgage, the mortgagee holding the
blanket mortgage could foreclose on that mortgage and terminate all subordinate
proprietary leases and occupancy agreements. In addition, the blanket mortgage
on a Cooperative may provide financing in the form of a mortgage that does not
fully amortize with a significant portion of principal being due in one lump sum
at final maturity. The inability of the Cooperative to refinance this mortgage
and its consequent inability to make such final payment could lead to
foreclosure by the mortgagee providing the financing. A foreclosure in either
event by the holder of the blanket mortgage could eliminate or significantly
diminish the value of any collateral held by the lender who financed the
purchase by an individual tenant-stockholder of Cooperative shares or, in the
case of a Trust Fund including Cooperative Loans, the collateral securing the
Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
units. Generally, a tenant-stockholder of a Cooperative must make a monthly
payment to the Cooperative representing such tenant-stockholder's pro rata share
of the Cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying rights is financed through a
Cooperative share loan evidenced by a promissory note and secured by a security
interest in the occupancy agreement or proprietary lease and in the related
Cooperative shares. The lender takes possession of the share certificate and a
counterpart of the proprietary lease or occupancy agreement and a financing
statement covering the proprietary lease or occupancy agreement and the
Cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of Cooperative
shares.
With respect to Cooperative Loans, any prospective purchaser will generally
have to obtain the approval of the board of directors of the relevant
Cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. See "Certain Legal Aspects of the
Mortgage Loans" herein. This approval is usually based on the purchaser's income
and net worth and numerous other factors. Although the Cooperative's approval is
unlikely to be unreasonably withheld or delayed, the necessity of acquiring such
approval could limit the number of potential purchasers for those shares and
otherwise limit the Trust Fund's ability to sell and realize the value of those
shares.
In general, a "tenant-stockholder" (as defined in Code Section 216(b)(2))
of a corporation that qualifies as a "cooperative housing corporation" within
the meaning of Code Section 216(b)(1) is allowed a deduction for amounts paid or
accrued within his taxable year to the corporation representing his
proportionate share of certain interest expenses and certain real estate taxes
allowable as a deduction under Code Section 216(a) to the corporation under Code
Sections 163 and 164. In order for a corporation to qualify under Code Section
216(b)(1) for its taxable year in which such items are allowable as a deduction
to the corporation, such Section requires, among other things, that at least 80%
of the gross income of the corporation be derived from its tenant-stockholders
(as defined in Code Section 216(b)(2)). By virtue of this requirement, the
status of a corporation for purposes of Code Section 216(b)(1) must be
determined on a year-to-year basis. Consequently, there can be no assurance that
Cooperatives relating to the Cooperative Loans will qualify under such Section
for any particular year. In the event that such a Cooperative fails to qualify
for one or more years, the value of the collateral securing any related
Cooperative Loans could be significantly impaired because no deduction would be
allowable to tenant-stockholders under Code Section 216(a) with respect to those
years. In view of the significance of the tax benefits accorded
tenant-stockholders of a corporation that qualifies under Code Section
216(b)(1), the likelihood that such a failure would be permitted to continue
over a period of years appears remote.
Foreclosure/Repossession
Deed of Trust. Foreclosure of a deed of trust is generally accomplished by
a non-judicial sale under a specific provision in the deed of trust which
authorizes the trustee to sell the property at public auction upon any default
by the borrower under the terms of the note or deed of trust. In certain states,
such foreclosure also may be accomplished by judicial action in the manner
provided for foreclosure of mortgages. In some states, such as California, the
trustee must record a notice of default and send a copy to the borrower-trustor,
to any person who has recorded a request for a copy of any notice of default and
notice of sale. In addition, the trustee must provide notice in some states to
any other individual having an interest of record
52
<PAGE>
in the real property, including any junior lienholder. If the deed of trust is
not reinstated within any applicable cure period, a notice of sale must be
posted in a public place and, in most states, including California, published
for a specified period of time in one or more newspapers. In addition, these
notice provisions require that a copy of the notice of sale be posted on the
property and sent to all parties having an interest of record in the property.
In California, the entire process from recording a notice of default to a
non-judicial sale usually takes four to five months.
In some states, including California, the borrower-trustor has the right to
reinstate the loan at any time following default until shortly before the
trustee's sale. In general, 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 obligation. Certain state laws control the amount of
foreclosure expenses and costs, including attorney's fees, which may be
recoverable by a lender.
Mortgages. 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. Judicial foreclosure proceedings sometimes are not contested by any of
the parties. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time consuming. After the
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints a referee or other court officer to conduct
the sale of the property. In general, the borrower, or any other person having a
junior encumbrance on the real estate, may, during a statutorily prescribed
reinstatement period, cure a monetary default by paying the entire amount in
arrears plus other designated costs and expenses incurred in enforcing the
obligation. Generally, state law controls the amount of foreclosure expenses and
costs, including attorney's fees, which may be recovered by a lender. After the
reinstatement period has expired without the default having been cured, the
borrower or junior lienholder no longer has the right to reinstate the loan and
must pay the loan in full to prevent the scheduled foreclosure sale. If the deed
of trust is not reinstated, a notice of sale must be posted in a public place
and, in most states, published for a specific period of time in one or more
newspapers. In addition, some state laws require that a copy of the notice of
sale be posted on the property and sent to all parties having an interest in the
real property.
Although foreclosure sales are typically public sales, frequently no third
party purchaser bids in excess of the lender's lien because of the absence of
equity in the property, the difficulty of determining the exact status of title
to the property, the possible deterioration of the property during the
foreclosure proceedings and a requirement that the purchaser pay to bid for the
property. Thus the foreclosing lender often purchases the property from the
trustee or referee for an amount equal to the principal amount outstanding under
the loan, accrued and unpaid interest and the expenses of foreclosure.
Thereafter, the lender will assume the burden of ownership, including obtaining
hazard insurance and making such repairs at its own expense as are necessary to
render the property suitable for sale. The lender will commonly obtain the
services of a real estate broker and pay the broker's commission in connection
with the sale of the property. Depending upon market conditions, the ultimate
proceeds of the sale of the property may not equal the lender's investment in
the property.
Courts have imposed general equitable principles upon foreclosure, which
are generally designed to mitigate the legal consequences to the borrower of the
borrower's defaults under the loan documents. These equitable principles are
generally designed to relieve the borrower from the legal effect of his defaults
under the loan documents. Examples of judicial remedies that have been fashioned
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes for the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disability. In
other cases, courts have limited the right of the lender to foreclose if the
default under the mortgage instrument is not monetary, such as the borrower
failing adequately to maintain the property or the borrower executing a second
security instrument affecting the property. Some courts have been faced with the
issue of whether federal or state constitutional provisions reflecting due
process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust does not involve sufficient state
action to afford constitutional protection to the borrower.
Home Equity Loans. Since the Mortgages securing Home Equity Loans are often
junior liens subordinate to the rights of the mortgagee under the related senior
mortgage or mortgages, the proceeds from any liquidation, insurance or
condemnation proceedings will be available to satisfy the outstanding balance of
such junior mortgage only to the extent that the claims of such senior
mortgagees have been satisfied in full, including any related foreclosure costs.
In addition, a junior mortgagee may not foreclose on the property securing a
junior mortgage unless it forecloses subject to the senior mortgages, in which
case it must either pay the entire amount due on the senior mortgages to the
senior mortgagees at or prior to the foreclosure
53
<PAGE>
sale or undertake the obligation to make payments on the senior mortgages in the
event the mortgagor is in default thereunder. The Trust Fund will not have any
source of funds to satisfy the senior mortgages to make payments due to the
senior mortgagees.
Cooperative Loans. The Cooperative shares owned by the tenant-stockholder
and pledged to the lender are, in almost all cases, subject to restrictions on
transfer as set forth in the Cooperative's Certificate of Incorporation and
Bylaws, as well as the proprietary lease or occupancy agreement, and may be
cancelled by the Cooperative for failure by the tenant-stockholder to pay rent
or other obligations or charges owed by such tenant-stockholder, including
mechanics' liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the Cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the Cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder on its obligations
under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on a
Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the UCC and the security
agreement relating to those shares. Article 9 of the UCC requires that a sale be
conducted in a "commercially reasonable" manner. Whether a foreclosure sale has
been conducted in a "commercially reasonable" manner will depend on the facts in
each case. In determining commercial reasonableness, a court will look to the
notice given the debtor and the method, manner, time, place and terms of the
foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency. See "Anti-Deficiency Legislation and Other
Limitations on Lenders" below.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elected to remain in the building but who did not purchase shares in the
Cooperative when the building was so converted.
Rights of Redemption
In some states after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and certain foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
certain other states, including California, this right of redemption applies
only to sales following judicial foreclosure, and not to sales pursuant to a
non-judicial power of sale. In most states where the right of redemption is
available, statutory redemption may occur upon payment of the foreclosure
purchase price, accrued interest and taxes. In some states, the right to redeem
is an equitable right. The effect of a right of redemption is to diminish the
ability of the lender to sell the foreclosed property. The exercise of a
54
<PAGE>
right of redemption would defeat the title of any purchaser at a foreclosure
sale, or of any purchaser from the lender subsequent to judicial 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 run.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory restrictions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, including California, statutes limit the right of the beneficiary or
mortgagee to obtain a deficiency judgment against the borrower following
foreclosure or sale under a deed of trust. A deficiency judgment is a personal
judgment against the borrower equal in most cases to the difference between the
amount due to the lender and the purchase price offered or paid for the property
at the time of the foreclosure sale. As a result of these prohibitions, it is
anticipated that in most instances the Master Servicer will utilize the
non-judicial foreclosure remedy and will not seek deficiency judgments against
defaulting Mortgagors. In some states, exceptions to the anti-deficiency
statutes are provided for in certain instances where the value of the lender's
security has been impaired by acts or omissions of the borrower; for example, in
the event of waste of the property.
Some state statutes may require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
In certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. Consequently, the
practical effect of the election requirement, when applicable, is that lenders
will usually proceed first against the security rather than bringing a personal
action against the borrower.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws
affording relief to debtors, may interfere with or affect the ability of the
secured mortgage lender to realize upon its security. For example, in a
proceeding under the federal Bankruptcy Code, a lender may not foreclose on the
Mortgaged Property without the permission of the bankruptcy court. The
rehabilitation plan proposed by the debtor may provide, if the Mortgaged
Property is not the debtor's principal residence and the court determines that
the value of the Mortgaged Property is less than the principal balance of the
mortgage loan, for the reduction of the secured indebtedness to the value of the
Mortgaged Property as of the date of the commencement of the bankruptcy,
rendering the lender a general unsecured creditor for the difference, and also
may reduce the monthly payments due under such mortgage loan, change the rate of
interest and alter the mortgage loan repayment schedule. The effect of any such
proceedings under the federal Bankruptcy Code, including but not limited to any
automatic stay, could result in delays in receiving payments on the Mortgage
Loans underlying a Series of Certificates and possible reductions in the
aggregate amount of such payments.
The Mortgage Loans are also subject to federal laws, including:
(i) the Federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding
the terms of the Mortgage Loans;
(ii) the 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 borrower's credit experience; and
(iv) the Home Ownership and Equity Protection Act of 1994.
These and other federal and state consumer protection laws impose
substantive requirements upon mortgage lenders in connection with the
origination, servicing and enforcement of Mortgage Loans. Violations of certain
provisions of these laws may limit the ability of the Master Servicer to collect
all or part of the principal of or interest on the Mortgage Loans, may subject
the Master Servicer to damages and administrative enforcement and in addition
could be raised by borrowers as a recoupment or setoff in a collection or
foreclosure action. The federal tax laws provide priority to certain tax liens
over the lien of a mortgage or secured party.
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award unless the
creditor
55
<PAGE>
establishes that the sale of the collateral (which, in the case of a Cooperative
Loan, would be the shares of the Cooperative and the related proprietary lease
or occupancy agreement) was conducted in a commercially reasonable manner.
Environmental Risks
Real property pledged as security to a lender may be subject to unforeseen
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the payment of the
costs of clean-up. In several states such a lien has priority over the lien of
an existing mortgage against such property. In addition, under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), the United States Environmental Protection Agency ("EPA") may impose
a lien on property where EPA has incurred clean-up costs. However, a CERCLA lien
is subordinate to pre-existing, perfected security interests.
Under the laws of some states, and under CERCLA, it is conceivable that a
lender may be held liable, as an "owner" or "operator," for costs of addressing
releases or threatened releases of hazardous substances at a Mortgaged Property,
regardless of whether or not the environmental damage or threat was caused by a
prior owner or operator. CERCLA imposes liability on any and all "responsible
parties" (which includes, inter alia, the property owner and operator) for the
cost of clean-up of releases of hazardous substances. However, CERCLA excludes
from the definition of "owner or operator" secured creditors who hold indicia of
ownership for the purpose of protecting their security interest, but "without
participating in the management of the facility." That exclusion was
substantially narrowed by a May 1990 decision of the United States Court of
Appeals for the Eleventh Circuit in United States v. Fleet Factors Corp., which
held that a lender need not have involved itself in the day-to-day operations of
the facility or participated in decisions relating to hazardous waste management
in order to be liable; rather, liability could attach to the lender if its
involvement with the management of the facility is broad enough to support the
inference that the lender could affect hazardous waste management practices if
it so chose. The court added that a lender's capacity to influence such
decisions could be inferred from the extent of its involvement in the facility's
financial management. In response to Fleet Factors, EPA promulgated regulations
designed to clarify the range of activities a lender may engage in without
losing the benefit of the statutory exclusion. Under the regulations, which took
effect in April 1992, a lender is permitted to monitor the borrower's
environmental practices in order to determine if the facility is in compliance
with applicable law, and to require the borrower to take measures necessary to
achieve or maintain compliance or conduct necessary clean-ups. The lender may
not, however, exercise control over or assume responsibility for the borrower's
environmental practices. Such actions would be considered "participation in the
management of the facility." Also, if the lender takes title to or possession of
the property, it might be deemed to have obviated the security interest
exclusion and to be liable for clean-up costs pursuant to CERCLA. The EPA
regulations allow lenders to take certain actions with respect to foreclosure,
without losing the benefit of the statutory exclusion. Essentially, the
regulations allow the lender to take actions consistent with protecting its
security interest, but not actions which demonstrate an intent to exercise long-
term ownership interest in the property. While the EPA regulations offer some
protection to lenders, it must be noted that such protection may not be
available under applicable state law. Furthermore, the regulations are binding
only on EPA with respect to EPA's enforcement powers and cost recovery rights.
It has not yet been determined whether the federal courts will apply the
regulations in cost recovery actions brought against lenders by other
responsible parties, although the regulations may well be considered persuasive
by the courts. (Two judicial challenges have been brought against the EPA
regulations in the United States Court of Appeals for the District of Columbia
Circuit. The challenges both allege that the regulations are inconsistent with
the statutory requirements of CERCLA and, therefore, should be invalidated. The
challenges were filed on July 28, 1992, and are still pending.) If a lender is
or becomes liable, it can bring an action for contribution against any other
"responsible parties," including a previous owner or operator, who created the
environmental hazard, but those persons or entities may be bankrupt or otherwise
judgment proof. The costs associated with environmental clean-up may be
substantial. It is conceivable that such remedial costs arising from the
circumstances set forth above would become a liability of the Trust Fund and
occasion a loss to Certificateholders.
Except as otherwise specified in the applicable Prospectus Supplement, at
the time the Mortgage Loans were originated, no environmental assessment or a
very limited environmental assessment of the Mortgaged Properties was conducted.
Due-on-Sale Clauses
Unless otherwise provided in the related Prospectus Supplement, each
conventional Mortgage Loan will contain a due-on-sale clause which will
generally provide that if the mortgagor or obligor sells, transfers or conveys
the Mortgaged Property, the loan may be accelerated by the mortgagee. In recent
years, court decisions and legislative actions placed substantial restriction on
the right of lenders to enforce such clauses in many states. For instance, the
California Supreme Court in
56
<PAGE>
August 1978 held that due-on-sale clauses were generally unenforceable. However,
the Garn-St Germain Depository Institutions Act of 1982 (the "Garn-St Germain
Act"), subject to certain exceptions, preempts state constitutional, statutory
and case law prohibiting the enforcement of due-on-sale clauses. As to loans
secured by an owner-occupied residence, the Garn-St Germain Act sets forth nine
specific instances in which a mortgagee covered by the Act may not exercise its
rights under a due-on-sale clause, notwithstanding the fact that a transfer of
the property may have occurred. The inability to enforce a due-on-sale clause
may result in transfer of the related Mortgaged Property to an uncreditworthy
person, which could increase the likelihood of default or may result in a
mortgage bearing an interest rate below the current market rate being assumed by
a new home buyer, which may affect the average life of the Mortgage Loans and
the number of Mortgage Loans which may extend to maturity.
Prepayment Charges
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following the origination of Mortgage Loans with respect
to prepayments on loans secured by liens encumbering owner-occupied residential
properties. Since many of the Mortgaged Properties will be owner-occupied, it is
anticipated that prepayment charges may not be imposed with respect to many of
the Mortgage Loans. The absence of such a restraint on prepayment, particularly
with respect to fixed-rate Mortgage Loans having higher Mortgage Rates or APRs,
may increase the likelihood of refinancing or other early retirement of such
loans or contracts.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects an application of the federal law. In
addition, even where Title V is not so rejected, any state is authorized by the
law to adopt a provision limiting discount points or other charges on mortgage
loans covered by Title V. Certain states have taken action to reimpose interest
rate limits and/or to limit discount points or other charges.
Soldiers' and Sailors' Civil Relief Act
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of such borrower's Mortgage Loan (including a borrower who
is a member of the National Guard or is in reserve status at the time of the
origination of the Mortgage Loan and is later called to active duty) may not be
charged interest above an annual rate of 6% during the period of such borrower's
active duty status, unless a court orders otherwise upon application of the
lender. It is possible that such interest rate limitation could have an effect,
for an indeterminate period of time, on the ability of the Master Servicer to
collect full amounts of interest on certain of the Mortgage Loans. Unless
otherwise provided in the applicable Prospectus Supplement, any shortfall in
interest collections resulting from the application of the Relief Act could
result in losses to the holders of the Certificates. In addition, the Relief Act
imposes limitations which would impair the ability of the Master Servicer to
foreclose on an affected Mortgage Loan during the borrower's period of active
duty status. Thus, in the event that such a Mortgage Loan goes into default,
there may be delays and losses occasioned by the inability to realize upon the
mortgaged property in a timely fashion.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary represents the advice of Petree Stockton, L.L.P. and
Moore & Van Allen, PLLC, counsel to the Depositor, as to the anticipated
material federal income tax consequences of the purchase, ownership and
disposition of Certificates. The summary is based on the provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), the regulations
promulgated thereunder, including, where applicable, proposed regulations and,
in particular, regulations promulgated under the REMIC provisions of the Code
(the "REMIC Regulations"), judicial and administrative rulings and decisions now
in effect, all of which are subject to change , possibly with retroactive
effect. The summary does not purport to address all aspects of federal income
taxation that may affect particular investors in view of their individual
circumstances, including investors that may be subject to special treatment
under the federal income tax laws, such as banks and insurance companies. In
addition, the discussion is addressed primarily to investors who will hold
Certificates as "capital assets" within the meaning of Section 1221 of the Code.
The tax consequences to an investor from an investment in Certificates will
depend in part on the status or individual tax circumstances of the investor.
Accordingly, prospective investors are urged to consult their tax
57
<PAGE>
advisors regarding the particular federal, state, local and other tax
consequences to them of the purchase, ownership and disposition of Certificates.
General
The federal income tax consequences to Certificateholders will vary
depending on whether an election is made to treat the Trust Fund relating to a
particular Series of Certificates as a REMIC under the Code. The Prospectus
Supplement for each Series of Certificates will specify whether a REMIC election
will be made.
Non-REMIC Certificates; Tax Status as a Grantor Trust
If a REMIC election is not made for a Trust Fund which relates to a
particular Series of Certificates, Petree Stockton, L.L.P. or Moore & Van Allen,
PLLC will deliver its opinion that the Trust Fund will not be classified as an
association taxable as a corporation, but will be classified as a grantor trust
under subpart E, Part I of subchapter J of the Code, and that owners of
Certificates issued by a particular Trust Fund will be subject to federal income
taxation as owners of their pro rata share of the Trust Fund's assets. Unless
otherwise specified, for purposes of the discussion below relating to non-REMIC
Certificates, the term "Mortgage Loan" includes Mortgage Loans and mortgages
underlying Agency Securities and other Mortgage Assets owned by a Trust Fund.
Single Class of Senior Certificates
Characterization. A Trust Fund may be created with one class of Senior
Certificates and one class of Subordinated Certificates. In such case, each
Senior Certificateholder will be treated as the owner of a pro rata undivided
interest in the interest and principal portions of the Trust Fund represented by
that Senior Certificate and will be considered the equitable owner of a pro rata
undivided interest in each of the assets in the pool. Any amounts received by a
Senior Certificateholder in lieu of amounts due with respect to any Mortgage
Loan because of a default or delinquency in payment will be treated for federal
income tax purposes as having the same character as the payments they replace.
Each holder of a Senior Certificate will be required to report on its
federal income tax return its pro rata share of the entire income from the
Mortgage Assets in the Trust Fund represented by that Senior Certificate,
including interest, original issue discount, if any, prepayment fees, assumption
fees, any gain recognized upon an assumption and late payment charges received
by the Master Servicer in accordance with such Senior Certificateholder's method
of accounting. Under Code Section 162 or 212, each Senior Certificateholder will
be entitled to deduct its pro rata share of servicing fees, prepayment fees,
assumption fees, any loss recognized upon an assumption and late payment charges
retained by the Master Servicer, provided that such amounts are reasonable
compensation for services rendered to the Trust Fund. A Senior Certificateholder
that is an individual, estate or trust will be entitled to deduct its share of
expenses only to the extent such expenses plus all other Code Section 212
expenses exceed two percent of its adjusted gross income. A Senior
Certificateholder using the cash method of accounting must take into account its
pro rata share of income and deductions as and when collected by or paid to the
Master Servicer. A Senior Certificateholder using an accrual method of
accounting must take into account its pro rata share of income and deductions as
they become due or are paid to the Master Servicer, whichever is earlier. If the
Servicing Fees paid to the Master Servicer were deemed to exceed reasonable
servicing compensation, the amount of such excess could be considered as a
retained ownership interest by the Master Servicer (or any person to whom the
Master Servicer assigned for value all or a portion of the Servicing Fees) in a
portion of the interest payments on the Mortgage Loans. The Mortgage Loans may
then be subject to the "coupon stripping" rules of the Code discussed below.
Unless otherwise specified in the related Prospectus Supplement, as to each
Series of Certificates, Petree Stockton, L.L.P. or Moore & Van Allen, PLLC will
render its opinion that:
(i) a Senior Certificate owned by a "domestic building and loan
association" within the meaning of Code Section 7701(a)(19) representing
principal and interest payments on Mortgage Loans will be considered to
represent "loans . . . secured by an interest in real property which is . .
. residential property" within the meaning of Code Section
7701(a)(19)(C)(v); to the extent that the Mortgage Loans represented by
that Senior Certificate are of a type described in such Code section;
(ii) a Senior Certificate owned by a financial institution described
in Code Section 593(a) representing principal and interest payments on
Mortgage Loans will be considered to represent "qualifying real property
loans" within the meaning of Code Section 593(d) and the Treasury
regulations under Code Section 593; to the extent that the Mortgage Loans
represented by that Senior Certificate are of a type described in such Code
section;
58
<PAGE>
(iii) a Senior Certificate owned by a real estate investment trust
representing an interest in Mortgage Loans will be considered to represent
"real estate assets" within the meaning of Code Section 856(c)(5)(A), and
interest income on the Mortgage Loans will be considered "interest on
obligations secured by mortgages on real property" within the meaning of
Code Section 856(c)(3)(B); to the extent that the Mortgage Loans
represented by that Senior Certificate are of a type described in such Code
section; and
(iv) a Senior Certificate owned by a REMIC will be an "obligation . .
. which is principally secured by an interest in real property" within the
meaning of Code Section 860G(a)(3).
Buydown Mortgage Loans. The assets constituting certain Trust Funds may
include Buydown Mortgage Loans. The characterization of any investment in
Buydown Mortgage Loans will depend upon the precise terms of the related Buydown
Agreement, but to the extent that such Buydown Mortgage Loans are secured in
part by a bank account or other personal property, they may not be treated in
their entirety as assets described in the foregoing sections of the Code. There
are no directly applicable precedents with respect to the federal income tax
treatment or the characterization of investments in Buydown Mortgage Loans.
Accordingly, holders of Senior Certificates should consult their own tax
advisors with respect to characterization of investments in Senior Certificates
representing an interest in a Trust Fund that includes Buydown Mortgage Loans.
Premium. The price paid for a Senior Certificate by a holder will be
allocated to such holder's undivided interest in each Mortgage Loan based on
each Mortgage Loan's relative fair market value, so that such holder's undivided
interest in each Mortgage Loan will have its own tax basis. A Senior
Certificateholder that acquires an interest in Mortgage Loans at a premium may
elect to amortize such premium under a constant interest method, provided that
such Mortgage Loan was originated after September 27, 1985. Premium allocable to
a Mortgage Loan originated on or before September 27, 1985, should be allocated
among the principal payments on the Mortgage Loan and allowed as an ordinary
deduction as principal payments are made. Amortizable bond premium will be
treated as an offset to interest income on such Senior Certificate. The basis
for such Senior Certificate will be reduced to the extent that amortizable
premium is applied to offset interest payments.
It is not clear whether a reasonable prepayment assumption should be used
in computing amortization of premium allowable under Code Section 171. If a
premium is not subject to amortization using a reasonable prepayment assumption,
the holder of a Senior Certificate acquired at a premium should recognize a
loss, if a Mortgage Loan prepays in full, equal to the difference between the
portion of the prepaid principal amount of the Mortgage Loan that is allocable
to the Certificate and the portion of the adjusted basis of the Certificate that
is allocable to the Mortgage Loan. If a reasonable prepayment assumption is used
to amortize such premium, it appears that such a loss would be available, if at
all, only if prepayments have occurred at a rate faster than the reasonable
assumed prepayment rate. It is not clear whether any other adjustments would be
required to reflect differences between an assumed prepayment rate and the
actual rate of prepayments.
Original Issue Discount. The Internal Revenue Service (the "IRS") has
stated in published rulings that, in circumstances similar to those described
herein, the special rules of the Code relating to "original issue discount"
(currently Code Sections 1271 through 1273 and 1275) will be applicable to a
Senior Certificateholder's interest in those Mortgage Loans meeting the
conditions necessary for these sections to apply. Rules regarding periodic
inclusion of original issue discount income are applicable to mortgages of
corporations originated after May 27, 1969, mortgages of noncorporate mortgagors
(other than individuals) originated after July 1, 1982, and mortgages of
individuals originated after March 2, 1984. Such original issue discount could
arise by the financing of points or other charges by the originator of the
mortgages in an amount greater than a statutory de minimis exception to the
extent that the points are not currently deductible under applicable Code
provisions or are not for services provided by the lender. Original issue
discount generally must be reported as ordinary gross income as it accrues under
a constant interest method. See "Accrual of Original Issue Discount" under
"Senior Certificates Representing Interests in Loans Other Than ARMs" below.
Market Discount. A Senior Certificateholder that acquires an undivided
interest in Mortgage Loans may be subject to the market discount rules of Code
Sections 1276 through 1278 to the extent an undivided interest in a Mortgage
Loan is considered to have been purchased at a "market discount." Generally, any
market discount would be equal to the excess of the portion of the principal
amount of such Mortgage Loan allocable to such holder's undivided interest over
such holder's tax basis in such interest. Pursuant to certain de minimis rules
applicable to the computation of market discount, market discount with respect
to a Senior Certificate will be considered to be zero if the amount allocable to
the Senior Certificate is less than 0.25% of the Senior Certificate's stated
redemption price at maturity multiplied by the weighted average maturity
remaining after the date of purchase. Treasury regulations implementing the
market discount rules have not yet been issued; therefore, investors should
consult their own tax advisors regarding the application of these rules and the
advisability of making any of the elections allowed under Code Sections 1276
through 1278.
59
<PAGE>
The Code provides that any principal payment (whether a scheduled payment
or a prepayment) or any gain on disposition of a market discount bond acquired
by the taxpayer after October 22, 1986, shall be treated as ordinary income to
the extent that it does not exceed the accrued market discount at the time of
such payment. The amount of accrued market discount for purposes of determining
the tax treatment of subsequent principal payments or dispositions of the market
discount bond is to be reduced by the amount so treated as ordinary income.
The Code also grants the Treasury Department authority to issue regulations
providing for the computation of accrued market discount on debt instruments,
the principal of which is payable in more than one installment. The Treasury
Department has not yet issued any such regulations; however, the relevant
legislative history provides the best guidance applicable to this situation.
Under certain analogous rules set forth in the Code and pursuant to the
legislative history, the holder of such a market discount bond may elect to
accrue market discount either on the basis of a constant interest rate or
according to one of the following methods. If a Senior Certificate is issued
with original issue discount, the amount of market discount that accrues during
any accrual period would be equal to the product of (i) the total remaining
market discount, multiplied by (ii) a fraction, the numerator of which is the
original issue discount accruing during the period and the denominator of which
is the total remaining original issue discount at the beginning of the accrual
period. For Senior Certificates issued without original issue discount, the
amount of market discount that accrues during a period is equal to the product
of (i) the total remaining market discount, multiplied by (ii) a fraction, the
numerator of which is the amount of stated interest paid during the accrual
period and the denominator of which is the total amount of stated interest
remaining to be paid at the beginning of the accrual period. For purposes of
calculating market discount under any of the above methods in the case of
instruments (such as the Senior Certificates) which provide for payments which
may be accelerated by reason of prepayments of other obligations securing such
instruments, the same prepayment assumption applicable to calculating the
accrual of original issue discount will apply. Because the regulations described
above have not yet been issued, it is not possible to predict what effect those
regulations might have on the tax treatment of a Senior Certificate purchased at
a discount or premium in the secondary market.
A holder who acquires a Senior Certificate at a market discount also may be
required to defer, until the maturity date of such Senior Certificate or its
earlier disposition in a taxable transaction, the deduction of a portion of the
amount of interest that the holder paid or accrued during the taxable year on
any indebtedness incurred or maintained to purchase or carry the Senior
Certificate in excess of the aggregate amount of interest (including original
issue discount) includable in such holder's gross income for the taxable year
with respect to such Senior Certificate. The amount of such net interest expense
deferred in a taxable year may not exceed the amount of market discount accrued
on the Senior Certificate for the days during the taxable year on which the
holder held the Senior Certificate and, in general, would be deductible when
such market discount is includable in income. The amount of any remaining
deferred deduction is to be taken into account in the taxable year in which the
Senior Certificate matures or is disposed of in a taxable transaction. In the
case of a disposition in which gain or loss is not recognized in whole or in
part, any remaining deferred deduction will be allowed to the extent of gain
recognized on the disposition. This deferral rule does not apply if the Senior
Certificateholder elects to include such market discount in income currently as
it accrues on all market discount obligations acquired by such Senior
Certificateholder in that taxable year or thereafter.
Multiple Classes of Senior Certificates
Stripped Bonds and Stripped Coupons. Pursuant to Code Section 1286, the
separation of ownership of the right to receive some or all of the interest
payments on an obligation from ownership of the right to receive some or all of
the principal payments results in the creation of "stripped bonds" with respect
to principal payments and "stripped coupons" with respect to interest payments.
For purposes of Code Sections 1271 through 1288, Code Section 1286 treats a
stripped bond or a stripped coupon as an obligation issued on the date that such
stripped interest is created. If a Trust Fund is created with two classes of
Senior Certificates, one class of Senior Certificates will represent the right
to principal and interest, or principal only, on all or a portion of the Loans
(the "Stripped Bond Certificates"), while the second class of Offered
Certificates will represent the right to some or all of the interest on all or a
portion of such Loans (the "Stripped Coupon Certificates").
Certain IRS guidance suggests that a servicing fee in excess of reasonable
servicing ("excess servicing") will be characterized under the stripped bond
rules. In such case, this guidance would appear to require that reasonable
servicing be calculated on a Mortgage Loan by Mortgage Loan basis which could
result in some Mortgage Loans being treated as having more than 100 basis points
of interest (i.e., 1% interest on the Mortgage Loan principal balance) stripped
off. However, if the Certificates are initially sold with a de minimis discount
(assuming no prepayment assumption is required), any non-de minimis discount
arising from a subsequent transfer of the Certificates should be treated as
market discount. See "Certain
60
<PAGE>
Federal Income Tax Consequences -- Non-REMIC Certificates," " -- Single Class of
Senior Certificates -- Market Discount" herein.
Under the Treasury Regulations issued December 28, 1992, a Stripped Bond
Certificate is generally treated as a single debt instrument issued on the day
it is purchased for purposes of calculating any original issue discount.
Generally, if the discount on a Stripped Bond Certificate is larger than a de
minimis amount (as calculated for purposes of the original issue discount rules)
a purchaser of such a certificate will be required to accrue the discount under
the original issue discount rules of the Code. See "Non-REMIC Certificates" and
"Single Class of Senior Certificates -- Original Issue Discount" herein.
However, a purchaser of a Stripped Bond Certificate will be required to account
for any discount on the certificate as market discount rather than original
issue discount if either (i) the amount of original issue discount with respect
to the certificate was treated as zero under the original issue discount de
minimis rule when the certificate was stripped or (ii) no more than 100 basis
points (including any amount of servicing in excess of reasonable servicing) is
stripped off of the Trust Fund's Mortgage Loans. The stripped bond rules
constitute a method of accounting and, pursuant to Revenue Procedure 91-49
issued on August 8, 1991, purchasers of Stripped Bond Certificates using a
method of accounting inconsistent with that set forth under these procedures are
required to change their method of accounting to conform with such rules by
requesting the consent of the IRS to the change in their accounting method on a
statement attached to their first timely tax return filed after August 8, 1991.
The precise tax treatment of Stripped Coupon Certificates is substantially
uncertain. The Code could be read literally to require that original issue
discount computations be made on a Loan by Loan basis. Certain IRS guidance
would appear to suggest that a Stripped Coupon Certificate be treated as a
single installment obligation subject to the original issue discount rules of
the Code. Under this characterization, all payments on a Stripped Coupon
Certificate would be included in the certificate's stated redemption price at
maturity for purposes of calculating income on such certificate under the
original issue discount rules of the Code.
It is unclear under what circumstances, if any, the prepayment of Mortgage
Loans will give rise to a loss to the holder of a Stripped Bond Certificate
purchased at a premium or a Stripped Coupon Certificate. If such Certificate is
treated as a single instrument (rather than an interest in discrete mortgage
loans) and the effect of prepayments is taken into account in computing yield
with respect to such Senior Certificate, it appears that no loss may be
available as a result of any particular prepayment unless prepayments occur at a
rate faster than the assumed prepayment rate. However, if such Certificate is
treated as an interest in discrete Mortgage Loans, or if no prepayment
assumption is used, then when a Mortgage Loan is prepaid, the holder of such
Certificate should be able to recognize a loss equal to the portion of the
adjusted issue price of such Certificate that is allocable to such Mortgage
Loan.
Holders of Stripped Bond Certificates and Stripped Coupon Certificates are
urged to consult with their own tax advisors regarding the proper treatment of
these Certificates for federal income tax purposes.
Treatment of Certain Owners. Several Code sections, as noted below, provide
beneficial treatment to certain taxpayers that invest in mortgage loans of the
type that would typically make up a Trust Fund. With respect to these Code
sections, there is no specific legal authority specifying whether the character
of Senior Certificates issued in connection with the issuance of a multiple
class of Senior Certificates will necessarily be treated the same as that of the
underlying Mortgage Loans for purposes of these provisions. For example, while
Code Section 1286 treats a stripped obligation as a separate obligation for
purposes of the Code provisions addressing original issue discount, as described
above, there is some uncertainty whether such characterization would necessarily
apply with regard to other Code sections. Nevertheless, unless otherwise
specified in the related Prospectus Supplement, as to each class of Senior
Certificates, Petree Stockton, L.L.P. or Moore & Van Allen, PLLC will render its
opinion that, although the issue is not free from doubt, based on policy
considerations, each class of Senior Certificates should be considered to
represent "qualifying real property loans" within the meaning of Code Section
593(d), "real estate assets" within the meaning of Code Section 856(c)(5)(A) and
"loans . . . secured by, an interest in real property which is . . . residential
real property" within the meaning of Code Section 7701(a)(19)(C)(v), and
interest income attributable to Senior Certificates should be considered to
represent "interest on obligations secured by mortgages on real property" within
the meaning of Code Section 856(c)(3)(B), provided that in each case the
underlying Mortgage Loans and interest on such Mortgage Loans qualify for such
treatment. In addition, such opinion will opine that Senior Certificates will be
"obligation[s] (including any participation or certificate of beneficial
ownership therein) which [are] principally secured by an interest in real
property" within the meaning of Code Section 860G(a)(3).
61
<PAGE>
Offered Certificates Representing Interests in Loans Other Than ARMs
Original issue discount on a Senior Certificate representing an interest in
a Mortgage Loan must be included in the owner's ordinary income for federal
income tax purposes as it accrues, in accordance with a constant interest method
that takes into account the compounding of interest, in advance of receipt of
the cash attributable to such income. The amount of original issue discount
required to be included in an owner's income in any taxable year with respect to
a Senior Certificate representing an interest in Mortgage Loans other than ARMs
likely will be computed as described below under "Accrual of Original Issue
Discount." The following discussion is based in part on Treasury regulations
under Code Sections 1271 through 1273 and 1275 (the "OID Regulations") and in
part on the provisions of the Tax Reform Act of 1986 (the "1986 Act").
In general, under the Code, original issue discount is equal to the excess
of a debt instrument's stated redemption price at maturity over its issue price.
The issue price of a debt instrument as to any purchaser is generally equal to
the price paid by such purchaser for the debt instrument. The stated redemption
price at maturity of a debt instrument is the sum of all payments to be made on
such debt instrument other than payments that are treated as qualified stated
interest payments. The accrual of original issue discount on a Senior
Certificate representing an interest in Mortgage Loans, as described below under
"Accrual of Original Issue Discount," will, unless otherwise specified in the
related Prospectus Supplement, utilize the original yield to maturity of the
Senior Certificate to compute any original issue discount, as calculated based
on a reasonable assumed prepayment rate for the Mortgage Loans underlying the
Senior Certificate (the "Prepayment Assumption"), and taking into account events
that occur during the calculation period. The Prepayment Assumption is required
to be determined in the manner prescribed by regulations, which regulations have
not yet been issued. The legislative history of the 1986 Act (the "Legislative
History") provides, however, that the regulations will require that the
Prepayment Assumption be the prepayment assumption that is used in determining
the offering price of such Certificate. No representation is made that such
Certificate will prepay at the Prepayment Assumption or at any other rate.
Although the existing authority literally only apply to debt instruments
collateralized by mortgages that are subject to prepayment rather than direct
ownership interests, such as the Senior Certificates, in mortgages, because no
other legal authority provides guidance with regard to the proper method for
accruing original issue discount on obligations that are subject to prepayment,
until Treasury regulations or other legal authority instructs otherwise, the
Master Servicer intends to calculate, and report original issue discount under
the method described below.
Accrual of Original Issue Discount. Generally, the owner of a Senior
Certificate must include in gross income the sum of the "daily portions," as
defined below, of the original issue discount on such Senior Certificate for
each day on which it owns a Senior Certificate, including the date of purchase
but excluding the date of disposition. In the case of an original owner, the
daily portions of original issue discount with respect to each component
generally will be determined as follows under the existing authority. A
calculation will be made by the Master Servicer or such other entity specified
in the related Prospectus Supplement of the portion of original issue discount
that accrues during each successive monthly accrual period (or shorter period
from the date of original issue) that ends on the day in the calendar year
corresponding to each of the Distribution Dates on the Senior Certificate (or
the day prior to each such date). This will be done, in the case of each full
month accrual period, by adding (i) the present value at the end of the accrual
period (determined by using as a discount factor the original yield to maturity
of the respective component, under the Prepayment Assumption) of all remaining
payments to be received under the Prepayment Assumption on the respective
component, and (ii) any payments received during such accrual period, and
subtracting from that total the "adjusted issue price" of the respective
component at the beginning of such accrual period. The "adjusted issue price" of
a Senior Certificate at the beginning of the first accrual period is its issue
price; the "adjusted issue price" of a Senior Certificate at the beginning of a
subsequent accrual period is the "adjusted issue price" at the beginning of the
immediately preceding accrual period plus the amount of original issue discount
allocable to that accrual period reduced by the amount of any payment made at
the end of or during that accrual period. The original issue discount accruing
during such accrual period will then be divided by the number of days in the
period to determine the daily portion of original issue discount for each day in
the period. With respect to an initial accrual period shorter than a full
monthly accrual period, the daily portions of original issue discount must be
determined according to an appropriate allocation under any reasonable method.
Senior Certificates Representing Interests in ARM Loans
The OID Regulations do not address the treatment of instruments, such as
the Senior Certificates, which represent interests in Mortgage Loans with
Mortgage Rates which adjust periodically ("ARM Loans"). Additionally, the IRS
has not issued guidance under the Code's coupon stripping rules with respect to
such instruments. In the absence of any authority the
62
<PAGE>
Master Servicer will report original issue discount on Senior Certificates
attributable to ARM Loans ("Stripped ARM Obligations") to holders in a manner it
believes is consistent with the rules described above under the heading "Senior
Certificates Representing Interests in Loans Other Than ARM Loans" and with the
OID Regulations. In general, application of these rules may require inclusion of
income on a Stripped ARM Obligation in advance of the receipt of cash
attributable to such income. Further, the addition of interest deferred by
reason of negative amortization ("Deferred Interest") to the principal balance
of an ARM Loan may require the inclusion of such amount in the income of the
Senior Certificateholder when such amount accrues. Furthermore, the addition of
Deferred Interest to the Senior Certificate's principal balance will result in
additional income (including possibly original issue discount income) to the
Senior Certificateholder over the remaining life of such Senior Certificates.
Because the treatment of Stripped ARM Obligations is uncertain, investors
are urged to consult their tax advisors regarding how income will be includable
with respect to such Certificates. Possible Application of Contingent Payment
Rules to Certain Non-REMIC Certificates
The regulations under Section 1275 of the Code include rules for
obligations that provide for one or more contingent payments. Rights to
interest-only payments on a mortgage loan might be considered to be contingent
within the meaning of the OID Regulations if such interest would not be paid
upon the borrower exercising a right to prepay the related mortgage loan. In the
case of an investor having a right to shares of the interest and principal
payments on a mortgage loan where the share of interest is not substantially
greater than the share of principal, the possibility of prepayment should not be
considered to characterize otherwise noncontingent interest payments as
contingent payments; the absence of interest payments following a prepayment
would be the normal consequence of the return of such investor's capital in the
form of a principal payment. On the other hand, a right to interest on such a
mortgage loan is more likely to be regarded as contingent if held by an investor
that does not also hold a right to the related principal; such an investor would
not recover its capital through receipt of a principal payment at the time of
the prepayment of the mortgage loan.
Applying these principles to the Senior Certificates, because the Mortgage
Loans are subject to prepayment at any time, payments on a Class of Senior
Certificates representing a right to interest on the Mortgage Loans could be
considered to be contingent within the meaning of the OID Regulations, at least
if the right is to interest only or if such Senior Certificate was issued at a
premium. The likelihood that such payments will be considered contingent
increases the greater the amount of such premium.
The IRS recently issued regulations (the "Final Contingent Debt
Regulations") governing the calculation of OID on instruments having contingent
interest payments. The Final Contingent Debt Regulations, which apply to debt
instruments issued on or after August 13, 1996, specifically do not apply
(similar to the proposed contingent debt regulations) for purposes of
calculating OID on debt instruments subject to principal acceleration under Code
Section 1272(a)(6), such as the Senior Certificates likely represent.
In the event that payments on a Senior Certificate in respect of interest
on the Mortgage Loans were considered contingent, the holder would generally
report income or loss as described above under "Stripped Bonds and Stripped
Coupons," except that the yield that would be used in calculating interest
income would not be the actual yield but would instead equal the "applicable
Federal rate" (the "AFR," generally, an average of current yields of Treasury
securities computed and published monthly by the IRS), in effect at the time of
purchase of such Senior Certificate by such holder. In addition, once such
holder's adjusted basis in such Senior Certificate has been reduced (by prior
distributions or losses) to an amount equal to the aggregate amount of the
remaining noncontingent payments of the Mortgage Loans that are allocable to
such Senior Certificate (or to zero if such Senior Certificate does not share in
principal payments), then such holder would recognize income in each subsequent
month equal to the full amount of interest on the Mortgage Loans that accrues in
that month and is allocable to such Senior Certificate. It is uncertain whether,
under the contingent payment rules, any other adjustments would be made to take
account of prepayments of the Mortgage Loans.
Sale or Exchange of a Senior Certificate
Sale or exchange of a Senior Certificate prior to its maturity will result
in gain or loss equal to the difference, if any, between the amount received,
and the owner's adjusted basis in the Senior Certificate. Such adjusted basis
generally will equal the seller's purchase price for the Senior Certificate,
increased by the original issue discount included in the seller's gross income
with respect to the Senior Certificate, and reduced by principal payments on the
Senior Certificate previously received by the seller. Such gain or loss will be
capital gain or loss to an owner for which a Senior Certificate is a "capital
asset" within the meaning of Code Section 1221, and will be long-term or
short-term depending on whether the Senior Certificate has been owned for the
long-term capital gain holding period (currently more than one year).
63
<PAGE>
Senior Certificates will be "evidences of indebtedness" within the meaning
of Code Section 582(c)(1), so that gain or loss recognized from the sale of a
Senior Certificate by a bank or a thrift institution to which such section
applies will be ordinary income or loss.
Non-U.S. Persons
Generally, to the extent that a Senior Certificate evidences ownership in
Mortgage Loans that are issued on or before July 18, 1984, interest or original
issue discount paid by the person required to withhold tax under Code Section
1441 or 1442 to (i) an owner that is not a U.S. Person (as defined below), or
(ii) a Senior Certificateholder holding on behalf of an owner that is not a U.S.
Person, will be subject to federal income tax, collected by withholding, at a
rate of 30% or such lower rate as may be provided for interest by an applicable
tax treaty. Accrued original issue discount recognized by the owner on the sale
or exchange of such a Senior Certificate also will be subject to federal income
tax at the same rate. Generally, such payments would not be subject to
withholding to the extent that a Senior Certificate evidences ownership in
Mortgage Loans issued after July 18, 1984, if (i) such Senior Certificateholder
does not actually or constructively own 10 percent or more of the combined
voting power of all classes of equity in the issuer (which for purposes of this
discussion may be defined as the Trust Fund (the "Issuer")); (ii) such Senior
Certificateholder is not a controlled foreign corporation (within the meaning of
Code Section 957) related to the Issuer; and (iii) such Senior Certificateholder
complies with certain identification requirements (including delivery of a
statement, signed by the Senior Certificateholder under penalties of perjury,
certifying that such Senior Certificateholder is not a U.S. Person and providing
the name and address of such Senior Certificateholder).
A "U.S. Person" means a citizen or resident of the United States, a
corporation or a partnership organized in or under the laws of the United
States, or any political subdivision thereof or an estate or trust, the income
of which is includable in gross income for federal income tax purposes
regardless of source.
Information Reporting and Backup Withholding
The Master Servicer will furnish or make available, within a reasonable
time after the end of each calendar year, to each Certificateholder at any time
during such year, such information as may be deemed necessary or desirable to
assist Certificateholders in preparing their federal income tax returns, or to
enable holders to make such information available to owners or other financial
intermediaries of holders that hold such Certificates as nominees. If a holder,
owner or other recipient of a payment on behalf of an owner fails to supply a
certified taxpayer identification number or if the Secretary of the Treasury
determines that such person has not reported all interest and dividend income
required to be shown on its federal income tax return, 31% backup withholding
may be required with respect to any payments. Any amounts deducted and withheld
from a distribution to a recipient would be allowed as a credit against such
recipient's federal income tax liability.
REMIC Certificates
A Trust Fund relating to a Series of Certificates may elect to be treated
as a REMIC. Qualification as a REMIC requires ongoing compliance with certain
conditions. Although a REMIC is not generally subject to federal income tax
(see, however, "Residual Certificates -- Prohibited Transactions and Other
Taxes"), if a Trust Fund with respect to which a REMIC election is made fails to
comply with one or more of the ongoing requirements of the Code for REMIC status
during any taxable year, including the implementation of restrictions on the
purchase and transfer of the residual interest in a REMIC as described below
under "Residual Certificates," the Code provides that a Trust Fund will not be
treated as a REMIC for such year and thereafter. In that event, such entity may
be taxable as a separate corporation, and the related REMIC Certificates may not
be accorded the status or given the tax treatment described below. While the
Code authorizes the Treasury Department to issue regulations providing relief in
the event of an inadvertent termination of status as a REMIC, 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
REMIC's income for the period in which the requirements for such status are not
satisfied. With respect to each such Trust Fund that elects REMIC status, Petree
Stockton, L.L.P. or Moore & Van Allen, PLLC will deliver its opinion generally
to the effect that, under then existing law and assuming compliance with all
provisions of the related Agreement, such Trust Fund will qualify as a REMIC and
the related Certificates will be considered to be regular interests ("Regular
Certificates") or residual interests ("Residual Certificates") in the REMIC. The
related Prospectus Supplement for each Series of Certificates will indicate
whether the Trust Fund will make a REMIC election and whether a class of
Certificates will be treated as a regular or residual interest in the REMIC.
In general, with respect to each Series of Certificates for which a REMIC
election is made, (i) Certificates held by a thrift institution taxed as a
"mutual savings bank" or "domestic building and loan association" will represent
interests in
64
<PAGE>
"qualifying real property loans" within the meaning of Code Section 593(d)(1);
(ii) Certificates held by a thrift institution taxed as a "domestic building and
loan association" will constitute assets described in Code Section
7701(a)(19)(C); (iii) Certificates held by a real estate investment trust will
constitute "real estate assets" within the meaning of Code Section 856(c)(5)(A);
and (iv) interest on Certificates held by a real estate investment trust will be
considered "interest on obligations secured by mortgages on real property"
within the meaning of Code Section 856(c)(3)(B). If less than 95% of the REMIC's
assets are assets qualifying under any of the foregoing Code sections, the
Certificates will be qualifying assets only to the extent that the REMIC's
assets are qualifying assets. In addition, payments on Mortgage Loans held
pending distribution on the REMIC Certificates will be considered to be
qualifying real property loans for purposes of Code Section 593(d)(1) and real
estate assets for purposes of Code Section 856(c).
In some instances the Mortgage Loans may not be treated entirely as assets
described in the foregoing sections. See, in this regard, the discussion of
Buydown Mortgage Loans contained in "Non-REMIC Certificates" and "Single Class
of Senior Certificates" above. REMIC Certificates held by a real estate
investment trust will not constitute "Government Securities" within the meaning
of Code Section 856(c)(5)(A), and REMIC Certificates held by a regulated
investment company will not constitute "Government Securities" within the
meaning of Code Section 851(b)(4)(A)(ii). REMIC Certificates held by certain
financial institutions will constitute "evidences of indebtedness" within the
meaning of Code Section 582(c)(1).
A "qualified mortgage" for REMIC purposes is any obligation (including
certificates of participation in such an obligation) that is principally secured
by an interest in real property and that is transferred to the REMIC within a
prescribed time period in exchange for regular or residual interests in the
REMIC. The REMIC Regulations provide that manufactured housing or mobile homes
(not including recreational vehicles, campers or similar vehicles) which are
"single family residences" under Code Section 25(e)(10) will qualify as real
property without regard to state law classifications. Under Code Section
25(e)(10), a single family residence includes any manufactured home which has a
minimum of 400 square feet of living space and a minimum width in excess of 102
inches and which is of a kind customarily used at a fixed location.
Tiered REMIC Structures. For certain Series of Certificates, two separate
elections may be made to treat designated portions of the related Trust Fund as
REMICs (respectively, the "Subsidiary REMIC" and the "Master REMIC") for federal
income tax purposes. Upon the issuance of any such Series of Certificates,
Petree Stockton, L.L.P. or Moore & Van Allen, PLLC, counsel to the Depositor,
will deliver its opinion generally to the effect that, assuming compliance with
all provisions of the related Agreement, the Master REMIC as well as any
Subsidiary REMIC will each qualify as a REMIC and the REMIC Certificates issued
by the Master REMIC and the Subsidiary REMICs, respectively, will be considered
to evidence ownership of Regular Certificates or Residual Certificates in the
related REMIC within the meaning of the REMIC provisions.
Only REMIC Certificates issued by the Master REMIC will be offered
hereunder. The Subsidiary REMIC and the Master REMIC will be treated as one
REMIC solely for purposes of determining whether the REMIC Certificates will be
(i) "qualifying real property loans" under Section 593(d) of the Code; (ii)
"real estate assets" within the meaning of Section 856(c)(5)(A) of the Code;
(iii) "loans secured by an interest in real property" under Section
7701(a)(19)(C) of the Code; and (iv) whether the income on such Certificates is
interest described in Section 856(c)(3)(B) of the Code.
Regular Certificates
General. Except as otherwise stated in this discussion, 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 Regular Certificates that otherwise report income under a
cash method of accounting will be required to report income with respect to
Regular Certificates under an accrual method.
Original Issue Discount. The Regular Certificates may be issued with
"original issue discount" within the meaning of Code Section 1273(a). Generally,
such original issue discount, if any, will equal the difference between the
"stated redemption price at maturity" of a Regular Certificate and its "issue
price." Holders of any class of Certificates issued with original issue discount
will be required to include such original issue discount in gross income for
federal income tax purposes as it accrues, in accordance with a constant
interest method based on the compounding of interest, in advance of receipt of
the cash attributable to such income. The following discussion is based in part
on the OID Regulations and the 1986 Act. The holder of a Regular Certificate
should be aware, however, that the OID Regulations do not currently address
certain issues relevant to prepayable securities, such as the Regular
Certificates.
Rules governing original issue discount are set forth in Code Sections 1271
through 1273 and 1275. These rules require that the amount and rate of accrual
of original issue discount be calculated based on a Prepayment Assumption and
prescribe
65
<PAGE>
a method for adjusting the amount and rate of accrual of such discount where the
actual prepayment rate differs from the Prepayment Assumption. Under the Code,
the Prepayment Assumption is required to be determined in the manner prescribed
by regulations which have not yet been issued. The Legislative History provides,
however, that Congress intended the regulations to require that the Prepayment
Assumption be the prepayment assumption that is used in determining the initial
offering price of such Regular Certificates. The Prospectus Supplement for each
Series of Regular Certificates will specify the Prepayment Assumption to be used
for the purpose of determining the amount and rate of accrual of original issue
discount. No representation is made that the Regular Certificates will prepay at
the Prepayment Assumption or at any other rate.
In general, each Regular Certificate will be treated as a single
installment obligation issued with an amount of original issue discount equal to
the excess, if any, of its "stated redemption price at maturity" over its "issue
price." The issue price of a Regular Certificate will generally be the first
price at which a substantial amount of Regular Certificates of that class are
first sold to the public (excluding bond houses, brokers, underwriters or
wholesalers). The issue price of a Regular Certificate also will include the
amount paid by an initial Regular Certificateholder, if any, for accrued
interest that relates to a period prior to the issue date of the Regular
Certificate. The stated redemption price at maturity of a Regular Certificate
will equal all payments to be made on the Certificate other than payments which
constitute "qualified stated interest." Under the OID Regulations, qualified
stated interest generally means interest payable at a single fixed rate or
qualified variable rate (as described below) provided that such interest
payments are unconditionally payable at intervals of one year or less during the
entire term of the Regular Certificate. Interest is payable at a single fixed
rate only if the rate appropriately takes into account the length of the
interval between payments. Distributions of interest on Regular Certificates,
with respect to which deferred interest will accrue, will not constitute
qualified stated interest payments, in which case the stated redemption price at
maturity of such Regular Certificates includes all distributions of interest as
well as principal thereon. Where the interval between the issue date and the
first Distribution Date on a Regular Certificate is either longer or shorter
than the interval between subsequent Distribution Dates, all or part of the
interest foregone, in the case of the longer interval, and all of the additional
interest, in the case of the shorter interval, will be included in the stated
redemption price at maturity and tested under the de minimis rule described
below. The OID Regulations suggest that all interest on a long first period
Regular Certificate that is issued with non-de minimis OID may be treated as
OID. Regular Certificateholders should consult their own tax advisors to
determine the issue price and stated redemption price at maturity of a Regular
Certificate.
Under the de minimis rule, original issue discount on a Regular Certificate
will be considered to be zero if such original issue discount is less than 0.25%
of the stated redemption price at maturity of the Regular Certificate multiplied
by the weighted average maturity of the Regular Certificate. For this purpose,
the weighted average maturity of the Regular Certificate is computed as the sum
of the amounts determined by multiplying the number of full years (i.e.,
rounding down partial years) from the issue date until each distribution in
reduction of stated redemption price at maturity is scheduled to be made by a
fraction, the numerator of which is the amount of each distribution included in
the stated redemption price at maturity of the Regular Certificate and the
denominator of which is the stated redemption price at maturity of the Regular
Certificate. Although currently unclear, it appears that the schedule of such
distributions should be determined in accordance with the Prepayment Assumption.
The Prepayment Assumption with respect to a Series of Regular Certificates will
be set forth in the related Prospectus Supplement. Holders generally must report
de minimis OID pro rata as principal payments are received, and such income will
be capital gain if the Regular Certificate is held as a capital asset. However,
accrual method holders may elect to accrue all de minimis OID as well as market
discount under a constant interest method.
Generally, a Regular Certificateholder must include in gross income the
"daily portions," as determined below, of the original issue discount that
accrues on a Regular Certificate for each day the Regular Certificateholder
holds the Regular Certificate, including the purchase date but excluding the
disposition date. In the case of an original holder of a Regular Certificate, a
calculation will be made of the portion of the original issue discount that
accrues during each successive period (an "accrual period") that ends on the day
in the calendar year corresponding to a Distribution Date (or if Distribution
Dates are on the first day or first business day of the immediately preceding
month, interest may be treated as payable on the last day of the immediately
preceding month) and begins on the day after the end of the immediately
preceding accrual period (or on the issue date in the case of the first accrual
period). This will be done, in the case of each full accrual period, by (i)
adding (a) the present value at the end of the accrual period (determined by
using as a discount factor the original yield to maturity of the Regular
Certificates as calculated under the Prepayment Assumption) of all remaining
payments to be received on the Regular Certificate under the Prepayment
Assumption, and (b) any payments included in the stated redemption price at
maturity received during such accrual period, and (ii) subtracting from that
total the "adjusted issue price" of the Regular Certificates at the beginning of
such accrual period. The "adjusted issue price" of a Regular Certificate at the
beginning of the first accrual period is its issue price; the "adjusted issue
price" of a Regular Certificate at the beginning of a subsequent accrual period
is the "adjusted issue price" at the beginning of the immediately preceding
accrual period plus the
66
<PAGE>
amount of original issue discount allocable to that accrual period and reduced
by the amount of any payment other than a payment of stated periodic interest
made at the end of or during that accrual period. The original issue discount
accrued during an accrual period will then be divided by the number of days in
the period to determine the daily portion of original issue discount for each
day in the accrual period. The calculation of original issue discount under the
method described above will cause the accrual of original issue discount to
either increase or decrease (but never below zero) in a given accrual period to
reflect the fact that prepayments are occurring faster or slower than under the
Prepayment Assumption. With respect to an initial accrual period shorter than a
full accrual period, the daily portions of original issue discount may be
determined according to an appropriate allocation under any reasonable method.
A subsequent purchaser of a Regular Certificate issued with original issue
discount who purchases the Regular Certificate at a cost less than the remaining
stated redemption price at maturity will also be required to include in gross
income the sum of the daily portions of original issue discount on that Regular
Certificate. In computing the daily portions of original issue discount for such
a purchaser (as well as an initial purchaser that purchases at a price higher
than the adjusted issue price but less than the stated redemption price at
maturity), however, the daily portion is reduced by the amount that would be the
daily portion for such day (computed in accordance with the rules set forth
above) multiplied by a fraction, the numerator of which is the excess of (a) the
purchaser's adjusted basis in the Regular Certificate immediately after the
purchase thereof over (b) the adjusted issue price of the Regular Certificate,
and the denominator of which is the excess of (c) all amounts remaining to be
paid on the Regular Certificate, other than qualified stated interest, over (d)
the adjusted issue price of the Regular Certificate.
Acquisition Premium. A purchaser of a Regular Certificate at a price
greater than its adjusted issue price but less than its redemption price at
maturity will be required to include in gross income the daily portions of the
original issue discount on the Regular Certificate reduced pro rata by a
fraction, the numerator of which is the excess of its purchase price over such
adjusted issue price and the denominator of which is the excess of the remaining
stated redemption price at maturity over the adjusted issue price.
Alternatively, such a subsequent purchaser may elect to treat all such
acquisition premium under the "constant yield method."
Variable Rate Regular Certificate. Regular Certificates may provide for
interest based on a variable rate. Under the OID Regulations, interest is
treated as payable at a variable rate and not as contingent interest if,
generally, (i) the issue price does not exceed the original principal balance,
and (ii) the interest compounds or is payable at least annually at current
values of (a) one or more "qualified floating rates," (b) a single fixed rate
and one or more qualified floating rates, (c) a single "objective rate," or (d)
a single fixed rate and a single objective rate that is a "qualified inverse
floating rate." A floating rate is a qualified floating rate if variations in
the rate can reasonably be expected to measure contemporaneous variations in the
cost of newly borrowed funds, where such rate is subject to a multiple of not
less than zero nor more than 1.35. Such rate may also be increased or decreased
by a fixed spread or subject to a fixed cap or floor, or a cap or floor that is
not reasonably expected as of the issue date to affect the yield of the
instrument significantly. An objective rate includes a rate determined using a
single fixed formula and that is based on one or more qualified floating rates
or the yield or changes in the price of actively traded personal property.
Certain proposed OID Regulations would expand the definition of objective rate
to include any rate (other than a qualified floating rate) that is determined
using a single fixed formula and that is based on objective financial or
economic information, provided that such information is not (i) within the
control of the issuer or a related party or (ii) unique to the circumstances of
the issuer or a related party. A qualified inverse floating rate is a rate equal
to a fixed rate minus a qualified floating rate that inversely reflects
contemporaneous variations in the cost of newly borrowed funds; an inverse
floating rate that is not a qualified inverse floating rate may nevertheless be
an objective rate. A class of Regular Certificates may be issued that does not
have a variable rate under the foregoing rules; for example, a class that bears
different rates at different times during the period it is outstanding such that
it is considered significantly "front-loaded" or "back-loaded" within the
meaning of the OID Regulations. It is possible that such a class may be
considered to bear "contingent interest" within the meaning of the OID
Regulations and the proposed OID Regulations. The proposed OID Regulations, as
they relate to the treatment of contingent interest, are by their terms not
applicable to Regular Certificates. However, if final regulations dealing with
contingent interest with respect to Regular Certificates apply the same
principles as the proposed OID Regulations, such regulations may lead to
different timing of income inclusion than would be the case under the OID
Regulations. Furthermore, application of such principles could lead to the
characterization of gain on the sale of contingent interest Regular Certificates
as ordinary income.
Under the REMIC Regulations, a Regular Certificate (i) bearing a rate that
qualifies as a variable rate under the OID Regulations that is tied to current
values of a variable rate (or the highest, lowest or average of two or more
variable rates, including a rate based on the average cost of funds of one or
more financial institutions), or a positive or negative multiple of such a rate
(plus or minus a specified number of basis points), or that represents a
weighted average of rates on some or all of
67
<PAGE>
the Mortgage Loans, including such a rate that is subject to one or more caps or
floors, or (ii) bearing one or more such variable rates for one or more periods,
or one or more fixed rates for one or more periods, and a different variable
rate or fixed rate for other periods, qualifies as a regular interest in a
REMIC. Accordingly, unless otherwise indicated in the applicable Prospectus
Supplement, the Depositor intends to treat Regular Certificates that qualify as
regular interests under this rule in the same manner as obligations bearing a
variable rate for original issue discount reporting purposes.
The amount of original issue discount with respect to a Regular Certificate
bearing a variable rate of interest will accrue in the manner described above
under "Original Issue Discount," with the yield to maturity and future payments
on such Regular Certificate generally to be determined by assuming that interest
will be payable for the life of the Regular Certificate based on the initial
rate (or, if different, the value of the applicable variable rate as of the
pricing date) for the relevant class. Unless otherwise specified in the
applicable Prospectus Supplement, the Depositor intends to treat such variable
interest as qualified stated interest, other than variable interest on an
interest-only or super-premium class, which will be treated as non-qualified
stated interest includable in the stated redemption price at maturity. Ordinary
income reportable for any period will be adjusted based on subsequent changes in
the applicable interest rate index.
Unless otherwise specified in the applicable Prospectus Supplement, the
Depositor intends to treat Regular Certificates bearing an interest rate that is
a weighted average of the net interest rates on Mortgage Loans as having
qualified stated interest. In the case of adjustable rate Mortgage Loans, the
applicable index used to compute interest on the Mortgage Loans in effect on the
pricing date (or possibly the issue date) will be deemed to be in effect
beginning with the period in which the first weighted average adjustment date
occurring after the issue date occurs. Adjustments will be made in each accrual
period either increasing or decreasing the amount of ordinary income reportable
to reflect the actual pass-through rate on the Regular Certificates.
Market Discount. A purchaser of a Regular Certificate may also be subject
to the market discount provisions of Code Sections 1276 through 1278. Under
these provisions and the OID Regulations, "market discount" equals the excess,
if any, of (i) the Regular Certificate's stated principal amount or, in the case
of a Regular Certificate with original issue discount, the adjusted issue price
(determined for this purpose as if the purchaser had purchased such Regular
Certificate from an original holder) over (ii) the price for such Regular
Certificate paid by the purchaser. A Certificateholder that purchases a REMIC
Regular Certificate at a market discount will recognize income upon receipt of
each distribution representing stated redemption price. In particular, under
Section 1276 of the Code such a holder generally will be required to allocate
each such principal distribution 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 using the accrual method of accounting 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 is deemed to have made an election to
include in income currently market discount with respect to all other debt
instruments having market discount that such Certificateholder acquires during
the year of the election or thereafter. Similarly, a Certificateholder that
makes this election for a Certificate that is acquired at a premium is 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 "Regular Certificates -- Premium." The election to accrue
interest, discount and premium on a constant yield method with respect to a
Certificate is irrevocable.
Market discount with respect to a Regular Certificate will be considered to
be zero if the amount allocable to the Regular Certificate is less than 0.25% of
the Regular Certificate's stated redemption price at maturity multiplied by the
Regular Certificate's weighted average maturity remaining after the date of
purchase. If market discount on a Regular Certificate is considered to be zero
under this rule, the actual amount of market discount must be allocated to the
remaining principal payments on the Regular Certificate, and gain equal to such
allocated amount will be recognized when the corresponding principal payment is
made. Treasury regulations implementing the market discount rules have not yet
been issued; therefore, investors should consult their own tax advisors
regarding the application of these rules and the advisability of making any of
the elections allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled payment
or a prepayment) or any gain on disposition of a market discount bond shall be
treated as ordinary income to the extent that it does not exceed the accrued
market discount at the time of such payment. The amount of accrued market
discount for purposes of determining the tax treatment
68
<PAGE>
of subsequent principal payments or dispositions of the market discount bond is
to be reduced by the amount so treated as ordinary income.
The Code also grants authority to the Treasury Department to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury, rules described in
the Legislative History will apply. Under those rules, the holder of a market
discount bond may elect to accrue market discount either on the basis of a
constant interest rate or according to one of the following methods. For Regular
Certificates issued with original issue discount, the amount of market discount
that accrues during a period is equal to the product of (i) the total remaining
market discount, multiplied by (ii) a fraction, the numerator of which is the
original issue discount accruing during the period and the denominator of which
is the total remaining original issue discount at the beginning of the period.
For Regular Certificates issued without original issue discount, the amount of
market discount that accrues during a period is equal to the product of (a) the
total remaining market discount and (b) a fraction, the numerator of which is
the amount of stated interest paid during the accrual period and the denominator
of which is the total amount of stated interest remaining to be paid at the
beginning of the period. For purposes of calculating market discount under any
of the above methods in the case of instruments (such as the Regular
Certificates) which provide for payments which may be accelerated by reason of
prepayments of other obligations securing such instruments, the same Prepayment
Assumption applicable to calculating the accrual of original issue discount will
apply.
A holder of a Regular Certificate that acquires such Regular Certificate at
a market discount also may be required to defer, until the maturity date of such
Regular Certificate or its earlier disposition in a taxable transaction, the
deduction of a portion of the amount of interest that the holder paid or accrued
during the taxable year on indebtedness incurred or maintained to purchase or
carry the Regular Certificate in excess of the aggregate amount of interest
(including original issue discount) includable in such holder's gross income for
the taxable year with respect to such Regular Certificate. The amount of such
net interest expense deferred in a taxable year may not exceed the amount of
market discount accrued on the Regular Certificate for the days during the
taxable year on which the holder held the Regular Certificate and, in general,
would be deductible when such market discount is includable in income. The
amount of any remaining deferred deduction is to be taken into account in the
taxable year in which the Regular Certificate matures or is disposed of in a
taxable transaction. In the case of a disposition in which gain or loss is not
recognized in whole or in part, any remaining deferred deduction will be allowed
to the extent of gain recognized on the disposition. This deferral rule does not
apply if the Regular Certificateholder elects to include such market discount in
income currently as it accrues on all market discount obligations acquired by
such Regular Certificateholder in that taxable year or thereafter.
Premium. A purchaser of a Regular Certificate that purchases the Regular
Certificate at a cost (not including accrued qualified stated interest) greater
than its remaining stated redemption price at maturity will be considered to
have purchased the Regular Certificate at a premium, and may elect to amortize
such premium under a constant yield method. It is not clear whether the
Prepayment Assumption would be taken into account in determining the life of the
Regular Certificate for this purpose. However, the Legislative History states
that the same rules that apply to accrual of market discount (which rules
require use of a Prepayment Assumption in accruing market discount with respect
to Regular Certificates without regard to whether such Certificates have
original issue discount) will also apply in amortizing bond premium under Code
Section 171. The Code provides that amortizable bond premium will be allocated
among the interest payments on such Regular Certificates and will be applied as
an offset against such interest payment.
Deferred Interest. Certain classes of Regular Certificates may provide for
the accrual of interest when one or more ARM Loans are adding interest to their
principal balance by reason of negative amortization ("Deferred Interest"). Any
Deferred Interest that accrues with respect to a class of Regular Certificates
will constitute income to the holders of such Certificates prior to the time
distributions of cash with respect to such Deferred Interest are made. It is
unclear, under the OID Regulations, whether any of the interest on such
Certificates will constitute qualified stated interest or whether all or a
portion of the interest payable on the Certificates must be included in the
stated redemption price at maturity of the Certificate and accounted for as
original issue discount (which could accelerate such inclusion). Interest on
Regular Certificates must in any event be accounted for under an accrual method
by the holders of such Certificates and, therefore, applying the latter analysis
may result only in a slight difference in the timing of the inclusion in income
of interest on such Regular Certificates.
Effects of Defaults and Delinquencies. Certain Series of Certificates may
contain one or more Classes of Subordinate Certificates, and in the event there
are defaults or delinquencies on the Mortgage Loans, amounts that would
otherwise be distributed on the Subordinate Certificates may instead be
distributed on the Senior Certificates. Holders of Subordinate Certificates
nevertheless will be required to report income with respect to such Certificates
under an accrual method without
69
<PAGE>
giving effect to delays and reductions in distributions on such Subordinate
Certificates attributable to defaults and delinquencies on the Mortgage Loans,
except to the extent that it can be established that such amounts are
uncollectible. As a result, the amount of income reported by a holder of a
Subordinate Certificate in any period could significantly exceed the amount of
cash distributed to such holder in that period. The holder will eventually be
allowed a loss (or will be allowed to report a lesser amount of income) to the
extent that the aggregate amount of distributions on the Subordinate Certificate
is reduced as a result of defaults and delinquencies on the Mortgage Loans.
However, the law is unclear with respect to the timing and character of such
losses or reductions in income, and, accordingly, holders of Subordinate
Certificates should consult their own tax advisors on this point.
Sale, Exchange or Redemption. Upon the sale, exchange or redemption of a
Regular Certificate, the holder will recognize gain or loss equal to the
difference between the amount realized on such disposition, and the holder's
adjusted basis in the Regular Certificate. Such adjusted basis generally will
equal the cost of the Regular Certificate to the holder, increased by any
original issue discount and market discount included in the holder's gross
income with respect to the Regular Certificate, and reduced (but not below zero)
by payments included in the stated redemption price at maturity previously
received by the holder and by any amortized premium. Except as provided in the
following paragraph and as provided under "Market Discount" above, any such gain
or loss will be capital gain or loss, provided that the Regular Certificate is
held as a "capital asset" (generally, property held for investment) within the
meaning of Code Section 1221.
Gain from the sale or other disposition of a Regular Certificate that might
otherwise be capital gain will be treated as ordinary income to the extent that
such gain does not exceed the excess, if any, of (i) the amount that would have
been includable in such holder's income with respect to the Regular Certificate
had income accrued thereon at a rate equal to 110% of the AFR as defined in Code
Section 1274(d) determined as of the date of purchase of such Regular
Certificate, over (ii) the amount actually includable in such holder's income.
Regular Certificates will be "evidences of indebtedness" within the meaning
of Code Section 582(c)(1), so that gain or loss recognized from the sale or
exchange of a Regular Certificate by a bank or a thrift institution to which
such section applies will be ordinary income or loss.
The Regular Certificate information reports will include a statement of the
adjusted issue price of the Regular Certificate at the beginning of each accrual
period. In addition, the reports will include information necessary to compute
the accrual of any market discount that may arise upon secondary trading of
Regular Certificates. Because exact computation of the accrual of market
discount on a constant yield method would require information relating to the
holder's purchase price which the REMIC may not have, it appears that the
information reports will only require information pertaining to the appropriate
proportionate method of accruing market discount.
Non-Interest Expenses of the REMIC. Under the REMIC regulations, if the
REMIC is considered to be a "single-class REMIC," a portion of the REMIC's
servicing, administrative and other non-interest expenses will be allocated as a
separate item to those Regular Certificateholders that are "pass-through
interest holders." Certificateholders that are "pass-through interest holders"
should consult their own tax advisors about the impact of these rules on an
investment in the Regular Certificates. See "Pass-Through of Non-Interest
Expenses of the REMIC" under "Residual Certificates" below.
Non-U.S. Persons. Generally, payments of interest (including any payment
with respect to accrued original issue discount) on the Regular Certificates to
a Regular Certificateholder who is a non-U.S. Person not engaged in a trade or
business within the United States, will not be subject to federal withholding
tax if (i) such Regular Certificateholder does not actually or constructively
own 10 percent or more of the combined voting power of all classes of equity in
the issuer (which for purposes of this discussion may be defined as the Trust
Fund or the beneficial owners of the related Residual Certificates (the
"Issuer")); (ii) such Regular Certificateholder is not a controlled foreign
corporation (within the meaning of Code Section 957), related to the Issuer; and
(iii) such Regular Certificateholder complies with certain identification
requirements (including delivery of a statement, signed by the Regular
Certificateholder under penalties of perjury, certifying that such Regular
Certificateholder is a foreign person and providing the name and address of such
Regular Certificateholder). If a Regular Certificateholder is not exempt from
withholding, distributions of interest, including distributions in respect of
accrued original issue discount, such holder may be subject to a 30% withholding
tax, subject to reduction under any applicable tax treaty.
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.
70
<PAGE>
Regular Certificateholders who are non-U.S. Persons and persons related to
such holders should not acquire any Residual Certificates, and Residual
Certificateholders and persons related to Residual Certificateholders should not
acquire any Regular Certificates without consulting their tax advisors as to the
possible adverse tax consequences of doing so.
Information Reporting and Backup Withholding. The Master Servicer will
furnish or make available, within a reasonable time after the end of each
calendar year, to each Regular Certificateholder at any time during such year,
such information as may be deemed necessary or desirable to assist Regular
Certificateholders in preparing their federal income tax returns, or to enable
holders to make such information available to owners or other financial
intermediaries of holders that hold such Regular Certificates. If a holder,
owner or other recipient of a payment on behalf of an owner fails to supply a
certified taxpayer identification number or if the Secretary of the Treasury
determines that such person has not reported all interest and dividend income
required to be shown on its federal income tax return, 31% backup withholding
may be required with respect to any payments. Any amounts deducted and withheld
from a distribution to a recipient would be allowed as a credit against such
recipient's federal income tax liability.
Residual Certificates
Allocation of the Income of the REMIC to the Residual Certificates. The
REMIC will not be subject to federal income tax except with respect to income
from prohibited transactions and certain other transactions. See "Prohibited
Transactions and Other Taxes" herein. Instead, each original holder of a
Residual Certificate will report on its federal income tax return, as ordinary
income, its share of the taxable income of the REMIC for each day during the
taxable year on which such holder owns any Residual Certificates. The taxable
income of the REMIC for each day will be determined by allocating the taxable
income of the REMIC for each calendar quarter ratably to each day in the
quarter. Such a holder's share of the taxable income of the REMIC for each day
will be based on the portion of the outstanding Residual Certificates that such
holder owns on that day. The taxable income of the REMIC will be determined
under an accrual method and will be taxable to the Residual Certificateholders
without regard to the timing or amounts of cash distributions by the REMIC.
Ordinary income derived from Residual Certificates will be "portfolio income"
for purposes of the taxation of taxpayers subject to the limitations on the
deductibility of "passive losses." As residual interests, the Residual
Certificates will be subject to tax rules, described below, that differ from
those that would apply if the Residual Certificates were treated for federal
income tax purposes as direct ownership interests in the assets of the Trust
Fund or as debt instruments issued by the REMIC.
A Residual Certificateholder may be required to include taxable income from
the Residual Certificate in excess of the cash distributed. For example, a
structure where principal distributions are made serially on regular interests
(that is, a fast-pay, slow-pay structure) may generate such a mismatching of
income and cash distributions. This mismatching may be caused by the use of
certain required tax accounting methods by the REMIC, variations in the
prepayment rate of the underlying Mortgage Loans and certain other factors.
Depending upon the structure of a particular transaction, the aforementioned
factors may significantly reduce the after-tax yield of a Residual Certificate
to a Residual Certificateholder. Investors should consult their own tax advisors
concerning the federal income tax treatment of a Residual Certificate and the
impact of such tax treatment on the after-tax yield of a Residual Certificate.
A subsequent Residual Certificateholder also will report on its federal
income tax return amounts representing a daily share of the taxable income of
the REMIC for each day that such Residual Certificateholder owns such Residual
Certificate. Those daily amounts generally would equal the amounts that would
have been reported for the same days by an original Residual Certificateholder,
as described above. The Legislative History indicates that certain adjustments
may be appropriate to reduce (or increase) the income of a subsequent holder of
a Residual Certificate that purchased such Residual Certificate at a price
greater than (or less than) the adjusted basis such Residual Certificate would
have in the hands of an original Residual Certificateholder. See "Sale or
Exchange of Residual Certificates" below. It is not clear, however, whether such
adjustments will in fact be permitted or required and, if so, how they would be
made. The REMIC Regulations do not provide for any such adjustments.
Excess Inclusions. A portion of the income on a Residual Certificate
(referred to in the Code as an "excess inclusion") for any calendar quarter
will, with an exception discussed below for certain thrift institutions, be
subject to federal income tax in all events. Thus, for example, an excess
inclusion (i) may not, except as described below, be offset by any unrelated
losses, deductions or loss carryovers of a Residual Certificateholder; (ii) will
be treated as "unrelated business taxable income" within the meaning of Code
Section 512 if the Residual Certificateholder is a pension fund or any other
organization that is subject to tax only on its unrelated business taxable
income (see "Tax-Exempt Investors" below); and (iii) is not eligible for any
reduction in the rate of withholding tax in the case of a Residual
Certificateholder that is a foreign investor. See "Non-U.S. Persons" below. The
exception for thrift institutions is available only to the institution holding
the Residual Certificate,
71
<PAGE>
and not to any affiliate of the institution, unless the affiliate is a
subsidiary all the stock of which, and substantially all the indebtedness of
which, is held by the institution, and which is organized and operated
exclusively in connection with the organization and operation of one or more
REMICs.
Except as discussed in the following paragraph, with respect to any
Residual Certificateholder, the excess inclusions for any calendar quarter is
the excess, if any, of (i) the income of such Residual Certificateholder for
that calendar quarter from its Residual Certificate over (ii) the sum of the
"daily accruals" (as defined below) for all days during the calendar quarter on
which the Residual Certificateholder holds such Residual Certificate. For this
purpose, the daily accruals with respect to a Residual Certificate are
determined by allocating to each day in the calendar quarter its ratable portion
of the product of the "adjusted issue price" (as defined below) of the Residual
Certificate at the beginning of the calendar quarter and 120 percent of the
"Federal long-term rate" in effect at the time the Residual Certificate is
issued. For this purpose, the "adjusted issue price" of a Residual Certificate
at the beginning of any calendar quarter equals the issue price of the Residual
Certificate, increased by the amount of daily accruals for all prior quarters,
and decreased (but not below zero) by the aggregate amount of payments made on
the Residual Certificate before the beginning of such quarter. The "Federal
long-term rate" is an average of current yields on Treasury securities with a
remaining term of greater than nine years, computed and published monthly by the
IRS.
As an exception to the general rule described above, the Treasury
Department has authority to issue regulations that would treat the entire amount
of income accruing on a Residual Certificate as excess inclusions if the
Residual Certificates in the aggregate are considered not to have "significant
value." Under the REMIC Regulations, Residual Certificateholders that are thrift
institutions described in Code Section 593 can offset excess inclusions with
unrelated deductions, losses and loss carryovers provided the Residual
Certificates have "significant value." For purposes of applying this rule,
thrift institutions that are members of an affiliated group filing a
consolidated return, together with their subsidiaries formed to issue REMICs,
are treated as separate corporations. Residual Certificates have "significant
value" if: (i) the Residual Certificates have an aggregate issue price that is
at least equal to 2% of the aggregate issue price of all Residual Certificates
and Regular Certificates with respect to the REMIC and (ii) the anticipated
weighted average life of the Residual Certificates is at least 20% of the
anticipated weighted average life of the REMIC based on the anticipated
principal payments to be received with respect thereto (using the Prepayment
Assumption and any required or permitted clean up calls or required liquidation
provided for in the REMIC's organizational documents), except that all
anticipated distributions are to be used if the Residual Certificate is not
entitled to any principal payments or is entitled to a disproportionately small
portion relative to interest payments thereon. The principal amount will be
considered disproportionately small if the issue price of the Residual
Certificates exceeds 125% of their initial principal amount. Finally, an
ordering rule under the REMIC Regulations provides that a thrift institution may
only offset its excess inclusion income with deductions after it has first
applied its deductions against income that is not excess inclusion income.
In the case of any Residual Certificates held by a real estate investment
trust, the aggregate excess inclusions with respect to such Residual
Certificates, reduced (but not below zero) by the real estate investment trust
taxable income (within the meaning of Code Section 857(b)(2), 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
Residual Certificate as if held directly by such shareholder. Regulated
investment companies, common trust funds, and certain cooperatives are subject
to similar rules.
Payments. Any distribution made on a Residual Certificate to a Residual
Certificateholder will be treated as a non-taxable return of capital to the
extent it does not exceed the Residual Certificateholder's adjusted basis in
such Residual Certificate. To the extent a distribution exceeds such adjusted
basis, it will be treated as gain from the sale of the Residual Certificate.
Sale or Exchange of Residual Certificates. If a Residual Certificate is
sold or exchanged, the seller will generally recognize gain or loss equal to the
difference between the amount realized on the sale or exchange and its adjusted
basis in the Residual Certificate (except that the recognition of loss may be
limited under the "wash sale" rules described below). A holder's adjusted basis
in a Residual Certificate generally equals the cost of such Residual Certificate
to such Residual Certificateholder, increased by the taxable income of the REMIC
that was included in the income of such Residual Certificateholder with respect
to such Residual Certificate, and decreased (but not below zero) by the net
losses that have been allowed as deductions to such Residual Certificateholder
with respect to such Residual Certificate and by the distributions received
thereon by such Residual Certificateholder. In general, any such gain or loss
will be capital gain or loss provided the Residual Certificate is held as a
capital asset. However, Residual Certificates will be "evidences of
indebtedness" within the
72
<PAGE>
meaning of Code Section 582(c)(1), so that gain or loss recognized from sale of
a Residual Certificate by a bank or thrift institution to which such section
applies would be ordinary income or loss.
Except as provided in Treasury regulations yet to be issued, if the seller
of a Residual Certificate reacquires such Residual Certificate, or acquires any
other Residual Certificate, any residual interest in another REMIC or similar
interest in a "taxable mortgage pool" (as defined in Code Section 7701(i))
during the period beginning six months before, and ending six months after, the
date of such sale, such sale will be subject to the "wash sale" rules of Code
Section 1091. In that event, any loss realized by the Residual Certificateholder
on the sale will not be deductible, but, instead, will increase such Residual
Certificateholder's adjusted basis in the newly acquired asset.
Taxation of the REMIC
General. As noted above, although a REMIC is a separate entity for federal
income tax purposes, a REMIC is not generally subject to entity-level tax.
Taxable Income of the REMIC Attributable to Residual Interests. The taxable
income of the REMIC will reflect a netting of (i) the income from the Mortgage
Loans and the REMIC's other assets and (ii) the deductions allowed to the REMIC
for interest and original issue discount on the Regular Certificates and, except
as described below under "Pass-Through of Non-Interest Expenses of the REMIC,"
other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate tax basis in its assets equal to the sum of the issue prices
of the Regular and Residual Certificates (or, if a class of Certificates is not
sold initially, their fair market values). Such aggregate basis will be
allocated among the Mortgage Loans and other assets of the REMIC in proportion
to their respective fair market values. A Mortgage Loan will be deemed to have
been acquired with discount or premium to the extent that the REMIC's basis
therein is less than or greater than its principal balance, respectively. Any
such discount (whether market discount or original issue 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 Regular
Certificates. The REMIC expects to elect under Code Section 171 to amortize any
premium on the Mortgage Loans. Premium on any Mortgage Loan to which such
election applies would be amortized under a constant yield method. It is not
clear whether the yield of a Mortgage Loan would be calculated for this purpose
based on scheduled payments or taking account of the Prepayment Assumption.
Additionally, such an election would not apply to any Mortgage Loan originated
on or before September 27, 1985. Instead, premium on such a Mortgage Loan would
be allocated among the principal payments thereon and would be deductible by the
REMIC as those payments become due.
The REMIC will be allowed a deduction for interest and original issue
discount on the Regular Certificates. The amount and method of accrual of
original issue discount will be calculated for this purpose in the same manner
as described above with respect to Regular Certificates except that the 0.25%
per annum de minimis rule and adjustments for subsequent holders described
therein will not apply.
A Residual Certificateholder will not be permitted to amortize the cost of
the Residual Certificate as an offset to its share of the REMIC's taxable
income. However, that taxable income will not include cash received by the REMIC
that represents a recovery of the REMIC's basis in its assets, and, as described
above, the issue price of the Residual Certificates will be added to the issue
price of the Regular Certificates in determining the REMIC's initial basis in
its assets. See "Sale or Exchange of Residual Certificates" herein. For a
discussion of possible adjustments to income of a subsequent holder of a
Residual Certificate to reflect any difference between the actual cost of such
Residual Certificate to such holder and the adjusted basis such Residual
Certificate would have in the hands of an original Residual Certificateholder,
see "Allocation of the Income of the REMIC to the Residual Certificates" above.
Net Losses of the REMIC. The REMIC will have a net loss for any calendar
quarter in which its deductions exceed its gross income. Such net loss would be
allocated among the Residual Certificateholders in the same manner as the
REMIC's taxable income. The net loss allocable to any Residual Certificate will
not be deductible by the holder to the extent that such net loss exceeds such
holder's adjusted basis in such Residual Certificate. Any net loss that is not
currently deductible by reason of this limitation may only be used by such
Residual Certificateholder to offset its share of the REMIC's taxable income in
future periods (but not otherwise). The ability of Residual Certificateholders
that are individuals or closely held corporations to deduct net losses may be
subject to additional limitations under the Code.
Pass-Through of Non-Interest Expenses of the REMIC. As a general rule, all
of the fees and expenses of a REMIC will be taken into account by holders of the
Residual Interests. In the case of a "single class REMIC," however, the expenses
and a matching amount of additional income will be allocated, under the Treasury
regulations, among the holders of the Regular
73
<PAGE>
Certificates and the holders of the Residual Interests on a daily basis in
proportion to the relative amounts of income accruing to each Certificateholder
on that day. In general terms, a single class REMIC is one that either (i) would
qualify, under existing Treasury regulations, as a grantor trust if it were not
a REMIC (treating all interests as ownership interests, even if they would be
classified as debt for federal income tax purposes) or (ii) is similar to such a
trust and is structured with the principal purpose of avoiding the single class
REMIC rules. Unless otherwise stated in the applicable Prospectus Supplement,
the expenses of the REMIC will be allocated to holders of the related Residual
Interests in their entirety and not to holders of the related Regular
Certificates.
In the case of individuals (or trusts, estates, or other persons who
compute their income in the same manner as individuals) who own an interest in a
Regular or Residual Certificate directly or through a pass-through interest
holder which is required to pass miscellaneous itemized deductions through to
its owners or beneficiaries (e.g., a partnership, an S corporation, or a grantor
trust), such expenses will be deductible under Code Section 67 only to the
extent that such expenses, plus other "miscellaneous itemized deductions" of the
individual, exceed 2% of such individual's adjusted gross income. In addition,
Code Section 68 provides that the amount of itemized deductions otherwise
allowable for an individual whose adjusted gross income exceeds a certain amount
(the "Applicable Amount") will be reduced by the lesser of (i) 3% of the excess
of the individual's adjusted gross income over the Applicable Amount or (ii) 80%
of the amount of itemized deductions otherwise allowable for the taxable year.
The amount of additional taxable income recognized by Residual
Certificateholders who are subject to the limitations of either Code Section 67
or Code Section 68 may be substantial. Further, holders (other than
corporations) subject to the alternative minimum tax may not deduct
miscellaneous itemized deductions in determining such holders' alternative
minimum taxable income. The REMIC is required to report to each pass-through
interest holder and to the IRS such holder's allocable share, if any, of the
REMIC's non-interest expenses. The term "pass-through interest holder" generally
refers to individuals, entities taxed as individuals and certain pass-through
entities, but does not include real estate investment trusts. Residual
Certificateholders that are "pass-through interest holders" should consult their
own tax advisors about the impact of these rules on an investment in the
Residual Certificates.
Prohibited Transactions and Other Taxes
The REMIC is subject to a tax at a rate equal to 100 percent of the net
income derived from "prohibited transactions." In general, a prohibited
transaction means the disposition of a Mortgage Loan other than pursuant to
certain specified exceptions, the receipt of investment income from a source
other than a Mortgage Loan or certain other permitted investments or the
disposition of an asset representing a temporary investment of payments on the
Mortgage Loans pending payment on the Residual Certificates or Regular
Certificates. In addition, the assumption of a Mortgage Loan by a subsequent
purchaser could cause the REMIC to recognize gain, which would also be subject
to the 100 percent tax on prohibited transactions.
In addition, certain contributions to a REMIC made after the Closing Date
could result in the imposition of a tax on the REMIC equal to 100% of the value
of the contributed property.
It is not anticipated that the REMIC will engage in any prohibited
transactions or receive any contributions subject to the contributions tax.
However, in the event that the REMIC is subject to any such tax, unless
otherwise disclosed in the related Prospectus Supplement, such tax would be
borne first by the Residual Certificateholders, to the extent of amounts
distributable to them and then by the Master Servicer.
Liquidation and Termination
If the REMIC adopts a plan of complete liquidation, within the meaning of
Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in the
REMICs final tax return a date on which such adoption is deemed to occur, and
sells all of its assets (other than cash) within a 90-day period beginning on
such date, the REMIC will not be subject to any prohibited transaction tax on
such sales, provided that the REMIC credits or distributes in liquidation all of
the sale proceeds plus its cash (other than the amounts retained to meet claims)
to holders of Regular and Residual Certificates within the 90-day period.
Administrative Matters
Solely for the purpose of the administrative provisions of the Code, the
REMIC will be treated as a partnership and the Residual Certificateholders will
be treated as the partners thereof; however, under the Treasury regulations if
there is at no time during the taxable year more than one Residual
Certificateholder, a REMIC shall not be subject to the rules of Subchapter C of
Chapter 63 of the Code relating to the treatment of Partnership items for a
taxable year. Accordingly, the REMIC will file an annual tax return on Form
1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return. In
74
<PAGE>
addition, certain other information will be furnished quarterly to each Residual
Certificateholder who held such Residual Certificate on any day in the previous
calendar quarter. Each Residual Certificateholder is required to treat items on
its return consistently with their treatment on the REMIC's return, unless the
Residual Certificateholder either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC.
Tax-Exempt Investors
Any Residual Certificateholder that is a pension fund or other entity that
is subject to federal income taxation only on its "unrelated business taxable
income" within the meaning of Code Section 512 will be subject to such tax on
that portion of the distributions received on a Residual Certificate that is
considered an "excess inclusion." See "Residual Certificates -- Excess
Inclusions" herein.
Non-U.S. Persons
Amounts paid to Residual Certificateholders who are not U.S. persons (see
"Regular Certificates -- Non-U.S. Persons") are treated as interest for purposes
of the 30% (or lower treaty rate) United States withholding tax. Treasury
regulations provide that amounts distributed to Residual Holders may qualify as
"portfolio interest," subject to the conditions described in "Regular
Certificates" above, but only to the extent that the Mortgage Loans were
originated after July 18, 1984, and the Mortgage Loans to which the Residual
Certificates relate are in "registered form" within the meaning of Section
163(f)(1) of the Code. In general, it is expected that Mortgage Loans will not
be treated as in registered form. Furthermore, the rate of withholding on any
income on a Residual Certificate that is excess inclusion income will not be
subject to reduction under any applicable tax treaties. See "Residual
Certificates -- Excess Inclusions." If the portfolio interest exemption is
unavailable, amounts paid will be subject to United States withholding tax when
paid or otherwise distributed (or when the Residual Certificate is disposed of)
under rules similar to those for withholding upon disposition of debt
instruments that have original issue discount. The Code, however, grants the
Treasury Department authority to issue regulations requiring that those amounts
be taken into account earlier than otherwise provided where necessary to prevent
avoidance of tax (for example, where the Residual Certificates do not have
significant value). See "Residual Certificates -- Excess Inclusions." If the
amounts paid to Residual Certificateholders that are not U.S. Persons are
effectively connected with their conduct of a trade or business within the
United States, the 30% (or lower treaty rate) withholding will not apply.
Instead, the amounts paid to such non-U.S. Person will be subject to U.S.
federal income taxation at regular graduated rates. For special restrictions on
the transfer of Residual Certificates, see "Tax-Related Restrictions on
Transfers of Residual Certificates" below.
Regular Certificateholders and persons related to such holders should not
acquire any Residual Certificates, and Residual Certificateholders and persons
related to Residual Certificateholders should not acquire any Regular
Certificates without consulting their tax advisors as to the possible adverse
tax consequences of such acquisition.
Tax-Related Restrictions on Transfers of Residual Certificates
Disqualified Organizations. An entity may not qualify as a REMIC unless
there are reasonable arrangements designed to ensure that residual interests in
such entity are not held by "disqualified organizations" (as defined below).
Further, a tax is imposed on the transfer of a residual interest in a REMIC to a
"disqualified organization." The amount of the tax equals the product of (A) an
amount (as determined under the REMIC regulations) equal to the present value of
the total anticipated "excess inclusions" with respect to such interest for
periods after the transfer and (ii) the highest marginal federal income tax rate
applicable to corporations. The tax is imposed on the transferor unless the
transfer is through an agent (including a broker or other middlemen) for a
disqualified organization, in which event the tax is imposed on the agent. The
person otherwise liable for the tax shall be relieved of liability for the tax
if the transferee furnished to such person an affidavit that the transferee is
not a disqualified organization and, at the time of the transfer, such person
does not have actual knowledge that the affidavit is false. A "disqualified
organization" means (A) the United States, any State, possession, or political
subdivision thereof, any foreign government, any international organization, or
any agency or instrumentality of any of the foregoing (provided that such term
does not include an instrumentality if all its activities are subject to tax
and, except for FHLMC, a majority of its board of directors is not selected by
any such governmental agency), (B) any organization (other than certain farmers'
cooperatives) generally exempt from federal income taxes unless such
organization is subject to the tax on "unrelated business taxable income" and
(C) a rural electric or telephone cooperative.
A tax is imposed on a "pass-through entity" (as defined below) holding a
residual interest in a REMIC if at any time during the taxable year of the
pass-through entity a disqualified organization is the record holder of an
interest in such entity. The amount of the tax is equal to the product of (A)
the amount of excess inclusions for the taxable year allocable to the interest
held by the disqualified organization, and (B) the highest marginal federal
income tax rate applicable to corporations.
75
<PAGE>
The pass-through entity otherwise liable for the tax, for any period during
which the disqualified organization is the record holder of an interest in such
entity, will be relieved of liability for the tax if such record holder
furnishes to such entity an affidavit that such record holder is not a
disqualified organization and, for such period, the pass-through entity does not
have actual knowledge that the affidavit is false. For this purpose, a
"pass-through entity" means (i) a regulated investment company, real estate
investment trust or common trust fund, (ii) a partnership, trust or estate and
(iii) certain cooperatives. Except as may be provided in Treasury regulations
not yet issued, any person holding an interest in a pass-through entity as a
nominee for another will, with respect to such interest, be treated as a
pass-through entity.
In order to comply with these rules, the Agreement will provide that no
record or beneficial ownership interest in a Residual Certificate may be,
directly or indirectly, purchased, transferred or sold without the express
written consent of the Master Servicer. The Master Servicer will grant such
consent to a proposed transfer only if it receives the following: (i) an
affidavit from the proposed transferee to the effect that it is not a
disqualified organization and is not acquiring the Residual Certificate as a
nominee or agent for a disqualified organization, and (ii) a covenant by the
proposed transferee to the effect that the proposed transferee agrees to be
bound by and to abide by the transfer restrictions applicable to the Residual
Certificate.
Noneconomic Residual Certificates. The REMIC Regulations disregard, for
federal income tax purposes, any transfer of a Noneconomic Residual Certificate
to a "U.S. Person," as defined below, if a significant purpose of the transfer
is to enable the transferor to impede the assessment or collection of tax. A
Noneconomic Residual Certificate is any Residual Certificate (including a
Residual Certificate with a positive value at issuance) unless, at the time of
transfer, taking into account the Prepayment Assumption and any required or
permitted clean up calls or required liquidation provided for in the REMIC's
organizational documents, (i) the present value of the expected future
distributions on the Residual Certificate at least equals the product of the
present value of the anticipated excess inclusions and the highest corporate
income tax rate in effect for the year in which the transfer occurs and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the REMIC at or after the time at which taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes. A
significant purpose to impede the assessment or collection of tax exists if the
transferor, at the time of the transfer, either knew or should have known that
the transferee would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC. A transferor is presumed not to have such knowledge
if (i) the transferor conducted a reasonable investigation of the transferee and
(ii) the transferee acknowledges to the transferor that the residual interest
may generate tax liabilities in excess of the cash flow and the transferee
represents that it intends to pay such taxes associated with the residual
interest as they become due. If a transfer of a Noneconomic Residual Certificate
is disregarded, the transferor would continue to be treated as the owner of the
Residual Certificate and would continue to be subject to tax on its allocable
portion of the net income of the REMIC.
Mark to Market Rules. Prospective purchasers of a Residual Certificate
should be aware that on January 3, 1995, the IRS released proposed regulations
under Section 475 (the "Proposed Regulations"). The Proposed Regulations provide
that any Residual Certificate acquired after January 3, 1995, cannot be marked
to market, regardless of the value of such Residual Certificate. The Proposed
Regulations change temporary regulations under Section 475 (the "Temporary
Regulations") which were issued on December 28, 1993, and which allowed
securities dealers to mark to market securities held for sale to customers,
including Residual Certificates which did not have "negative value." In general,
a Residual Certificate has negative value if, as of the date a taxpayer acquires
the Residual Certificate, the present value of the tax liabilities associated
with holding the Residual Certificate exceeds the sum of (i) the present value
of the expected future distributions on the Residual Certificate, and (ii) the
present value of the anticipated tax savings associated with holding the
Residual Certificate as the REMIC generates losses. The amounts and present
values of the anticipated tax liabilities, expected future distributions and
anticipated tax savings are all to be determined using (i) the prepayment and
reinvestment assumptions adopted under Section 1272(a)(6), or that would have
been adopted had the REMIC's regular interests been issued with original issue
discount, (ii) any required or permitted clean up calls, or required qualified
liquidation, provided for in the REMIC's organizational documents and (iii) a
discount rate equal to the "applicable Federal rate" (as specified in Section
1274(d)(1), that would apply to a debt instrument issued on the date of
acquisition of the Residual Certificate. The Proposed Regulations still apply to
any REMIC residual interest acquired on or prior to January 3, 1995. Thus,
holders of positive value REMIC residual interests acquired on or prior to
January 3, 1995, may continue to mark such residual interests to market for the
entire economic life of such interests. Prospective purchasers of a Residual
Certificate should consult their tax advisors regarding the possible application
of the Proposed Regulations.
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Certificate that has a "tax avoidance potential" to a "foreign person"
will be disregarded for federal income tax purposes. This rule appears to apply
to a transferee who is not a "U.S. Person," unless such transferee's income in
respect of the Residual Certificate is effectively connected
76
<PAGE>
with the conduct of a United Sates trade or business. A Residual Certificate is
deemed to have a tax avoidance potential unless, at the time of transfer, the
transferor reasonably expects that the REMIC will distribute to the transferee
amounts that will equal at least 30 percent of each excess inclusion, and that
such amounts will be distributed at or after the time the excess inclusion
accrues and not later than the end of the calendar year following the year of
accrual. If the non-U.S. Person transfers the Residual Certificate to a U.S.
Person, the transfer will be disregarded, and the foreign transferor will
continue to be treated as the owner, if the transfer has the effect of allowing
the transferor to avoid tax on accrued excess inclusions. The Agreement will
provide that no record or beneficial ownership interest in a Residual
Certificate may be, directly or indirectly, transferred to a non-U.S. Person
unless such person provides the Trustee with a duly completed I.R.S. Form 4224
and the Trustee consents to such transfer in writing.
Any attempted transfer or pledge in violation of the transfer restrictions
shall be absolutely null and void and shall vest no rights in any purported
transferee. Investors in Residual Certificates are advised to consult their own
tax advisors with respect to transfers of the Residual Certificates and, in
addition, pass-through entities are advised to consult their own tax advisors
with respect to any tax which may be imposed on a pass-through entity.
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to the federal income tax consequences described above in
"Certain Federal Income Tax Considerations," potential investors should consider
the state, local and other tax consequences relating to the acquisition,
ownership and disposition of the Certificates. State, local and other income tax
law may differ substantially from the corresponding federal law, and this
discussion does not purport to describe any aspect of the tax laws other than
federal income tax law. Therefore, potential investors should consult their tax
advisors with respect to the state, local and other tax consequences to them
arising from an investment in the Certificates.
ERISA CONSIDERATIONS
The following describes certain considerations under the Employee
Retirement Income Act of 1974, as amended ("ERISA") and the Code, which apply
only to Certificates of a Series that are not divided into subclasses. If
Certificates are divided into subclasses the related Prospectus Supplement will
contain information concerning considerations relating to ERISA and the Code
that are applicable to such Certificates.
ERISA imposes requirements on employee benefit plans subject to ERISA (and
on certain other retirement plans and arrangements, including individual
retirement accounts and annuities, Keogh plans and collective investment funds
and separate accounts in which such plans, accounts or arrangements are invested
subject to the requirement of ERISA and/or the Code) (collectively "Plans") and
on persons who are fiduciaries with respect to such Plans. Generally, ERISA
applies to investments made by Plans. Among other things, ERISA requires that
the assets of Plans be held in trust and that the trustee, or other duly
authorized fiduciary, have exclusive authority and discretion to manage and
control the assets of such Plans. ERISA also imposes certain duties on persons
who are fiduciaries of Plans. Under ERISA, any person who exercises any
authority or control respecting the management or disposition of the assets of a
Plan is considered to be a fiduciary of such Plan (subject to certain exceptions
not here relevant). Certain employee benefit plans, such as governmental plans
(as defined in ERISA Section 3(32)) and, if no election has been made under
Section 410(d) of the Code, church plans (as defined in ERISA Section 3(33)),
are not subject to ERISA requirements. Accordingly, assets of such plans may be
invested in Senior Certificates without regard to the ERISA considerations
described above and below, subject to the provisions of applicable state law.
Any such plan which is qualified and exempt from taxation under Code Sections
401(a) and 501(a), however, is subject to the prohibited transaction rules set
forth in Code Section 503.
On November 13, 1986, the United States Department of Labor ("Labor")
issued final regulations concerning the definition of what constitutes the
assets of a Plan. (Labor Reg. Section 2510.3-101) Under this regulation, the
underlying assets and properties of corporations, partnerships and certain other
entities in which a Plan makes an "equity" investment could be deemed for
purposes of ERISA to be assets of the investing Plan in certain circumstances.
However, the regulation provides that, generally, the assets of a corporation or
partnership in which a Plan invests will not be deemed for purposes of ERISA to
be assets of such Plan if the equity interest acquired by the investing Plan is
a publicly-offered security. A publicly-offered security, as defined in the
Labor Reg. Section 2510.3-101, is a security that is widely held, freely
transferable and registered under the Securities Exchange Act of 1934, as
amended.
In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA prohibits a broad range of transactions
involving Plan assets and persons ("Parties in Interest") having certain
specified relationships to
77
<PAGE>
a Plan and imposes additional prohibitions where Parties in Interest are
fiduciaries with respect to such Plan. Because the Mortgage Loans may be deemed
Plan assets of each Plan that purchases Certificates, an investment in the
Certificates by a Plan might be a prohibited transaction under ERISA Sections
406 and 407 and subject to an excise tax under Code Section 4975 unless a
statutory or administrative exemption applies.
PTE 83-1
In Prohibited Transaction Exemption 83-1 ("PTE 83-1"), which amended
Prohibited Transaction Exemption 81-7, Labor exempted from ERISA's prohibited
transaction rules certain transactions relating to the operation of residential
mortgage pool investment trusts and the purchase, sale and holding of "mortgage
pool pass-through certificates" in the initial issuance of such certificates.
PTE 83-1 permits, subject to certain conditions, transactions that might
otherwise be prohibited between Plans and Parties in Interest with respect to
those Plans related to the origination, maintenance and termination of mortgage
pools consisting of mortgage loans secured by first or second mortgages or deeds
of trust on single-family residential property, and the acquisition and holding
of certain mortgage pool pass-through certificates representing an interest in
such mortgage pools by Plans. If the general conditions (discussed below) of PTE
83-1 are satisfied, investments by a Plan in Certificates that represent
interests in a Mortgage Pool consisting of Mortgage Loans representing loans for
single family homes ("Single Family Certificates") will be exempt from the
prohibitions of ERISA Sections 406(a) and 407 (relating generally to
transactions with Parties in Interest who are not fiduciaries) if the Plan
purchases the Single Family Certificates at no more than fair market value and
will be exempt from the prohibitions of ERISA Sections 406(b)(1) and (2)
(relating generally to transactions with fiduciaries) if, in addition, the
purchase is approved by an independent fiduciary, no sales commission is paid to
the pool sponsor, the Plan does not purchase more than 25% of all Single Family
Certificates, and at least 50% of all Single Family Certificates are purchased
by persons independent of the pool sponsor or pool trustee. PTE 83-1 does not
provide an exemption for transactions involving Subordinate Certificates.
Accordingly, unless otherwise provided in the related Prospectus Supplement, no
transfer of a Subordinate Certificate may be made to a Plan.
The discussion in this and the next succeeding paragraph applies only to
Single Family Certificates. The Depositor believes that, for purposes of PTE
83-1, the term "mortgage pass-through certificate" would include: (i)
Certificates issued in a Series consisting of only a single class of
Certificates; and (ii) Offered Certificates issued in a Series in which there is
only one class of Offered Certificates; provided that the Certificates in the
case of clause (i), or the Offered Certificates in the case of clause (ii),
evidence the beneficial ownership of both a specified percentage of future
interest payments (greater than 0%) and a specified percentage (greater than 0%)
of future principal payments on the Mortgage Loans. It is not clear whether a
class of Certificates that evidences the beneficial ownership in a Trust Fund
divided into Mortgage Loan Groups, beneficial ownership of a specified
percentage of interest payments only or principal payments only, or a notional
amount of either principal or interest payments, or a class of Certificates
entitled to receive payments of interest and principal on the Mortgage Loans
only after payments to other classes or after the occurrence of certain
specified events would be a "mortgage pass-through certificate" for purposes of
PTE 83-1.
PTE 83-1 sets forth three general conditions which must be satisfied for
any transaction to be eligible for exemption: (i) the maintenance of a system of
insurance or other protection for the pooled mortgage loans and property
securing such loans, and for indemnifying Certificateholders against reductions
in pass-through payments due to property damage or defaults in loan payments in
an amount not less than the greater of one percent of the aggregate principal
balance of all covered pooled mortgage loans or the principal balance of the
largest covered pooled mortgage loan; (ii) the existence of a pool trustee who
is not an affiliate of the pool sponsor; and (iii) a limitation on the amount of
the payment retained by the pool sponsor, together with other funds inuring to
its benefit, to not more than adequate consideration for selling the mortgage
loans plus reasonable compensation for services provided by the pool sponsor to
the Mortgage Pool. The Depositor believes that the first general condition
referred to above will be satisfied with respect to the Certificates in a Series
issued without a subordination feature, or the Senior Certificates only in a
Series issued with a subordination feature, provided that the subordination and
Reserve Fund, subordination by shifting of interests, the pool insurance or
other form of credit enhancement described herein (such subordination, pool
insurance or other form of credit enhancement being the system of insurance or
other protection referred to above) with respect to a Series of Certificates is
maintained in an amount not less than the greater of one percent of the
aggregate principal balance of the Mortgage Loans or the principal balance of
the largest Mortgage Loan. See "Description of the Certificates" herein. In the
absence of a ruling that the system of insurance or other protection with
respect to a Series of Certificates satisfies the first general condition
referred to above, there can be no assurance that these features will be so
viewed by Labor. The Trustee will not be affiliated with the Depositor.
Each Plan fiduciary who is responsible for making the investment decisions
whether to purchase or commit to purchase and to hold Single Family Certificates
must make its own determination as to whether the first and third general
conditions,
78
<PAGE>
and the specific conditions described briefly in the preceding paragraph, of PTE
83-1 have been satisfied, or as to the availability of any other prohibited
transaction exemptions. Each Plan fiduciary should also determine whether, under
the general fiduciary standards of investment prudence and diversification, an
investment in the Certificates is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
Underwriter Exemptions
Labor has issued to various underwriters substantially similar individual
exemptions (each, an "Underwriter Exemption" and collectively, the "Underwriter
Exemptions") which apply to certain sales and servicing of "certificates" that
are obligations of a "trust" with respect to which such underwriters are the
underwriter, manager or co-manager of an underwriting syndicate. The Underwriter
Exemptions provide relief which is generally similar to that provided by PTE
83-1, but is broader in several respects.
The Underwriter Exemptions contain several requirements, some of which
differ from those in PTE 83-1. The Underwriter Exemptions contain an expanded
definition of "certificate," which includes an interest which entitles the
holder to pass-through payments of principal, interest and/or other payments.
The Underwriter Exemptions contain an expanded definition of "trust" which
permits the trust corpus to consist of secured consumer receivables, including
obligations secured by shares issued by a cooperative housing association. The
definition of "trust," however, does not include private mortgage-backed
securities like the Private Mortgage-Backed Securities, and does not include any
other investment pool unless, inter alia: (i) the investment pool consists only
of assets of the type which have been included in other investment pools; (ii)
certificates evidencing interests in such other investment pools have been
purchased by investors other than Plans for at least one year prior to the
Plan's acquisition of certificates pursuant to the Underwriter Exemptions; and
(iii) certificates in such other investment pools have been rated in one of the
three highest generic rating categories of the four credit rating agencies noted
below. Generally, the Underwriter Exemptions hold that the acquisition of
certificates by a Plan must be on terms (including the price for the
certificates) that are at least as favorable to the Plan as they would be in an
arm's-length transaction with an unrelated party. The Underwriter Exemptions
require that the rights and interests evidenced by the certificates held by a
Plan not be "subordinated" to the rights and interests evidenced by other
certificates of the same trust. Further, the Underwriter Exemptions require that
certificates acquired by a Plan have received a rating at the time of their
acquisition that is in one of the three highest generic rating categories of
Standard and Poor's Ratings Group, Moody's Investors Service, Inc., Duff &
Phelps Inc. or Fitch Investors Service, Inc. The Underwriter Exemptions also
specify that the pool trustee must not be an affiliate of the pool sponsor, nor
an affiliate of the underwriter, the pool servicer, any obligor with respect to
mortgage loans included in the trust constituting more than five percent of the
aggregate unamortized principal balance of the assets in the trust, or any
affiliate of such entities. Finally, the Underwriter Exemptions stipulate that
any Plan investing in the certificates 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. The Prospectus Supplement relating
to a Series of Certificates will describe the Underwriters Exemption, if any,
that may be applicable to such Series of Certificates.
Any Plan fiduciary which proposes to cause a Plan to purchase Certificates
should consult with their counsel concerning the impact of ERISA and the Code,
the applicability of PTE 83-1, and the potential consequences in their specific
circumstances, prior to making such investment. The Prospectus Supplement for a
Series of Certificates will contain additional information with respect to PTE
83-1 and other prohibited transaction exemptions that may be applicable to such
Series of Certificates. Moreover, each Plan fiduciary should determine whether
under the general fiduciary standards of investment procedure and
diversification an investment in the Certificates is appropriate for the Plan,
taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
LEGAL INVESTMENT
The Prospectus Supplement for each Series of Certificates will specify
which, if any, of the Classes of Certificates offered thereby will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"). Classes of Certificates that qualify as
"mortgage related securities" will be legal investments for persons, trusts,
corporations, partnerships, associations, business trusts and business entities
(including depository institutions, life insurance companies and pension funds)
created pursuant to or existing under the laws of the United States or of any
state (including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulation to the same extent as, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any such entities. Under SMMEA, if a state enacts
legislation prior to October 4, 1991, specifically limiting the legal
79
<PAGE>
investment authority of any such entities with respect to "mortgage related
securities," the Certificates that qualify as mortgage related securities will
constitute legal investments for entities subject to such legislation only to
the extent provided therein. Approximately twenty-one states adopted such
legislation prior to the October 4, 1991, deadline. SMMEA provides, however,
that in no event will the enactment of any such legislation affect the validity
of any contractual commitment to purchase, hold or invest in Certificates that
qualify as mortgage related securities, or require the sale or other disposition
of such Certificates, so long as such contractual commitment was made or such
Certificates acquired prior to the enactment of such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in Certificates
without limitations as to the percentage of their assets represented thereby,
federal credit unions may invest in mortgage related securities, and national
banks may purchase Certificates for their own account without regard to the
limitations generally applicable to investment securities set forth in 12 U.S.C.
SS24 (Seventh), subject in each case to such regulations as the applicable
federal authority may prescribe. In this connection, federal credit unions
should review the National Credit Union Administration ("NCUA") Letter to Credit
Unions No. 96, as modified by Letter to Credit Unions No. 108, which includes
guidelines to assist federal credit unions in making investment decisions for
mortgage related securities, and the NCUA's regulation "Investment and Deposit
Activities" (12 C.F.R. Part 703), (whether or not the Class of Certificates
under consideration for purchase constitutes a "mortgage related security").
All depository institutions considering an investment in the Certificates
(whether or not the Class of Certificates under consideration for purchase
constitutes a mortgage related security should review the Federal Financial
Institutions Examination Council's Supervisory Policy Statement on the
Securities Activities (to the extent adopted by their respective regulators)
(the "Policy Statement"), setting forth, in relevant part, certain securities
trading and sales practices deemed unsuitable for an institution's investment
portfolio, and guidelines for (and restrictions on) investing in mortgage
derivative products, including mortgage related securities, which are "high-risk
mortgage securities" as defined in the Policy Statement. According to the Policy
Statement, such "high-risk mortgage securities" include securities such as
Certificates not entitled to distributions allocated to principal or interest,
or Subordinated Certificates. Under the Policy Statement, it is the
responsibility of each depository institution to determine, prior to purchase
(and at stated intervals thereafter), whether a particular mortgage derivative
product is a "high-risk mortgage security," and whether the purchase (or
retention) of such a product would be consistent with the Policy Statement.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines, or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits and provisions
that may restrict or prohibit investment in securities that are not "interest
bearing" or "income paying."
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Certificates or to
purchase Certificates representing more than a specified percentage of the
investor's assets. Investors should consult their own legal advisors in
determining whether and to what extent the Certificates constitute legal
investments for such investors.
METHOD OF DISTRIBUTION
The Certificates offered hereby and by the Prospectus Supplements will be
offered in Series. The distribution of the Certificates may be effected from
time to time in one or more transactions, including negotiated transactions, at
a fixed public offering price or at varying prices to be determined at the time
of sale or at the time of commitment therefor. If so specified in the related
Prospectus Supplement, the Certificates will be distributed in a firm commitment
underwriting, subject to the terms and conditions of the underwriting agreement,
by First Union Capital Markets Corp., an affiliate of the Depositor, acting as
underwriter with other underwriters, if any, named therein. In such event, the
Prospectus Supplement may also specify that the underwriters will not be
obligated to pay for any Certificates agreed to be purchased by purchasers
pursuant to purchase agreements acceptable to the Depositor. In connection with
the sale of the Certificates, underwriters may receive compensation from the
Depositor or from purchasers of the Certificates in the form of discounts,
concessions or commissions. The Prospectus Supplement will describe any such
compensation paid by the Depositor.
Alternatively, the Prospectus Supplement may specify that the Certificates
will be distributed by First Union Capital Markets Corp. acting as agent or in
some cases as principal with respect to Certificates that it has previously
purchased or agreed to purchase. If First Union Capital Markets Corp. acts as
agent in the sale of Certificates, First Union Capital Markets
80
<PAGE>
Corp. will receive a selling commission with respect to each Series of
Certificates, depending on market conditions, expressed as a percentage of the
aggregate principal balance of the Certificates sold hereunder as of the Cut-off
Date. The exact percentage for each Series of Certificates will be disclosed in
the related Prospectus Supplement. To the extent that First Union Capital
Markets Corp. elects to purchase Certificates as principal, First Union Capital
Markets Corp. may realize losses or profits based upon the difference between
its purchase price and the sales price. The Prospectus Supplement with respect
to any Series offered other than through underwriters will contain information
regarding the nature of such offering and any agreements to be entered into
between the Depositor and purchasers of Certificates of such Series.
This Prospectus and the related Prospectus Supplement may be used by First
Union Capital Markets Corp., an affiliate of the Depositor, in connection with
offers and sales related to market-making transactions in the Certificates.
First Union Capital Markets Corp. may act as principal or agent in such
transactions. Such sales will be made at prices related to prevailing market
prices at the time of sale or otherwise.
The Depositor will indemnify First Union Capital Markets Corp. and any
underwriters against certain civil liabilities, including liabilities under the
Securities Act of 1933, or will contribute to payments First Union Capital
Markets Corp. and any underwriters may be required to make in respect thereof.
In the ordinary course of business, First Union Capital Markets Corp. and
the Depositor may engage in various securities and financing transactions,
including repurchase agreements to provide interim financing of the Depositor's
Mortgage Loans pending the sale of such Mortgage Loans or interests therein,
including the Certificates.
The Depositor anticipates that the Certificates will be sold primarily to
institutional investors. Purchasers of Certificates, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with reoffers and sales by them of Certificates. Holders of Certificates should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
Underwriters or agents and their associates may be customers of (including
borrowers from), engage in transactions with and/or perform services for, FUNB,
its affiliates and the Trustee in the ordinary course of business.
LEGAL MATTERS
As specified in the related Prospectus Supplement, certain legal matters
relating to the Certificates, including certain federal income tax consequences
with respect thereto, will be passed upon for the Depositor and the underwriters
by Petree Stockton, L.L.P., Charlotte, North Carolina, and by Moore & Van Allen,
PLLC, Charlotte, North Carolina.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of Certificates
and no Trust Fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related Series of Certificates.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this Prospectus or in the related Prospectus Supplement.
RATING
It is a condition to the issuance of the Certificates of each Series
offered hereby and by the Prospectus Supplement that they shall have been rated
in one of the four highest rating categories by the nationally recognized
statistical rating agency or agencies specified in the related Prospectus
Supplement.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by certificateholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying mortgage loans
and the credit quality of the credit enhancer or guarantor, if any. Ratings on
mortgage pass-through certificates do not represent any assessment of the
likelihood of principal prepayments by mortgagors or of the degree by which such
prepayments might differ from those originally anticipated. As a result,
certificateholders might suffer a lower than anticipated yield, and, in
addition, holders of stripped pass-through certificates in extreme cases might
fail to recoup their underlying investments.
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
organization. Each security rating should be evaluated independently of any
other security rating.
81
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, a class of Book-Entry Certificates
(the "Global Securities") will be available only in book-entry form. Investors
in the Global Securities may hold such Global Securities through any of DTC,
CEDEL or Euroclear. The Global Securities will be tradeable 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 and prior Residential Mortgage Pass-Through
Certificates issues.
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.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to prior Residential Mortgage Pass-Through
Certificates issues. Investor securities custody accounts will be credited with
their holdings against 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 "lock-up" 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 using the procedures applicable to prior
Residential Mortgage Pass-Through Certificates issues 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.
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, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
I-1
<PAGE>
excluding the first day of the following month. Payment will then be made by the
respective Depositary of 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 debt 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 debt
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 preposition 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 or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon the 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 European 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 Participants 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 Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of the actual
number of days in such accrual period and a year assumed to consist of 360 days.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. 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 will be back-valued to
the value date (which would be the preceding 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 debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that 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 were 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.
I-2
<PAGE>
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 (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-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption For Non-U.S. Persons With Actively 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 Certificate Owners 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 W-8. Form 1001 may be filed by the Certificate Owners
or his agent.
Exemption For U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner 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 W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
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 or any political subdivision thereof or (iii) an estate or trust
the income of which is includable 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.
I-3
<PAGE>
INDEX TO DEFINED TERMS
<TABLE>
<S> <C>
1986 Act................................................................................................................ 62
Accrual Certificates.................................................................................................... 29
Accrual period.......................................................................................................... 66
Act..................................................................................................................... 51
Adjusted issue price.................................................................................................... 62
Advance................................................................................................................. 12
AFR..................................................................................................................... 63
Agency Securities....................................................................................................... 1
Agreement............................................................................................................... 5
ALTA.................................................................................................................... 25
Applicable Amount....................................................................................................... 74
ARM Loans............................................................................................................... 62
Available Distribution Amount........................................................................................... 29
Balloon Loan............................................................................................................ 25
Balloon payments........................................................................................................ 6
Balloon Period.......................................................................................................... 25
Bankruptcy Bond......................................................................................................... 37
Bankruptcy Bonds........................................................................................................ 11
Beneficial owner........................................................................................................ 32
Book-Entry Certificates................................................................................................. 31
Buydown Fund............................................................................................................ 17
Buydown Loans........................................................................................................... 17
Capital asset........................................................................................................... 57
Cede.................................................................................................................... 32
CEDEL................................................................................................................... 31
CEDEL Participants...................................................................................................... 33
CERCLA.................................................................................................................. 56
Certificate Balance..................................................................................................... 30
Certificate Owners...................................................................................................... 31
Certificate Register.................................................................................................... 28
Certificates............................................................................................................ 1
Charter Act............................................................................................................. 21
Closing Date............................................................................................................ 5
Code.................................................................................................................... 13
Collateral Value........................................................................................................ 17
Collection Account...................................................................................................... 41
Combined Loan-to-Value Ratio............................................................................................ 17
Commission.............................................................................................................. 3
Cooperative............................................................................................................. 33
Cooperative Loans....................................................................................................... 6
Cooperatives............................................................................................................ 6
Cut-off Date............................................................................................................ 11
Deferred Interest....................................................................................................... 63
Definitive Certificate.................................................................................................. 32
Depositor............................................................................................................... 1
Detailed Description.................................................................................................... 16
Determination Date...................................................................................................... 29
Disqualified organization............................................................................................... 75
Distribution Date....................................................................................................... 9
DTC..................................................................................................................... 31
Due-on-sale............................................................................................................. 7
Eligible Investments.................................................................................................... 42
EPA..................................................................................................................... 56
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
ERISA................................................................................................................... 13
Euroclear............................................................................................................... 31
Euroclear Operator...................................................................................................... 33
Euroclear Participants.................................................................................................. 33
European Depositaries................................................................................................... 32
Excess inclusion........................................................................................................ 71
Excess inclusions....................................................................................................... 75
Excess servicing........................................................................................................ 60
FDIC.................................................................................................................... 26
Federal long-term rate.................................................................................................. 72
FHA..................................................................................................................... 6
FHA Insurance........................................................................................................... 11
FHA Loans............................................................................................................... 18
FHLMC................................................................................................................... 1
FHLMC Act............................................................................................................... 20
FHLMC Certificate Group................................................................................................. 20
FHLMC Certificates...................................................................................................... 7
Financial Intermediary.................................................................................................. 32
FNMA.................................................................................................................... 1
FNMA Certificates....................................................................................................... 7
FUNB.................................................................................................................... 5
Funding Period.......................................................................................................... 12
Garn-St Germain Act..................................................................................................... 57
Global Securities....................................................................................................... I-1
GNMA.................................................................................................................... 1
GNMA Certificates....................................................................................................... 7
GNMA Issuer............................................................................................................. 18
Guaranty Agreement...................................................................................................... 18
Home Equity Loans....................................................................................................... 6
Housing Act............................................................................................................. 18
HUD..................................................................................................................... 46
Insurance Proceeds...................................................................................................... 42
Insured Expenses........................................................................................................ 42
IRS..................................................................................................................... 59
Issuer.................................................................................................................. 64
Labor................................................................................................................... 77
Legislative History..................................................................................................... 62
Letter of Credit........................................................................................................ 11
Limited Guarantee....................................................................................................... 11
Liquidation Expenses.................................................................................................... 42
Liquidation Proceeds.................................................................................................... 42
Loan-to-Value Ratio..................................................................................................... 17
Lockout periods......................................................................................................... 7
Master REMIC............................................................................................................ 65
Master Servicer......................................................................................................... 5
Master Servicing Fee.................................................................................................... 47
Morgan.................................................................................................................. 32
Mortgage................................................................................................................ 40
Mortgage Assets......................................................................................................... 1
Mortgage Loans.......................................................................................................... 1
Mortgage Note........................................................................................................... 40
Mortgage pass-through certificate....................................................................................... 78
Mortgage Pool........................................................................................................... 5
Mortgage Pool Insurance Policy.......................................................................................... 10
Mortgage Rate........................................................................................................... 9
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
Mortgage related securities............................................................................................. 79
Mortgaged Properties.................................................................................................... 16
Mortgagor............................................................................................................... 14
NCUA.................................................................................................................... 80
Net Liquidation Proceeds................................................................................................ 42
OID Regulations......................................................................................................... 62
Participant............................................................................................................. 31
Parties in Interest..................................................................................................... 77
Pass-through entity..................................................................................................... 75
Pass-through interest holder............................................................................................ 70
Pass-Through Rate....................................................................................................... 9
Plans................................................................................................................... 77
PMBS Agreement.......................................................................................................... 22
PMBS Issuer............................................................................................................. 22
PMBS Servicer........................................................................................................... 22
PMBS Trustee............................................................................................................ 22
Policy Statement........................................................................................................ 80
Pool Insurer............................................................................................................ 35
Pre-Funded Amount....................................................................................................... 5
Pre-Funding Account..................................................................................................... 1
Prepayment Assumption................................................................................................... 62
Primary Insurer......................................................................................................... 45
Primary Mortgage Insurance Policy....................................................................................... 16
Principal Prepayments................................................................................................... 30
Private Mortgage-Backed Securities...................................................................................... 1
Proposed Regulations.................................................................................................... 76
PTE 83-1................................................................................................................ 78
Purchase Price.......................................................................................................... 26
Qualified mortgage...................................................................................................... 65
Rating Agency........................................................................................................... 13
Record Date............................................................................................................. 28
Regular Certificates.................................................................................................... 64
Regular interests....................................................................................................... 28
Relevant Depositary..................................................................................................... 32
Relief Act.............................................................................................................. 57
REMIC................................................................................................................... 2
REMIC Regulations....................................................................................................... 57
Reserve Fund............................................................................................................ 10
Residual Certificates................................................................................................... 64
Residual interests...................................................................................................... 28
Retained Interest....................................................................................................... 27
Rules................................................................................................................... 32
Seller.................................................................................................................. 1
Sellers................................................................................................................. 16
Senior Certificates..................................................................................................... 8
Series.................................................................................................................. 1
Significant value....................................................................................................... 72
Single Family Certificates.............................................................................................. 78
SMMEA................................................................................................................... 12
Special Hazard Insurance Policy......................................................................................... 11
Special Hazard Insurer.................................................................................................. 36
Stripped ARM Obligations................................................................................................ 63
Stripped Bond Certificates.............................................................................................. 60
Stripped bonds.......................................................................................................... 60
Stripped Coupon Certificates............................................................................................ 60
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
Stripped coupons........................................................................................................ 60
Sub-Servicer............................................................................................................ 5
Subordinated Certificates............................................................................................... 8
Subsequent Mortgage Assets.............................................................................................. 1
Subsidiary REMIC........................................................................................................ 65
Subsidy Account......................................................................................................... 25
Subsidy Loans........................................................................................................... 25
Subsidy Payments........................................................................................................ 25
Surety Bond............................................................................................................. 11
Temporary Regulations................................................................................................... 76
Terms and Conditions.................................................................................................... 33
Title V................................................................................................................. 57
Trust Fund.............................................................................................................. 1
Trustee................................................................................................................. 5
U.S. Person............................................................................................................. 64
Underwriter Exemption................................................................................................... 79
Underwriter Exemptions.................................................................................................. 79
VA...................................................................................................................... 6
VA Guaranty Policy...................................................................................................... 47
VA Insurance............................................................................................................ 11
VA Loans................................................................................................................ 18
</TABLE>
iv
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus Supplement or the
Prospectus and, if given or made, such information or representations must not
be relied upon. This Prospectus Supplement and the Prospectus do not constitute
an offer to sell or a solicitation of an offer to buy any securities other than
the Offered Certificates offered hereby, nor an offer of the Offered
Certificates in any state or jurisdiction in which, or to any person to whom,
such offer would be unlawful. The delivery of this Prospectus Supplement or the
Prospectus at any time does not imply that information herein or therein is
correct as of any time subsequent to its date; however, if any material change
occurs while this Prospectus Supplement or the Prospectus is required by law to
be delivered, this Prospectus Supplement or the Prospectus will be amended or
supplemented accordingly.
TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
<CAPTION>
Page
<S> <C>
Incorporation of Certain Documents by Reference...... S-3
Summary of Terms of the Offered Certificates......... S-4
Risk Factors......................................... S-12
The Mortgage Loan Pool............................... S-17
The Seller and the Master Servicer................... S-24
Prepayment and Yield Considerations.................. S-26
Formation of the Trust Fund and Trust Property....... S-31
Description of the Certificates...................... S-31
Description of the Purchase Agreement................ S-46
The Trustee.......................................... S-47
The Certificate Insurer and the Certificate Insurance
Policy............................................. S-48
Certain Legal Aspects of the Mortgage Loans.......... S-50
Certain Federal Income Tax Consequences.............. S-54
State Taxes.......................................... S-59
ERISA Considerations................................. S-59
Use of Proceeds...................................... S-61
Legal Investment Considerations...................... S-61
Underwriting......................................... S-61
Experts.............................................. S-62
Legal Matters........................................ S-62
Certificate Rating................................... S-62
Index of Principal Terms............................. S-63
Annex I -- Global Clearance, Settlement and Tax
Documentation Procedures
Appendix A -- Audited Financial Statements of
Certificate Insurer
Appendix B -- Unaudited Financial Statements of
Certificate Insurer
Prospectus
Prospectus Supplement................................ 3
Available Information................................ 3
Reports to Certificateholders........................ 3
Incorporation of Certain Information by Reference.... 4
Summary of Terms..................................... 5
Risk Factors......................................... 14
The Trust Fund....................................... 15
Use of Proceeds...................................... 23
The Depositor........................................ 23
Mortgage Loan Program................................ 24
Description of the Certificates...................... 27
Credit Enhancement................................... 35
Yield and Prepayment Considerations.................. 39
The Pooling and Servicing Agreement.................. 40
Certain Legal Aspects of The Mortgage Loans.......... 51
Certain Federal Income Tax Consequences.............. 57
State, Local and Other Tax Considerations............ 77
ERISA Considerations................................. 77
Legal Investment..................................... 79
Method of Distribution............................... 80
Legal Matters........................................ 81
Financial Information................................ 81
Rating............................................... 81
Index to Defined Terms............................... i
</TABLE>
$157,259,000
(Approximate)
First Union Residential
Securitization Transactions, Inc.
Depositor
Home Equity Loan
Asset-Backed Certificates,
Series 1996-1
$68,008,000 Class A-1 6.69% Certificates
$34,126,000 Class A-2 6.97% Certificates
$26,157,000 Class A-3 7.29% Certificates
$11,433,000 Class A-4 7.60% Certificates
$17,535,000 Class A-5 7.77% Certificates
First Union National Bank
of North Carolina,
Seller and Master Servicer
PROSPECTUS SUPPLEMENT
First Union Capital Markets Corp.
Lehman Brothers
August 22, 1996
