FILED PURSUANT TO RULE 424B(5)
FILE NO. 333-04127
PROSPECTUS SUPPLEMENT
(To Prospectus Dated August 2, 1996)
- --------------------------------------------------------------------------------
$438,238,000
(APPROXIMATE)
SAXON ASSET SECURITIES TRUST 1996-2
$55,500,000 6.375% Class A-1 Certificates
$47,500,000 6.475% Class A-2 Certificates
$17,000,000 6.750% Class A-3 Certificates
$20,500,000 7.025% Class A-4 Certificates
$19,329,000 7.185% Class A-5 Certificates
$278,409,000 Class A-6 Variable Rate Certificates
Mortgage Loan Asset Backed Certificates, Series 1996-2
SAXON ASSET SECURITIES COMPANY AS SELLER
The Mortgage Loan Asset Backed Certificates, Series 1996-2 (the
"Certificates"), will consist of the Class A-1, Class A-2, Class A-3, Class A-4
and Class A-5 Certificates (the "Fixed Rate Certificates"), the Class A-6
Certificates (the "Variable Rate Certificates," and, collectively with the Fixed
Rate Certificates, the "Class A Certificates") and the Class R Certificates (the
"Subordinated Certificates"). Only the Class A Certificates are offered hereby.
The Pass-Through Rate for the Variable Rate Certificates is 5.615% per
annum for the first Distribution Date and adjusts monthly thereafter as
described herein.
FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING INVESTMENT IN THE
CERTIFICATES, SEE "RISK FACTORS" BEGINNING ON PAGE S-13 HEREIN AND BEGINNING ON
PAGE 9 IN THE PROSPECTUS.
The Certificates will represent undivided ownership interests in pools
of mortgage loans (the "Mortgage Loans") held by a trust (the "Trust") created
pursuant to a Trust Agreement dated as of November 1, 1996 (the "Agreement"),
among Saxon Asset Securities Company (the "Seller"), Texas Commerce Bank
National Association, as Master Servicer (the "Master Servicer"), and Citibank,
N.A., as trustee (the "Trustee"). The Mortgage Loans will be acquired by the
Seller from Saxon Mortgage, Inc. ("Saxon Mortgage"), an affiliate of the Seller
which originated or acquired the Mortgage Loans from various mortgage banking
institutions.
(Cover continued on next page)
THE CLASS A CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN THE TRUST ONLY AND DO
NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE SELLER, THE MASTER SERVICER,
THE TRUSTEE, ANY ORIGINATORS OR ANY OF THEIR AFFILIATES. NEITHER THE CLASS A
CERTIFICATES NOR THE MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY
GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED
ON OR ENDORSED THE THE MERITS OF THIS OFFERING. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
The Class A Certificates will be purchased by the Underwriters from the
Seller and will be offered by the Underwriters from time to time in negotiated
transactions or otherwise, at varying prices to be determined at the time of
sale. Proceeds to the Seller are expected to be approximately $437,001,397, plus
accrued interest, before deducting expenses payable by the Seller estimated to
be $400,000. See "Underwriting" herein.
The Class A Certificates are offered by the Underwriters, subject to
prior sale, withdrawal, cancellation or modification of the offer without
notice, to delivery and acceptance by the Underwriters and certain other
conditions. It is expected that delivery of the Class A Certificates in
book-entry form will be made on or about December 5, 1996, only through the
facilities of The Depository Trust Company, CEDEL and Euroclear.
PRUDENTIAL SECURITIES INCORPORATED
LEHMAN BROTHERS
MERRILL LYNCH & CO.
PAINEWEBBER INCORPORATED
- --------------------------------------------------------------------------------
The date of this Prospectus Supplement is November 27, 1996
<PAGE>
(Cover continued from previous page)
The Mortgage Loans will be secured by first and second liens on single
family residential properties, including investment properties (which may be
condominiums, one family residences, two-to-four family residences or homes in
planned unit developments). The Mortgage Loans will be serviced by Meritech
Mortgage Services, Inc., an affiliate of the Seller, and Long Beach Mortgage
Company.
The Class A Certificates will be unconditionally and irrevocably
guaranteed to the extent described herein pursuant to the terms of two separate
certificate guaranty insurance policies (the "Certificate Insurance Policies")
issued by MBIA Insurance Corporation.
[MBIA LOGO HERE]
The obligations of the Seller, the Master Servicer and the Trustee with
respect to the Certificates will be limited to their respective contractual
obligations under the Agreement. The assets of the Trust will include two pools
(each, a "Mortgage Loan Group" or "Group") of Mortgage Loans secured by first
and second mortgages or deeds of trust (the "Mortgages") on single family
residential properties (the "Mortgaged Premises") to be conveyed by the Seller
to the Trust on the Closing Date. Distributions in respect of the Fixed Rate
Certificates will generally be calculated with reference to a pool of fixed-rate
first and second lien Mortgage Loans (the "Fixed Rate Group"). Distributions in
respect of the Variable Rate Certificates will generally be calculated with
reference to a pool of variable-rate first lien Mortgage Loans (the "Variable
Rate Group"). See "DESCRIPTION OF THE CLASS A CERTIFICATES --
Overcollateralization and Crosscollateralization Provisions" in this Prospectus
Supplement.
The Agreement provides that additional fixed-rate and variable-rate
Mortgage Loans (the "Subsequent Mortgage Loans") may be purchased by the Trust
from the Seller from time to time on or before February 5, 1997, from funds on
deposit in the Pre-Funding Account. On the Closing Date approximately
$34,000,000 will be deposited in the Pre-Funding Account to be used to acquire
fixed-rate Subsequent Mortgage Loans for the Fixed Rate Group and approximately
$51,000,000 will be deposited in the Pre-Funding Account to be used to acquire
variable-rate Subsequent Mortgage Loans for the Variable Rate Group.
Distributions of principal and interest payable to each Class of the
Class A Certificates will be made on the 25th day of each month or, if the 25th
day is not a business day, the first business day thereafter (each, a
"Distribution Date"), beginning on December 26, 1996. Distributions on the
Subordinated Certificates are subordinate to distributions on the Class A
Certificates to the extent described herein.
An election will be made to treat certain assets of the Trust as a real
estate mortgage investment conduit (a "REMIC") for federal income tax purposes.
As described more fully herein, each Class of Class A Certificates will
constitute "regular interests" in the REMIC. See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES" in this Prospectus Supplement and "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES -- REMIC Certificates" in the Prospectus. The Fixed Rate
Certificates and, prior to the end of Funding Period, the Variable Rate
Certificates will not constitute "mortgage related securities" for purposes of
SMMEA (as defined herein). See "LEGAL INVESTMENT CONSIDERATIONS" in this
Prospectus Supplement.
There is currently no secondary market for the Class A Certificates.
The Underwriters intend to make a secondary market in the Class A Certificates
but have no obligation to do so. There can be no assurance that a secondary
market for the Class A Certificates will develop or, if it does develop, that it
will continue.
All the Mortgage Loans were originated or acquired in accordance with
Saxon Mortgage's loan programs for non-conforming credits. See "RISK FACTORS --
Risk of Higher Delinquencies Associated With Underwriting Standards" in this
Prospectus Supplement.
TABLE OF CONTENTS
Prospectus Supplement
Page
SUMMARY...................................................................S-1
RISK FACTORS.............................................................S-13
USE OF PROCEEDS..........................................................S-15
THE MORTGAGE LOAN POOL...................................................S-15
General.............................................................S-15
Conveyance of Subsequent Mortgage Loans.............................S-17
Conversion Option...................................................S-17
Interest Payments on the Mortgage Loans.............................S-18
Additional Information..............................................S-18
Characteristics of the Statistical Mortgage Loans...................S-19
Servicing of the Mortgage Loans.....................................S-22
Servicing and Other Compensation and Payment of
Expenses; Repurchase...............................................S-23
Advances and Month End Interest.....................................S-23
The Master Servicer.................................................S-24
PREPAYMENT AND YIELD CONSIDERATIONS......................................S-24
Mandatory Prepayment................................................S-25
Prepayments and Yields for Class A Certificates.....................S-25
Payment Delay Feature of Fixed Rate Certificates....................S-30
DESCRIPTION OF THE CLASS A CERTIFICATES..................................S-30
General.............................................................S-30
Available Funds.....................................................S-30
Distributions.......................................................S-31
Overcollateralization and Crosscollateralization
Provisions.........................................................S-33
Class A Distributions and Insured Payments..........................S-35
Pre-Funding Account.................................................S-35
Capitalized Interest Account........................................S-36
Calculation of One Month LIBOR......................................S-36
Book Entry Registration of the Class A Certificates.................S-36
THE CERTIFICATE INSURANCE POLICIES AND THE
CERTIFICATE INSURER.....................................................S-40
THE AGREEMENT............................................................S-44
Formation of the Trust..............................................S-44
Reports to Certificateholders.......................................S-44
Assignment of Mortgage Loans........................................S-45
Delivery and Substitution of Mortgage Loans.........................S-45
The Trustee, Certificate Registrar, Paying Agent and
the Custodian......................................................S-46
Voting Rights.......................................................S-46
Termination of the Trust............................................S-46
Optional Termination................................................S-46
Sale of Mortgage Loans..............................................S-46
Events of Default...................................................S-47
Governing Law.......................................................S-47
CERTAIN FEDERAL INCOME TAX CONSEQUENCES..................................S-47
REMIC Elections.....................................................S-48
ERISA CONSIDERATIONS.....................................................S-48
RATINGS..................................................................S-50
LEGAL INVESTMENT CONSIDERATIONS..........................................S-50
UNDERWRITING.............................................................S-51
REPORT OF EXPERTS........................................................S-51
CERTAIN LEGAL MATTERS....................................................S-51
GLOBAL CLEARANCE, SETTLEMENT AND TAX
DOCUMENTATION PROCEDURES.............................................ANNEX I
INDEX TO LOCATION OF PRINCIPAL DEFINED
TERMS....................................................................A-1
<PAGE>
TABLE OF CONTENTS (cont'd.)
Prospectus
Page
PROSPECTUS SUMMARY........................................................ 1
RISK FACTORS.............................................................. 9
Certificateholders Must Look Solely to
Limited Trust Assets for Certificate
Payments........................................................ 9
Credit Enhancement (if Available) May Be
Limited......................................................... 9
Economic Developments May Adversely
Affect Mortgage Asset Performance............................... 9
Bankruptcy Recharacterization of Mortgage
Asset Transfers May Delay or Reduce Certificate
Payments........................................................ 9
Various Laws May Delay or Reduce
Certificate Payments............................................ 9
Modification of Mortgage Loans May Delay
or Reduce Certificate Payments.................................. 10
Mortgage Loan Prepayments May Affect
Final Certificate Payment Date or Certificate
Yield........................................................... 10
Secondary Market for Certificates May Not
Develop or Continue............................................. 10
Holders of Book-Entry Certificates May
Experience Liquidity Problems or Payment
Delays.......................................................... 10
Certificate Ratings May Be Affected by
Credit Enhancer Ratings......................................... 11
Holders of Original Issue Discount
Certificates Are Subject to Special Tax Rules................... 11
Balloon Loans May Experience Relatively
Higher Losses................................................... 11
Junior Mortgage Loans May Experience
Relatively Higher Losses........................................ 11
Mortgage Loans Secured by Non-Owner
Occupied Properties May Experience Relatively
Higher Losses................................................... 12
Mortgage Loans Underwritten as Non-
Conforming Credits May Experience Relatively
Higher Losses................................................... 12
Mortgage Assets May Include Delinquent
and Non-Performing Mortgage Loans............................... 12
DESCRIPTION OF THE CERTIFICATES........................................... 12
General ........................................................ 12
Classes of Certificates.......................................... 13
Book-Entry Procedures............................................ 13
Allocation of Distributions from Mortgage
Assets.......................................................... 14
Allocation of Losses and Shortfalls.............................. 15
Valuation of Mortgage Assets..................................... 16
Optional Redemption.............................................. 16
MATURITY, PREPAYMENT AND YIELD
CONSIDERATIONS........................................................... 17
THE TRUSTS................................................................ 18
Assignment of Mortgage Assets.................................... 18
The Mortgage Loans -- General.................................... 19
Single Family Loans.............................................. 21
Cooperative Loans................................................ 21
Multi-Family Loans............................................... 22
Junior Mortgage Loans............................................ 22
Conventional Home Improvement Loans.............................. 22
Title I Loans.................................................... 23
Repurchase of Converted Mortgage Loans........................... 23
Repurchase of Delinquent Mortgage Loans.......................... 24
Substitution of Mortgage Loans .................................. 24
Agency Securities -- General..................................... 24
Government National Mortgage Association;
GNMA Certificates............................................... 25
Federal National Mortgage Association;
FNMA Certificates............................................... 26
Federal Home Loan Mortgage Corporation;
FHLMC Certificates.............................................. 26
Stripped Mortgage-Backed Certificates;
Other Agency Securities......................................... 27
Private Mortgage-Backed Securities............................... 27
Home Equity Lines of Credit...................................... 29
Pre-Funding Account.............................................. 29
Asset Proceeds Account........................................... 30
CREDIT ENHANCEMENT........................................................ 30
General ........................................................ 30
Subordination.................................................... 30
Certificate Guaranty Insurance Policies.......................... 31
Overcollateralization............................................ 32
Mortgage Pool Insurance Policies................................. 32
Special Hazard Insurance Policies................................ 33
Bankruptcy Bonds................................................. 34
Cross-Support.................................................... 34
Reserve Funds.................................................... 34
Other Credit Enhancement ....................................... 35
ORIGINATION OF MORTGAGE LOANS............................................. 35
General ........................................................ 35
Representations and Warranties................................... 36
SERVICING OF MORTGAGE LOANS............................................... 37
General ........................................................ 37
Payments on Mortgage Loans....................................... 38
Advances ........................................................ 38
Collection and Other Servicing Procedures........................ 39
Primary Mortgage Insurance Policies.............................. 39
Standard Hazard Insurance Policies............................... 40
Maintenance of Insurance Policies; Claims
Thereunder and Other Realization Upon Defaulted
Mortgage Loans.................................................. 41
Modification of Mortgage Loans................................... 42
Evidence as to Servicing Compliance.............................. 42
Events of Default and Remedies................................... 42
Master Servicer Duties........................................... 43
Special Servicing Agreement...................................... 43
THE AGREEMENT............................................................. 44
The Trustee...................................................... 44
Administration of Accounts....................................... 44
Reports to Certificateholders.................................... 45
Events of Default and Remedies................................... 45
Amendment........................................................ 46
Termination...................................................... 46
CERTAIN LEGAL ASPECTS OF MORTGAGE
LOANS.................................................................... 46
General ........................................................ 46
The Mortgage Loans............................................... 46
Foreclosure...................................................... 48
Junior Mortgage Loans; Rights of Senior
Mortgagees...................................................... 50
Right of Redemption.............................................. 51
Anti-Deficiency Legislation and Other
Limitations on Lenders.......................................... 51
Soldiers' and Sailors' Civil Relief Act of 1940.................. 52
Environmental Considerations .................................... 52
"Due-on-Sale" Clauses............................................ 53
Enforceability of Certain Provisions............................. 54
THE SELLER................................................................ 54
USE OF PROCEEDS........................................................... 54
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES............................................................. 55
General ........................................................ 55
REMIC Certificates............................................... 55
Risk Factors for Certain Types of
Investors....................................................... 69
Disposition of REMIC Residual
Certificates.................................................... 71
Liquidation of the REMIC......................................... 72
REMIC-Level Taxes................................................ 72
Taxation of Certain Foreign Holders of
REMIC Certificates.............................................. 73
Reporting and Tax Administration................................. 74
Non-REMIC Certificates........................................... 75
Treatment of Pass-Through Certificates........................... 76
Treatment of Strip Certificates.................................. 77
Determination of Income With Respect to
Strip Certificates.............................................. 78
Limitations on Deductions With Respect to
Strip Certificates.............................................. 78
Sale of a Non-REMIC Certificate.................................. 79
Taxation of Certain Foreign Holders of
Non-REMIC Certificates.......................................... 79
Backup Withholding............................................... 79
Reporting and Tax Administration................................. 79
STATE TAX CONSIDERATIONS.................................................. 80
ERISA CONSIDERATIONS...................................................... 80
LEGAL INVESTMENT MATTERS.................................................. 82
PLAN OF DISTRIBUTION...................................................... 83
INDEX TO LOCATION OF PRINCIPAL DEFINED
TERMS.................................................................... 84
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT,
ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS A CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
-----------------------------
The Certificates offered by this Prospectus Supplement will be part of
a separate series of Certificates being offered by the Seller pursuant to its
Prospectus dated August 2, 1996, of which this Prospectus Supplement is a part
and which accompanies this Prospectus Supplement. The Prospectus contains
important information regarding this offering which is not contained herein, and
prospective investors are urged to read the Prospectus and this Prospectus
Supplement in full.
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus. Reference is made to the "Index to Location of
Principal Defined Terms" in this Prospectus Supplement and in the Prospectus for
the definitions of certain capitalized terms.
Trust: Saxon Asset Securities Trust 1996-2 (the "Trust").
Certificates: The Mortgage Loan Asset Backed Certificates, Series
1996-2 (the "Certificates") will consist of the Class
A-1 Certificates, Class A-2 Certificates, Class A-3
Certificates, Class A-4 Certificates and Class A-5
Certificates (the "Fixed Rate Certificates") and
Class A-6 Certificates (the "Variable Rate
Certificates" and, together with the Fixed Rate
Certificates, the "Class A Certificates") and the
Class R Certificates (the "Subordinated
Certificates"). The Certificates will be issued
pursuant to a trust agreement to be dated as of
November 1, 1996 (the "Agreement"), among the Seller,
the Master Servicer and the Trustee.
Certificates Offered: Only the Class A Certificates are offered hereby.
The initial Certificate Principal Balances and the
Last Scheduled Distribution Dates for the Class
A Certificates are as follows:
Initial Certificate Last Scheduled
Class Principal Balance Distribution Date
--------- ----------------- -----------------
Class A-1 $ 55,500,000 July 25, 2012
Class A-2 $ 47,500,000 November 25, 2020
Class A-3 $ 17,000,000 September 25, 2022
Class A-4 $ 20,500,000 July 25, 2024
Class A-5 $ 19,329,000 July 25, 2026
Class A-6 $278,409,000 November 25, 2026
The Initial Certificate Principal Balance of each
Class of Class A Certificates may be increased or
decreased by up to 4% on the Closing Date, depending
upon the Initial Mortgage Loans actually acquired by
the Trust and the amount deposited into the
Pre-Funding Account. Accordingly, any investor's
commitments with respect to a Class of Class A
Certificates may be correspondingly increased or
decreased.
On any date after the Closing Date the "Certificate
Principal Balance" of each Class of Class A
Certificates is the Initial Certificate Principal
Balance of each such Class set forth above, less all
amounts previously distributed to the Holders of such
Class on account of principal.
It is expected that the actual last Distribution Date
for each Class of Certificates will occur
significantly earlier than such Last Scheduled
Distribution Dates. To the extent that the aggregate
Certificate Principal Balance of the Variable Rate
Certificates has not been reduced to zero on the Last
Scheduled Distribution Date therefor, the Certificate
Insurer will include as an Insured Payment to the
Variable Rate Certificates on such Distribution Date
an amount which shall be sufficient to reduce such
aggregate Certificate Principal Balance to zero (any
such payment, the "Variable Rate Final Payment"). See
"DESCRIPTION OF THE CLASS A CERTIFICATES--Class A
Distributions and Insured Payments", "THE CERTIFICATE
INSURANCE POLICIES AND THE CERTIFICATE INSURER" and
"PREPAYMENT AND YIELD CONSIDERATIONS" in this
Prospectus Supplement.
S-1
<PAGE>
Denominations: The Class A Certificates are issuable in book entry
form in minimum denominations of $1,000 in original
principal amount and integral multiples thereof.
Seller: Saxon Asset Securities Company (the "Seller"), a
Virginia corporation and wholly owned limited purpose
financing subsidiary of Dominion Mortgage Services,
Inc., which is a wholly owned subsidiary of Dominion
Capital, Inc., which is a wholly owned subsidiary of
Dominion Resources, Inc. The Seller's principal
executive offices are located at 4880 Cox Road, Glen
Allen, Virginia 23060, and its phone number is (804)
967-7400.
Saxon Mortgage: Saxon Mortgage, Inc. ("Saxon Mortgage"), a Virginia
corporation and an affiliate of the Seller.
Master Servicer: Texas Commerce Bank National Association, a national
banking association (the "Master Servicer").
Custodian, Certificate
Registrar and Paying
Agent: Texas Commerce Bank National Association, a national
banking association (in such several capacities, the
"Custodian", the "Certificate Registrar" and the
"Paying Agent").
Trustee: Citibank, N.A., a national banking association (the
"Trustee").
Servicers: Meritech Mortgage Services, Inc., an affiliate of the
Seller, and Long Beach Mortgage Company.
Closing Date: On or about December 5, 1996.
Cut-Off Date: As of the close of business on November 20, 1996
(except that the interest portion of the payments due
on December 1, 1996, on the Variable Rate Mortgage
Loans will be retained by the Seller).
Trust Assets: The assets of the Trust initially will include two
pools (each, a "Mortgage Loan Group" or "Group") of
mortgage loans (the "Initial Mortgage Loans") secured
by mortgages or deeds of trust (the "Mortgages") on
single family residential properties (the "Mortgaged
Premises") to be conveyed to the Trust on the Closing
Date.
Distributions in respect of the Fixed Rate
Certificates will generally be calculated with
reference to a pool of fixed-rate first and second
lien Mortgage Loans (the "Fixed Rate Group").
Distributions in respect of the Variable Rate
Certificates generally will be calculated with
reference to a pool of variable-rate first lien
Mortgage Loans (the "Variable Rate Group"). See
"DESCRIPTION OF THE CLASS A CERTIFICATES --
Overcollateralization and Crosscollateralization
Provisions" in this Prospectus Supplement.
The Initial Mortgage Loans are expected to have
aggregate Scheduled Principal Balances of
approximately $353,238,000 as of the Cut-Off Date.
The Initial Mortgage Loans in the Fixed Rate Group
are expected to have aggregate Scheduled Principal
Balances of approximately $125,829,000, and the
Initial Mortgage Loans in the Variable Rate Group are
expected to have aggregate Scheduled Principal
Balances of approximately $227,409,000.
On the Closing Date, approximately $85,000,000 (the
"Original Pre-Funded Amount") will be deposited in
the Pre-Funding Account (as defined herein). It is
intended that additional Mortgage Loans (the
"Subsequent Mortgage Loans") be purchased by the
Trust from the Seller from time to time on or before
February 5, 1997, from funds on deposit in the
Pre-Funding Account. Each
S-2
<PAGE>
Subsequent Mortgage Loan so acquired by the Trust
will be assigned to one (and only one) of either the
Fixed Rate Group or the Variable Rate Group. As a
result, the aggregate principal balance of the
Mortgage Loans in the Fixed Rate Group and the
Variable Rate Group will increase by an amount equal
to the aggregate principal balance of the Subsequent
Mortgage Loans so purchased and the amount in the
Pre- Funding Account will decrease by an offsetting
amount.
The Initial Mortgage Loans and the Subsequent
Mortgage Loans are referred to collectively as the
"Mortgage Loans".
All the Mortgage Loans will be originated or acquired
by Saxon Mortgage in accordance with its mortgage
loan program as described in the Prospectus. As a
general matter, Saxon Mortgage's mortgage loan
program consists of the origination and packaging of
mortgage loans relating to non-conforming credits. A
non-conforming credit means a mortgage loan which is
ineligible for purchase by Federal National Mortgage
Association ("FNMA") due to credit characteristics
that do not meet FNMA guidelines. Mortgage loans
originated under Saxon Mortgage's mortgage loan
program are likely to experience rates of
delinquency, bankruptcy and loss that are higher than
mortgage loans originated under FNMA guidelines.
On the Closing Date, cash will be deposited in the
name of the Paying Agent in the Capitalized Interest
Account (as defined herein) to be applied by the
Trustee to cover shortfalls in interest attributable
to the provisions allowing for the purchase of
Subsequent Mortgage Loans.
Statistical Cut-Off
Date; Statistical Mortgage Loans As of the date of this Prospectus
Supplement, information with respect to only a
portion of the Initial Mortgage Loans (such loans,
the "Statistical Mortgage Loans") was available.
Accordingly, information presented with respect to
the Initial Mortgage Loans included herein is derived
solely from the Statistical Mortgage Loans.
Wherever reference is made herein to the
characteristics of the Statistical Mortgage Loans (or
to the Statistical Mortgage Loans in a Group) or to a
percentage thereof, the reference is based on the
Scheduled Principal Balances thereof as of November
7, 1996 (the "Statistical Cut-Off Date"). The
characteristics of the Initial Mortgage Loans at the
Cut-Off Date will vary from the characteristics of
the Statistical Mortgage Loans as of the Statistical
Cut-Off Date and the characteristics of the Mortgage
Loans as a whole will change upon the acquisition of
Subsequent Mortgage Loans. See "THE MORTGAGE LOAN
POOL -- Additional Information" in this Prospectus
Supplement.
The Statistical Mortgage Loans consisted of 2,222
fixed-rate and variable-rate Mortgage Loans on
single-family residential properties, including
investment properties (which may be condominiums, one
family residence, two-to-four family residences or
homes in planned unit developments.) The mortgagee is
not required to make future advances under any
Mortgage Loan. Less than 1% of the Statistical
Mortgage Loans by aggregate Scheduled Principal
Balance were 30 days or more delinquent in monthly
payments as of the Cut-Off Date. See "RISK FACTORS
-- Risk of Higher Delinquencies Associated with
Underwriting Standards" in this Prospectus
Supplement.
The Statistical Mortgage Loans had aggregate
Scheduled Principal Balances of $316,238,425 as of
the Statistical Cut-Off Date. The Statistical
Mortgage Loans in the Fixed Rate Group had aggregate
Scheduled Principal Balances of $118,163,411, and the
Statistical Mortgage Loans in the Variable Rate Group
had aggregate Scheduled Principal Balances of
$198,075,014.
S-3
<PAGE>
Fixed Rate Group. The average Scheduled Principal
Balance of the Statistical Mortgage Loans in the
Fixed Rate Group was $101,341, with a range from
$14,735 to $1,163,931; the Mortgage Interest Rate of
the Statistical Mortgage Loans in the Fixed Rate
Group ranged from 7.875% to 14.25% per annum, with a
weighted average Mortgage Interest Rate of 10.01% per
annum.
The weighted average loan-to-value ratio of the
Statistical Mortgage Loans in the Fixed Rate Group
was 71.5%. The weighted average remaining term to
stated maturity of the Statistical Mortgage Loans in
the Fixed Rate Group was 331 months, with a range
from 118 months to 360 months.
Less than 9% of the Statistical Mortgage Loans in the
Fixed Rate Group are secured by second liens.
Approximately 6% of the Statistical Mortgage Loans in
the Fixed Rate Group provide for payments based on a
30-year amortization with a balloon payment in the
fifteenth year.
As a percentage of the aggregate Scheduled Principal
Balance of the Statistical Mortgage Loans in the
Fixed Rate Group, 84% were secured by Mortgages on
one-family detached dwellings, 2% by Mortgages on
one-family attached dwellings, 2% by Mortgages on
planned unit developments and 4% by Mortgages on
condominium units. See "THE MORTGAGE LOAN POOL --
Fixed Rate Group" in this Prospectus Supplement.
The characteristics of the Fixed Rate Group will be
affected by the Initial Mortgage Loans not included
in the Statistical Mortgage Loans and the acquisition
of Subsequent Mortgage Loans.
Variable Rate Group. All the Statistical Mortgage
Loans in the Variable Rate Group bear interest at
rates that adjust periodically. Approximately 61% of
such Statistical Mortgage Loans ("Six Month LIBOR
Loans") adjust semiannually based on the London
interbank offered rate for six-month United States
Dollar deposits ("Six Month LIBOR") in the London
Market based on quotations of major banks as
published in The Wall Street Journal; 24% of such
Statistical Mortgage Loans ("One Year CMT Loans")
adjust annually based on the weekly average yield on
United States Treasury Securities adjusted to a
constant maturity of one year as made available by
the Federal Reserve Board and 15% of such Statistical
Mortgage Loans ("3/27 and 2/28 Loans") bear interest
initially at a rate fixed at origination for three
years (or two years) and thereafter adjust
semiannually based on Six Month LIBOR. All the
Statistical Mortgage Loans in the Variable Rate Group
also are subject to periodic interest rate adjustment
caps, lifetime interest rate ceilings and lifetime
interest rate floors. See "THE MORTGAGE LOAN POOL --
Variable Rate Group" in this Prospectus Supplement.
The average Scheduled Principal Balance of the
Statistical Mortgage Loans in the Variable Rate Group
was $187,571, with a range from $21,126 to $949,467.
All the Statistical Mortgage Loans in the Variable
Rate Group have initial, minimum and maximum Mortgage
Interest Rates. The current weighted average Mortgage
Interest Rate of the Statistical Mortgage Loans in
the Variable Rate Group was 8.41% per annum, with
Mortgage Interest Rates that ranged from 5.75% to
12.90% per annum. The weighted average maximum
Mortgage Interest Rate of the Statistical Mortgage
Loans in the Variable Rate Group was 14.73% per
annum, with maximum Mortgage Interest Rates that
ranged from 11.75% to 19.50% per annum. The gross
margin range for the Statistical Mortgage Loans
constituting Six Month LIBOR Loans in the Variable
Rate Group was 3.00% to 7.75%. The gross margin range
for the Statistical Mortgage Loans constituting One
Year CMT Loans in the Variable Rate Group was 2.75%
to 7.25%. The gross margin range for the Statistical
Mortgage Loans constituting 3/27 and 2/28 Loans in
the Variable Rate Group was 2.88% to 7.00% after the
interest rates on the Statistical
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Mortgage Loans constituting 3/27 and 2/28 Loans are
subject to adjustment. Substantially all the
Statistical Mortgage Loans in the Variable Rate Group
had interest rates which were not fully indexed
(i.e., the Mortgage Interest Rates did not equal the
sum of the gross margin and the applicable index).
The weighted average loan to value ratio of the
Statistical Mortgage Loans in the Variable Rate Group
was 74.7%. The weighted average remaining term to
stated maturity of the Statistical Mortgage Loans in
the Variable Rate Group was 358 months, with a range
from 176 months to 360 months.
As a percentage of the aggregate Scheduled Principal
Balance of the Statistical Mortgage Loans in the
Variable Rate Group 88% were secured by Mortgages on
one-family detached dwellings, 2% by Mortgages on
single-family attached dwellings, 3% by Mortgages on
planned unit developments and 5% by Mortgages on
condominium units. See "THE MORTGAGE LOAN POOL --
Variable Rate Group" in this Prospectus Supplement.
The characteristics of the Variable Rate Group will
be affected by the Initial Mortgage Loans not
included in the Statistical Mortgage Loans and the
acquisition of Subsequent Mortgage Loans.
General. The Mortgage Loans are not insured by pool
mortgage insurance policies; however, certain
distributions due to the Holders of the Class A
Certificates are insured by two Certificate Insurance
Policies, one relating to the Fixed Rate Certificates
and the other relating to the Variable Rate
Certificates. Each Certificate Insurance Policy will
provide, subject to the terms of such Certificate
Insurance Policy, coverage for Deficiency Amounts (as
defined herein) with respect to the related Class A
Certificates. See "CREDIT ENHANCEMENT" in this
Summary and "THE CERTIFICATE INSURANCE POLICIES AND
THE CERTIFICATE INSURER" in this Prospectus
Supplement. The Mortgage Loans are not guaranteed by
the Seller or any of its affiliates. The Mortgage
Loans are required to be serviced by the Servicers in
accordance with the terms of the Servicing Agreements
and with reasonable care, using that degree of skill
and attention that each Servicer exercises with
respect to comparable mortgage loans that it services
for itself and others. See "THE MORTGAGE LOAN POOL --
Servicing of the Mortgage Loans" in this Prospectus
Supplement.
Pass-Through Rates: The Pass-Through Rates for the Fixed Rate
Certificates are as follows:
Pass-Through
Class Rate
--------- -------------
Class A-1 6.375%
Class A-2 6.475
Class A-3 6.750
Class A-4 7.025
Class A-5 7.185
For any Distribution Date that occurs on or after the
Initial Optional Termination Date (as defined herein)
the Pass-Through Rate for each class of Fixed Rate
Certificates will be the rate set forth above
increased by 0.50% per annum.
For the first Distribution Date, the Pass-Through
Rate for the Variable Rate Certificates is 5.615% per
annum. On each Distribution Date thereafter, the
Variable Rate Pass-Through Rate will be equal to the
least of (i) with respect to any Distribution Date
which occurs on or before the Initial Optional
Termination Date (as defined herein) the London
interbank offered rate for one-month United States
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dollar deposits ("One Month LIBOR") (calculated as
described under "DESCRIPTION OF THE CLASS A
CERTIFICATES -- Calculation of One Month LIBOR" in
this Prospectus Supplement) as of the second business
day prior to the immediately preceding Distribution
Date plus 0.24% per annum and for any Distribution
Date that occurs on or after the Initial Optional
Termination Date, One Month LIBOR plus 0.48% per
annum, (ii) the weighted average of the maximum
lifetime Mortgage Interest Rates on the Mortgage
Loans in the Variable Rate Group less approximately
0.582% per annum and (iii) the "Variable Rate
Available Funds Cap", which is defined as a per annum
rate equal to (I) the quotient of the total scheduled
interest on the Mortgage Loans in the Variable Rate
Group during the related Due Period divided by the
Certificate Principal Balance of the Variable Rate
Certificates less (II) approximately 0.582% per annum
prior to the thirteenth Distribution Date and
approximately 1.082% thereafter.
If on any Distribution Date the Variable Rate
Pass-Through Rate is based upon the Variable Rate
Available Funds Cap, the excess of (i) the amount of
interest the Variable Rate Certificates would have
been entitled to receive on such Distribution Date
had the Variable Pass-Through Rate not been
calculated based on the Variable Rate Available Funds
Cap over (ii) the amount of interest such
Certificates received on such Distribution Date based
on the Variable Rate Available Funds Cap, together
with the unpaid portion of any such excess from prior
Distribution Dates (and interest accrued thereon at
the then applicable Pass-Through Rate, without giving
effect to the Variable Rate Available Funds Cap), is
the "Variable Rate Certificates Carryover". Any
Variable Rate Certificates Carryover will be paid on
future Distribution Dates as set forth under
"DESCRIPTION OF THE CLASS A CERTIFICATES --
Distributions" in this Prospectus Supplement. The
rating of the Variable Rate Certificates does not
address the likelihood of the payment of the amount
of any Variable Rate Certificates Carryover and the
applicable Certificate Insurance Policy does not
guarantee payment of any such amount.
Distributions, Generally: Distributions on the Certificates will be made on the
25th day of each calendar month, or if such day is
not a business day, the next succeeding
business day (each, a "Distribution Date") commencing
on December 26, 1996, to the holders of record as of
the last business day of the month immediately
preceding the calendar month in which such
Distribution Date occurs, or the Closing Date in the
case of the first Distribution Date (each a "Record
Date").
Distributions of Interest: On each Distribution Date, the interest due with
respect to the Fixed Rate Certificates will be the
interest which has accrued thereon at the related
Pass-Through Rate during the calendar month
immediately preceding the calendar month in which
such Distribution Date occurs; and the interest due
with respect to the Variable Rate Certificates will
be the interest which has accrued thereon at the then
applicable Variable Rate Pass-Through Rate from and
including the preceding Distribution Date (or from
the Closing Date in the case of the first
Distribution Date) to and including the day prior to
the current Distribution Date. Each period referred
to in the prior sentence relating to the accrual of
interest is the "Accrual Period" for the related
Class of Class A Certificates and the amount of
interest due on a Class of Class A Certificates on a
Distribution Date less any Variable Rate Certificates
Carryover is the "Class A Current Interest" for such
Class of Class A Certificates on such Distribution
Date.
All calculations of interest on the
Fixed Rate Certificates will be made on
the basis of a 360-day year assumed to
consist of twelve 30-day months. All
calculations of interest on the Variable
Rate Certificates will be made on the
basis of the actual number of days and a
year of 360 days.
Distributions of
Principal: On each Distribution Date, the Holders of the Class A
Certificates are entitled to receive monthly
distributions in reduction of their Certificate
Principal Balances which distributions (i) will
generally reflect collections of principal in respect
of the Mortgage Loans in the related Group on each
Distribution Date and (ii) until certain
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overcollateralization levels have been reached, will
include excess interest; provided, however, any such
amounts payable to the Fixed Rate Certificates will
be payable first to the Class A-1 Certificates, until
the Certificate Principal Balances thereof have been
reduced to zero, then to the Class A-2 Certificates
until the Certificate Principal Balances thereof have
been reduced to zero, then to the Class A-3
Certificates until the Certificate Principal Balances
thereof have been reduced to zero, then to the Class
A-4 Certificates until the Certificate Principal
Balances thereof have been reduced to zero, and then
to the Class A-5 Certificates. See "DESCRIPTION OF
THE CLASS A CERTIFICATES-- Distributions" and "--
Overcollateralization and Crosscollateralization
Provisions" in this Prospectus Supplement.
Credit Enhancement: The Credit Enhancement provided for the benefit of
the Holders of the Class A Certificates consists of
(x) excess interest, (y) the overcollateralization
and crosscollateralization mechanics which utilize
the internal cash flows of the Trust and (z) the
Certificate Insurance Policies.
Overcollateralization and Crosscollateralization. The
cashflow provisions of the Trust are expected to
result in an increased rate of amortization of the
Class A Certificates relative to the amortization of
the related Mortgage Loans through the application of
excess interest to the payment of the principal of
Class A Certificates until the required level of
overcollateralization is achieved. In addition, the
cashflow provisions of the Agreement require, under
certain circumstances, that excess interest generated
by one Mortgage Loan Group be used to fund shortfalls
with respect to the other Mortgage Loan Group or to
accelerate the amortization of the Class A
Certificates related to the other Mortgage Loan
Group. As a result of the application of excess
interest to pay down Class A Certificates, there is
expected to be an excess of the aggregate Scheduled
Principal Balances of the Mortgage Loans in each
Mortgage Loan Group over the Certificate Principal
Balances of the related Class A Certificates. Once
the required level of overcollateralization is
reached, and subject to the provisions described in
the next paragraph, the increased rate of
amortization of the Class A Certificates will cease,
unless necessary to maintain the required level of
overcollateralization.
The Agreement provides that, subject to certain
floors, caps and triggers, the required level of
overcollateralization with respect to a Mortgage Loan
Group may increase or decrease over time. An increase
would result in a temporary period of faster
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 slower amortization to reduce the
actual level of overcollateralization to its required
level.
See "DESCRIPTION OF THE CLASS A CERTIFICATES --
Overcollateralization and Crosscollateralization
Provisions" in this Prospectus Supplement.
The Certificate Insurance Policies. The Seller will
obtain the Certificate Insurance Policies, which are
noncancelable, in favor of the Trustee on behalf of
the Holders of each Class of the Class A
Certificates. On each Distribution Date, subject to
the terms of the related Certificate Insurance
Policy, the Certificate Insurer will be required to
make available to the Trustee the amount by which the
related Class A Current Interest and any
Subordination Deficit (as defined herein), if any,
for the related Mortgage Loan Group exceeds the Total
Available Funds for such Group (as defined herein)
after deducting the amount necessary to pay the
related premium amount to the Certificate Insurer for
such Mortgage Loan Group as of such Distribution
Date. The Certificate Insurance Policies do not
guarantee to Holders of the related Class A
Certificates any specified rate of prepayments or any
Variable Rate Certificates Carryover. See "THE
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<PAGE>
CERTIFICATE INSURANCE POLICIES AND THE CERTIFICATE
INSURER" in this Prospectus Supplement and
"DESCRIPTION OF CREDIT ENHANCEMENT" in the
Prospectus.
Certificate Insurer: MBIA Insurance Corporation (the "Certificate
Insurer").
Pre-Funding Account: On the Closing Date, the Original Pre-Funded Amount
(approximately $85,000,000) will be deposited in the
Pre-Funding Account which account will be in the name
of the Trustee on behalf of the Trust. Approximately
$34,000,000 of such aggregate amount will be funded
from the sale of the Fixed Rate Certificates and an
amount of approximately $51,000,000 of such aggregate
amount will be funded from the sale of the Variable
Rate Certificates and may be used to acquire
Subsequent Mortgage Loans for addition to the Fixed
Rate Group and the Variable Rate Group, respectively.
The Original Pre-Funded Amount will be reduced during
the Funding Period by the amount thereof used to
purchase Subsequent Mortgage Loans in accordance with
the Agreement.
Until the earlier of (i) the date on which the amount
on deposit in the Pre- Funding Account is less than
$100,000, (ii) the date on which an Event of Default
occurs under the Agreement and (iii) February 5, 1997
(the "Funding Period"), the Pre-Funded Amount will be
maintained in the Pre- Funding Account. The amount on
deposit in the Pre-Funding Account at any time, less
any interest and other investment earnings on amounts
on deposit therein (the "Pre-Funding Account
Earnings"), is the "Pre-Funded Amount". Subsequent
Mortgage Loans added to the Fixed Rate Group or the
Variable Rate Group on any date (each, a "Subsequent
Sales Date") must satisfy the criteria for such Group
set forth in the Agreement. Any Pre-Funded Amount
remaining at the end of the Funding Period with
respect to either Group will be distributed to the
Holders of the related Certificates then entitled to
receive distributions of principal on the
Distribution Date that immediately follows the end of
the Funding Period in reduction of the Certificate
Principal Balance of such Holders' Certificates, as
specified herein under "DESCRIPTION OF THE CLASS A
CERTIFICATES -- Distributions" in this Prospectus
Supplement. Pre-Funding Account Earnings will be
deposited in the Capitalized Interest Account. The
Pre- Funding Account will be an asset of the Trust
but will not be an asset of the REMIC (as defined
herein).
Capitalized Interest
Account: On the Closing Date, cash will be deposited in the
Capitalized Interest Account which account will be in
the name of the Trustee on behalf of the Trust. The
amount on deposit in the Capitalized Interest
Account, including reinvestment income thereon, will
be used by the Paying Agent to fund on each
Distribution Date to and including the Distribution
Date immediately following the end of the Funding
Period the excess of (i) the sum of (a) the
applicable Class A Current Interest for such
Distribution Date and (b) the related premium amount
to the Certificate Insurer for such Distribution Date
over (ii) the Interest Funds (as defined herein) for
the related Mortgage Loan Group and Master Servicer
Remittance Date. Amounts remaining in the
Capitalized Interest Account at the end of the
Funding Period will be paid to the Seller. The
Capitalized Interest Account will be an asset of the
Trust but will not be an asset of the REMIC (as
defined herein).
Mandatory Prepayment of
Certificates: If, at the end of the Funding Period, not all the
approximately $34,000,000 and $51,000,000 funded from
the sale of the Fixed Rate Certificates and Variable
Rate Certificates, respectively, has been used to
acquire Subsequent Mortgage Loans with respect to the
related Group, then the Class A Certificates of the
related Group will receive a prepayment not later
than February 25, 1997. The Agreement does not
permit Pre-Funding Account moneys funded from the
sale of one Group of Class A Certificates to be used
to acquire Subsequent Mortgage Loans relating to the
other Group of Class A Certificates.
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<PAGE>
Although no assurance can be given, it is intended
that the principal amount of Subsequent Mortgage
Loans sold to the Trust and added to the Fixed Rate
Group or the Variable Rate Group will require
application of substantially all the Original
Pre-Funded Amount, and it is not intended that there
be any material amount of principal prepaid to the
Holders of the Fixed Rate or Variable Rate
Certificates from the Pre-Funding Account.
Advances and Month-End
Interest: Each Servicer will be obligated to make advances
("Advances") with respect to delinquent payments of
interest (at the related Mortgage Interest Rate less
the Servicing Fee, as defined below) and scheduled
principal due on each Mortgage Loan serviced by it to
the extent that the Master Servicer determines, in
good faith, that such Advances will be recoverable
from Insurance Proceeds, Liquidation Proceeds or
subsequent payments with respect to such Mortgage
Loan. See "SERVICING OF MORTGAGE LOANS -- Advances"
in the Prospectus.
In addition, the Servicers will be required to
deposit in its Custodial Account on or before each
Remittance Date (the 21st day of each month or the
preceding business day if such 21st day is not a
business day), an amount equal to Month End Interest
(as defined herein) with respect to the preceding
Prepayment Period but only to the extent of the
Servicing Fee payable with respect to the Remittance
Date.
Servicing Fee: Each Servicer will be entitled to (i) a monthly
servicing fee with respect to each Mortgage Loan
serviced by it (the "Servicing Fee"), which fee will
be payable from an amount equal to one-twelfth of a
fixed percentage per annum (the "Servicing Fee Rate")
multiplied by the Scheduled Principal Balance of such
Mortgage Loan on the first day of the Due Period (the
period from and including the second day of a month
to and including the first day of the following
month) with respect to each Distribution Date and
(ii) additional servicing compensation described
herein. As of the Statistical Cut-Off Date, the
weighted average Servicing Fee Rate for the Initial
Mortgage Loans in the Fixed Rate Group was
approximately 0.33% per annum and for the Initial
Mortgage Loans in the Variable Rate Group was
approximately 0.43% per annum. See "THE MORTGAGE
LOAN POOL-- Servicing and Other Compensation and
Payment of Expenses" in this Prospectus Supplement
and "SERVICING OF THE MORTGAGE LOANS" in the
Prospectus.
Master Servicing Fee: The Master Servicer will be entitled to a monthly fee
with respect to each Mortgage Loan (the "Master
Servicing Fee"), payable on each Distribution Date,
in an amount equal to one-twelfth of 0.032% per annum
(the "Master Servicing Fee Rate") multiplied by the
Scheduled Principal Balance of such Mortgage Loan on
the first day of the Due Period with respect to each
Distribution Date. The Master Servicer will pay the
Trustee, the Paying Agent, the Certificate Registrar
and the Custodian their monthly fees out of the
Master Servicing Fee. See "THE MORTGAGE LOAN POOL--
The Master Servicer" in this Prospectus Supplement
and "SERVICING OF MORTGAGE LOANS-- Master Servicer
Duties" in the Prospectus.
Optional Termination: The Holders of Class R Certificates will have the
right to purchase all the Mortgage Loans when the
aggregate Scheduled Principal Balances of the
Mortgage Loans have declined to less than 10% of the
sum of (a) the aggregate Scheduled Principal Balances
of the Initial Mortgage Loans as of the Closing Date
and (b) the Original Pre-Funded Amount (the "Maximum
Collateral Amount"). Any such repurchase will result
in the early retirement of the Certificates. See
"THE AGREEMENT-- Optional Termination" in this
Prospectus Supplement.
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<PAGE>
Ratings: It is a condition of the original issuance of the
Class A Certificates that the Class A Certificates
receive ratings of AAA by Standard & Poor's Ratings
Service, a Division of The McGraw-Hill Companies,
Inc. ("Standard & Poor's"), and Aaa by Moody's
Investors Service, Inc. ("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 entity. See
"PREPAYMENT AND YIELD CONSIDERATIONS" and "RATINGS"
in this Prospectus Supplement and "MATURITY,
PREPAYMENT AND YIELD CONSIDERATIONS" in the
Prospectus.
Book-Entry Registration of
the Class A Certificates: The Class A Certificates will initially be issued in
book-entry form. Persons acquiring beneficial
ownership interests in such Class A Certificates
("Beneficial Holders") may elect to hold their
interests through The Depository Trust Company
("DTC"), in the United States, or CEDEL Bank, S.A.
("CEDEL") or the Euroclear System ("Euroclear"), in
Europe. Transfers within DTC, CEDEL or Euroclear, as
the case may be, will be made 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
European Depositaries (as defined below).
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
Chase Manhattan Bank ("Chase", and together with
Citibank, the "European Depositaries"), the relevant
depositaries of CEDEL and Euroclear, respectively,
and each a participating member of DTC. No
Beneficial Holder 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 Beneficial
Holders 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
"DESCRIPTION OF THE CLASS A CERTIFICATES--Book-Entry
Registration of the Class A Certificates" in, and
Annex I to, this Prospectus Supplement.
Federal Income Tax
Aspects: For Federal income tax purposes an election will be
made to treat the Trust (exclusive of the Pre-Funding
Account and the Capitalized Interest Account) as a
"real estate mortgage investment conduit" (the
"REMIC"). Each Class of Class A Certificates will be
designated as "regular interests" in the REMIC and
generally will be treated as debt instruments of the
Trust for federal income tax purposes. The REMIC will
also issue the Class R Certificates, which will be
designated as the sole class of "residual interests"
in the REMIC. See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES" in this Prospectus Supplement and in
the Prospectus.
ERISA Considerations: Fiduciaries of employee benefit plans subject to the
Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), or plans subject to Section 4975
of the Internal Revenue Code of 1986 (the "Code")
should carefully review with their legal advisors
whether the purchase or holding of the Class A
Certificates could give rise to a transaction
prohibited or not otherwise permissible under ERISA
or the Code. See "ERISA CONSIDERATIONS" in this
Prospectus Supplement and in the Prospectus.
Legal Investment
Considerations: Upon the termination of the Funding Period, the
Variable Rate Certificates will constitute "mortgage
related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA") for
so long as they are rated in one of the two highest
rating categories by one or more nationally
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<PAGE>
recognized statistical rating organizations. As
such, the Variable Rate Certificates will be legal
investments for certain entities to the extent
provided in SMMEA, subject to state laws overriding
SMMEA. In addition, institutions whose investment
activities are subject to review by federal or state
regulatory authorities may be or may become subject
to restrictions, which may be retroactively imposed
by such regulatory authorities, on the investment by
such institutions in certain forms of mortgage
related securities. Furthermore, certain states have
enacted legislation overriding the legal investment
provisions of SMMEA.
Although the Fixed Rate Certificates are expected to
be rated "AAA" by Standard & Poor's and "Aaa" by
Moody's, the Fixed Rate Certificates will not
constitute "mortgage related securities" for purposes
of SMMEA because some of the Mortgage Loans in the
Fixed Rate Group are secured by second liens.
Accordingly, many institutions with legal authority
to invest in comparably rated securities may not be
legally authorized to invest in the Fixed Rate
Certificates.
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<PAGE>
RISK FACTORS
Prospective investors in the Class A Certificates should consider the
following factors (as well as the factors set forth under "RISK FACTORS" in the
Prospectus) in connection with the purchase of the Class A Certificates.
Risk of Mortgage Loan Interest Rates Reducing Variable Rate
Pass-Through Rate. Subject to the Variable Rate Available Funds Cap, the
Variable Rate Pass-Through Rate is based upon the value of an index (One Month
LIBOR) which is different from the value of the indices applicable to the
Mortgage Loans in the Variable Rate Group, as described under "THE MORTGAGE POOL
- -- Variable Rate Group" in this Prospectus Supplement (either as a result of the
use of a different index rate, determination date, rate adjustment date or rate
cap or floor). The Variable Rate Group contains Mortgage Loans the interest
rates of which adjust semi-annually based upon Six Month LIBOR or annually based
on a One Year CMT Index or semi-annually based upon Six Month LIBOR beginning
two or three years after origination whereas the Pass-Through Rate on the
Variable Rate Certificates adjusts monthly based upon One Month LIBOR, subject
to the Variable Rate Available Funds Cap. Consequently, the Variable Rate
Pass-Through Rate for any Distribution Date may not equal the rate determined on
the basis of One Month LIBOR plus the applicable margin on the Variable Rate
Certificates during the related Accrual Period. In particular, the Variable Rate
Pass-Through Rate adjusts monthly, while the interest rates of the Mortgage
Loans in the Variable Rate Group adjust less frequently, with the result that
the Variable Rate Available Funds Cap may be lower than the otherwise applicable
Variable Rate Pass-Through Rate for extended periods in a rising interest rate
environment. In addition, One Month LIBOR and the indices applicable to such
Mortgage Loans may respond to different economic and market factors, and there
is not necessarily any correlation between them. Thus, it is possible, for
example, that One Month LIBOR may rise during periods in which such indices are
stable or are falling or that, even if One Month LIBOR and such indices rise
during the same period, One Month LIBOR may rise much more rapidly than such
indices. If the Variable Pass-Through Rate on any Distribution Date is limited
by application of the Variable Rate Available Funds Cap, a Variable Rate
Certificates Carryover will result and, to the extent funds are available on
subsequent Distribution Dates in accordance with the priority of payment
provisions set forth in the Agreement, will be distributed to the Variable Rate
Certificates.
Risk of Early Prepayment of Principal Associated with the Pre-Funding
Account. If the principal amount of eligible Subsequent Mortgage Loans available
during the Funding Period is less than 100% of the Original Pre- Funded Amount,
the Seller will have insufficient Subsequent Mortgage Loans to sell to the Trust
for addition to the Fixed Rate Group and the Variable Rate Group on the
Subsequent Sales Dates, thereby resulting in a prepayment of principal to
Holders of the Fixed Rate Certificates and/or the Variable Rate Certificates as
described herein. See "Social, Economic and Other Factors" below.
To the extent that amounts on deposit in the Pre-Funding Account have
not been fully applied to the purchase of Subsequent Mortgage Loans by the Trust
for inclusion in the Fixed Rate Group or the Variable Rate Group by the end of
the Funding Period, the Holders of the Fixed Rate Certificates and/or the
Variable Rate Certificates will receive a prepayment of principal in an amount
equal to the Pre-Funded Amount, remaining in the Pre-Funding Account on the
first Distribution Date following the end of the Funding Period (in no event
later than February 25, 1997). Although no assurances can be given, the Seller
intends that the principal amount of Subsequent Mortgage Loans sold to the Trust
require the application of substantially all the Original Pre-Funded Amount and
that there be no material principal prepayment to the Holders of the Fixed Rate
Certificates or the Variable Rate Certificates from the Original Pre-Funded
Amount.
Subsequent Mortgage Loans may have different characteristics than the
Initial Mortgage Loans (and the Statistical Mortgage Loans). Therefore,
following the transfer of Subsequent Mortgage Loans to the Fixed Rate Group or
the Variable Rate Group, the aggregate characteristics of the Mortgage Loans
then held in such Group may vary from those of the Initial Mortgage Loans (and
the Statistical Mortgage Loans) in such Group. See "THE MORTGAGE LOAN
POOL--Conveyance of Subsequent Mortgage Loans.
Risk of Higher Delinquencies Associated with Underwriting Standards.
All the Mortgage Loans will be originated or acquired by Saxon Mortgage in
accordance with its mortgage loan program as described in the Prospectus. As a
general matter, Saxon Mortgage's mortgage loan program consists of the
origination and packaging of mortgage loans relating to non-conforming credits.
A non-conforming credit means a mortgage loan which is ineligible for purchase
by Federal National Mortgage Association ("FNMA") due to credit characteristics
that do not meet FNMA guidelines. Mortgage loans originated under Saxon
Mortgage's mortgage loan program are likely to experience rates of delinquency,
bankruptcy and loss that are higher than mortgage loans originated under FNMA
guidelines. Nevertheless, approximately 21% and approximately 23% (by aggregate
Scheduled Principal Balances as of the Cut-Off Date) of the Mortgage Loans in
the Fixed Rate Group and Variable Rate Group, respectively, had a first monthly
payment due on or before October 1, 1996. Therefore, it was not possible for any
Mortgage Loan other than such Mortgage Loans to have had a monthly payment that
was delinquent 30 days or more.
Risk of Higher Default Rates Associated with California Real Property.
Because the Mortgaged Premises for approximately 38% of the Statistical Mortgage
Loans (approximately 52% by Scheduled Principal Balance) in the Variable Rate
Group and approximately 15% of the Statistical Mortgage Loans (approximately 20%
by Scheduled Principal Balance) in the Fixed Rate Group are located in
S-12
<PAGE>
California, an overall decline in the California residential real estate market
could adversely affect the values of the Mortgaged Premises securing such
Mortgage Loans, causing the Scheduled Principal Balances of the related Mortgage
Loans to equal or exceed the value of such Mortgaged Premises.
The standard hazard insurance policy required to be maintained under
the terms of each Mortgage Loan does not insure against physical damage arising
from earth movement (including earthquakes, landslides and mudflows). See
"SERVICING OF MORTGAGE LOANS -- Standard Hazard Insurance Policies" in the
Prospectus. Accordingly, if any such event causes losses in respect of the
Mortgage Loans, the protection afforded by the overcollateralization and
crosscollateralization of the Certificates is insufficient and the Certificate
Insurer is unable to meet its obligations under the related Certificate
Insurance Policy, the Holders of the Class A Certificates could experience a
loss on their investment.
Risk of Higher Default Rates Associated with Second Liens. Because
approximately 8.2% of the aggregate Scheduled Principal Balance of the
Statistical Mortgage Loans in the Fixed Rate Group are secured by second liens
subordinate to the rights of the mortgagee or beneficiary under the related
first mortgage 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. The Trust 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. See "MORTGAGE LOAN POOL - Advances and Month-End Investment" herein.
An overall decline in the residential real estate market, the general
condition of Mortgage Premises, or other factors, could adversely affect the
values of the Mortgage Premises such that the outstanding balances of the
Mortgage Loans, together with any senior liens on the Mortgage Premises, equal
or exceed the value of the Mortgage Premises. A decline in the value of Mortgage
Premises would affect the interest of the Trust in the Mortgage Premises before
having any effect on the interest of the related first mortgagee, and could
cause the Trust's interest in the Mortgage Premises to be extinguished. If such
a decline occurs, the actual rates of delinquencies, foreclosures and losses on
the Mortgage Loans could be higher than those currently experienced in the
mortgage lending industry in general. In addition, adverse economic conditions
(which may or may not affect real property values) may affect the timely payment
by borrowers of scheduled payments of principal and interest on the Mortgage
Loans and, accordingly, the actual rates of delinquencies, foreclosures and
losses with respect to the Trust.
Risk of Higher Default Rates for Balloon Loans. Approximately 6% of the
aggregate Scheduled Principal Balance of the Statistical Mortgage Loans in the
Fixed Rate Group are "balloon loans" that provide for the payment of the
unamoritized principal balance in a single payment at maturity ("Balloon
Loans"). Balloon Loans provide for equal monthly payments, consisting of
principal and interest, generally based on a 30-year amortization schedule, and
a single payment of the remaining balance of the Balloon Loan, generally five,
seven, ten or 15 years after origination. Amortization of a Balloon Loan based
on a scheduled period that is longer than the term of the loan results in a
remaining principal balance at maturity that is substantially larger than the
regular scheduled payments. The Seller does not have any information regarding
the default history or prepayment history of payments on Balloon Loans. Because
borrowers of Balloon Loans are required to make substantial single payments at
maturity and because the ability to repay such amounts is frequently dependent
upon the ability to obtain refinancing, it is possible that the default risk
associated with Balloon Loans is greater than that associated with
fully-amortizing Mortgage Loans. Neither the Servicers nor the Master Servicer
will be required to advance defaulted payments at maturity on Balloon Loans.
Other Legal Considerations; Litigation. Applicable state laws generally
regulate interest rates and other charges, require certain disclosures, and
require licensing of Saxon Mortgage and the other originators. 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. Saxon Mortgage has represented that all applicable federal and state laws
were complied with in connection with the origination of the Initial Mortgage
Loans and will be complied with in connection with the Subsequent Mortgage
Loans. If such representation is breached in respect of any Mortgage Loan in a
manner that materially and adversely affects Certificateholders or the
Certificate Insurer, Saxon Mortgage will be obligated to repurchase the affected
Mortgage Loan at a price equal to the unpaid principal balance thereof plus
accrued interest or to substitute a new mortgage loan in place of the affected
Mortgage Loan. Unscheduled recoveries of principal on Mortgage Loans due to any
such repurchase by Saxon Mortgage may, depending on the magnitude thereof and
the availability of funds therefor, accelerate the timing of principal
distributions to holders of the related Certificates and thereby affect the
yields and weighted average lives of such Certificates, especially those
purchased at a premium. See "PREPAYMENT AND YIELD CONSIDERATIONS" herein. In
addition, 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 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 Seller to
damages and administrative enforcement. See "CERTAIN LEGAL ASPECTS OF MORTGAGE
LOANS -- Anti-Deficiency Legislation and Other Limitations on Lenders" in the
Prospectus.
S-13
<PAGE>
On November 12, 1996, Saxon Mortgage was served with a complaint in
which the plaintiff alleged: (a) it obtained in March 1996 a mortgage loan from
a broker which the broker subsequently sold to Saxon Mortgage; (b) although the
amount paid by Saxon Mortgage to the broker was disclosed on the HUD-1
settlement sheet, that amount was not made available prior to closing in the
good faith estimate; and (c) any such payment by Saxon Mortgage is impermissible
under applicable law, regardless of disclosure. The complaint requests
certification of a class of similarly situated persons and damages equal to
three times the settlement charges. Saxon Mortgage is one of a number of major
mortgage lending institutions subject to this type of lawsuit. Saxon Mortgage
does not believe that the complaint will have any material adverse effect on its
business and intends to file an answer denying liability. To the extent that a
class of plaintiffs is certified which includes borrowers under the Mortgage
Loans, and Saxon Mortgage subsequently suffers an adverse judgment, the related
Mortgage Loans may be subject to repurchase as described in the preceding
paragraph.
Risk of Saxon Mortgage Insolvency. Saxon Mortgage believes that the
transfer of the Mortgage Loans by Saxon Mortgage to the Seller and by the Seller
to the Trust constitute sales by Saxon Mortgage to the Seller and by the Seller
to the Trust and, accordingly, that the Mortgage Loans will not be part of the
assets of Saxon Mortgage or the Seller in the event of the insolvency of Saxon
Mortgage and will not be available to the creditors of Saxon Mortgage.
Nevertheless, in the event of an insolvency, it is possible that a bankruptcy
trustee or a creditor of Saxon Mortgage may argue that the transaction between
Saxon Mortgage and the Seller was a pledge of such Mortgage Loans in connection
with a borrowing by Saxon Mortgage rather than a true sale. Such an attempt,
even if unsuccessful, could result in delays in distributions on the
Certificates.
On the Closing Date, the Trustee, the Seller, the Rating Agencies and
the Certificate Insurer will have received an opinion of Arter & Hadden, counsel
to the Seller, with respect to the true sale of the Mortgage Loans from Saxon
Mortgage to the Seller and from the Seller to the Trust, in form and substance
satisfactory to the Certificate Insurer and the Rating Agencies.
USE OF PROCEEDS
The Seller will sell the Mortgage Loans to the Trust concurrently with
the delivery of the Certificates. Net proceeds from the sale of the Class A
Certificates less the Original Pre-Funded Amount and the amount deposited in the
Capitalized Interest Account will (together with the Subordinated Certificates
retained by the Seller or its affiliates) represent the purchase price to be
paid by the Trust to the Seller for the Mortgage Loans.
THE MORTGAGE LOAN POOL
General
All the Mortgage Loans will be originated or acquired by Saxon Mortgage
in accordance with its mortgage loan program as described in the Prospectus. As
a general matter, Saxon Mortgage's mortgage loan program consists of the
origination and packaging of mortgage loans relating to non-conforming credits.
A non-conforming credit means a mortgage loan which is ineligible for purchase
by Federal National Mortgage Association ("FNMA") due to credit characteristics
that do not meet FNMA guidelines. Mortgage loans originated under Saxon
Mortgage's mortgage loan program are likely to experience rates of delinquency,
bankruptcy and loss that are higher than mortgage loans originated under FNMA
guidelines. Additional Mortgage Loans will be included in the Trust on the
Closing Date and Subsequent Mortgage Loans are intended to be purchased by the
Trust for inclusion in the Fixed Rate Group and the Variable Rate Group from the
Seller from time to time on or before February 5, 1997, from funds on deposit in
the Pre-Funding Account. The Initial Mortgage Loans and the Subsequent Mortgage
Loans are referred to herein collectively as the "Mortgage Loans".
The pool of Statistical Mortgage Loans consisted of approximately 2,222
Statistical Mortgage Loans evidenced by promissory notes (the "Notes") secured
by Mortgages on the Mortgaged Premises, 40% of which by aggregate Scheduled
Principal Balance are located in the State of California. The Mortgaged Premises
securing the Mortgage Loans consist of single-family residences (which may be
detached, attached, part of a two- to- four family dwelling, a condominium unit,
townhouse, manufactured housing, or a unit in a planned unit development). The
Mortgaged Premises may be owner-occupied (which includes second and vacation
homes) or non-owner occupied investment properties. The Mortgage Loans are
secured by first and second lien mortgages on the Mortgaged Premises.
The Statistical Mortgage Loans were required to satisfy certain
criteria as of the Statistical Cut-Off Date including: remaining terms to stated
maturity of no more than 360 months; a Mortgage Interest Rate as of the
Statistical Cut-Off Date of at least 7.875% with respect to the Fixed Rate Group
and at least 5.75% with respect to the Variable Rate Group; and a loan-to-value
ratio not in excess of 95%. Substantially all the Statistical Mortgage Loans
will have been originated less than six months prior to the Statistical Cut-Off
Date.
S-14
<PAGE>
Each Mortgage Loan in the Trust will be assigned to one of the two
Mortgage Loan Groups comprised of Mortgage Loans which bear fixed interest rates
only, in the case of the Fixed Rate Group, and Mortgage Loans which bear
variable interest rates only, in the case of the Variable Rate Group. Subject to
the cross-collateralization provisions described herein, the Fixed Rate
Certificates represent undivided ownership interests in all Mortgage Loans
contained in the Fixed Rate Group, and the Variable Rate Certificates represent
undivided ownership interests in all Mortgage Loans contained in the Variable
Rate Group.
Wherever reference is made herein to the characteristics of the
Statistical Mortgage Loans (or to the Statistical Mortgage Loans in a Group) or
to a percentage thereof, the reference is based on the Scheduled Principal
Balances thereof as of November 7, 1996 (the "Statistical Cut-Off Date"). The
characteristics of the Initial Mortgage Loans at the Cut-Off Date will vary from
the characteristics of the Statistical Mortgage Loans as of the Statistical
Cut-Off Date and the characteristics of the Mortgage Loans as a whole will
change upon the acquisition of Subsequent Mortgage Loans.
The average Scheduled Principal Balance of the Statistical Mortgage
Loans in the Fixed Rate Group was $101,341, with a range from $14,735 to
$1,163,931; the Mortgage Interest Rate of the Statistical Mortgage Loans in the
Fixed Rate Group ranged from 7.875% to 14.25% per annum, with a weighted average
Mortgage Interest Rate of 10.01% per annum.
The weighted average loan-to-value ratio of the Statistical Mortgage
Loans in the Fixed Rate Group was 71.5%. The weighted average remaining term to
stated maturity of the Statistical Mortgage Loans in the Fixed Rate Group was
331 months, with a range from 118 months to 360 months.
Less than 9% of the Statistical Mortgage Loans in the Fixed Rate Group
are secured by second liens. Approximately 6% of the Statistical Mortgage Loans
in the Fixed Rate Group provide for payments based on a 30- year amortization
with a balloon payment in the fifteenth year.
As a percentage of the aggregate Scheduled Principal Balance of the
Statistical Mortgage Loans in the Fixed Rate Group, 84% were secured by
Mortgages on one-family detached dwellings, 2% by Mortgages on one-family
attached dwellings, 2% by Mortgages on planned unit developments and 4% by
Mortgages on condominium units. See "THE MORTGAGE LOAN POOL -- Fixed Rate Group"
in this Prospectus Supplement.
The characteristics of the Fixed Rate Group will be affected by the
Initial Mortgage Loans not included in the Statistical Mortgage Loans and the
acquisition of Subsequent Mortgage Loans.
All the Statistical Mortgage Loans in the Variable Rate Group bear
interest at rates that adjust periodically. Approximately 61% of such
Statistical Mortgage Loans ("Six Month LIBOR Loans") adjust semiannually based
on the London interbank offered rate for six-month United States Dollar deposits
("Six Month LIBOR") in the London Market based on quotations of major banks as
published in The Wall Street Journal; 24% of such Statistical Mortgage Loans
("One Year CMT Loans") adjust annually based on the weekly average yield on
United States Treasury Securities adjusted to a constant maturity of one year as
made available by the Federal Reserve Board and 15% of such Statistical Mortgage
Loans ("3/27 and 2/28 Loans") bear interest initially at a rate fixed at
origination for three years (or two years) and thereafter adjust semiannually
based on Six Month LIBOR. Initial Mortgage Loans that are: (a) Six Month LIBOR
Loans have periodic adjustment caps, generally, of 1% to 1.5% and lifetime caps,
generally, of 5% to 7.5% above the start up rate; (b) One Year CMT Loans have
periodic adjustment caps, generally, of 1% to 2% and lifetime caps, generally,
of 6% to 7% above the start up rate; (c) 3/27 and 2/28 Loans have periodic
adjustment caps, generally, of 1% to 2% and lifetime caps, generally, of 5.995%
to 7.5% above the start up rate. The gross margin range for the Statistical
Mortgage Loans constituting One Year CMT Loans in the Variable Rate Group was
2.75% to 7.25%. The gross margin range for the Statistical Mortgage Loans
constituting 3/27 and 2/28 Loans in the Variable Rate Group was 2.88% to 7.00%
after the interest rates on the Statistical Mortgage Loans constituting 3/27 and
2/28 Loans are subject to adjustment. Substantially all the Statistical Mortgage
Loans in the Variable Rate Group had interest rates which were not fully indexed
(i.e., the Mortgage Interest Rates did not equal the sum of the gross margin and
the applicable index).
The average Scheduled Principal Balance of the Statistical Mortgage
Loans in the Variable Rate Group was $187,571, with a range from $21,126 to
$949,467. All the Statistical Mortgage Loans in the Variable Rate Group have
initial, minimum and maximum Mortgage Interest Rates. The current weighted
average Mortgage Interest Rate of the Statistical Mortgage Loans in the Variable
Rate Group was 8.41% per annum, with Mortgage Interest Rates that ranged from
5.75% to 12.90% per annum. The weighted average maximum Mortgage Interest Rate
of the Statistical Mortgage Loans in the Variable Rate Group was 14.73% per
annum, with maximum Mortgage Interest Rates that ranged from 11.75% to 19.50%
per annum. The gross margin range for the Statistical Mortgage Loans
constituting Six Month LIBOR Loans in the Variable Rate Group was 3.00% to
7.75%. The gross margin range for the Statistical Mortgage Loans constituting
S-15
<PAGE>
One Year CMT Loans in the Variable Rate Group was 2.75% to 7.25%. The gross
margin range for the Statistical Mortgage Loans constituting 3/27 and 2/28 Loans
in the Variable Rate Group was 2.88% to 7.00% after the interest rates on the
Statistical Mortgage Loans constituting 3/27 and 2/28 Loans are subject to
adjustment. Substantially all the Statistical Mortgage Loans in the Variable
Rate Group had interest rates which were not fully indexed (i.e., the Mortgage
Interest Rates did not equal the sum of the gross margin and the applicable
index).
The weighted average loan to value ratio of the Statistical Mortgage
Loans in the Variable Rate Group was 74.7%. The weighted average remaining term
to stated maturity of the Statistical Mortgage Loans in the Variable Rate Group
was 358 months, with a range from 176 months to 360 months.
As a percentage of the aggregate Scheduled Principal Balance of the
Statistical Mortgage Loans in the Variable Rate Group 88% were secured by
Mortgages on one-family detached dwellings, 2% by Mortgages on single-family
attached dwellings, 3% by Mortgages on planned unit developments and 5% by
Mortgages on condominium units. See "THE MORTGAGE LOAN POOL -- Variable Rate
Group" in this Prospectus Supplement.
The characteristics of the Variable Rate Group will be affected by the
Initial Mortgage Loans not included in the Statistical Mortgage Loans and the
acquisition of Subsequent Mortgage Loans.
Conveyance of Subsequent Mortgage Loans
The Agreement permits the Trust to acquire approximately $34,000,000
and $51,000,000 in aggregate Scheduled Principal Balance of Subsequent Mortgage
Loans for addition to the Fixed Rate Group and Variable Rate Group,
respectively. Accordingly, the statistical characteristics of the Mortgage Loan
Pool and the Fixed Rate Group and the Variable Rate Group will change upon the
acquisition of Subsequent Mortgage Loans. Pursuant to the Agreement, however,
the Seller has covenanted to deliver Subsequent Mortgage Loans for inclusion
that will not materially change the statistical characteristics of the Fixed
Rate Group or the Variable Rate Group.
The obligation of the Trust to purchase Subsequent Mortgage Loans on a
Subsequent Sales Date is subject to the requirements of the Agreement.
Conversion Option
Less than 0.5% of the Mortgage Loans in the Variable Rate Group are
expected to be convertible, upon the fulfillment of certain conditions, from a
variable rate to a fixed rate at the option of the Mortgagor. Should interest
rates decline so that the fixed rates applicable upon conversion are
significantly lower than the then current variable rates, or are significantly
lower than the applicable maximum lifetime variable rates on convertible
Mortgage Loans in the Variable Rate Group, Borrowers may have a significant
financial incentive to effect conversions.
The Seller is obligated to purchase any such converted Mortgage Loan
from the Trustee at a purchase price equal to 100% of its Scheduled Principal
Balance plus 30 days' interest thereon at the applicable rate in effect
immediately prior to such conversion. If any such converted Mortgage Loan is not
repurchased from the Trustee, the Master Servicer will attempt to sell such
Mortgage Loan, but only at a price at which the Trustee would receive a net
amount at least equal to the price at which the Seller is obligated to
repurchase such Converted Mortgage Loan. Until sold at such a price, such
converted Mortgage Loan will remain in the Variable Rate Group, but with a fixed
rate. The ratings assigned to the Certificates do not represent an assessment of
the ability of the Seller to purchase converted Mortgage Loans when the Seller
is required to do so.
Interest Payments on the Mortgage Loans
Each Mortgage Loan provides for monthly payments by the obligor on the
related Note (the "Mortgagor") according to the actuarial method ("Actuarial
Loans"). Actuarial 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. Scheduled monthly payments
made by the Mortgagors on the actuarial 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.
S-16
<PAGE>
Additional Information
The description in this Prospectus Supplement of the Mortgage Pool and
the Mortgaged Premises is based upon the pool of Statistical Mortgage Loans, as
constituted at the close of business on the Statistical Cut-Off Date. Initial
Mortgage Loans, including Statistical Mortgage Loans, may be removed from either
mortgage pool prior to closing as a result of incomplete documentation or
non-compliance with representations and warranties set forth in the Agreement,
if the Seller deems such removal necessary or appropriate and the Seller may
substitute other Initial Mortgage Loans subject to certain terms and conditions
set forth in the Agreement including the consent of the Certificate Insurer.
None of the substitution of Statistical Mortgage Loans, the addition of the
Initial Mortgage Loans not included in the Statistical Mortgage Loans or the
acquisition of the Subsequent Mortgage Loans are expected to cause material
variances from the information set forth herein.
A current report on Form 8-K will be available to purchasers of the
Class A Certificates and will be filed with the Commission, together with the
Agreement within fifteen days after the initial issuance of the Class A
Certificates. Any Mortgage Loans that are added to, or removed from, the
Mortgage Pool as set forth in the preceding paragraph, will be noted in the
current report on Form 8-K. A current report on Form 8-K will also be filed
within fifteen days of the end of the Funding Period reflecting Subsequent
Mortgage Loans added to the Trust. Also, the Seller intends to file certain
additional yield tables and other computational materials with the Commission in
a report on Form 8-K. Such tables and materials were prepared by the
Underwriters at the request of certain prospective investors, based on
assumptions provided by, and satisfying the special requirements of, such
prospective investors. Such tables and assumptions may be based on assumptions
that differ from the Modeling Assumptions; see "PREPAYMENT AND YIELD
CONSIDERATIONS" in this Prospectus Supplement. Accordingly, such tables and
other materials may not be relevant to or appropriate for investors other than
those specifically requesting them.
S-17
<PAGE>
Characteristics of the Statistical Mortgage Loans
The information in the following tables (including the textual
information beneath each table) has been derived solely from the Mortgage Loan
Pool as constituted as of the Statistical Cut-Off Date and reflects only the
characteristics of the Statistical Mortgage Loans and does not include
information with respect to the additional Initial Mortgage Loans that are
expected to be delivered at the Closing Date or the Subsequent Mortgage Loans.
Asterisks (*) in the tables indicate values between and including 0.0% and 0.5%.
Totals may not sum to 100% due to rounding. Double dashes (--) in the tables
indicate that no values exist for the given range.
1) Current Scheduled Principal Balance
Variable Rate Group Fixed Rate Group
------------------- ----------------
Percent Percent Percent Percent
by No. by by No. by
of Scheduled of Scheduled
Current Scheduled Mortgage Principal Mortgage Principal
Principal Balance Loans Balance Loans Balance
- ----------------- -------- --------- --------- ----------
$50,000 and below 5.5 1.2 26.9 9.0
50,001 - 100,000 26.0 10.8 35.4 25.6
100,001 - 150,000 22.1 14.5 21.8 26.2
150,001 - 200,000 12.8 11.9 7.0 11.9
200,001 - 250,000 10.1 12.3 3.2 6.9
250,001 - 300,000 8.1 11.9 2.4 6.5
300,001 - 350,000 3.8 6.5 1.5 4.6
350,001 - 400,000 3.3 6.7 * 1.3
400,001 - 450,000 1.8 4.1 * 2.2
450,001 - 500,000 2.0 5.1 * 1.6
500,001 - 550,000 1.0 2.9 * 1.3
550,001 - 600,000 1.3 4.1 * *
600,001 - 650,000 0.7 2.2 * *
650,001 - 700,000 * 1.7 -- --
700,001 - 750,000 * 0.8 -- --
750,001 - 800,000 * 1.6 -- --
850,001 - 900,000 * 0.9 -- --
900,001 - 950,000 * 0.9 -- --
950,001 -1,000,000 -- -- * 0.8
over 1,000,000 -- -- * 1.0
--- --- --- ----
Totals: 100 100 100 100
=== === === ===
The average Scheduled Principal Balance of the Variable Rate Group is $187,571.
The average Scheduled Principal Balance of the Fixed Rate Group is $101,341. The
maximum Scheduled Principal Balance of the Mortgage Loans is $1,163,931. The
minimum Scheduled Principal Balance of the Mortgage Loans is $14,735.
2) Current Mortgage Interest Rates
Variable Rate Group Fixed Rate Group
------------------- ----------------
Percent Percent Percent Percent
by No. by by No. by
by Scheduled of Scheduled
Current Scheduled Mortgage Principal Mortgage Principal
Principal Balance Loans Balance Loans Balance
- ------------------ ------- ---------- -------- ---------
5.500 - 5.999 * * -- --
6.000 - 6.499 1.9 3.5 -- --
6.500 - 6.999 9.0 14.7 -- --
7.000 - 7.499 7.6 11.7 -- --
7.500 - 7.999 11.3 13.1 * *
8.000 - 8.499 7.9 8.6 0.9 1.6
8.500 - 8.999 15.0 13.5 4.5 5.7
9.000 - 9.499 10.5 8.5 15.3 19.4
9.500 - 9.999 17.4 14.1 32.3 36.3
10.000 - 10.499 5.7 3.9 7.9 8.5
10.500 - 10.999 8.0 5.5 12.3 11.7
11.000 - 11.499 2.7 1.3 8.8 5.9
11.500 - 11.999 1.7 1.0 9.3 6.1
12.000 - 12.499 0.9 * 4.5 2.6
12.500 - 12.999 * * 2.5 1.2
13.000 - 13.499 -- -- 1.4 0.7
13.500 - 13.999 -- -- * *
14.000 - 14.499 -- -- * *
--- --- --- ---
Totals: 100 100 100 100
=== === === ===
The weighted average current Mortgage Interest Rate of the Mortgage Loans is
approximately 9.01% per annum. The weighted average current Mortgage Interest
Rate of the Variable Rate Group is approximately 8.41% per annum, and the
weighted average Mortgage Interest Rate of the Fixed Rate Group is approximately
10.01% per annum.
3) Maximum Lifetime Mortgage Interest Rates of the Variable Rate Group
Maximum Lifetime Percent by No. of Percent by Scheduled
Mortgage Interest Rates Mortgage Loans Principal Balance
- ----------------------- ----------------- --------------------
11.500 - 11.999 * *
12.000 - 12.499 1.9 3.5
12.500 - 12.999 8.9 14.8
13.000 - 13.499 7.4 11.6
13.500 - 13.999 8.2 10.4
14.000 - 14.499 5.8 6.8
14.500 - 14.999 12.4 11.3
15.000 - 15.499 8.2 7.2
15.500 - 15.999 10.3 8.7
16.000 - 16.499 6.3 4.5
16.500 - 16.999 14.0 10.6
17.000 - 17.499 4.6 3.4
17.500 - 17.999 7.0 4.7
18.000 - 18.499 2.3 1.1
18.500 - 18.999 1.6 0.9
19.000 - 19.499 0.8 *
19.500 - 19.999 * *
---- ----
Totals: 100 100
=== ===
The weighted average maximum lifetime Mortgage Interest Rate of the Variable
Rate Group is approximately 14.73% per annum.
4) Minimum Lifetime Mortgage Interest Rates of the Variable Rate Group
Minimum Lifetime Percent by No. of Percent by Scheduled
Mortgage Interest Rates Mortgage Loans Principal Balance
- ----------------------- ----------------- --------------------
3.000 - 3.499 * 0.6
3.500 - 3.999 * *
4.000 - 4.499 1.6 3.0
4.500 - 4.999 7.8 12.7
5.000 - 5.499 6.9 10.7
5.500 - 5.999 6.6 8.8
6.000 - 6.499 4.0 5.0
6.500 - 6.999 7.3 7.9
7.000 - 7.499 3.2 3.6
7.500 - 7.999 6.9 6.9
8.000 - 8.499 5.1 4.6
8.500 - 8.999 8.4 6.8
9.000 - 9.499 7.5 5.8
9.500 - 9.999 16.1 12.0
10.000 - 10.499 4.8 3.3
10.500 - 10.999 8.0 5.8
11.000 - 11.499 2.6 1.4
11.500 - 11.999 1.6 0.8
12.000 - 12.499 0.8 *
12.500 - 12.999 * *
---- ----
Totals: 100 100
=== ===
The weighted average minimum lifetime Mortgage Interest Rate of the Variable
Rate Group is approximately 7.35% per annum. In no case will the minimum
lifetime Mortgage Interest Rate be less than the Gross Margin of a Variable Rate
Group Mortgage Loan.
S-18
<PAGE>
5) Next Interest Adjustment Date on Variable Rate Group
Interest Percent by No. of Percent by Scheduled
Adjustment Date Mortgage Loans Principal Balance
- ---------------- ------------------ --------------------
December 1, 1996 1.3 1.1
January 1, 1997 2.8 2.8
February 1, 1997 10.7 11.7
March 1, 1997 18.5 21.4
April 1, 1997 13.7 17.3
May 1, 1997 5.8 6.9
June 1, 1997 * *
July 1, 1997 0.6 0.7
August 1, 1997 3.3 3.5
September 1, 1997 7.7 7.4
October 1, 1997 7.7 7.2
November 1, 1997 5.8 5.3
May 1, 1998 0.6 *
June 1, 1998 0.9 *
July 1, 1998 1.3 0.9
August 1, 1998 1.4 1.3
September 1, 1998 6.6 4.6
October 1, 1998 1.3 1.0
April 1, 1999 * *
May 1, 1999 * *
July 1, 1999 * *
August 1, 1999 2.3 1.2
September 1, 1999 2.5 1.4
October 1, 1999 2.5 1.5
November 1, 1999 2.0 1.3
--- ---
Totals: 100 100
=== ===
The weighted average next Interest Adjustment Date on the Variable Rate Group is
August 1, 1997.
6) Gross Margins on Variable Rate Group
Percent by No. of Percent by Scheduled
Gross Margin (%) Mortgage Loans Principal Balance
- ---------------- ----------------- --------------------
2.750- 2.999 0.8 0.6
3.000- 3.249 2.8 4.2
3.250- 3.499 12.7 21.7
3.500- 3.749 5.3 7.3
3.750- 3.999 4.8 5.4
4.000- 4.249 7.3 8.5
4.250- 4.499 4.7 4.3
4.500- 4.749 3.8 4.6
4.750- 4.999 5.8 6.2
5.000- 5.249 5.1 3.3
5.250- 5.499 9.4 6.4
5.500- 5.749 5.8 4.7
5.750- 5.999 6.0 5.2
6.000- 6.249 6.3 5.2
6.250- 6.499 6.6 4.5
6.500- 6.749 2.7 1.9
6.750- 6.999 7.2 4.5
7.000- 7.249 1.1 0.5
7.250- 7.499 1.3 0.8
7.500- 7.749 * *
7.750- 7.999 * *
---- ----
Totals: 100 100
=== ===
The weighted average Gross Margin of the Variable Group Rate is approximately
4.56% per annum.
7) Remaining Term to Stated Maturity
Variable Rate Group Fixed Rate Group
------------------- ----------------
Percent Percent by Percent Percent by
by No. of Scheduled by No. of Scheduled
Remaining Mortgage Principal Mortgage Principal
Terms (Months) Loans Balance Loans Balance
- -------------- --------- --------- -------- ---------
118 - 120 -- -- * *
175 - 179 * * 14.5 10.9
180 -- -- 5.3 3.3
235 - 240 -- -- 1.7 0.7
299 - 353 1.5 1.4 2.3 3.8
354 1.4 1.0 2.5 2.8
355 2.1 1.6 2.7 2.9
356 4.8 4.4 4.2 3.8
357 17.9 17.8 9.6 10.2
358 35.0 34.4 19.5 20.7
359 24.3 26.2 18.8 20.1
360 12.8 13.0 18.6 20.8
---- ---- ---- ----
Totals: 100 100 100 100
=== === === ===
The weighted average remaining term to stated maturity of the Fixed Rate Group
is approximately 331 months.
The weighted average remaining term to stated maturity of the Variable Rate
Group is approximately 358 months.
8) Original Loan-to-Value Ratios (1)
Variable Rate Group Fixed Rate Group
------------------- ----------------
Percent Percent by Percent Percent by
Original by No. of Scheduled by No. of Scheduled
Loan-to-Value Mortgage Principal Mortgage Principal
Ratios Loans Balance Loans Balance
- -------------- --------- ---------- -------- ----------
50.00 and below 3.9 4.8 23.5 11.7
50.01 - 55.00 1.3 2.0 3.0 2.7
55.01 - 60.00 4.8 5.3 4.5 6.2
60.01 - 65.00 5.6 7.0 5.2 5.8
65.01 - 70.00 13.1 17.1 8.7 9.5
70.01 - 75.00 11.9 11.8 11.1 12.2
75.01 - 80.00 31.6 30.2 24.3 29.7
80.01 - 85.00 7.1 5.2 4.0 3.9
85.01 - 90.00 18.8 14.9 11.1 13.5
90.01 - 95.00 1.9 1.7 4.4 5.1
---- ---- ---- ----
Totals: 100 100 100 100
=== === === ===
(1) The Loan-to-Value Ratio of a Mortgage Loan (including second lien Mortgage
Loans) is equal to the ratio (expressed as a percentage) of the original
Scheduled Principal Balance of the Mortgage Loan and the fair market value of
the Mortgaged Premises at the time of origination. The fair market value is the
lower of (i) the purchase price and (ii) the appraised value in the case of
purchases and is the appraised value in all other cases.
The weighted average original loan-to-value ratio of the Fixed Rate Group is
71.48%.
The weighted average original loan-to-value ratio of the Variable Rate Group is
74.71%.
S-19
<PAGE>
9) Property Types of Mortgaged Premises
Variable Rate Group Fixed Rate Group
------------------- ----------------
Percent by Percent Percent Percent
No. of by Scheduled by No. of by Scheduled
Mortgage Principal Mortgage Principal
Property Type Loans Balance Loans Balance
- ------------- -------- -------- ------- ----------
Single-Family
Detached 86.3 88.0 82.6 84.4
Single-Family
Attached 3.2 2.4 2.9 2.3
De Minimis PUD * * 0.8 1.1
Planned Unit
Development 2.6 2.6 1.7 2.0
Low Rise
Condominium 4.6 4.0 3.9 3.0
Manufactured
Housing * * 2.7 1.4
High Rise
Condominium * * 0.6 0.6
Townhouse 0.6 * * *
2-4 Family 1.3 1.3 4.4 4.8
---- ---- ---- ----
Totals: 100 100 100 100
=== === === ===
10) Occupancy Type of Mortgaged Premises
Variable Rate Group Fixed Rate Group
------------------- ----------------
Percent Percent by Percent Percent by
by No. of Scheduled by No. of Scheduled
Mortgage Principal Mortgage Principal
Occupancy Type(1) Loans Balance Loans Balance
- ----------------- -------- --------- --------- ----------
Primary Home 94.2 96.8 92.1 93.9
Second Home 1.61.2 1.2 1.0
Investor 4.2 2.0 6.7 5.1
---- ---- ---- ----
Totals: 100 100 100 100
=== === === ===
(1) As represented by the borrowers on their Mortgage Loan applications.
11) Mortgage Loan Purpose
Variable Rate Group Fixed Rate Group
------------------- ----------------
Percent Percent by Percent Percent by
by No. of Scheduled by No. of Scheduled
Mortgage Principal Mortgage Principal
Loan Purpose Loans Balance Loans Balance
- ------------ --------- ---------- --------- ----------
Purchase 38.7 34.2 31.4 34.5
Refinance (Cash-Out) 37.8 34.8 52.8 45.8
Refinance (No Cash-Out) 23.5 31.0 15.8 19.7
---- ---- ---- ----
Totals: 100 100 100 100
=== === === ===
12) Origination Program
Variable Rate Group Fixed Rate Group
-------------------- ----------------
Percent Percent of Percent Percent by
by No. of Scheduled by No. of Scheduled
Mortgage Principal Mortgage Principal
Origination Program Loans Balance Loans Balance
- ------------------- --------- --------- --------- ----------
Full Documentation 68.0 63.4 60.5 52.4
Limited Documentation 22.7 27.2 25.3 32.4
Stated Income 9.3 9.4 14.2 15.3
---- ---- ---- ----
Totals: 100 100 100 100
=== === === ===
13) State Distribution of Mortgage Premises
Variable Rate Group Fixed Rate Group
-------------------- ----------------
Percent Percent of Percent Percent by
by No. of Scheduled by No. of Scheduled
Mortgage Principal Mortgage Principal
State Loans Balance Loans Balance
- ---------- --------- --------- --------- ----------
Arizona 0.9 0.6 2.7 2.2
California 37.6 52.1 14.9 19.7
Colorado 6.3 4.9 4.1 3.7
Florida 2.9 2.7 10.8 9.9
Georgia 2.8 2.1 3.3 2.5
Illinois 3.7 3.3 2.7 3.0
Maryland 4.2 4.0 5.3 5.7
Missouri 1.7 1.1 1.7 0.9
New Jersey * * 1.1 1.6
Nevada 1.2 1.0 2.3 3.0
Ohio 2.4 1.6 2.6 1.9
Oklahoma 1.5 0.9 1.8 1.7
Oregon 3.3 2.1 5.7 4.7
Pennsylvania 2.7 1.4 4.4 3.8
Tennessee 1.6 0.7 3.9 3.1
Texas 2.1 1.5 3.9 4.2
Utah 5.0 3.6 6.4 4.5
Virginia 6.3 5.7 4.3 5.3
Washington 3.5 3.1 3.4 3.8
Other* 10.1 7.5 14.7 14.8
---- --- ---- ----
Total 100 100 100 100
=== === === ===
*Others may include: Alabama, District of Columbia, Delaware, Hawaii, Idaho,
Iowa, Indiana, Kansas, Kentucky, Louisiana, Massachusetts, Maine, Michigan,
Minnesota, Mississippi, Montana, Nebraska, North Carolina, New Mexico, New York,
Rhode Island, South Carolina, West Virginia, Wisconsin and Wyoming.
S-20
<PAGE>
Servicing of the Mortgage Loans
General. The Mortgage Loans will be serviced by Meritech Mortgage
Services, Inc. ("Meritech"), an affiliate of the Seller, and, as to Initial
Mortgage Loans with a Scheduled Principal Balance of approximately $10 million,
by Long Beach Mortgage Company ("Long Beach"; Long Beach and Meritech are
referred to collectively as the "Servicers"). The Servicers are (a) HUD-approved
originators and (b) approved by and in good standing with FNMA and FHLMC. The
Servicers will provide customary servicing functions with respect to the
Mortgage Loans pursuant to Servicing Agreements among the Seller, each Servicer
and the Master Servicer. Among other things, each Servicer is obligated under
certain circumstances to advance delinquent payments of principal and interest
with respect to the Mortgage Loans and to pay Month-End Interest with respect to
Mortgage Loans serviced by it. Each Servicing Agreement requires each related
Servicer to obtain approvals of the Master Servicer with respect to certain
servicing activities. See "SERVICING OF THE MORTGAGE LOANS" in the Prospectus.
Meritech Loan Servicing Activities. Meritech commenced its servicing
operations in 1960 and operated under the name Cram Mortgage Service, Inc. prior
to September 1994. The principal offices of Meritech are located in Fort Worth,
Texas.
As of September 30, 1996, Meritech serviced a portfolio of
approximately 16,410 one- to- four family residential mortgage loans totalling
approximately $1,775 million. The following tables set forth certain unaudited
information concerning the delinquency experience (including loans in
foreclosure) and mortgage loans foreclosed with respect to Meritech's
conventional loan servicing portfolio as of the end of the indicated period. The
indicated periods of delinquency are based on the number of days past due on a
contractual basis. No mortgage loan is considered delinquent for these purposes
until 30 days past due on a contractual basis.
<TABLE>
<CAPTION>
Percentage of Total Percentage of Total Percentage of Total
Portfolio as of Portfolio as of Portfolio as of
September 30, 1996 December 31, 1995 December 31, 1994
---------------------------- --------------------------- ---------------------------
By By Dollar By By Dollar By By Dollar
No. of Amount of No. of Amount of No. of Amount of
Loans Loans Loans Loans Loans Loans
----------- ------------ --------- ------------ ---------- -------------
<S> <C>
Period of delinquency
(including loans in
foreclosure)
30 to 59 days 2.07% 1.71% 3.56% 3.25% 2.18% 1.75%
60 to 89 days 0.82 0.76 0.65 0.71 0.28 0.14
90 days or more 1.26 1.44 1.57 2.30 0.40 0.21
Percentage of Total
Portfolio Delinquent(1) 4.16 3.92 5.79 6.27 2.87 2.12
Percentage of Total
Portfolio Foreclosed 0.68 0.94 0.73 0.99 0.71 0.41
</TABLE>
- ------------------------------------
(1)Totals may not sum due to rounding.
The above statistics represent the recent experience of Meritech. There
can be no assurance, however, that the delinquency and foreclosure experience of
the Mortgage Loans will be comparable. In addition, the foregoing statistics are
based on all the one- to four-family residential mortgage loans in Meritech's
servicing portfolio, including mortgage loans with a variety of payment and
other characteristics, including geographic locations and underwriting
standards. Not all the mortgage loans in Meritech's servicing portfolio
constitute non-conforming credits. Accordingly, there can be no assurance that
the delinquency and foreclosure experience of the Mortgage Loans in the future
will correspond to the future delinquency and foreclosure experience of
Meritech's one- to- four family conventional residential mortgage loan servicing
portfolio. The actual delinquency and foreclosure experience of the Mortgage
Loans will depend, among other things, upon the value of real estate securing
such Mortgage Loans and the ability of borrowers to make required payments.
Long Beach Servicing Activities. Long Beach is a Delaware corporation
incorporated in June 1994, which succeeded to the mortgage banking business
formerly conducted by Long Beach Bank, F.S.B., a federally chartered
S-21
<PAGE>
savings bank (the "Bank"), including all operating systems, computers, files and
substantially all personnel maintained and utilized by the Bank in its mortgage
banking operations prior to its reorganization.
The principal business of Long Beach is originating, purchasing,
selling and servicing residential real estate loans secured by one- to
four-family properties ("single-family") and multi-family properties containing
five or more units ("multi-family"). The initial working capital for Long
Beach's operations was provided by Long Beach Financial Services Company. Its
principal sources of funds are anticipated to be sales of loans and
mortgage-backed securities, bank lines of credit, term loans and other
borrowings. At June 30, 1996, Long Beach had 112 offices, consisting of 41 loan
origination centers located in California and 71 loan origination centers
located throughout the rest of the United States.
Long Beach originates single-family and multi-family real estate loans
through referrals from mortgage brokerage companies and through its network of
offices and loan origination centers. Long Beach also participates in secondary
market activities by originating and selling mortgage loans, participations in
loans, or mortgage-backed securities in the secondary market, generally
retaining loan servicing.
Generally, Long Beach services all the mortgage loans it originates
whether those loans are sold or retained in its portfolio. Servicing includes
collecting and remitting loan payments, accounting for principal and interest,
contacting delinquent mortgagors, and supervising foreclosure in the event of
unremedied defaults. Long Beach's servicing activities are audited regularly by
its internal auditors and examined periodically by applicable regulatory
authorities. Certain financial records of Long Beach relating to its loan
servicing activities are reviewed annually as part of the audit of Long Beach's
financial statements conducted by its independent accountants.
Servicing and Other Compensation and Payment of Expenses; Repurchase
The Servicing Fee Rate applicable to each Mortgage Loan equals one
twelfth of a fixed percentage per annum of the Scheduled Principal Balance of
such Mortgage Loan with respect to each Distribution Date. As of the Cut-Off
Date, the weighted average Servicing Fee Rate for the Statistical Mortgage Loans
in the Fixed Rate Group is approximately 0.33% per annum and the weighted
average Servicing Fee Rate for Statistical Mortgage Loans in the Variable Rate
Group is approximately 0.43% per annum. In addition, late payment fees with
respect to the Mortgage Loans, and any interest or other income earned on
collections with respect to the Mortgage Loans pending remittance to the Asset
Proceeds Account, will be paid to or retained by each Servicer as additional
servicing compensation. Each Servicer is obligated to pay certain insurance
premiums and certain ongoing expenses associated with the Mortgage Loans and
expenses incurred by each Servicer in connection with its responsibilities under
the related Servicing Agreement. With the consent of the Certificate Insurer,
each Servicer may transfer its servicing to successor servicers that meet the
criteria for servicers approved by the Rating Agencies.
Each Servicer and/or the Seller will have the right, but not the
obligation, to repurchase from the Trust any Mortgage Loan delinquent as to
three consecutive scheduled payments, at a price equal to the unpaid principal
balance thereof plus accrued interest thereon.
Advances and Month End Interest
Prior to each Distribution Date, each Servicer is, and any successor
servicer will be, obligated to advance its own funds with respect to delinquent
payments of principal and interest on the Mortgage Loans, net of the Servicing
Fees with respect to any Mortgage Loan for which it is making an advance, unless
the Master Servicer deems such advance "non-recoverable". Advances of principal
and interest will be deemed by the Master Servicer to be non-recoverable only to
the extent such amounts are not reimbursable from late collections, Insurance
Proceeds, Liquidation Proceeds and other assets of the Trust. Any failure by a
Servicer to make any such required advance will constitute an event of default
under the related Servicing Agreement. If a Servicer fails to make a required
advance of principal and interest, the Master Servicer will be obligated to make
such advance. Neither Servicer nor the Master Servicer will be required to make
an advance of principal and interest that the Master Servicer deems
nonrecoverable. The total advance obligations of the Master Servicer may be
subject to a dollar limitation that is acceptable to the Rating Agencies and the
Certificate Insurer as set forth in the Agreement. See "SERVICING OF MORTGAGE
LOANS -- Advances" in the Prospectus.
In addition, each Servicer will be required to deposit in its Custodial
Account on or before each Remittance Date (the 21st day of each month or the
preceding business day if such 21st day is not a business day), an amount equal
to Month End Interest with respect to the preceding Prepayment Period but only
to the extent of the Servicing Fee payable with respect to the Remittance Date.
"Month End Interest" means, with respect to any Mortgage Loan liquidated or
prepaid in full during a Prepayment Period (the period from and including the
18th day of a month to and including the 17th day of the following month), the
difference between the interest that would have been paid on such Mortgage Loan
through the last day of the month in which such liquidation or prepayment
S-22
<PAGE>
occurred and interest actually received by the applicable Servicer with respect
to such Mortgage Loan, in each case net of the Servicing Fee (except that Month
End Interest does not accrue with respect to a prepayment of a Mortgage Loan or
to liquidation proceeds during the period from the first day of a month through
the last day of the Prepayment Period ending during such month). The Master
Servicer is not obligated to pay Month End Interest.
The Master Servicer
Texas Commerce Bank National Association will act as master servicer of
both Mortgage Loan Groups (in such capacity, the "Master Servicer"). The Master
Servicer has limited experience master servicing mortgage loans. The Master
Servicer will supervise the servicing of the Mortgage Loans, provide certain
reports to the Trustee regarding the Mortgage Loans, make advances to the extent
described herein with respect to the Mortgage Loans if the Servicer fails to
make a required advance and appoint a successor servicer, with the consent of or
at the direction of the Certificate Insurer, if a Servicer is terminated. The
Master Servicer is entitled to a monthly fee with respect to the Mortgage Loans
(the "Master Servicing Fee"), payable on each Distribution Date, in the amount
equal to one-twelfth of 0.032% per annum (the "Master Servicing Fee Rate")
multiplied by the Scheduled Principal Balance of such Mortgage Loan on the first
day of the Due Period with respect to each Distribution Date. The Master
Servicer will pay the Trustee and the Custodian their monthly fees out of the
Master Servicing Fee.
PREPAYMENT AND YIELD CONSIDERATIONS
The weighted average life of, and, if purchased at other than par, the
yield to maturity on each Class of the Class A Certificates will be directly
related to the rate of payment of principal of the Mortgage Loans in the related
Mortgage Loan Group, including payments in full of Mortgage Loans in the related
Mortgage Loan Group prior to stated maturity, liquidations due to defaults,
casualties and condemnations, and repurchases of Mortgage Loans in the related
Mortgage Loan Group by the Seller. 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, the extent of the mortgagors' equity in such properties, and changes in
the mortgagors' housing needs, job transfers and employment status.
The timing of changes in the rate of prepayments may significantly
affect the actual yield to investors, even if the average rate of principal
prepayments is consistent with the expectations of investors. In general, the
earlier the payment of principal of the Mortgage Loans the greater the effect on
an investor's yield to maturity. As a result, the effect on an investor's yield
of principal prepayments occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the issuance
of the Class A Certificates may not be offset by a subsequent like reduction (or
increase) in the rate of principal prepayments. Investors must make their own
decisions as to the appropriate prepayment assumptions to be used in deciding
whether to purchase any of the Class A Certificates. The Seller does not make
any representations or warranties as to the rate of prepayment or the factors to
be considered in connection with such determination.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a Certificate until each dollar of principal
of such Certificate will be repaid to the investor. As described above, the
weighted average life and yield to maturity (if purchased at a price other than
par) of each class of the Class A Certificates will be influenced by the rate at
which principal payments on the Mortgage Loans in the related Mortgage Loan
Group are paid, which may be in the form of scheduled amortization or
prepayments (for this purpose, the term "prepayment" includes prepayments,
liquidations due to default or early termination of the Trust) and will also be
significantly influenced by the amount of excess spread generated by the
Mortgage Loans and applied in reduction of the Certificate Principal Balances of
such Certificates. The level of excess spread available on any Distribution Date
to be applied in reduction of the Certificate Principal Balances of the Class A
Certificates will be influenced by, among other factors, (i) the
overcollateralization level of the assets in the Trust at such time (i.e., the
extent to which interest on the Mortgage Loans is accruing on a higher Scheduled
Principal Balance than the Certificate Principal Balance of the Certificates);
(ii) the delinquency and default experience of the Mortgage Loans (i.e., excess
spread will be applied to shortfalls on the Certificates before it is
distributed in reduction of the Certificate Principal Balances thereof); (iii)
the level of One Month LIBOR and the indices for the Variable Rate Mortgage
Loans (i.e., excess spread is largely a function of the extent to which the
values of the indices applicable to the Variable Rate Mortgage Loans plus the
applicable gross margin exceed the Variable Pass-Through Rate); and (iv) the
provisions of the Agreement that permit excess spread to be distributed to
Subordinated Certificateholders when required overcollateralization levels have
been met. To the extent that greater amounts of excess spread are distributed in
reduction of the Certificate Principal Balances of a Class of Class A
Certificates, the weighted average life
S-23
<PAGE>
thereof can be expected to shorten. No assurance, however, can be given as to
the amount of excess spread distributed at any time or in the aggregate. See
"DESCRIPTION OF THE CLASS A CERTIFICATES -- Overcollateralization and
Crosscollateralization Provisions" in this Prospectus Supplement.
Mandatory Prepayment
If not all the Original Pre-Funded Amount is used to acquire Subsequent
Mortgage Loans for inclusion in the Fixed Rate Group or the Variable Rate Group,
then the Holders of the Fixed Rate Certificates and/or Variable Rate
Certificates then entitled to receive payments of principal will receive a
partial prepayment on the Distribution Date immediately following the end of the
Funding Period (not later than February 25, 1997).
Although no assurances can be given, the Seller expects that the
principal amount of Subsequent Mortgage Loans sold to the Trust for inclusion in
the Fixed Rate Group and the Variable Rate Group will require the application of
substantially all the amount on deposit in the Pre-Funding Account and that
there should be no material principal prepaid to the Holders of the Fixed Rate
Certificates or Variable Rate Certificates.
Prepayments and Yields for Class A Certificates
Generally, if purchased at other than par, the yield to maturity on a
Class A Certificate will be affected by the rate of the payment of principal of
the Mortgage Loans in the related Mortgage Loan Group. If the actual rate of
payments on the Mortgage Loans in a Mortgage Loan Group is slower than the rate
anticipated by an investor who purchases a Class A Certificate of the related
Class 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 in a Mortgage Loan Group is faster than the rate anticipated by an
investor who purchases a Class A Certificate of the related Class at a premium,
the actual yield to such investor will be lower than such investor's anticipated
yield.
All the Mortgage Loans in the Fixed Rate Group are fixed rate Mortgage
Loans. The rate of prepayments with respect to conventional fixed rate mortgage
loans has fluctuated significantly in recent years. In general, if prevailing
interest rates fall significantly below the interest rates on fixed rate
mortgage loans, such mortgage loans are likely to be subject to higher
prepayment rates than if prevailing rates remain at or above the interest rates
on such mortgage loans. Conversely, if prevailing interest rates rise
appreciably above the interest rates on fixed rate mortgage loans, such mortgage
loans are likely to experience a lower prepayment rate than if prevailing rates
remain at or below the interest rates on such mortgage loans.
All the Mortgage Loans in the Variable Rate Group are adjustable rate
mortgage loans. As is the case with conventional fixed rate mortgage loans,
adjustable rate mortgage loans may be subject to a greater rate of principal
prepayments in a declining interest rate environment. For example, if prevailing
interest rates fall significantly, adjustable rate mortgage loans could be
subject to higher prepayment rates than if prevailing interest rates remain
constant because the availability of fixed rate mortgage loans at lower interest
rates may encourage mortgagors to refinance their adjustable rate mortgage loans
to a lower fixed interest rate. Nevertheless, no assurance can be given as to
the level of prepayments that the Mortgage Loans will experience. The Seller
does not believe that data compiled by FNMA or FHLMC is representative of the
types of borrowers included in the Seller's lending program and cannot assure
that such prepayment experience is relevant to the Mortgage Loans contained in
the Variable Rate Group.
The "Last Scheduled Distribution Date" for the Class A-1, Class A-2,
Class A-3 and Class A-4 and Class A-5 Certificates is July 25, 2012, November
25, 2020, September 25, 2022, July 25, 2024, and July 25, 2026, respectively,
which are the dates on which the Certificate Principal Balance thereof would be
reduced to zero assuming, among other things, that no prepayments are received
on the Mortgage Loans in the Fixed Rate Group and that scheduled monthly
payments of principal of and interest on each of such Mortgage Loans are timely
received and that no Total Monthly Excess Cashflow is used to make accelerated
payments of principal to the Holders of the Class A-1, Class A-2, Class A-3,
Class A-4 or Class A-5 Certificates. The Last Scheduled Distribution Date for
the Class A-6 Certificate is November 25, 2026, notwithstanding that certain
Mortgage Loans have scheduled payment dates after such Last Scheduled
Distribution Date. The actual final Distribution Date with respect to each Class
of Class A Certificates could occur significantly earlier than the Last
Scheduled Distribution Date because (i) prepayments are likely to occur which
will be applied to the payment of the Certificate Principal Balances thereof,
(ii) excess interest to the extent available will be applied as an accelerated
payment of principal on the Class A Certificates up to the Specified
Subordinated Amount for each Class and (iii) the holders of a majority of the
Subordinated Certificates or, in limited circumstances, the Certificate Insurer,
may purchase all the Mortgage Loans when the aggregate outstanding Scheduled
Principal Balances of the Mortgage Loans in the Trust has declined to 10% or
less of the Maximum Collateral Amount.
S-24
<PAGE>
Prepayments on mortgage loans are commonly measured relative to a
prepayment model or standard. The model used in this Prospectus Supplement
("Home Equity Prepayment" or "HEP") is a prepayment assumption (the "Prepayment
Assumption") which represents an assumed rate of prepayment each month relative
to the then outstanding principal balance of a pool of mortgage loans for the
life of such mortgage loans. 21% HEP, which represents Scenario IV for the Fixed
Rate Group, assumes prepayment rates of 2.1% per annum of the then outstanding
principal balance of the related Mortgage Loans in the first month of the life
of such Mortgage Loans and an additional 2.1% per annum in each month thereafter
up to and including the tenth month. Beginning in the eleventh month and in each
month thereafter during the life of such Mortgage Loans, 21% HEP assumes a
constant prepayment rate of 21% per annum. Similarly, 23% HEP, which represents
Scenario IV for the Variable Rate Group, assumes prepayment rates of 2.3% per
annum of the then outstanding principal balance of the related Mortgage Loans in
the first month of the life of such Mortgage Loans and an additional 2.3% per
annum in each month thereafter up to and including the tenth month. Beginning in
the eleventh month and in each month thereafter during the life of such Mortgage
Loans, 23% HEP assumes a constant prepayment rate of 23% per annum. As used in
the table below, 0% Prepayment Assumption (Scenario I for each Group below)
assumes prepayment rates equal to 0% of the Prepayment Assumption, i.e., no
prepayments on the mortgage loans having the characteristics described below.
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 related Mortgage Loans.
The following tables have been prepared on the basis of the following
assumptions (collectively, the "Modeling Assumptions"): (i) the Mortgage Loans
of the related Mortgage Loan Groups prepay at the indicated percentage of the
related Prepayment Assumption; (ii) distributions on the Class A Certificates
are received, in cash, on the 25th day of each month, commencing December 26,
1996, in accordance with the payment priorities defined herein; (iii) no
defaults or delinquencies in, or modifications, waivers or amendments
respecting, the payment by the Mortgagors of principal and interest on the
Mortgage Loans occur; (iv) scheduled payments are assumed to be received on the
first day of each Due Period commencing in December 1996, and prepayments
represent payment in full of individual Mortgage Loans and are assumed to be
received on the last day of each Prepayment Period, commencing December 26,
1996, and include 30 days' interest thereon; (v) the level of Six-Month LIBOR
remains constant at 5.5391%; (vi) the level of One Year CMT remains constant at
5.440%; (vii) the Variable Rate Pass- Through Rate remains constant at 5.615%
per annum; (viii) the Closing Date for the Certificates is December 5, 1996;
(ix) all the Original Pre-Funded Amount is applied to acquired Subsequent
Mortgage Loans on December 31, 1996; (x) the Mortgage Interest Rate for each
Mortgage Loan in the Variable Rate Group is adjusted on its next Mortgage
Interest Rate change date (and on subsequent Mortgage Interest Rate change
dates, if necessary) to equal the sum of (a) the assumed level of the applicable
index and (b) the respective gross margin (such sum being subject to the
applicable periodic adjustment caps and floors); (xi) overcollateralization
levels are initially set as specified in the Agreement, and thereafter decrease
in accordance with the provisions of the Agreement; (xii) prepayments are stated
as a percentage of the related Group's Prepayment Assumption each as stated in
the "Prepayment Scenario" table below; (xiii) the optional termination is
exercised; and (xiv) each Mortgage Loan Group consists of Mortgage Loans having
the approximate characteristics described below:
S-25
<PAGE>
FIXED RATE GROUP
<TABLE>
<CAPTION>
Original Remaining Original Remaining
Amortization Current Net Amortization Amortization Term to Term to Balloon
Methodology Balance WAC WAC Term Term Maturity Maturity Date
------------- --------- --- --- ------ ------ -------- -------- ----
<S> <C>
Level $16,839,368.65 9.894% 9.570% 180 178 180 178
Level 10,683,399.97(1) 9.931 9.604(3) 331 331 331 331
Level 24,591,933.26(2) 9.931 9.604(3) 331 331 331 331
Level 98,415,406.37 9.963 9.628 358 356 358 356
15 Year Balloon 7,064,636.37 11.251 10.848 360 358 180 178 9/1/11
15 Year Balloon 670,187.66(1) 11.251 10.848(3) 360 360 180 180 11/1/11
15 Year Balloon 1,563,771.21(2) 11.251 10.848(3) 360 360 180 180 11/1/11
</TABLE>
VARIABLE RATE GROUP
<TABLE>
<CAPTION>
Six Month LIBOR Loans
Original Remaining Initial
Current Net Term to Term to Gross Periodic Periodic Net Net Next
Balance WAC WAC Maturity Maturity Margin Cap Cap Life Cap Floor Reset
------- ----- ----- -------- -------- ------ ----- ----- -------- ----- -----
<S> <C>
$30,794,649.08 7.879% 7.458% 359 356 4.271% 1.121% 1.121% 13.790% 6.299% 2/1/97
42,372,083.94 7.870 7.449 360 358 4.298 1.092 1.092 13.728 6.266 3/1/97
60,453,227.33 8.311 7.888 360 359 4.803 1.012 1.012 14.032 6.854 4/1/97
11,518,520.58(1) 7.959 7.545(3) 360 360 4.352 1.069 1.069 13.799 6.324 4/1/97
26,876,548.02(2) 7.959 7.545(3) 360 360 4.352 1.069 1.069 13.799 6.324 4/1/97
22,936,904.19 9.751 9.254 360 358 5.456 3.000 1.171 15.587 9.254 8/1/98
1,654,154.22(1) 9.732 9.236(3) 360 360 5.474 3.000 1.225 15.674 9.236 10/1/98
3,859,693.18(2) 9.732 9.236(3) 360 360 5.474 3.000 1.225 15.674 9.236 10/1/98
11,357,973.53 10.485 10.013 360 358 5.121 3.000 1.030 16.738 9.714 9/1/99
1,077,475.66(1) 10.485 10.013(3) 360 360 5.121 3.000 1.030 16.738 9.714 10/1/99
2,514,109.87(2) 10.485 10.013(3) 360 360 5.121 3.000 1.030 16.738 9.714 10/1/99
</TABLE>
<TABLE>
<CAPTION>
One Year CMT Loans
Initial
Current Net Original Remaining Gross Periodic Periodic Net Net Next
Balance WAC WAC Term Term Margin Cap Cap Life Cap Floor Reset
------- ----- ----- ------ ------ ------ ----- ----- -------- ----- -----
<S> <C>
$47,860,175.94 8.569% 8.150% 360 359 4.640% 1.994% 1.994% 14.512% 6.935% 10/1/97
4,540,261.91(1) 8.569 8.150(3) 360 360 4.640 1.994 1.994 14.512 6.935 10/1/97
10,593,944.46(2) 8.569 8.150(3) 360 360 4.640 1.994 1.994 14.512 6.935 10/1/97
</TABLE>
- ---------------------
(1) Assumes transfer to the Trust in December 1996 with monthly payments
calculated thereafter using the assumed characteristics set forth above.
(2) Assumes transfer to the Trust in January 1997 with monthly payments
calculated thereafter using the assumed characteristics set forth above.
(3) For any accrual period before transfer to the Trust interest is calculated
on the current balance at the Net WAC.
PREPAYMENT SCENARIOS
<TABLE>
<CAPTION>
Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI
---------- ----------- ------------ ----------- ---------- -----------
<S> <C>
Fixed Rate Group (HEP): 0% 10% 15% 21% 27% 30%
Variable Rate Group (HEP): 0% 10% 15% 23% 27% 30%
</TABLE>
S-26
<PAGE>
The following tables set forth the percentages of the initial principal
amount of the Class A Certificates that would be outstanding after each of the
dates shown, based on prepayment scenarios described in the table entitled
"Prepayment Scenarios." The percentages have been rounded to the nearest 1%.
Asterisks (*) in the following tables indicate values between 0.0% and 0.5%.
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
<TABLE>
<CAPTION>
Class A-1 Class A-2
Scenario Scenario
------------------------------------------------- -------------------------------------------------------
<S> <C>
Payment Date I II III IV V VI I II III IV V VI
- -- --- -- - -- - -- --- -- - --
Initial 100 100 100 100 100 100 100 100 100 100 100 100
11/25/97 93 73 63 50 38 32 100 100 100 100 100 100
11/25/98 90 44 22 0 0 0 100 100 100 97 70 57
11/25/99 87 18 0 0 0 0 100 100 86 49 16 2
11/25/00 84 0 0 0 0 0 100 94 52 11 0 0
11/25/01 80 0 0 0 0 0 100 69 24 0 0 0
11/25/02 76 0 0 0 0 0 100 47 1 0 0 0
11/25/03 71 0 0 0 0 0 100 28 0 0 0 0
11/25/04 66 0 0 0 0 0 100 11 0 0 0 0
11/25/05 61 0 0 0 0 0 100 0 0 0 0 0
11/25/06 55 0 0 0 0 0 100 0 0 0 0 0
11/25/07 48 0 0 0 0 0 100 0 0 0 0 0
11/25/08 40 0 0 0 0 0 100 0 0 0 0 0
11/25/09 32 0 0 0 0 0 100 0 0 0 0 0
11/25/10 23 0 0 0 0 0 100 0 0 0 0 0
11/25/11 3 0 0 0 0 0 100 0 0 0 0 0
11/25/12 0 0 0 0 0 0 92 0 0 0 0 0
11/25/13 0 0 0 0 0 0 83 0 0 0 0 0
11/25/14 0 0 0 0 0 0 74 0 0 0 0 0
11/25/15 0 0 0 0 0 0 64 0 0 0 0 0
11/25/16 0 0 0 0 0 0 52 0 0 0 0 0
11/25/17 0 0 0 0 0 0 40 0 0 0 0 0
11/25/18 0 0 0 0 0 0 26 0 0 0 0 0
11/25/19 0 0 0 0 0 0 11 0 0 0 0 0
11/25/20 0 0 0 0 0 0 0 0 0 0 0 0
11/25/21 0 0 0 0 0 0 0 0 0 0 0 0
11/25/22 0 0 0 0 0 0 0 0 0 0 0 0
11/25/23 0 0 0 0 0 0 0 0 0 0 0 0
11/25/24 0 0 0 0 0 0 0 0 0 0 0 0
11/25/25 0 0 0 0 0 0 0 0 0 0 0 0
11/25/26 0 0 0 0 0 0 0 0 0 0 0 0
11/25/27 0 0 0 0 0 0 0 0 0 0 0 0
Weighted
Average Life
Years(1) 9.6 1.8 1.3 1.0 0.9 0.8 19.9 6.0 4.2 3.0 2.4 2.2
<CAPTION>
Class A-3
Scenario
-----------------------------------------------------
<S> <C>
Payment Date I II III IV V VI
- -- --- -- - --
Initial 100 100 100 100 100 100
11/25/97 100 100 100 100 100 100
11/25/98 100 100 100 100 100 100
11/25/99 100 100 100 100 100 100
11/25/00 100 100 100 100 40 1
11/25/01 100 100 100 51 0 0
11/25/02 100 100 100 0 0 0
11/25/03 100 100 47 0 0 0
11/25/04 100 100 0 0 0 0
11/25/05 100 86 0 0 0 0
11/25/06 100 47 0 0 0 0
11/25/07 100 12 0 0 0 0
11/25/08 100 0 0 0 0 0
11/25/09 100 0 0 0 0 0
11/25/10 100 0 0 0 0 0
11/25/11 100 0 0 0 0 0
11/25/12 100 0 0 0 0 0
11/25/13 100 0 0 0 0 0
11/25/14 100 0 0 0 0 0
11/25/15 100 0 0 0 0 0
11/25/16 100 0 0 0 0 0
11/25/17 100 0 0 0 0 0
11/25/18 100 0 0 0 0 0
11/25/19 100 0 0 0 0 0
11/25/20 86 0 0 0 0 0
11/25/21 36 0 0 0 0 0
11/25/22 0 0 0 0 0 0
11/25/23 0 0 0 0 0 0
11/25/24 0 0 0 0 0 0
11/25/25 0 0 0 0 0 0
11/25/26 0 0 0 0 0 0
11/25/27 0 0 0 0 0 0
Weighted
Average Life
Years(1) 24.7 10.0 7.0 5.1 3.9 3.5
</TABLE>
- -----------------------------
(1) The weighted average life of the Class A Certificates is determined by
(i) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related Distribution Date, (ii)
adding the results, and (iii) dividing the sum by the initial
respective Certificate Principal Balance for such Class of Class A
Certificates.
S-27
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
<TABLE>
<CAPTION>
Class A-4 Class A-5
Scenario Scenario
-------------------------------------------------------- -----------------------------------------
Payment Date I II III IV V VI I II III IV V VI
- -- --- -- - -- - -- --- -- - --
<S> <C>
Initial 100 100 100 100 100 100 100 100 100 100 100 100
11/25/97 100 100 100 100 100 100 100 100 100 100 100 100
11/25/98 100 100 100 100 100 100 100 100 100 100 100 100
11/25/99 100 100 100 100 100 100 100 100 100 100 100 100
11/25/00 100 100 100 100 100 100 100 100 100 100 100 100
11/25/01 100 100 100 100 69 40 100 100 100 100 100 100
11/25/02 100 100 100 90 23 0 100 100 100 100 100 98
11/25/03 100 100 100 49 0 0 100 100 100 100 89 0
11/25/04 100 100 100 16 0 0 100 100 100 100 0 0
11/25/05 100 100 67 0 0 0 100 100 100 90 0 0
11/25/06 100 100 40 0 0 0 100 100 100 0 0 0
11/25/07 100 100 16 0 0 0 100 100 100 0 0 0
11/25/08 100 84 0 0 0 0 100 100 96 0 0 0
11/25/09 100 60 0 0 0 0 100 100 78 0 0 0
11/25/10 100 39 0 0 0 0 100 100 0 0 0 0
11/25/11 100 15 0 0 0 0 100 100 0 0 0 0
11/25/12 100 0 0 0 0 0 100 98 0 0 0 0
11/25/13 100 0 0 0 0 0 100 84 0 0 0 0
11/25/14 100 0 0 0 0 0 100 72 0 0 0 0
11/25/15 100 0 0 0 0 0 100 0 0 0 0 0
11/25/16 100 0 0 0 0 0 100 0 0 0 0 0
11/25/17 100 0 0 0 0 0 100 0 0 0 0 0
11/25/18 100 0 0 0 0 0 100 0 0 0 0 0
11/25/19 100 0 0 0 0 0 100 0 0 0 0 0
11/25/20 100 0 0 0 0 0 100 0 0 0 0 0
11/25/21 100 0 0 0 0 0 100 0 0 0 0 0
11/25/22 83 0 0 0 0 0 100 0 0 0 0 0
11/25/23 32 0 0 0 0 0 100 0 0 0 0 0
11/25/24 0 0 0 0 0 0 78 0 0 0 0 0
11/25/25 0 0 0 0 0 0 0 0 0 0 0 0
11/25/26 0 0 0 0 0 0 0 0 0 0 0 0
11/25/27 0 0 0 0 0 0 0 0 0 0 0 0
Weighted
Average Life
Years(1) 26.7 13.5 9.7 7.1 5.5 4.9 28.4 18.0 13.1 9.1 7.4 6.6
<CAPTION>
Class A-6
Scenario
------------------------------------------------------
Payment Date I II III IV V VI
- -- --- -- - --
<S> <C>
Initial 100 100 100 100 100 100
11/25/97 97 90 87 81 79 76
11/25/98 97 81 73 62 56 53
11/25/99 96 72 61 47 41 36
11/25/00 95 64 51 36 29 25
11/25/01 94 57 43 27 21 18
11/25/02 93 50 36 21 15 12
11/25/03 93 45 31 16 11 0
11/25/04 91 40 26 12 0 0
11/25/05 90 35 22 9 0 0
11/25/06 89 31 18 0 0 0
11/25/07 87 28 15 0 0 0
11/25/08 86 25 13 0 0 0
11/25/09 84 22 10 0 0 0
11/25/10 82 19 0 0 0 0
11/25/11 80 17 0 0 0 0
11/25/12 77 15 0 0 0 0
11/25/13 74 13 0 0 0 0
11/25/14 71 11 0 0 0 0
11/25/15 68 0 0 0 0 0
11/25/16 64 0 0 0 0 0
11/25/17 60 0 0 0 0 0
11/25/18 56 0 0 0 0 0
11/25/19 51 0 0 0 0 0
11/25/20 45 0 0 0 0 0
11/25/21 39 0 0 0 0 0
11/25/22 33 0 0 0 0 0
11/25/23 26 0 0 0 0 0
11/25/24 18 0 0 0 0 0
11/25/25 0 0 0 0 0 0
11/25/26 0 0 0 0 0 0
11/25/27 0 0 0 0 0 0
Weighted
Average Life
Years(1) 20.9 7.6 5.4 3.6 3.0 2.7
</TABLE>
- -----------------------------
(1) The weighted average life of the Class A Certificates is determined by
(i) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related Distribution Date, (ii)
adding the results, and (iii) dividing the sum by the initial
respective Certificate Principal Balance for such Class of Class A
Certificates.
S-28
<PAGE>
There is no assurance that prepayments will occur, or, if they do
occur, that they will occur at any constant percentage or in accordance with any
of the aforementioned Prepayment Assumptions.
Payment Delay Feature of Fixed Rate Certificates
The effective yield to the Holders of the Fixed Rate Certificates will
be lower than the yield otherwise produced by the related Fixed Rate Certificate
Pass-Through Rate and the purchase price of such Certificates because principal
and interest distributions will not be payable to such holders until at least
the 25th day of the month following the month of accrual (without any additional
distributions of interest or earnings thereon in respect of such delay).
DESCRIPTION OF THE CLASS A CERTIFICATES
General
The Certificates will consist of the Fixed Rate Certificates, the
Variable Rate Certificates and the Subordinated Certificates. The Certificates
will be issued by Saxon Asset Securities Trust 1996-2, pursuant to the
Agreement. Only the Class A Certificates are offered hereby. The Subordinated
Certificates will be retained by the Seller and are not being offered hereby.
Persons in whose name Certificates are registered in the Register
maintained by the Certificate Registrar are the "Holders" of the Certificates.
For so long as the Class A Certificates are in book-entry form with DTC, the
only "Holder" of the Class A Certificates as the term "Holder" is used in the
Agreement will be Cede & Co., a nominee of DTC. No Beneficial Holders will be
entitled to receive a definitive certificate representing such person's interest
in the Trust, except in the event that physical Certificates are issued under
limited circumstances set forth in the Agreement. All references herein to the
Holders of Class A Certificates shall mean and include the rights of Holders as
such rights may be exercised through DTC and its participating organizations,
except as otherwise specified in the Agreement.
As described under "THE MORTGAGE LOAN POOL" in this Prospectus
Supplement, the Mortgage Loan Pool is divided into the Fixed Rate Group, which
contains Mortgage Loans having fixed rates of interest, and the Variable Rate
Group, which contains Mortgage Loans having variable rates of interest. On each
Distribution Date, the Fixed Rate Certificates and Variable Rate Certificates
will evidence the right to receive the related Class A Distribution Amount.
Any Deficiency Amount (as defined herein) is insured by the Certificate
Insurer pursuant to, and subject to the terms of, the Certificate Insurance
Policies. See "THE CERTIFICATE INSURANCE POLICIES AND THE CERTIFICATE INSURER"
in this Prospectus Supplement.
Available Funds
The Agreement requires that the Trustee create an Asset Proceeds
Account, to be established as an "Eligible Account" (the "Asset Proceeds
Account"). All funds in the Asset Proceeds Account shall be invested and
reinvested for the benefit of the Holders of the Certificates and the
Certificate Insurer, as directed by the Master Servicer, in Permitted
Investments (as defined in the Agreement). See "THE AGREEMENT -- Administration
of Accounts" in the Prospectus.
One business day prior to the related Distribution Date (or, if such
day is not a business day, the immediately preceding business day) (the "Master
Servicer Remittance Date") the Master Servicer is required to withdraw from the
Master Servicer Custodial Account and remit to the Asset Proceeds Account an
amount equal to the Available Funds with respect to each Group. The "Available
Funds" with respect to each Group and Distribution Date are equal to the sum of
the related Interest Funds and the related Principal Funds and any amounts
transferred from the Capitalized Interest Fund with respect to such Group in
each case for such Distribution Date.
The "Interest Funds" with respect to each Mortgage Loan Group and
Master Servicer Remittance Date are equal to the sum, without duplication, of
(i) all scheduled interest collected by the Servicers during the related Due
Period less the related Servicing Fee and Master Servicing Fee, (ii) all
Advances relating to interest, (iii) all Month End Interest and (iv) Liquidation
Proceeds (to the extent such Liquidation Proceeds relate to interest) less all
nonrecoverable Advances relating to interest and certain expenses reimbursed
during the related Due Period.
S-29
<PAGE>
The "Principal Funds" with respect to each Mortgage Loan Group and
Master Servicer Remittance Date are equal to the sum, without duplication, of
(i) the scheduled principal actually collected by the Servicers during the
related Due Period or advanced on or before such Master Servicer Remittance
Date, (ii) prepayments collected by the Servicers in the related Prepayment
Period, (iii) the Scheduled Principal Balance of each Mortgage Loan that was
repurchased by the Seller, to the extent such Scheduled Principal Balance was
actually deposited in the Master Servicer Custodial Account on the related
Master Servicer Remittance Date, (iv) any Substitution Shortfall (the amount, if
any, by which the aggregate unpaid principal balance of any substitute Mortgage
Loans is less than the aggregate unpaid principal balance of any deleted
Mortgage Loans) delivered by the Seller in connection with a substitution of a
Mortgage Loan, to the extent such Substitution Shortfall was actually deposited
in the Master Servicer Custodial Account on such Master Servicer Remittance
Date, (v) all Liquidation Proceeds collected by the Servicer during the related
Due Period (to the extent such Liquidation Proceeds related to principal) to the
extent such Liquidation Proceeds were actually deposited in the Master Servicer
Custodial Account on such Master Servicer Remittance Date, less all
non-recoverable Advances relating to principal reimbursed during the related Due
Period and (vi) with respect to the Distribution Date immediately following the
end of the Funding Period, the Pre-Funded Amount, if any.
Distributions
General. Distributions on each Class of the Class A Certificates will
be made on each Distribution Date to Holders of each Class of the Class A
Certificates as of the immediately preceding Record Date in an amount equal to
the product of such Holder's Percentage Interest and the related Class A
Distribution Amount (as defined below) on such Distribution Date. The
"Percentage Interest" represented by any Class A Certificate will be equal to
the percentage obtained by dividing the initial Certificate Principal Balance of
such Class A Certificate by the initial Certificate Principal Balance of all
Certificates of the same Class.
Distributions to the Fixed Rate and Variable Rate Certificates will be
made on each Distribution Date from the related Available Funds, except to the
extent described below. The Class A Distribution Amount relating to each
Mortgage Loan Group for each Distribution Date (to the extent funds are
available therefor) shall be allocated in the following amounts and in the
following order of priority:
(i) First, to the Holders of the Fixed Rate and Variable Rate
Certificates, the Class A Current Interest (including any such interest
remaining unpaid from previous Distribution Dates) on a pro rata basis without
any priority among such Class A Certificates; and
(ii) Second, to the Holders of the Fixed Rate and Variable Rate
Certificates, the Class A Principal Distribution Amount (as defined below under
"Distributions of Principal") for the applicable Mortgage Loan Group until the
Certificate Principal Balance thereof is reduced to zero; provided, however, any
such amounts payable to the Fixed Rate Certificates will be payable first to the
Class A-1 Certificates, until the Certificate Principal Balances thereof have
been reduced to zero, then to the Class A-2 Certificates until the Certificate
Principal Balances thereof have been reduced to zero, then to the Class A-3
Certificates until the Certificate Principal Balances thereof have been reduced
to zero, then to the Class A-4 Certificates until the Certificate Principal
Balances thereof have been reduced to zero, and then to the Class A-5
Certificates.
Distributions of Interest. On each Distribution Date, the interest due
with respect to the Fixed Rate Certificates will be the interest which has
accrued thereon at the related Pass-Through Rate during the calendar month
immediately preceding the calendar month in which such Distribution Date occurs;
and the interest due with respect to the Variable Rate Certificates will be the
interest which has accrued thereon at the then applicable Variable Rate
Pass-Through Rate from and including the preceding Distribution Date (or from
the Closing Date in the case of the first Distribution Date) to and including
the day prior to the current Distribution Date. Each period referred to in the
prior sentence relating to the accrual of interest is the "Accrual Period" for
the related Class of Class A Certificates and the amount of interest due on a
Class of Class A Certificates on a Distribution Date less any Variable Rate
Certificates Carryover is the "Class A Current Interest" for such Class of Class
A Certificates on such Distribution Date.
All calculations of interest on the Fixed Rate Certificates will be
made on the basis of a 360-day year assumed to consist of twelve 30-day months.
All calculations of interest on the Variable Rate Certificates will be made on
the basis of the actual number of days and a year of 360 days.
S-30
<PAGE>
Distributions of Principal. On each Distribution Date, the Holders of
the Class A Certificates are entitled to receive monthly distributions in
reduction of their Certificate Principal Balances which distributions (i) will
generally reflect collections of principal in respect of the Mortgage Loans in
the related Group on each Distribution Date and (ii) until certain
overcollateralization levels have been reached, will include excess interest;
provided, however, any such amounts payable to the Fixed Rate Certificates will
be payable first to the Class A-1 Certificates, until the Certificate Principal
Balances thereof have been reduced to zero, then to the Class A-2 Certificates
until the Certificate Principal Balances thereof have been reduced to zero, then
to the Class A-3 Certificates until the Certificate Principal Balances thereof
have been reduced to zero, then to the Class A-4 Certificates until the
Certificate Principal Balances thereof have been reduced to zero, and then to
the Class A-5 Certificates.
The "Class A Principal Distribution Amount" for each Mortgage Loan
Group with respect to each Distribution Date shall be the lesser of:
(x) the Total Available Funds (as defined under "-- Class A
Distributions and Insured Payments") for the related Mortgage Loan Group plus
any Deficiency Amount paid under the related Certificate Insurance Policy minus
the related Class A Current Interest and the Certificate Insurer premium for the
related Mortgage Loan Group; and
(y)(i) the sum (without duplication) of:
(a) the principal portion of all scheduled monthly payments on the
Mortgage Loans in the related Mortgage Loan Group due during the related Due
Period, to the extent actually received by the Trustee on or prior to the
related Master Servicer Remittance Date or to the extent actually advanced on or
prior to the related Master Servicer Remittance Date, and the principal portion
of all full and partial principal prepayments made by the respective Mortgagors
during the related Prepayment Period;
(b) the Scheduled Principal Balance of each Mortgage Loan in the
related Mortgage Loan Group that was repurchased during the related Prepayment
Period to the extent an amount representing such Scheduled Principal Balance is
actually received by the Trustee on or before the related Master Servicer
Remittance Date;
(c) any Substitution Shortfall delivered in connection with a
substitution of a Mortgage Loan during the related Prepayment Period to the
extent an amount representing such Substitution Shortfall is actually received
by the Trustee on or before the related Master Servicer Remittance Date;
(d) all Liquidation Proceeds actually collected by the Servicers with
respect to the Mortgage Loans in the related Mortgage Loan Group during the
related Prepayment Period to the extent such Liquidation Proceeds relate to
principal and were actually received by the Trustee on or before the related
Master Servicer Remittance Date;
(e) the amount of any Subordination Deficit with respect to such
Mortgage Loan Group for such Distribution Date;
(f) the proceeds received by the Trustee with respect to the related
Mortgage Loan Group (to the extent such proceeds relate to principal) on any
termination of the Trust;
(g) the amount of any Subordination Increase Amount with respect to
such Mortgage Loan Group for such Distribution Date consisting of the portion of
any Total Monthly Excess Cash Flow to be applied for the accelerated payment of
principal on the related Class A Certificates; and
(h) with respect to the Distribution Date immediately following the end
of the Funding Period, the Pre- Funded Amount, if any, with respect to such
Mortgage Loan Group;
minus
(ii) the amount of any Subordination Reduction Amount with respect to
such Mortgage Loan Group for such Distribution Date.
S-31
<PAGE>
In no event will the Class A Principal Distribution Amount for any
Mortgage Loan Group and Distribution Date (x) be less than zero or (y) be
greater than the then outstanding Certificate Principal Balance of the related
Class of Class A Certificates.
The sum of the Class A Current Interest (including any such amounts
remaining unpaid from previous Distribution Dates) and the Class A Principal
Distribution Amount with respect to any Class of Class A Certificates and
Distribution Date is the "Class A Distribution Amount" for such Class of Class A
Certificates and Distribution Date.
"Liquidation Proceeds" are the proceeds received in connection with the
liquidation of any Mortgage Loan as a result of defaults (including any
insurance or guarantee proceeds with respect thereto), less the expenses of such
liquidation and any unreimbursed Advances related to such Mortgage Loan.
A "Subordination Deficit" with respect to a Mortgage Loan Group and
Distribution Date is the amount, if any, by which (x) the Certificate Principal
Balance of the related Class A Certificates, giving effect to all distributions
made on such Distribution Date (except any payments as to principal by the
Certificate Insurer), exceeds (y) the sum of (i) the aggregate Scheduled
Principal Balances of the Mortgage Loans in the related Mortgage Loan Group as
of the close of the related Due Period and (ii) the amount, if any, on deposit
with respect to such Mortgage Loan Group in the Pre-Funding Account less any
Pre-Funding Account Earnings with respect thereto. As described herein, Insured
Payments do not include Realized Losses until such time as the aggregate
cumulative Realized Losses have created a Subordination Deficit, nor do Insured
Payments cover any failure to make Advances until such time as the sum of the
aggregate cumulative amount of such unpaid Advances and Realized Losses results
in a Subordination Deficit.
Overcollateralization and Crosscollateralization Provisions
The Agreement requires that, on each Distribution Date, Total Monthly
Excess Cashflow with respect to a Mortgage Loan Group be applied as an
additional payment of principal on the related Class of Class A Certificates,
but only to the limited extent hereafter described. "Total Monthly Excess
Cashflow" for any Distribution Date and Mortgage Loan Group equals the sum of
(i) the excess of (x) the related Interest Funds over (y) the sum of (A) the
related Class A Current Interest (plus any amounts representing such interest
remaining unpaid from previous Distribution Dates) and (B) the related
Certificate Insurance Policy premium and (ii) the related Subordination
Reduction Amount (as defined in the fifth succeeding paragraph), if any.
Pursuant to the Agreement, on each Distribution Date each Mortgage Loan
Group's Total Monthly Excess Cashflow is required to be applied in the following
order:
(i) to fund any Available Funds Shortfall (which is
equal to the excess, if any, of (x) the related Class A Distribution
Amount (calculated only with respect to clause (y) of the definition of
Class A Principal Distribution Amount and without any Subordination
Increase Amount) with respect to such Mortgage Loan Group for such
Distribution Date over (y) the Available Funds with respect to such
Mortgage Loan Group for such Distribution Date) with respect to the
related Mortgage Loan Group;
(ii) to fund any Available Funds Shortfall with respect
to the other Mortgage Loan Group;
(iii) to pay to the Certificate Insurer all amounts owed
to the Certificate Insurer with respect to the related Mortgage Loan
Group, including amounts owed on account of any Insured Payments
theretofore made and interest thereon (any such amount so owed to the
Certificate Insurer and not theretofore paid, together with accrued
interest thereon, the "Insurer Reimbursable Amount" with respect to the
related Mortgage Loan Group);
(iv) to pay to the Certificate Insurer in respect of any
Insurer Reimbursable Amount with respect to the other Mortgage Loan
Group;
(v) to fund any required Subordination Increase Amount
with respect to the related Mortgage Loan Group as a portion of the
distribution of the Class A Principal Distribution Amount with respect
to the related Mortgage Loan Group;
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(vi) to fund any required Subordination Increase Amount
with respect to the other Mortgage Loan Group as a portion of the
distribution of the Class A Principal Distribution Amount with respect
to the other Mortgage Loan Group; and
(vii) from the Total Monthly Excess Cashflow with respect
to the Variable Rate Mortgage Loan Group, to pay the Variable Rate
Certificates Carryover to the Holders of the Variable Rate
Certificates.
With respect to each Mortgage Loan Group, any remaining amount after
payment of the Class A Distribution Amount and all other amounts payable from
Total Monthly Excess Cashflow will be distributed to the Subordinated
Certificates.
"Subordinated Amount" means, with respect to any Mortgage Loan Group
and Distribution Date, the excess of (x) the sum of (i) the aggregate Scheduled
Principal Balances (minus the principal portion of all Monthly Payments due but
not paid by the Borrowers as of the last day of the related Prepayment Period)
of the Mortgage Loans in such Mortgage Loan Group as of the close of business on
the last day of the preceding Due Period and (ii) any amount with respect to
such Mortgage Loan Group on deposit in the Pre-Funding Account less any
Pre-Funding Account Earnings with respect thereto over (y) the Certificate
Principal Balance of the related Class of Class A Certificates as of such
Distribution Date (giving effect to all distributions made on such Distribution
Date other than an Insured Payment). With respect to either Mortgage Loan Group,
a "Subordination Increase Amount", is the lesser of (i) the excess of (a) the
related Specified Subordinated Amount over (b) the related Subordinated Amount
and (ii) any amount of Total Monthly Excess Cashflow available on the applicable
Distribution Date to reduce the principal amount of the related Class A
Certificates. The required level of the Subordinated Amount with respect to a
Mortgage Loan Group and Distribution Date is the "Specified Subordinated Amount"
with respect to such Mortgage Loan Group and Distribution Date. The Agreement
generally provides that the related Specified Subordinated Amount may, over
time, decrease, or increase, subject to certain floors, caps and triggers.
The application of Total Monthly Excess Cashflow to principal has the
effect of accelerating the amortization of the related Class of Class A
Certificates relative to the amortization of the Mortgage Loans in the related
Mortgage Loan Group.
If the required level of the Specified Subordinated Amount with respect
to a Mortgage Loan Group is permitted to decrease or "step down" on a
Distribution Date in the future, the Agreement provides for the related Class A
Principal Distribution Amount to be reduced by the related Subordination
Reduction Amount (as defined below) with the result that principal which would
otherwise have been distributed to the Holders of the related Class of Class A
Certificates on such Distribution Date is made available for distribution to the
other Class of Class A Certificates, to the Certificate Insurer as an Insurer
Reimbursable Amount or to the Holders of the Subordinated Certificates to the
extent of the Excess Subordinated Amount. This has the effect of reducing the
rate of amortization of the related Class of Class A Certificates relative to
the amortization of the Mortgage Loans in the related Mortgage Loan Group and of
reducing the related Subordinated Amount. On any Distribution Date, the
Subordination Reduction Amount with respect to a Mortgage Loan Group is an
amount equal to the lesser of (x) the Excess Subordinated Amount (the amount, if
any, by which (i) the Subordinated Amount that would apply to the related
Mortgage Loan Group on such Distribution Date after taking into account all
distributions to be made on such Distribution Date (except for any distributions
of related Subordination Reduction Amounts) exceeds (ii) the related Specified
Subordinated Amount for such Distribution Date) and (y) the amount available for
distribution on account of principal with respect to the related Class of Class
A Certificates on such Distribution Date.
Liquidation Proceeds with respect to a Mortgage Loan which are
allocated to principal may be less than the principal balance of the related
Mortgage Loan; the amount of any such insufficiency is a "Realized Loss." The
Agreement does not require that the amount of any Realized Loss be distributed
to the Holders of the related Class of Class A Certificates on the Distribution
Date which immediately follows the event of loss; that is the Agreement does not
require the current recovery of losses to Certificateholders. Nevertheless, the
occurrence of a Realized Loss will reduce the Subordinated Amount with respect
to the related Mortgage Loan Group, which, to the extent that such reduction
causes the Subordinated Amount to be less than the related Specified
Subordinated Amount applicable to the related Distribution Date, will require
the payment of a Subordination Increase Amount on such Distribution Date (or, if
insufficient funds are available on such Distribution Date, on subsequent
Distribution Dates, until the Subordinated Amount equals the related Specified
Subordinated Amount). The effect of the foregoing is to allocate Realized Losses
to the Holders of the Subordinated Certificates by reducing, or eliminating
entirely, payments of Total Monthly Excess Cashflow which such Holders would
otherwise receive.
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Class A Distributions and Insured Payments
No later than three Business Days prior to each Distribution Date the
Master Servicer will be required to determine "Available Funds" (as defined
above under "-- Distribution Dates") with respect to each Mortgage Loan Group;
and "Total Available Funds" with respect to each Mortgage Loan Group (which is
equal to the Available Funds for that Mortgage Loan Group plus any amount of
Total Monthly Excess Cashflow with respect to the other Mortgage Loan Group to
be applied on account of that Mortgage Loan Group as described above under "--
Overcollateralization and Crosscollateralization Provisions"). If the Class A
Current Interest (including any such interest remaining unpaid on previous
Distribution Dates) and any Subordination Deficit with respect to a Class of the
Class A Certificates for any Distribution Date exceeds the Total Available Funds
(after deducting the amount necessary to pay the related premium amount to the
Certificate Insurer) for the related Mortgage Loan Group on such Distribution
Date, the Trustee will be required to make a claim for such insufficiency from
the Certificate Insurer under the related Certificate Insurance Policy. The
amount of any Insured Payment made by the Certificate Insurer will be deposited
in the Asset Proceeds Account to pay to the Holders of the related Classes of
the Class A Certificates.
On each Distribution Date, and following the application of all
allocations, transfers and deposits heretofore described under this caption,
from amounts (including any related Insured Payment) then on deposit in the
Asset Proceeds Account with respect to the related Mortgage Loan Group, the
Paying Agent will be required to distribute to the Holders of each Class of the
Class A Certificates, the related Class A Distribution Amount for such
Distribution Date.
To the extent that the aggregate Certificate Principal Balance of the
Variable Rate Certificates has not been reduced to zero on the Last Scheduled
Distribution Date therefor, the Certificate Insurer will include as an Insured
Payment to the Variable Rate Certificates on such Distribution Date an amount
which shall be sufficient to reduce such aggregate Certificate Principal Balance
to zero (any such payment, the "Variable Rate Final Payment"). See "DESCRIPTION
OF THE CLASS A CERTIFICATES--Class A Distributions and Insured Payments" and
"THE CERTIFICATE INSURANCE POLICIES AND THE CERTIFICATE INSURER" herein.
Pre-Funding Account
On the Closing Date, the Original Pre-Funded Amount will be deposited
in the Pre-Funding Account, which account shall be an Eligible Account in the
name of the Trustee and shall be part of the Trust. During the Funding Period,
the Pre-Funded Amount will be maintained in the Pre-Funding Account. The
Original Pre-Funded Amount will be reduced during the Funding Period by the
amount thereof used to purchase Subsequent Mortgage Loans for addition to the
Fixed Rate Group or the Variable Rate Group in accordance with the Agreement.
Any Pre-Funded Amount with respect to a Mortgage Loan Group remaining at the end
of the Funding Period will be distributed to the Holders of the related Class or
Classes of the Class A Certificates then entitled to receive principal in
accordance with the terms of the Agreement on the Distribution Date that
immediately follows the end of the Funding Period in reduction of the
Certificate Principal Balance of such Holder's Certificates, thus resulting in a
principal prepayment of such Class of Certificates.
Amounts on deposit in the Pre-Funding Account will be invested in
Eligible Investments. Pre-Funding Account Earnings will be deposited in the
Capitalized Interest Account. The Pre-Funding Account will not be an asset of
the REMIC.
Capitalized Interest Account
On the Closing Date, cash will be deposited in the Capitalized Interest
Account which account will be in the name of the Trustee on behalf of the Trust.
The amount on deposit in the Capitalized Interest Account, including
reinvestment income thereon, will be used by the Paying Agent to fund on each
Distribution Date to and including the Distribution Date immediately following
the end of the Funding Period the excess of (i) the sum of (a) the applicable
Class A Current Interest for such Distribution Date and (b) the related premium
amount to the Certificate Insurer for such Distribution Date over (ii) the
Interest Funds (as defined herein) for the related Mortgage Loan Group and
Master Servicer Remittance Date. Amounts remaining in the Capitalized Interest
Account at the end of the Funding Period will be paid to the Seller. The
Capitalized Interest Account will be an asset of the Trust but will not be an
asset of the REMIC (as defined herein).
Amounts on deposit in the Capitalized Interest Account will be invested
in Eligible Investments. The Capitalized Interest Account will not be an asset
of the REMIC.
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Calculation of One Month LIBOR
On the second business day preceding each Distribution Date other than
the first Distribution Date (each such date, an "Interest Determination Date"),
the Paying Agent will determine One Month LIBOR (as defined below).
"One Month LIBOR" means, as of any Interest Determination Date, the
rate for deposits in United States dollars for one-month U.S. dollar deposits
("LIBOR") which appears in the Telerate Page 3750, as of 11:00 a.m., (London
time) on such Interest Determination Date. If such rate does not appear on
Telerate Page 3750, the rate for that day will be determined on the basis of the
rates at which deposits in United States dollars are offered by the Reference
Banks at approximately 11:00 a.m., London time, on that day to prime banks in
the London interbank market for a period equal to the relevant Accrual Period
(commencing on the first day of such Accrual Period). The Paying Agent will
request the principal London office of each of the Reference Banks to provide a
quotation of its rate. If at least two such quotations are provided, the rate
for that day will be the arithmetic-mean of the quotations. If fewer than two
quotations are provided as requested, the rate for that day will be the
arithmetic-mean of the rates quoted by major banks in New York City, selected by
the Paying Agent, at approximately 11:00 a.m., New York City time, on that day
for loans in United States dollars to leading European banks for a period equal
to the relevant Accrual Period (commencing on the first day of such Accrual
Period).
"Telerate Page 3750" means the display page currently so designated on
the Dow Jones Telerate Service (or such other page as may replace that page on
that service for the purpose of displaying comparable rates or prices) and
"Reference Banks" means leading banks selected by the Paying Agent and engaged
in transactions in Eurodollar deposits in the international Eurocurrency market.
Book Entry Registration of the Class A Certificates
The Class A Certificates will be book-entry Certificates (the
"Book-Entry Certificates"). Beneficial Holders may elect to hold their
Book-Entry Certificates directly through DTC in the United States, or CEDEL or
Euroclear (in Europe) if they are participants of such systems ("Participants"),
or indirectly through organizations which are Participants. The Book-Entry
Certificates will be issued in one or more certificates per class of Class A
Certificates which in the aggregate equal the principal balance of such Class A
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
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 principal amounts of $1,000 and in integral multiples
in excess thereof. Except as described below, no Beneficial Holder 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 "Holder" of such Book-Entry Certificates will be
Cede & Co., as nominee of DTC. Beneficial Holders will not be Holders as that
term is used in the Agreement. Beneficial Holders are only permitted to exercise
their rights indirectly through Participants and DTC.
The Beneficial Holder'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 Holder'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 Holder's Financial Intermediary is not a DTC Participant and on
the records of CEDEL or Euroclear, as appropriate).
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Beneficial Holders will receive all distributions of principal of, and
interest on, the Book-Entry 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 Certificates and is required to receive and transmit
distributions of principal of, and interest on, such Certificates. Participants
and indirect participants with whom Beneficial Holders have accounts with
respect to Book-Entry Certificates are similarly required to make book-entry
transfers and receive and transmit such distributions on behalf of their
respective Beneficial Holders. Accordingly, although Beneficial Holders will not
possess Certificates, the Rules provide a mechanism by which Beneficial Holders
will receive distributions and will be able to transfer their interests.
Beneficial Holders will not receive or be entitled to receive
certificates representing their respective interests in the Class A
Certificates, except under the limited circumstances described below. Unless and
until Definitive Certificates are issued, Beneficial Holders who are not
Participants may transfer ownership of Class A Certificates only through
Participants and indirect participants by instructing such Participants and
indirect participants to transfer such Class A Certificates, by book-entry
transfer, through DTC for the account of the purchasers of such Class A
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of such Class A 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 Beneficial Holders.
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 settlements in DTC. For information with respect to tax
documentation procedures relating to the Certificates, see "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES -- Backup Withholding" in the Prospectus and "GLOBAL
CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES -- Certain U.S. Federal
Income Tax Documentation Requirements" in Annex I in this Prospectus Supplement.
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). 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 ("DTC 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 participant 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.
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Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 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 Morgan Guaranty Trust Company of New
York, Brussels Office (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 an office of a New York trust company 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 Paying Agent 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 payment to the Beneficial Holders 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 Holders of the Book-Entry Certificates
that it represents.
Under a book-entry format, Beneficial Holders of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Paying Agent to Cede. Distributions with
respect to Certificates held through CEDEL or Euroclear will be credited to the
cash accounts of CEDEL Participants or Euroclear Participants in accordance with
the relevant 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
Holder 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 provided by the Master Servicer
to Cede, as nominee of DTC, may be made available by DTC to Beneficial Holders
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 Holders 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 action
permitted to be taken by an Holder 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.
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None of Saxon Mortgage, the Seller, the Servicers, the Master Servicer,
the Certificate Insurer or 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, as nominee for
DTC, or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
Definitive Certificates will be issued to Beneficial Holders of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Seller advises the Trustee and the Certificate Insurer in writing that
DTC is no longer willing, qualified or able to discharge properly its
responsibilities as a nominee and depository with respect to the Book-Entry
Certificates and the Seller or the Trustee is unable to locate a qualified
successor, (b) the Seller, at its sole option, elects to terminate a book-entry
system through DTC or (c) DTC, at the direction of the Beneficial Holders
representing a majority of the outstanding Percentage Interests of the Class A
Certificates, advises the Trustee 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 Holders.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Beneficial
Holders and the Certificate Insurer 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 Holders under the 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.
THE CERTIFICATE INSURANCE POLICIES AND THE CERTIFICATE INSURER
The following information has been supplied by the Certificate Insurer
for inclusion in this Prospectus Supplement.
The Certificate Insurer, in consideration of the payment of the premium
and subject to the terms of the Certificate Insurance Policies thereby
unconditionally and irrevocably guarantees to any Owner (as defined below) that
an amount equal to each full and complete Insured Payment will be received by
the Trustee (directly or through the Paying Agent) or its successor, as trustee
for the Owners, on behalf of the Owners from the Certificate Insurer, for
distribution by the Trustee to each Owner of each Owner's proportionate share of
the Insured Payment. The Certificate Insurer's obligations under the Certificate
Insurance Policies with respect to a particular Insured Payment shall be
discharged to the extent funds equal to the applicable Insured Payment are
received by the Trustee, whether or not such funds are properly applied by the
Trustee. Insured Payments shall be made only at the time set forth in the
Certificate Insurance Policies and no accelerated Insured Payments shall be made
regardless of any acceleration of the Class A Certificates, unless such
acceleration is at the sole option of the Certificate Insurer.
To the extent the aggregate Certificate Principal Balance of the
Variable Rate Certificates is greater than zero on the Last Scheduled
Distribution Date therefor (November 26, 2026), the Certificate Insurer will be
required to distribute to the Variable Rate Certificates the Variable Rate Final
Payment. The Certificate Insurer will assume all rights of the Variable Rate
Certificateholders upon such payment.
Notwithstanding the foregoing paragraph, the Certificate Insurance
Policies do not cover shortfalls, if any, attributable to the liability of the
Trust, the REMIC or the Trustee for withholding taxes, if any (including
interest and penalties in respect of any such liability).
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The Certificate Insurer will pay any Insured Payment that is a
Preference Amount on the second Business Day following receipt on a Business Day
by the Fiscal Agent (as described below) of (i) a certified copy of the order
requiring the return of a preference payment, (ii) an opinion of counsel
satisfactory to the Certificate Insurer that such order is final and not subject
to appeal, (iii) an assignment in such form as is reasonably required by the
Certificate Insurer, irrevocably assigning to the Certificate Insurer all rights
and claims of the Owner relating to or arising under the Class A Certificates
against the debtor which made such preference payment or otherwise with respect
to such preference payment, (iv) appropriate instruments to effect the
appointment of the Certificate Insurer as agent for such Owner in any legal
proceeding related to such preference payment and (v) a Notice (as described
below), such instruments being in a form satisfactory to the Certificate
Insurer, provided that if such documents are received after 12:00 noon New York
City time on such Business Day, they will be deemed to be received on the
following Business Day. Such payments shall be disbursed to the receiver or
trustee in bankruptcy named in the final order of the court exercising
jurisdiction on behalf of the Owner and not to any Owner directly unless such
Owner has returned principal or interest paid on the Class A Certificates to
such receiver or trustee in bankruptcy, in which case such payment shall be
disbursed to such Owner.
The Certificate Insurer will pay any other amount payable under the
Certificate Insurance Policies no later than 12:00 noon New York City time on
the later of the Distribution Date on which the related Class A Distribution
Amount is due or the second Business Day following receipt in New York, New York
on a Business Day by State Street Bank and Trust Company, N.A., as Fiscal Agent
for the Certificate Insurer or any successor fiscal agent appointed by the
Certificate Insurer (the "Fiscal Agent") of a Notice (as described below);
provided that if such Notice is received after 12:00 noon New York City time on
such Business Day, it will be deemed to be received on the following Business
Day. If any such Notice received by the Fiscal Agent is not in proper form or is
otherwise insufficient for the purpose of making a claim under the related
Certificate Insurance Policy, it shall be deemed not to have been received by
the Fiscal Agent for purposes of this paragraph, and the Certificate Insurer or
the Fiscal Agent, as the case may be, shall promptly so advise the Trustee and
the Trustee may submit an amended Notice.
Insured Payments due under the Certificate Insurance Policies, unless
otherwise stated in the Certificate Insurance Policies, will be disbursed by the
Fiscal Agent to the Trustee (or, upon written request of the Trustee, to the
Paying Agent) on behalf of Owners by wire transfer of immediately available
funds in the amount of the Insured Payment less, in respect of Insured Payments
related to Preference Amounts, any amount held by the Trustee for the payment of
such Insured Payment and legally available therefor.
The Fiscal Agent is the agent of the Certificate Insurer only and the
Fiscal Agent shall in no event be liable to Owners for any acts of the Fiscal
Agent or any failure of the Certificate Insurer to deposit, or cause to be
deposited, sufficient funds to make payments due under the Certificate Insurance
Policies.
Subject to the terms of the Agreement, the Certificate Insurer shall be
subrogated to the rights of each Owner to receive distributions on the Class A
Certificates to the extent of any payment by the Certificate Insurer under the
Policy and shall also be entitled to direct reimbursement of payments made under
the Certificate Insurance Policy according to the terms and in the priority set
forth in the Agreement.
As used in the Certificate Insurance Policies, the following terms
shall have the following meanings:
"Agreement" means the Trust Agreement dated as of November 1,
1996, among Saxon Asset Securities Company, as Seller, Texas Commerce
Bank National Association, as Master Servicer, and Citibank, N.A., as
Trustee, without regard to any amendment or supplement thereto, unless
the Certificate Insurer shall have consented in writing thereto.
"Business Day" means any day other than a Saturday, a Sunday
or a day on which the Certificate Insurer and banking institutions in
New York City or in the city in which the corporate trust office of the
Trustee or the Paying Agent under the Agreement is located are
authorized or obligated by law or executive order to close.
"Deficiency Amount" means with respect to either Mortgage Loan
Group and any Distribution Date, (i) the excess, if any, of (a) the sum
of the related Class A Current Interest and the related Subordination
Deficit, if any, over (b) the related Total Available Funds (after
applying the cross collateralization provisions of the Agreement, after
deducting the related Certificate Insurer premium and without regard to
any related Insured Payment to be made with respect to such
Distribution Date which would otherwise be included in the related
Total Available Funds).
S-39
<PAGE>
"Insured Payment" means (i) as of any Distribution Date any
Deficiency Amount; (ii) any Preference Amount; and (iii) the Final
Variable Rate Payment, if required.
"Notice" means the telephonic or telegraphic notice, promptly
confirmed in writing by telecopy substantially in the form of the
exhibit attached to the related Certificate Insurance Policy, the
original of which is subsequently delivered by registered or certified
mail, from the Trustee specifying the Insured Payment which shall be
due and owing on the applicable Distribution Date.
"Owner" means each Holder (as defined in the Agreement) of a
Class A Certificate who, on the applicable Distribution Date, is
entitled under the terms of the applicable Class A Certificate to
payment thereunder.
"Paying Agent" means Texas Commerce Bank National Association
and its successors and assigns.
"Preference Amount" means any amount previously distributed to
an Owner on the Class A Certificates that is recoverable and sought to
be recovered as a voidable preference by a trustee in bankruptcy
pursuant to the United States Bankruptcy Code (11 U.S.C.), as amended
from time to time, in accordance with a final nonappealable order of a
court having competent jurisdiction.
Capitalized terms used in the Certificate Insurance Policies and not
otherwise defined therein shall have the respective meanings set forth in the
Agreement as of the date of execution of the Certificate Insurance Policies,
without giving effect to any subsequent amendment or modification to the
Agreement unless such amendment or modification has been approved in writing by
the Certificate Insurer.
Any notice under the Certificate Insurance Policies or service of
process on the Fiscal Agent may be made at the address listed below for the
Fiscal Agent of the Certificate Insurer or such other address as the Certificate
Insurer shall specify in writing to the Trustee.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway, New
York, New York 10006, Attention: Municipal Registrar and Paying Agency or such
other address as the Fiscal Agent shall specify to the Trustee in writing.
Each Certificate Insurance Policy is being issued under and pursuant
to, and shall be construed under, the laws of the State of New York, without
giving effect to the conflict of laws principles thereof.
The insurance provided by each Certificate Insurance Policy is not
covered by the Property/Casualty Insurance Security Fund specified in Article 76
of the New York Insurance Law.
The Certificate Insurance Policies are not cancelable for any reason.
The premium on a Certificate Insurance Policy is not refundable for any reason
including payment, or provision being made for payment, prior to the maturity of
the Class A Certificates.
The Certificate Insurer is the principal operating subsidiary of MBIA
Inc., a New York Stock Exchange listed company. MBIA Inc. is not obligated to
pay the debts of or claims against the Certificate Insurer. The Certificate
Insurer is domiciled in the State of New York and licensed to do business in,
and subject to regulation under the laws of, all 50 states, the District of
Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern
Mariana Islands, the Virgin Islands of the United States and the Territory of
Guam. The Certificate Insurer has two European branches, one in the Republic of
France and the other in the Kingdom of Spain. New York has laws prescribing
minimum capital requirements, limiting classes and concentrations of investments
and requiring the approval of policy rates and forms. State laws also regulate
the amount of both the aggregate and individual risks that may be insured, the
payment of dividends by the Insurer, changes in control and transactions among
affiliates. Additionally, the Insurer is required to maintain contingency
reserves on its liabilities in certain amounts and for certain periods of time.
S-40
<PAGE>
The consolidated financial statements of the Certificate Insurer, a
wholly owned subsidiary of MBIA Inc., and its subsidiaries as of December 31,
1995 and December 31, 1994 and for the three years ended December 31, 1995,
prepared in accordance with generally accepted accounting principles, included
in the Annual Report on Form 10-K of MBIA Inc. for the year ended December 31,
1995 and the consolidated financial statements of the Certificate Insurer and
its subsidiaries for the nine months ended September 30, 1996 and for the
periods ending September 30, 1996 and September 30, 1995 included in the
Quarterly Report on Form 10-Q of MBIA Inc. for the period ending September 30,
1996, are hereby incorporated by reference into this Prospectus Supplement and
shall be deemed to be a part hereof. Any statement contained in a document
incorporated by reference herein shall be modified or superseded for purposes of
this Prospectus Supplement to the extent that a statement contained herein or in
any other subsequently filed document which also is incorporated by reference
herein modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus Supplement.
All financial statements of the Certificate Insurer and its
subsidiaries included in documents filed by MBIA Inc. pursuant to Section 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended,
subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Class A Certificates shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing such documents.
The tables below present selected financial information of the
Certificate Insurer determined in accordance with statutory accounting practices
prescribed or permitted by insurance regulatory authorities ("SAP") as well as
generally accepted accounting principles ("GAAP"):
<TABLE>
<CAPTION>
SAP
--------------------------------------------------------------------------
December 31, September 30,
1995 1996
------------------------------------ ---------------------------------
(Audited) (Unaudited)
(in millions)
<S> <C>
Admitted Assets $3,814 $4,348
Liabilities 2,540 2,911
Capital and Surplus 1,274 1,437
<CAPTION>
GAAP
--------------------------------------------------------------------------
December 31, September 30,
1995 1996
------------------------------------ ------------------------------------
(Audited) (Unaudited)
(in millions)
<S> <C>
Assets $4,463 $4,861
Liabilities 1,937 2,161
Shareholder's Equity 2,526 2,700
</TABLE>
Copies of the financial statements of the Certificate Insurer
incorporated by reference herein and copies of the Insurer's 1995 year-end
audited financial statements prepared in accordance with statutory accounting
practices are available, without charge from the Certificate Insurer. The
address of the Certificate Insurer is 113 King Street, Armonk, New York 10504.
The telephone number of the Certificate Insurer is (914) 273-4545.
The Certificate Insurer does not accept any responsibility for the
accuracy or completeness of this Prospectus Supplement or any information or
disclosure contained herein, or omitted herefrom, other than with respect to the
accuracy of the information regarding the Certificate Insurance Policies and
Certificate Insurer set forth under "THE CERTIFICATE INSURANCE POLICIES AND THE
CERTIFICATE INSURER". Additionally, the Certificate Insurer makes no
representation regarding the Class A Certificates, or the advisability of
investing in the Class A Certificates.
Moody's rates the claims paying ability of the Certificate Insurer
"Aaa."
Standard & Poor's rates the claims paying ability of the Certificate
Insurer "AAA."
Fitch Investors Service, L.P. rates the claims paying ability of the
Certificate Insurer "AAA."
S-41
<PAGE>
Each rating of the Certificate Insurer should be evaluated
independently. The ratings reflect the respective rating agency's current
assessment of the creditworthiness of the Certificate Insurer and its ability to
pay claims on its policies of insurance. Any further explanation as to the
significance of the above ratings may be obtained only from the applicable
rating agency.
The above ratings are not recommendations to buy, sell or hold the
Class A Certificates, and such ratings may be subject to revision or withdrawal
at any time by the rating agencies. Any downward revision or withdrawal of any
of the above ratings may have an adverse effect on the market price of the Class
A Certificates. The Certificate Insurer does not guarantee the market price of
the Class A Certificates, nor does it guarantee that the ratings on the Class A
Certificates will not be revised or withdrawn.
THE AGREEMENT
In addition to the provisions of the Agreement summarized elsewhere in
this Prospectus Supplement, there is set forth below a summary of certain other
provisions of the Agreement. See also "THE AGREEMENT -- The Trustee", "--
Administration of Accounts", "-- Events of Default and Remedies", "--
Amendment", and "-- Termination" in the Prospectus.
Formation of the Trust
On the Closing Date, the Trust will be created and established pursuant
to the Agreement. On such date, the Seller will sell without recourse the
Mortgage Loans to the Trust and the Trust will issue the Class A Certificates to
the Holders thereof pursuant to the Agreement. Reference is made to the
Prospectus for important information in addition to that set forth herein
regarding the terms and conditions of the Certificates. The Seller will provide
to any prospective or actual Certificateholder, upon written request, a copy
(without exhibits) of the Agreement. Requests should be addressed to Saxon Asset
Securities Company, 4880 Cox Road, Glen Allen, Virginia 23060, Attention:
Secretary.
The Trust created pursuant to the Agreement will consist of (a) the
Mortgage Loans, (b) such assets as from time to time are identified as deposited
in any account held for the benefit of the related Certificateholders, (c) any
Mortgaged Premises acquired on behalf of such Certificateholders by foreclosure
or by deed in lieu of foreclosure, (d) the rights of the Trustee to receive the
proceeds of applicable insurance policies and funds, if any, required to be
maintained pursuant to the Agreement, (e) certain rights of the Seller to the
enforcement of representations and warranties made by Saxon Mortgage relating to
the Mortgage Loans and (f) the Servicing Agreement. On the Closing Date, the
Seller will also deposit with the Trustee an amount in respect of Mortgage Loans
that do not provide for a monthly payment prior to the first Distribution Date.
The Class A Certificates will not represent an interest in or an
obligation of, nor will the Mortgage Loans be guaranteed by, the Seller, the
Servicers, the Master Servicer or the Trustee.
Reports to Certificateholders
On each Distribution Date the Master Servicer is required to report in
writing to each Holder of a Class A Certificate and the Certificate Insurer:
(i) the amount of the distribution with respect to
each Class of Class A Certificates (based on a Class A
Certificate in the original principal amount of $1,000);
(ii) the amount of such distributions allocable to
principal, separately identifying the aggregate amount of any
prepayments or other recoveries of principal included therein,
and any Subordination Increase Amount with respect to the
related Mortgage Loan Group (based on a Class A Certificate in
the original principal amount of $1,000);
(iii) the amount of such distributions allocable to
interest (based on a Class A Certificate in the original
principal amount of $1,000);
S-42
<PAGE>
(iv) if the distribution with respect to any Class of
the Class A Certificates on such Distribution Date was less
than the related Class A Distribution Amount on such
Distribution Date, the allocation thereof to the related
Classes of the Class A Certificates resulting therefrom;
(v) the amount of any Insured Payment included in the
amounts distributed to the Class A Certificates on such
Distribution Date;
(vi) the Certificate Principal Balance of each Class
of Class A Certificates and the aggregate Scheduled Principal
Balance of each Group, in each case after giving effect to any
Class A Principal Distribution on such Distribution Date;
(vii) the Subordinated Amount or Subordination
Deficit, if any, for each Group remaining after giving effect
to all distributions and transfers on such Distribution Date;
(viii) the total of any Substitution Shortfalls and
any repurchase amounts included in such distribution with
respect to each Group;
(ix) the weighted average Net Rate of the Mortgage
Loans with respect to each Group;
(x) such other information as the Certificate
Insurer may reasonably request with respect to Delinquent
Mortgage Loans;
(xi) the largest Mortgage Loan balance outstanding
in each Group;
(xii) the Servicing Fees, Master Servicing Fees and
related premium amount to the Certificate Insurer allocable to
each Group;
(xiii) One-Month LIBOR on the most recent Interest
Determination Date; and
(xiv) the Pass-through Rates for the Class A-6
Certificates for the Current Accrual Period; and
(xv) for each Distribution Date during the Funding
Period, the Pre-Funded Amount allocable to each Group.
Assignment of Mortgage Loans
The Seller is required, with respect to each Mortgage Loan, to deliver
or cause to be delivered to the Trustee or Custodian the related mortgage note
(the "Note") endorsed to the order of the Trustee or Custodian or in blank,
evidence of recording of the Mortgage, and certain other original documents
relating to the Mortgage Loans.
Currently, the Seller is also required to deliver an assignment of such
Mortgage in recordable form either naming the Trustee as assignee or in blank,
and to cause such assignment to be recorded in the appropriate public office for
real property records. See "THE TRUSTS -- Assignment of Mortgage Assets" in the
Prospectus.
Delivery and Substitution of Mortgage Loans
If any Mortgage Loan proposed to be included in the Mortgage Loan
Groups is not delivered with all the required documentation on the Closing Date,
the Seller intends to deposit cash on an interim basis with the Trustee in an
amount equal to the Scheduled Principal Balance of any such Mortgage Loan, plus
applicable interest for one month on the amount of cash deposited. If cash is
deposited, the Seller will use its reasonable best efforts to provide the
Trustee with Mortgage Loans consistent with the terms hereof before the first
Distribution Date.
S-43
<PAGE>
Under the limited circumstances specified in the Agreement, certain
mortgage loans acceptable to the Certificate Insurer may be substituted for
Mortgage Loans initially delivered to the Custodian. It is anticipated that any
permitted substitution will not materially change the characteristics of the
Mortgage Pools, as set forth above. See "THE TRUSTS -- The Mortgage Assets --
Substitution of Mortgage Assets" in the Prospectus.
The Trustee, Certificate Registrar, Paying Agent and the Custodian
Citibank, N.A., a national banking association, will act as Trustee of
the Trust. The mailing address of the Trustee's Corporate Trust Office is 120
Wall Street, New York, New York 10043, and its telephone number is (212)
412-6179. Texas Commerce Bank National Association will act Certificate
Registrar and Paying Agent for the Certificates and as Custodian of the Mortgage
Loans. The mailing address of the Certificate Registrar and Paying Agent is 601
Travis, Houston, Texas 77002. The mailing address of the Custodian's office is
801 West Greens Road, Suite 200, Houston, Texas 77067.
Voting Rights
The voting rights of the Trust will be allocated as follows: 1% to the
Subordinated Certificates and 99% to the Classes of Class A Certificates in
proportion to their respective outstanding Principal Balances. In the absence of
a default on the part of the Certificate Insurer, the Certificate Insurer will
be entitled to exercise all voting rights of the Class A Certificateholders
without the consent of such Class A Certificateholders, and such Class A
Certificateholders may exercise such rights only with the prior written consent
of the Certificate Insurer.
Termination of the Trust
The Agreement provides that the Trust will terminate upon the payment
to the Holders of all Class A Certificates and the Certificate Insurer, from
amounts other than those available under the Certificate Insurance Polices of
all amounts required to be paid to such Holders and the Certificate Insurer upon
the last to occur of (a) the final payment or other liquidation (or any advance
made with respect hereto) of the last Mortgage Loan, (b) the disposition of all
property acquired in respect of any Mortgage Loan remaining in the Trust and (c)
at any time when a qualified liquidation (as defined in the Code) of the Trust
is effected as described below.
Optional Termination
By Owners of Class R Certificate. At their option, the Holders of a
majority in interest of the Class R Certificates then outstanding may, on any
Distribution Date when the aggregate outstanding Scheduled Principal Balances of
the Mortgage Loans are less than 10% of the Maximum Collateral Amount (the first
such Distribution Date, "Initial Optional Termination Date"), purchase from the
Trust all (but not fewer than all) remaining Mortgage Loans, in whole only, and
other property acquired by foreclosure, deed in lieu of foreclosure, or
otherwise then constituting the Trust at a price equal to 100% of the aggregate
Schedule Principal Balances of the Mortgage Loans plus one month's interest
computed as provided in the Agreement plus any Insurer Reimbursable Amount with
respect to either Mortgage Loan Group.
Termination Upon Loss of REMIC Status. Following a final determination
by the Internal Revenue Service or by a court of competent jurisdiction, in
either case from which no appeal is taken within the permitted time for such
appeal, or if any appeal is taken, following a final determination of such
appeal from which no further appeal may be taken, to the effect that the REMIC
does not and will no longer qualify as a "REMIC" pursuant to Section 860D of the
Code (the "Final Determination"), at any time on or after the date which is 30
calendar days following such Final Determination, the Certificate Insurer or the
Holders of a majority in Percentage Interests represented by the Class A
Certificates then outstanding with the consent of the Certificate Insurer may
direct the Trustee on behalf of the Trust to adopt a plan of complete
liquidation acceptable to the Certificate Insurer.
Sale of Mortgage Loans
On the Closing Date the Seller will sell without recourse to the Trust
all right, title and interest of the Seller in each Initial Mortgage Loan listed
on the related schedules of the Mortgage Loans delivered to the Trustee prior to
the Closing Date with respect to the Initial Mortgage Loans and all its right,
title and interest in all scheduled payments due on each Initial Mortgage Loan
on or after the Cut-Off Date and all principal and interest collected on each
such Initial Mortgage Loan on or after the Cut-Off Date. On each Subsequent
Sales Date the Seller will sell without recourse to the Trust all right, title
and interest of the Seller in each Subsequent Mortgage Loan listed on the
related schedules of Subsequent Mortgage Loans and all its right, title and
interest in all scheduled payments due on each Mortgage Loan on or after the
related cut-off date and all principal and interest collected on each such
Subsequent Mortgage Loan on and after such cut-off date.
S-44
<PAGE>
In connection with the sale of Mortgage Loans, the Seller will be
required to deliver to the Custodian a file consisting of (i) the original Notes
or certified copies thereof, endorsed by the Originator thereof in blank or to
the order of the holder, (ii) originals of all intervening assignments, showing
a complete chain of title from origination to the applicable Originators, if
any, including warehousing assignments, with evidence of recording thereon,
(iii) originals of all assumption and modification agreements, if any, (iv)
unless such Mortgage Loan is covered by a counsel's opinion to the effect that
recording is not required in order to protect the right, title and interest of
the Trustee in such Mortgage Loan, either: (a) the original Mortgage, with
evidence of recording thereon, or a certified copy of the Mortgage as recorded,
or (b) if the original Mortgage has not yet been returned from the recording
office, a certified copy of the Mortgage, and (v) evidence of title insurance
with respect to the mortgaged property in the form of a binder or commitment.
The Custodian will agree, for the benefit of the Holders and the Certificate
Insurer, as their interests may appear, to review each such file on or before
the Closing Date (or Subsequent Sales Date) and again within 90 days after the
Closing Date (or Subsequent Sales Date) or to ascertain that all required
documents (or certified copies of documents) have been executed and received.
Pursuant to the terms of the Agreement, the Seller shall assign to the
Trustee for the benefit of the Holders of the Certificates and the Certificate
Insurer, as their interests may appear, all the Seller's right, title and
interest in the Sales Agreement and any Subsequent Sales Agreement insofar as it
relates to the representations and warranties made therein by Saxon Mortgage in
respect of the origination of the Mortgage Loans and the remedies provided for
breach of such representations and warranties. Upon discovery by the Trustee,
the Master Servicer or the Certificate Insurer of a breach of any
representation, warranty or covenant which materially and adversely affects the
interests of the Holders of the Certificates or of the Certificate Insurer, such
party will promptly notify the Seller, Saxon Mortgage and the Certificate
Insurer. Saxon Mortgage will have 60 days from its discovery or its receipt of
such notice to cure such breach or repurchase the Mortgage Loan or to substitute
a qualified substitute mortgage loan.
Events of Default
The Master Servicer will have the right which may only be exercised
with the consent of and must be exercised at the direction of the Certificate
Insurer to direct the termination of a Servicer in the event of a breach by such
Servicer under its Servicing Agreement. In the event of such termination, the
Master Servicer will be required to appoint a successor servicer acceptable to
the Certificate Insurer to assume the obligations of such Servicer under the
Servicing Agreement, including the obligation to make Advances (the Master
Servicer will not be obligated to pay Month End Interest). See "THE MORTGAGE
LOAN POOL -- Advances and Month End Interest" in this Prospectus Supplement. If
the Master Servicer is unable to appoint a successor servicer acceptable to the
Certificate Insurer, the Trustee will appoint or petition a court of competent
jurisdiction for the appointment of a suitable mortgage loan servicing
institution to act as successor servicer under the Servicing Agreement. Pending
such appointment, the Master Servicer will be obligated to service the Mortgage
Loans. Any successor servicer, including the Trustee, will be entitled to
compensation arrangements similar to (but no greater than) those provided to the
predecessor Servicer. See "SERVICING OF THE MORTGAGE LOANS -- General" in the
Prospectus.
Governing Law
The Agreement and each Certificate will be construed in accordance with
and governed by the laws of the State of New York applicable to agreements made
and to be performed therein.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion of certain of the material anticipated federal
income tax consequences of the purchase, ownership and disposition of the Class
A Certificates is to be considered only in connection with "Certain Federal
Income Tax Consequences" in the Prospectus. The discussion herein and in the
Prospectus is based upon laws, regulations, rulings and decisions now in effect,
all of which are subject to change. The discussion below and in the Prospectus
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 federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of the Class A Certificates.
S-45
<PAGE>
REMIC Elections
The Trustee will cause an election to be made to treat the Trust as a
REMIC for federal income tax purposes. In the opinion of Arter & Hadden, counsel
to the Seller, for federal income tax purposes, assuming (i) a REMIC election is
made, (ii) the Agreement is fully executed, delivered and enforceable against
the parties thereto in accordance with its terms, (iii) the transactions
described herein are completed on substantially the terms and conditions set
forth herein and (iv) compliance with the Trust Agreement, the Trust will be
treated as a REMIC and each Class of Class A Certificates will be treated as
"regular interests" in the REMIC and generally will be treated as debt
instruments issued by the REMIC. Holders of Class A Certificates that otherwise
report income under a cash method of accounting will be required to report
income with respect to such Class A Certificates under an accrual method. The
Class A Certificates may be issued with "original issue discount" for federal
income tax purposes. In that connection, the Trust will report the variable rate
of interest on the Class A-6 Certificates as "qualified stated interest". The
prepayment assumptions to be used in determining whether the Class A-1, Class
A-2, Class A-3, Class A-4, Class A-5 and Class A-6 Certificates are issued with
original issue discount and the rate of accrual of original issue discount are
100% of the respective Prepayment Assumptions as defined herein. No
representation is made that any of the Mortgage Loans will prepay at this rate
or any other rate. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES -- REMIC
Certificates" in the Prospectus.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain requirements on those employee benefit plans and
individual retirement arrangements (and entities whose underlying assets include
plan assets by reason of such a plan's or arrangement's investment in such
entities) to which it applies ("Plan") and on those persons who are fiduciaries
with respect to such Plans. Any Plan fiduciary which proposes to cause a Plan to
acquire any of the Class A Certificates should consult with counsel with respect
to the consequences under ERISA and the Code of the Plan's acquisition and
ownership of such Certificates. See "ERISA CONSIDERATIONS -- Plan Asset
Regulations," "-- Prohibited Transaction Class Exemption," "-- Tax Exempt
Investors" and "--Consultation with Counsel" in the Prospectus.
Section 406 of ERISA prohibits Plans from engaging in certain
transactions involving the assets of such Plans with Parties in Interest with
respect to such Plans, unless a statutory or administrative exemption is
applicable to the transaction. Excise taxes under Section 4975 of the Code,
penalties under Section 502 of ERISA and other penalties may be imposed on Plan
fiduciaries and Parties in Interest (or "disqualified persons" under the Code)
that engage in "prohibited transactions" involving assets of a Plan. Individual
retirement arrangements and other plans that are not subject to ERISA, but are
subject to Section 4975 of the Code, and disqualified persons with respect to
such arrangements and plans, also may be subject to excise taxes and other
penalties if they engage in prohibited transactions. Furthermore, based on the
reasoning of the United States Supreme Court in John Hancock Life Ins. Co. v.
Harris Trust and Sav. Bank, 510 U.S. 86 (1993) an insurance company may be
subject to excise taxes and other penalties if such insurance company's general
account is deemed to include assets of the Plans investing in the general
account (e.g., through the purchase of an annuity contract).
The Department of Labor (the "DOL") has issued a regulation (the "Plan
Asset Regulation") describing what constitutes the assets of a Plan when the
Plan acquires an equity interest in another entity. The Plan Asset Regulation
states that, unless an exemption described in the regulation is applicable, the
underlying assets of an entity considered, for purposes of ERISA, to be the
assets of the investing Plan. Pursuant to the Plan Asset Regulation, if the
assets of the Trust were deemed to be plan assets by reason of a Plan's
investment in any Class A Certificates, such plan assets would include an
undivided interest in any exemption, the purchase, sale or holding of any
Certificate by a Plan subject to Section 406 of ERISA or Section 4975 of the
Code might result in prohibited transactions and the imposition of excise taxes
and civil penalties.
The DOL has issued to Prudential Securities Incorporated an individual
prohibited transaction exemption, Prohibited Transaction Exemption 90-32 (the
"Exemption"), which generally exempts from the application of the prohibited
transaction provision of Section 406(a), Section 406(b)(1) and Section 406(b)(2)
of ERISA and the excise taxes imposed pursuant to Sections 4975(a) and (b) of
the Code, relating to the initial purchase, the holding and the subsequent
resale by Plans of certificates in pass-through trusts that consist of certain
receivables, loans and other obligations with respect to which Prudential
Securities Incorporated or any of its affiliates is the sole underwriter or the
manager or co-manager of the underwriting syndicate; provided that the
conditions and requirements of the Exemption are met. The loans covered by the
Exemption include mortgage loans such as the Mortgage Loans.
S-46
<PAGE>
Among the conditions that must be satisfied for the Exemption to apply
are the following:
(1) the acquisition of the certificates by a Plan is 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;
(2) the rights and interests evidenced by the certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the trust;
(3) the certificates acquired by the Plan have received a
rating at the time of such acquisition that is one of the three highest
generic rating categories from either Standard & Poor's, Moody's, Duff
& Phelps Credit Rating Co. ("D&P") or Fitch Investors Service, Inc.
("Fitch");
(4) the Trustee must not be an affiliate of any other member
of the Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the
Underwriters in connection with the distribution of the certificates
represents not more than reasonable compensation for underwriting the
certificates; the sum of all payments made to and retained by the
Seller pursuant to the assignment of the loans to the Trust represents
not more than the fair market value of such loans; the sum of all
payments made to and retained by any Servicer represents not more than
reasonable compensation for such person's services under the Servicing
Agreement and reimbursement of such person's reasonable expenses in
connection therewith; and
(6) the Plan investing in the certificates is 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 Trust must also meet the following requirements:
(i) the corpus of the Trust must consist solely of assets of
the type that have been included in other investment pools;
(ii) certificates in such other investment pools must have
been rated in one of the three highest rating categories of Standard &
Poor's, Moody's, Fitch or D&P for at least one year prior to the Plan's
acquisition of certificates; and
(iii) certificates evidencing interests in such other
investment pools must have been purchased by investors other than Plans
for at least one year prior to the Plan's acquisition of certificates.
Moreover, the Exemption provides relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when
the Plan fiduciary causes a Plan to acquire certificates in a trust in which the
fiduciary (or its affiliate) is an obligor on the receivables held in the trust;
provided that, among other requirements, (i) in the case of an acquisition in
connection with the initial issuance of certificates, at least fifty percent of
each class of certificates in which Plans have invested is acquired by persons
independent of the Restricted Group and at least fifty percent of the aggregate
interest in the trust is acquired by persons independent of the Restricted
Group; (ii) such fiduciary (or its affiliate) is an obligor with respect to five
percent or less of the fair market value of the obligations contained in the
trust; (iii) the Plan's investment in certificates of any class does not exceed
twenty-five percent of all the certificates of that class outstanding at the
time of the acquisition; and (iv) immediately after the acquisition, no more
than twenty-five percent of the assets of the Plan with respect to which such
person is a fiduciary are invested in certificates representing an interest in
one or more trusts containing assets sold or serviced by the same entity. The
Exemption does not apply to Plans sponsored by the Seller, the Certificate
Insurer, the Underwriters, the Trustee, the Master Servicer, any obligor with
respect to Mortgage Loans included in the Trust Estate constituting more than
five percent of the aggregate unamortized principal balance of the assets in the
Trust Estate, or any affiliate of such parties (the "Restricted Group").
S-47
<PAGE>
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of the Exemption,
and the potential consequences in their specific circumstances, prior to making
an investment in the Class A Certificates. Moreover, each Plan fiduciary should
determine whether under the general fiduciary standards of investment procedure
and diversification an investment in the Class A 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.
RATINGS
It is a condition of the original issuance of the Class A Certificates
that they receive ratings of AAA by Standard & Poor's and Aaa by Moody's. The
ratings assigned to the Class A Certificates will be based on the claims-paying
ability of the Certificate Insurer. The ratings do not represent any assessment
of the likelihood or rate of principal prepayments, the likelihood that any
Variable Rate Certificates Carryover will be paid or any assessment of the
ability of the Seller to purchase Converted Mortgage Loans.
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. The security rating assigned to the Class A
Certificates should be evaluated independently of similar security ratings
assigned to other kinds of securities.
Explanations of the significance of such ratings may be obtained from
Moody's Investors Service, Inc., 99 Church Street, New York, New York, 10007 and
Standard & Poor's, a Division of The McGraw-Hill Companies, Inc., 25 Broadway,
New York, New York 10004. Such ratings will be the views only of such rating
agencies. There is no assurance that any such ratings will continue for any
period of time or that such ratings will not be revised or withdrawn. Any such
revision or withdrawal of such ratings may have an adverse effect on the market
price of the Class A Certificates.
LEGAL INVESTMENT CONSIDERATIONS
Upon the termination of the Funding Period, the Variable Rate
Certificates will constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") for so long as they
are rated in one of the two highest rating categories by one or more nationally
recognized statistical rating organizations. As such, the Variable Rate
Certificates will be legal investments for certain entities to the extent
provided in SMMEA, subject to state laws overriding SMMEA. In addition,
institutions whose investment activities are subject to review by federal or
state regulatory authorities may be or may become subject to restrictions, which
may be retroactively imposed by such regulatory authorities, on the investment
by such institutions in certain forms of mortgage related securities.
Furthermore, certain states have enacted legislation overriding the legal
investment provisions of SMMEA.
Although the Fixed Rate Certificates are expected to be rated "AAA" by
Standard & Poor's and "Aaa" by Moody's, the Fixed Rate Certificates will not
constitute "mortgage related securities" for purposes of SMMEA because some of
the Mortgage Loans in the Fixed Rate Group are secured by second liens.
Accordingly, many institutions with legal authority to invest in comparably
rated securities may not be legally authorized to invest in the Fixed Rate
Certificates.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement for the sale of the Class A Certificates, the Seller has agreed to
cause the Trust to sell and the Underwriters named below (the "Underwriters")
have severally agreed to purchase the principal amount of Class A Certificates
set forth below.
<TABLE>
<CAPTION>
Underwriters Fixed Rate Certificates Variable Rate Certificates
- ---------------------------------------------------- ----------------------------- ------------------------------
<S> <C>
Prudential Securities Incorporated $95,897,400 $111,363,600
Lehman Brothers -- 83,522,700
Merrill Lynch, Pierce Fenner & Smith
Incorporated 63,931,600 --
PaineWebber Incorporated -- 83,522,700
----------- ------------
$159,829,000 $278,409,000
=========== ===========
</TABLE>
S-48
<PAGE>
The Underwriters have advised the Seller that they propose to offer the
Class A Certificates for sale from time to time in one or more negotiated
transactions or otherwise, at market prices prevailing at the time of sale, at
prices related to such market prices or at negotiated prices. The Underwriters
may effect such transactions by selling such Certificates to or through dealers,
and such dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Underwriters or purchasers of the Class A
Certificates for whom they may act as agent. Any dealers that participate with
the Underwriters in the distribution of the Class A Certificates purchased by
the Underwriters may be deemed to be underwriters, and any discounts or
commissions received by them or the Underwriters and any profit on the resale of
Class A Certificates by them or the Underwriters may be deemed to be
underwriting discounts or commissions under the Securities Act.
Proceeds to the Seller are expected to be approximately $437,001,397
plus accrued interest, before deducting expenses payable by the Seller in
connection with the Class A Certificates, estimated to be $400,000. In
connection with the purchase and sale of the Class A Certificates, the
Underwriters may be deemed to have received compensation from the Seller in the
form of underwriting discounts.
The Seller, Saxon Mortgage and Dominion Mortgage Services, Inc., have
agreed to indemnify the Underwriters against certain liabilities including
liabilities under the Securities Act of 1933, as amended.
Certain of the Mortgage Loans may have been the subject of financing
provided by affiliates of the Underwriters.
REPORT OF EXPERTS
The consolidated financial statements of the Certificate Insurer and
its subsidiaries as of December 31, 1995 and December 31, 1994, and for each of
the three years ended December 31, 1995, incorporated by reference into this
Prospectus Supplement have been audited by Coopers & Lybrand, LLP, independent
accountants, as set forth in their report thereon and have been incorporated by
reference into this Prospectus Supplement in reliance upon the authority of such
firm as experts in accounting and auditing.
CERTAIN LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Seller by legal counsel of the Seller
and Saxon Mortgage, Arter & Hadden, Washington, D.C. Certain legal matters
relating to insolvency issues and certain federal income tax matters concerning
the Certificates will be passed upon for the Seller by Arter & Hadden,
Washington, D.C. Certain legal matters relating to the validity of the
Certificates will be passed upon for the Underwriters by Brown & Wood, LLP,
Washington, D.C. Certain legal matters relating to the Certificate Insurance
Policies will be passed upon for the Certificate Insurer by Kutak Rock, Omaha,
Nebraska.
S-49
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Mortgage
Loan Asset Backed Certificates Series 1996-2 "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 through CEDEL and Euroclear
will be conducted in the ordinary way in accordance with the normal rules and
operating procedures of CEDEL and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be
conducted according to DTC's rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of CEDEL and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, CEDEL and
Euroclear will hold positions on behalf of their participants through their
Relevant Depositary which in turn will hold such positions in their accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow DTC settlement practices. 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
asset-backed 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.
I-1
<PAGE>
Trading between DTC, Seller and CEDEL or Euroclear Participants. 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 Relevant 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 or a 360-day year of
twelve 30 days months as applicable to the related class of Global Securities.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. Payment
will then be made by the Relevant Depositary to the DTC Participant's account
against delivery of the Global Securities. After settlement has been completed,
the Global Securities will be credited to the respective clearing system and by
the clearing system, in accordance with its usual procedures, to the CEDEL
Participant's or Euroclear Participant's account. The securities credit will
appear the next day (European time) and the cash 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 account 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 to finance
settlement. Under this procedure, CEDEL Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day, assuming
they cleared the overdraft when the Global Securities were credited to their
accounts. However, interest on the Global Securities would accrue from the value
date. Therefore, in many cases the investment income on the Global Securities
earned during that one-day period may substantially reduce or offset the amount
of such overdraft charges, although the 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 crediting 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 credit
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 or a 360-day year of twelve 30 day months as applicable to the related
class of Global Securities. 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 CEDEL
Participant or Euroclear Participant the following day, and receipt of the cash
proceeds in the CEDEL Participant's or Euroclear Participant's account would be
back-valued to the value date (which would be the 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 is 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 trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
I-2
<PAGE>
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their CEDEL or Euroclear account
in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the CEDEL Participant or Euroclear
Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
CEDEL or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons (as defined below), 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 Holders of Global
Securities that are Non-U.S. Persons (as defined below) 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 effectively connected income (Form
4224). A Non-U.S. Person (as defined below), 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 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 (Holdership, 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 Certificate Holders or their 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 Holder of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds the
security (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, partnership or other entity organized in or under
the laws of the United States or any political subdivision thereof, (iii) an
estate or trust that is subject to U.S. federal income tax regardless of the
source of its income or (iv) a trust for which (a) a Court within the United
States is able to exercise primary supervision over the administration of the
trust and (b) one or more United States trustees have the authority to control
all substantial decisions of the trust. The term "Non- U.S. Person" means any
person who is not a U.S. Person. 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>
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
<TABLE>
<S> <C>
2/28 Loans................................................................................................................S-4
3/27 Loans................................................................................................................S-4
Accrual Period............................................................................................................S-7
Actuarial Loans..........................................................................................................S-18
Advances..................................................................................................................S-9
Asset Proceeds Account...................................................................................................S-30
Available Funds..........................................................................................................S-30
Beneficial Holders.......................................................................................................S-11
Book-Entry Certificates..................................................................................................S-36
Capitalized Interest Account..............................................................................................S-9
Cede.....................................................................................................................S-11
CEDEL....................................................................................................................S-11
CEDEL Participants.......................................................................................................S-38
Certificate Account......................................................................................................S-30
Certificate Insurance Policies............................................................................................S-8
Certificate Insurer.......................................................................................................S-8
Certificate Registrar.....................................................................................................S-2
Citibank.................................................................................................................S-11
Class A Certificates......................................................................................................S-1
Class A Current Interest..................................................................................................S-7
Class A Distribution Amount..............................................................................................S-33
Class A Principal Distribution Amount....................................................................................S-32
Class A-1 Pass-Through Rate...............................................................................................S-1
Class A-2 Certificates....................................................................................................S-1
Class A-3 Certificates....................................................................................................S-1
Class A-4 Certificates....................................................................................................S-1
Class A-5 Certificates....................................................................................................S-1
Closing Date..............................................................................................................S-2
Code.....................................................................................................................S-11
Company...................................................................................................................S-2
Cooperative..............................................................................................................S-38
Credit Enhancement........................................................................................................S-7
Cut-Off Date..............................................................................................................S-2
D&P......................................................................................................................S-49
Definitive Certificate...................................................................................................S-37
Delinquency Advances......................................................................................................S-9
Denominations.............................................................................................................S-2
Distribution Date.........................................................................................................S-7
DOL......................................................................................................................S-48
DTC......................................................................................................................S-11
DTC Participants.........................................................................................................S-38
Due Period...............................................................................................................S-10
ERISA....................................................................................................................S-11
Euroclear................................................................................................................S-11
Euroclear Operator.......................................................................................................S-38
Euroclear Participants...................................................................................................S-38
European Depositaries....................................................................................................S-11
Excess Subordinated Amount...............................................................................................S-34
Exemption................................................................................................................S-49
Financial Intermediary...................................................................................................S-37
Fiscal Agent.............................................................................................................S-40
Fitch....................................................................................................................S-49
Fixed Rate Group..........................................................................................................S-2
FNMA......................................................................................................................S-3
Funding Period............................................................................................................S-8
Group.....................................................................................................................S-2
Holder...................................................................................................................S-30
Initial Mortgage Loans....................................................................................................S-2
Insurer Reimbursable Amount..............................................................................................S-34
Interest Determination Date..............................................................................................S-36
Interest Funds...........................................................................................................S-30
Last Scheduled Payment Date..............................................................................................S-25
Liquidated Mortgage Loan.................................................................................................S-33
LTV......................................................................................................................S-20
Master Servicer...........................................................................................................S-2
Master Servicer Remittance Date..........................................................................................S-30
Master Servicing Fee.....................................................................................................S-10
Master Servicing Fee Rate................................................................................................S-10
Maximum Collateral Amount................................................................................................S-10
Modeling Assumptions.....................................................................................................S-26
Month End Interest.......................................................................................................S-24
Moody's..................................................................................................................S-10
Mortgage Loan Group.......................................................................................................S-2
Mortgage Loans............................................................................................................S-3
Mortgaged Properties......................................................................................................S-2
Mortgages.................................................................................................................S-2
Mortgagor................................................................................................................S-18
Notes....................................................................................................................S-15
One Month LIBOR...........................................................................................................S-6
One Year CMT Loans........................................................................................................S-4
Optional Termination Date................................................................................................S-46
Original Pre-Funded Amount................................................................................................S-3
Participants.............................................................................................................S-36
Pass-Through Rates........................................................................................................S-6
Paying Agent..............................................................................................................S-2
Percentage Interest......................................................................................................S-31
Permitted Investments....................................................................................................S-30
Plan.....................................................................................................................S-48
Plan Asset Regulation....................................................................................................S-48
Pooling and Servicing Agreement...........................................................................................S-1
Pre-Funded Amount.........................................................................................................S-9
Pre-Funding Account.......................................................................................................S-8
Pre-Funding Account Earnings..............................................................................................S-9
Prepayment...............................................................................................................S-24
Principal Funds..........................................................................................................S-31
Realized Loss............................................................................................................S-35
Record Date...............................................................................................................S-7
Relevant Depositary......................................................................................................S-37
REMIC....................................................................................................................S-11
Remittance Date..........................................................................................................S-10
Restricted Group.........................................................................................................S-50
Rules....................................................................................................................S-37
Saxon Mortgage............................................................................................................S-2
Securities................................................................................................................S-1
Servicer..................................................................................................................S-2
Servicers.................................................................................................................S-2
Servicing Fee............................................................................................................S-10
Servicing Fee Rate.......................................................................................................S-10
Six Month LIBOR...........................................................................................................S-4
Six Month LIBOR Loans.....................................................................................................S-4
SMMEA....................................................................................................................S-11
Specified Subordinated Amount............................................................................................S-34
Standard & Poor's........................................................................................................S-10
Subordinate Certificates..................................................................................................S-1
Subordinated Amount......................................................................................................S-34
Subordination Deficit....................................................................................................S-33
Subordination Increase Amount............................................................................................S-34
Subordination Reduction Amount...........................................................................................S-34
Subsequent Mortgage Loans.................................................................................................S-3
Subsequent Sales Date....................................................................................................S-47
Substitution Shortfall...................................................................................................S-31
Terms and Conditions.....................................................................................................S-38
Total Available Funds....................................................................................................S-35
Total Monthly Excess Cashflow............................................................................................S-33
Trust.....................................................................................................................S-1
Trustee...................................................................................................................S-2
Underwriter..............................................................................................................S-51
Variable Rate Available Funds Cap.........................................................................................S-6
Variable Rate Certificates................................................................................................S-1
Variable Rate Certificates Carryover......................................................................................S-6
Variable Rate Group.......................................................................................................S-2
Variable Rate Pass-Through Rate...........................................................................................S-6
Weighted average life....................................................................................................S-24
</TABLE>
A-4
<PAGE>
<PAGE>
PROSPECTUS
SAXON ASSET SECURITIES COMPANY
(Seller)
ASSET BACKED CERTIFICATES
(Issuable in Series)
This Prospectus relates to Asset Backed Certificates (the
"Certificates") to be issued from time to time in one or more Series (each, a
"Series") by Saxon Asset Securities Company (the "Seller") on terms determined
at the time of sale and described in this Prospectus and the related Prospectus
Supplement. Each Series of Certificates will evidence (i) beneficial ownership
interests in one or more segregated pools of mortgage-related assets as
described herein (the "Mortgage Assets") and certain other assets described
herein assigned or transferred by the Seller to one or more trusts
(collectively, a "Trust") or (ii) if specified in the related Prospectus
Supplement, beneficial ownership interests in a Trust that holds a beneficial
ownership interest in another trust to which the Mortgage Assets and such other
assets have been assigned or transferred.
Each Series of Certificates will be issued in one or more classes (each,
a "Class"). One or more Classes of Certificates of a Series may be subordinated
in right to receive distributions on the Mortgage Assets and be subject to
allocation of losses on the Mortgage Assets in favor of one or more other
Classes of Certificates of the same Series as specified in the related
Prospectus Supplement.
Each Series of Certificates will receive distributions at the intervals
and on the dates specified in the related Prospectus Supplement from the
Mortgage Assets and any other assets included in the related Trust. The Seller
or an affiliate of the Seller may make or obtain for the benefit of any Series
of Certificates limited representations and warranties with respect to the
Mortgage Assets included in the related Trust. Neither the Seller nor any
affiliate of the Seller will have any other obligation with respect to any
Series of Certificates.
The yield on each Series of Certificates will be affected by, among
other things, the rate and timing of payments of principal (including
prepayments) of the Mortgage Assets included in the related Trust. Each Series
of Certificates will be subject to early termination under the circumstances
described herein and in the related Prospectus Supplement.
If specified in the Prospectus Supplement for a Series, one or more
elections may be made to treat certain Trusts or specified portions thereof as
real estate mortgage investment conduits (each, a "REMIC") for federal income
tax purposes. See "Certain Federal Income Tax Consequences."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Certain risk factors should be considered by prospective purchasers of
the Certificates offered hereby. See "Risk Factors" herein at page and in the
related Prospectus Supplement.
See "ERISA Considerations" herein and in the related Prospectus
Supplement for a discussion of restrictions on the acquisition of Certificates
by "plan fiduciaries."
Prospective purchasers of the Certificates offered hereby should
carefully review the information in the related Prospectus Supplement concerning
the risks associated with different types and Classes of Certificates.
THE CERTIFICATES OF EACH SERIES WILL BE ENTITLED TO PAYMENT ONLY FROM
THE ASSETS OF THE RELATED TRUST. THE CERTIFICATES DO NOT REPRESENT AN INTEREST
IN OR OBLIGATION OF THE SELLER, ANY SERVICER, ANY MASTER SERVICER, ANY TRUSTEE
OR ANY OF THEIR AFFILIATES, EXCEPT AS SET FORTH HEREIN AND IN THE RELATED
PROSPECTUS SUPPLEMENT. NEITHER THE CERTIFICATES NOR THE UNDERLYING MORTGAGE
ASSETS WILL BE GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OR BY THE SELLER, ANY SERVICER, ANY MASTER SERVICER, ANY TRUSTEE
OR ANY OF THEIR AFFILIATES, EXCEPT AS SET FORTH IN THE RELATED PROSPECTUS
SUPPLEMENT.
------------------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
------------------------------
Offers of the Certificates may be made through one or more different
methods, including offerings through underwriters, as more fully described
herein and in the related Prospectus Supplement. See "Plan of Distribution"
herein.
There can be no assurance that a secondary market will develop for the
Certificates of any Series or, if such a market does develop, that it will
provide the holders of such Certificates with liquidity of investment or that it
will continue for the life of such Certificates.
This Prospectus may not be used to consummate sales of Certificates
unless accompanied by a Prospectus Supplement.
------------------------------
The date of this Prospectus is August 2, 1996
<PAGE>
PROSPECTUS SUPPLEMENT
The Prospectus Supplement for a Series will, among other things, set
forth with respect to the Certificates of such Series, if applicable: (i) the
respective allocations and order of application of principal and interest
distributions on the Mortgage Assets in the related Trust to each Class of such
Certificates, (ii) certain information as to the nature of the Mortgage Assets
and any other assets assigned or transferred to such Trust, (iii) the dates
periodic distributions will be made to the holders of such Certificates, (iv) if
applicable, the fixed date on which the final distribution of principal is
scheduled to be made to the holders of each Class of such Certificates (each, a
"Final Scheduled Distribution Date"), (v) the authorized denominations of such
Certificates, (vi) the circumstances, if any, under which such Trust is subject
to early termination, (vii) certain information regarding the subordination of
rights to distributions of any Class of such Certificates to the rights of any
other Class of such Certificates and the allocation of losses among each Class
of such Certificates, (viii) whether the Seller intends to elect to cause such
Trust or specified portions thereof to be treated as a REMIC and the designation
of the regular and residual interests therein, (ix) information regarding the
credit enhancement, if any, for each Class of such Certificates, specifying the
provider of such credit enhancement and (x) additional information with respect
to the plan of distribution of such Certificates.
AVAILABLE INFORMATION
The Seller will be subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and, in accordance therewith, will
file reports and other information with the Securities and Exchange Commission
(the "Commission"). Reports and other information filed by the Seller with the
Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at certain of its Regional Offices located as follows: Chicago
Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511; and New York Regional Office, 7 World Trade Center, Suite 1300, New
York, New York 10048. Copies of such materials can also be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. The Commission also maintains a site on the
World Wide Web at "http://www.sec.gov" at which users can view and download
copies of reports, proxy and information statements and other information filed
electronically through the Electronic Data Gathering, Analysis and Retrieval
("EDGAR") system. The Seller has filed the Registration Statement, including all
exhibits thereto, through the EDGAR system and therefore such materials should
be available by logging onto the Commission's Web site. The Commission maintains
computer terminals providing access to the EDGAR system at each of the offices
referred to above.
This Prospectus does not contain all the information set forth in the
Registration Statement of which this Prospectus is a part, or in the exhibits
relating thereto, which the Seller has filed with the Commission in Washington,
D.C. Copies of the information and the exhibits are on file at the offices of
the Commission and may be obtained upon payment of the fee prescribed by the
Commission or may be examined without charge at the offices of the Commission.
Copies of the Agreement (as defined herein) for a Series will be provided to
each person to whom a Prospectus is delivered upon written or oral request,
provided that such request is made to Saxon Asset Securities Company, 4880 Cox
Road, Glen Allen, Virginia 23060 ((804) 967-7400).
The Seller and the Master Servicer are not obligated with respect to the
Certificates. Accordingly, the Seller has determined that financial statements
of the Seller and the Master Servicer are not material to the offering made
hereby. Any prospective purchaser who desires to review financial information
concerning the Seller, however, will be provided with a copy of the most recent
financial statements of the Seller upon request.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed with respect to each Trust pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended,
after the date of this Prospectus and prior to the termination of the offering
of the Certificates of such Trust hereunder shall be deemed to be incorporated
into and made a part of this Prospectus from the date of filing of such
documents. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus. The Seller will provide
a copy of any and all information that has been incorporated by reference into
this Prospectus (not including exhibits to the information so incorporated by
reference unless such exhibits are specifically incorporated by reference into
the information that this Prospectus incorporates) upon written or oral request
of any person, without charge to such person, provided that such request is made
to Saxon Asset Securities Company, 4880 Cox Road, Glen Allen, Virginia 23060
((804) 967-7400).
REPORTS TO CERTIFICATEHOLDERS
The Seller will cause to be provided to the Certificateholders of each
Series periodic and annual reports concerning the Certificates of such Series
and the related Trust as described herein and in the related Prospectus
Supplement. See "The Agreement -- Reports to Certificateholders."
ii
<PAGE>
TABLE OF CONTENTS
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Page
<S> <C>
PROSPECTUS SUMMARY.................................................................................... 1
RISK FACTORS.......................................................................................... 9
Certificateholders Must Look Solely to Limited Trust Assets for
Certificate Payments............................................................................... 9
Credit Enhancement (if Available) May Be Limited.................................................... 9
Economic Developments May Adversely Affect Mortgage Asset
Performance........................................................................................ 9
Bankruptcy Recharacterization of Mortgage Asset Transfers
May Delay or Reduce Certificate Payments........................................................... 9
Various Laws May Delay or Reduce Certificate Payments............................................... 9
Modification of Mortgage Loans May Delay or Reduce
Certificate Payments............................................................................... 10
Mortgage Loan Prepayments May Affect Final Certificate
Payment Date or Certificate Yield.................................................................. 10
Secondary Market for Certificates May Not Develop or
Continue........................................................................................... 10
Holders of Book-Entry Certificates May Experience Liquidity
Problems or Payment Delays......................................................................... 10
Certificate Ratings May Be Affected by Credit Enhancer
Ratings............................................................................................ 11
Holders of Original Issue Discount Certificates Are Subject to
Special Tax Rules.................................................................................. 11
Balloon Loans May Experience Relatively Higher Losses............................................... 11
Junior Mortgage Loans May Experience Relatively Higher
Losses............................................................................................. 11
Mortgage Loans Secured by Non-Owner Occupied Properties
May Experience Relatively Higher Losses............................................................ 12
Mortgage Loans Underwritten as Non-Conforming Credits May
Experience Relatively Higher Losses................................................................ 12
Mortgage Assets May Include Delinquent and Non-Performing
Mortgage Loans..................................................................................... 12
DESCRIPTION OF THE CERTIFICATES....................................................................... 12
General............................................................................................. 12
Classes of Certificates............................................................................. 13
Book-Entry Procedures............................................................................... 13
Allocation of Distributions from Mortgage Assets.................................................... 14
Allocation of Losses and Shortfalls................................................................. 15
Valuation of Mortgage Assets........................................................................ 16
Optional Redemption................................................................................. 16
MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS......................................................... 17
THE TRUSTS............................................................................................ 18
Assignment of Mortgage Assets....................................................................... 18
The Mortgage Loans -- General........................................................................19
Single Family Loans................................................................................. 21
Cooperative Loans................................................................................... 21
Multi-Family Loans.................................................................................. 22
Junior Mortgage Loans............................................................................... 22
Conventional Home Improvement Loans................................................................. 22
Title I Loans....................................................................................... 23
Repurchase of Converted Mortgage Loans.............................................................. 23
Repurchase of Delinquent Mortgage Loans............................................................. 24
Substitution of Mortgage Loans ..................................................................... 24
Agency Securities -- General.........................................................................24
Government National Mortgage Association; GNMA
Certificates....................................................................................... 25
Federal National Mortgage Association; FNMA Certificates............................................ 26
Federal Home Loan Mortgage Corporation; FHLMC
Certificates....................................................................................... 26
Stripped Mortgage-Backed Certificates; Other Agency
Securities......................................................................................... 27
Private Mortgage-Backed Securities.................................................................. 27
Home Equity Lines of Credit......................................................................... 28
Pre-Funding Account................................................................................. 29
Asset Proceeds Account.............................................................................. 29
CREDIT ENHANCEMENT.................................................................................... 30
General............................................................................................. 30
Subordination....................................................................................... 30
Certificate Guaranty Insurance Policies............................................................. 31
Overcollateralization............................................................................... 32
Mortgage Pool Insurance Policies.................................................................... 32
Special Hazard Insurance Policies................................................................... 33
Bankruptcy Bonds.................................................................................... 34
Cross-Support....................................................................................... 34
Reserve Funds....................................................................................... 34
Other Credit Enhancement .......................................................................... 35
ORIGINATION OF MORTGAGE LOANS......................................................................... 35
General............................................................................................. 35
Representations and Warranties...................................................................... 36
SERVICING OF MORTGAGE LOANS........................................................................... 37
General............................................................................................. 37
Payments on Mortgage Loans.......................................................................... 38
Advances............................................................................................ 38
Collection and Other Servicing Procedures........................................................... 39
Primary Mortgage Insurance Policies................................................................. 39
Standard Hazard Insurance Policies.................................................................. 40
Maintenance of Insurance Policies; Claims Thereunder and Other
Realization Upon Defaulted Mortgage Loans.......................................................... 41
Modification of Mortgage Loans...................................................................... 42
Evidence as to Servicing Compliance................................................................. 42
Events of Default and Remedies...................................................................... 42
Master Servicer Duties.............................................................................. 43
Special Servicing Agreement......................................................................... 43
THE AGREEMENT......................................................................................... 44
The Trustee......................................................................................... 44
Administration of Accounts.......................................................................... 44
Reports to Certificateholders....................................................................... 45
Events of Default and Remedies...................................................................... 45
Amendment........................................................................................... 45
Termination......................................................................................... 46
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS............................................................... 46
General............................................................................................. 46
The Mortgage Loans.................................................................................. 46
Foreclosure......................................................................................... 47
Junior Mortgage Loans; Rights of Senior Mortgagees.................................................. 50
Right of Redemption................................................................................. 51
Anti-Deficiency Legislation and Other Limitations on Lenders........................................ 51
Soldiers' and Sailors' Civil Relief Act of 1940..................................................... 52
Environmental Considerations ....................................................................... 52
"Due-on-Sale" Clauses............................................................................... 53
Enforceability of Certain Provisions................................................................ 53
THE SELLER............................................................................................ 54
USE OF PROCEEDS....................................................................................... 54
CERTAIN FEDERAL INCOME TAX CONSEQUENCES............................................................... 54
General............................................................................................. 55
REMIC Certificates.................................................................................. 55
Risk Factors for Certain Types of Investors......................................................... 69
Disposition of REMIC Residual Certificates.......................................................... 71
Liquidation of the REMIC............................................................................ 71
REMIC-Level Taxes................................................................................... 72
Taxation of Certain Foreign Holders of REMIC Certificates........................................... 72
Reporting and Tax Administration.................................................................... 74
Non-REMIC Certificates.............................................................................. 74
Treatment of Pass-Through Certificates.............................................................. 75
Treatment of Strip Certificates..................................................................... 76
Determination of Income With Respect to Strip Certificates.......................................... 77
Limitations on Deductions With Respect to Strip Certificates........................................ 78
Sale of a Non-REMIC Certificate..................................................................... 78
Taxation of Certain Foreign Holders of Non-REMIC Certificates....................................... 78
Backup Withholding.................................................................................. 79
Reporting and Tax Administration.................................................................... 79
STATE TAX CONSIDERATIONS.............................................................................. 79
ERISA CONSIDERATIONS.................................................................................. 79
LEGAL INVESTMENT MATTERS.............................................................................. 81
PLAN OF DISTRIBUTION.................................................................................. 82
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS.......................................................... 84
</TABLE>
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<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each Series of Certificates contained in the
related Prospectus Supplement and in the Agreement with respect to such Series.
A form of the Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
<TABLE>
<S> <C>
Seller..................... Saxon Asset Securities Company (the "Seller"), a wholly owned, limited-
purpose financing subsidiary of Dominion Mortgage Services, Inc., a Virginia
corporation ("Dominion Mortgage"). Dominion Mortgage is a wholly owned
subsidiary of Dominion Capital, Inc., a Virginia corporation ("Dominion
Capital"). Dominion Capital is a wholly owned subsidiary of Dominion
Resources, Inc., a Virginia corporation ("Dominion Resources"). None of
Dominion Resources, Dominion Capital, Dominion Mortgage or the Seller has
guaranteed, or is otherwise obligated with respect to, the Certificates of any
Series. The principal executive offices of the Seller are located at 4880 Cox
Road, Glen Allen, Virginia 23060, and the telephone number of the Seller is
(804) 967-7400. See "The Seller."
Certificates Offered. ..... Asset Backed Certificates (the "Certificates"), issuable in one or more Series
(each, a "Series"), all as more fully described in the related Prospectus
Supplement. The Certificates of each Series will evidence (i) beneficial
ownership interests in one or more segregated pools of Mortgage Assets and
certain other assets assigned or transferred by the Seller to one or more trusts
(collectively, a "Trust") or (ii) if specified in the related Prospectus Supplement,
beneficial ownership interests in a Trust that holds a beneficial ownership
interest in another trust to which the Mortgage Assets and such other assets have
been assigned or transferred. Each Series of Certificates will be issued in one
or more classes (each, a "Class") as specified in the related Prospectus
Supplement. The Certificates of each Series will be entitled to payment only
from the assets of the related Trust.
The Certificates of any Class of any Series (i) may be entitled to receive
distributions allocable only to principal, only to interest or to any combination
of principal and interest, (ii) may be entitled to receive distributions allocable to
prepayments of principal throughout the life of such Certificates or only during
specified periods, (iii) may be subordinated in right to receive distributions on
the Mortgage Assets and be subject to allocation of losses on the Mortgage
Assets in favor of one or more other Classes of Certificates of such Series, (iv)
may be entitled to receive distributions on the Mortgage Assets only after the
occurrence of specified events, (v) may be entitled to receive distributions on the
Mortgage Assets in accordance with a specified schedule or formula or on the
basis of distributions on specified portions of the Mortgage Assets, (vi) in the
case of Certificates entitled to receive distributions allocable to interest, may be
entitled to receive interest at a specified rate (a "Pass-Through Rate"), which
may be fixed, variable or adjustable and may differ from the rate at which other
Classes of Certificates of such Series are entitled to receive interest and (vii) in
the case of Certificates entitled to receive distributions allocable to interest, may
be entitled to receive such distributions only after the occurrence of specified
events and may accrue interest until such events occur, in each case as specified
in the related Prospectus Supplement.
<PAGE>
The Certificates of each Series will be issued as fully registered certificates in
certificated or book-entry form in the authorized denominations specified in the
related Prospectus Supplement. Neither the Certificates nor the underlying
Mortgage Assets will be guaranteed or insured by any governmental agency or
instrumentality or by the Seller, any Servicer, any Master Servicer, any Trustee
or any of their affiliates, except as set forth in the related Prospectus
Supplement. The Seller may retain or hold for sale from time to time one or
more Classes of Certificates. See "Description of the Certificates."
Agreement.................. Each Series of Certificates will be issued pursuant to one or more trust
agreements or pooling and servicing agreements (each, an "Agreement") among
the Seller, the Master Servicer and the trustee identified in the related
Prospectus Supplement (the "Trustee"). Pursuant to an Agreement, the Seller
will assign and transfer the Mortgage Assets and other assets to be included in
the related Trust to the Trustee in exchange for a Series of Certificates. The
Mortgage Assets will be registered in the name of such Trustee or its custodian
following the closing for such Series. See "The Trusts-- Assignment of
Mortgage Assets."
Distributions on
the Certificates......... The Prospectus Supplement for each Series of Certificates will specify (i)
whether distributions of principal and/or interest on such Certificates will be
made monthly, quarterly, semi-annually or at other intervals, (ii) the date for
each such distribution (each, a "Distribution Date"), (iii) the amount of each
such distribution allocable to principal and interest and (iv) whether all
distributions will be made pro rata to Certificateholders of the Class entitled
thereto or on some other basis. The amount available to be distributed on each
Distribution Date with respect to each Series of Certificates (the "Available
Distribution") will be determined as set forth in the related Agreement and will
be described in the related Prospectus Supplement. See "Description of the
Certificates-- Allocation of Distributions from Mortgage Assets."
The aggregate original principal balance of the Certificates of each Series will
equal the aggregate distributions allocable to principal that such Certificates will
be entitled to receive. The Mortgage Assets and any other assets included in the
Trust for each Series of Certificates (including amounts held in any Pre-Funding
Account for such Series) will have an initial aggregate value ("Asset Value")
determined as set forth in the related Agreement and described in the related
Prospectus Supplement. The Asset Value of the Mortgage Assets and any other
assets included in the Trust for a Series will equal or exceed the aggregate
original principal balance of the Certificates of such Series. See "Description
of the Certificates-- Valuation of Mortgage Assets."
Mortgage Assets. . ........ The Mortgage Assets assigned or transferred to the Trust for a Series may
consist of one or more of the following, each of which will be specified in the
related Prospectus Supplement: (i) one- to four-family mortgage loans secured
by first, second or more junior liens on residential and mixed use properties (or
participation interests in such loans) ("Single Family Loans"), (ii) loans secured
by security interests in or similar liens on shares in private, non-profit
cooperative housing corporations ("Cooperatives") and on the related proprietary
leases or occupancy agreements granting exclusive rights to occupy specific
dwelling units in the buildings owned by the Cooperatives (or participation
interests in such loans) ("Cooperative Loans"), (iii) multi-family mortgage loans
secured by first, second or more junior liens on residential and mixed use
2
<PAGE>
properties, including buildings owned by Cooperatives (or participation interests in
such loans) ("Multi-Family Loans"), (iv) home improvement mortgage loans secured by
first, second or more junior liens on various types of properties (or participation
interests in such loans) ("Conventional Home Improvement Loans"), (v) home
improvement mortgage loans originated under the Title I credit insurance program
created under the National Housing Act of 1934 by the Federal Housing Administration
("FHA") (or participation interests in such loans) ("Title I Loans" and,
collectively with Single Family Loans, Cooperative Loans, Multi-Family Loans and
Conventional Home Improvement Loans, "Mortgage Loans"), (vi) mortgage-backed
securities issued or guaranteed by the Government National Mortgage Association
("GNMA"), the Federal National Mortgage Association ("FNMA"), the Federal Home Loan
Mortgage Corporation ("FHLMC") or another government agency or government sponsored
agency (collectively, "Agency Securities"), (vii) privately-issued mortgage-backed
securities ("Private Mortgage-Backed Securities" and, collectively with Agency
Securities, "Mortgage Certificates") and (viii) home equity lines of credit
("HELOCs").
A. Mortgage Loans....... The Mortgage Loans will be evidenced by promissory notes (each, a "Mortgage
Note") and will be secured by first, second or more junior liens on (i) the
related real property or leasehold interest, together with improvements thereon,
or (ii) with respect to Cooperative Loans, the shares issued by the related
Cooperative (the "Mortgaged Premises"). If so specified in the Prospectus
Supplement for a Series, the Mortgage Loans will not be insured or guaranteed
by any government agency ("Conventional Mortgage Loans"). The payment
terms of the Mortgage Loans to be included in the Trust for any Series will be
described in the related Prospectus Supplement.
The Mortgaged Premises (and, with respect to Cooperative Loans, the buildings
owned by Cooperatives) may be located in any state, territory or possession of
the United States (including the District of Columbia or Puerto Rico). The
Mortgaged Premises generally will be covered by standard hazard insurance
policies ("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 ("Primary Mortgage Insurance Policies") insuring,
subject to their provisions and certain limitations, against all or a portion of any
loss sustained by reason of nonpayments by borrowers to the extent specified in
the related Prospectus Supplement. If so specified in the Prospectus Supplement
for a Series, the Mortgage Loans will be purchased by the Seller from Saxon
Mortgage, Inc., a Virginia corporation and an affiliate of the Seller ("Saxon
Mortgage"). If so specified in the Prospectus Supplement for a Series, the
Mortgage Loans will be originated by Saxon Mortgage or purchased by Saxon
Mortgage in the open market or in privately negotiated transactions from savings
and loan associations, savings banks, commercial banks, credit unions, insurance
companies or similar institutions that are supervised and examined by a federal
or state authority or by an institution approved by the United States Department
of Housing and Urban Development ("HUD") (each, including Saxon Mortgage
in its capacity as an originator of Mortgage Loans, an "Originator"). See "The
Trusts-- The Mortgage Loans-- General" and "Origination of Mortgage
Loans."
Certain of the Mortgage Loans may be partially insured by the FHA, an agency
of HUD, pursuant to the Title I credit insurance program (the "Title I Loan
Program") created under the National Housing Act of 1934. Under the Title I
3
<PAGE>
Loan Program, the FHA is authorized and empowered to insure qualified lending
institutions against losses on eligible loans. The Title I Loan Program operates as
a coinsurance program in which the FHA insures up to 90% of certain losses incurred
on an individual insured loan, including the unpaid principal balance of the loan,
but only to the extent of the insurance coverage available in the lender's FHA
insurance coverage reserve account. The owner of the loan bears the uninsured loss
on each loan. FHA insurance is accorded the full faith and credit of the United
States. See "The Trusts -- Title I Loans."
B. Agency Securities.... The Agency Securities may include (i) fully modified pass-through mortgage-
backed certificates guaranteed as to timely payment of principal and interest by
the Government National Mortgage Association ("GNMA 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) mortgage participation certificates issued and
guaranteed as to timely payment of interest and, if so specified in the related
Prospectus Supplement, ultimate payment of principal by the Federal Home
Loan Mortgage Corporation ("FHLMC Certificates"), (iv) stripped mortgage-
backed securities representing an undivided interest in all or a part of either the
principal distributions (but not the interest distributions) or the interest
distributions (but not the principal distributions) or in some specified portion of
the principal and interest distributions (but not all of such distributions) on
certain GNMA Certificates, FNMA Certificates, FHLMC Certificates or other
government agency or government-sponsored agency certificates and, if so
specified in the related Prospectus Supplement, guaranteed to the same extent
as the underlying securities, (v) another type of guaranteed pass-through
certificate issued or guaranteed by GNMA, FNMA, FHLMC or another
government agency or government-sponsored agency and described in the related
Prospectus Supplement or (vi) a combination of the Agency Securities described
in clauses (i) through (v) above. The GNMA Certificates will be backed by the
full faith and credit of the United States. The FNMA Certificates and FHLMC
Certificate will not be backed, directly or indirectly, by the full faith and credit
of the United States. See "The Trusts-- Agency Securities-- General."
C. Private Mortgage-Backed
Securities......... The Private Mortgage-Backed Securities may include (i) mortgage participation
or pass-through certificates representing beneficial interests in certain mortgage
loans or Agency Securities or (ii) collateralized mortgage obligations secured by
certain mortgage loans. The Private Mortgage-Backed Securities will not be
insured or guaranteed by the United States or any agency or instrumentality
thereof. If so specified in the related Prospectus Supplement, 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 Trusts
-- Private Mortgage-Backed Securities."
D. Home Equity Lines
of Credit ......... HELOCs will consist of home equity lines of credit or certain balances thereof
secured by mortgages on one- to four-family residential properties, including
condominium units and cooperative dwellings, or mixed-use properties. The
HELOCs may be subordinated to other mortgages on such properties. See
"The Trusts -- Home Equity Lines of Credit."
Pre-Funding Account........ If so specified in the related Prospectus Supplement, a Trust may enter into an
agreement (each, a "Pre-Funding Agreement") with the Seller under which the
4
<PAGE>
Seller will agree to transfer additional Mortgage Assets to such Trust following the
date on which such Trust is established and the related Certificates are issued. Any
Pre-Funding Agreement will require that any Mortgage Loans so transferred conform to
the requirements specified in such Pre-Funding Agreement. If a Pre-Funding Agreement
is used, the related Trustee will be required to deposit in a segregated account
(each, a "Pre-Funding Account") upon receipt all or a portion of the proceeds
received by the Trustee in connection with the sale of one or more classes of
Certificates of the related Series. The additional Mortgage Assets will thereafter
be transferred to the related Trust in exchange for money released to the Seller
from the related PreFunding Account. Each Pre-Funding Agreement will specify a
period during which any such transfer must occur. If all moneys originally deposited
in such Pre-Funding Account are not used by the end of such specified period, then
any remaining moneys will be applied as a mandatory prepayment of one or more
Classes of Certificates as specified in the related Prospectus Supplement. The
specified period for the acquisition by a Trust of additional Mortgage Loans will
not exceed three months from the date such Trust is established. See "The Trusts --
Pre-Funding Account."
Servicer................... One or more servicers (each, a "Servicer"), which may include an affiliate of
the Seller, will perform certain customary servicing functions with respect to the
Mortgage Loans included in the Trust for any Series of Certificates. See
"Servicing of Mortgage Loans."
Master Servicer............ If specified in the Prospectus Supplement for a Series, a master servicer (the
"Master Servicer"), which may include an affiliate of the Seller, will perform,
directly or indirectly through one or more sub-servicers, certain administrative
and supervisory functions with respect to the Mortgage Assets included in the
related Trust. See "Servicing of Mortgage Loans."
Special Servicer........... If specified in the Prospectus Supplement for a Series, a special servicer (a
"Special Servicer") may be appointed to service, make certain decisions with
respect to and take various actions with respect to delinquent or defaulted
Mortgage Loans or Mortgage Loans that are secured by Mortgaged Premises
acquired by foreclosure or by deed-in-lieu of foreclosure (collectively, "REO
Properties").
Assets Proceeds Account.... All payments and collections received or advanced on the Mortgage Assets
assigned or transferred to the Trust for the Certificates of a Series will be
remitted to one or more accounts (collectively, the "Asset Proceeds Account")
established and maintained in trust on behalf of the holders of such Certificates.
In general, reinvestment income, if any, on amounts in the Asset Proceeds
Account will not accrue for the benefit of the holders of the Certificates of a
Series but will be remitted periodically to the Master Servicer or the Servicers
as additional master servicing or servicing compensation. See "The Trusts--
Asset Proceeds Account."
Advances................... If so specified in the Prospectus Supplement for a Series, the Servicers of the
Mortgage Loans included in the related Trust and, to the limited extent
described herein, the Master Servicer are, and the Trustee may be, obligated to
advance funds to such Trust to cover (i) delinquent payments of principal or
interest on such Mortgage Loans, (ii) delinquent payments of taxes, insurance
premiums or other escrowed items and (iii) foreclosure costs, including
reasonable attorney's fees ("Advances"). Any such advance obligation may be
5
<PAGE>
limited to amounts deemed to be recoverable from late payments or liquidation
proceeds, to amounts due holders of specified Classes of Certificates of the related
Series, to specified periods of time, to certain dollar amounts or to any
combination of the foregoing, in each case as specified in the related Prospectus
Supplement. Any such Advance will be recoverable as specified in the related
Prospectus Supplement. See "Servicing of Mortgage Loans -- General" and " --
Advances."
Credit Enhancement......... If so specified in the Prospectus Supplement for a Series, the related Trust may
include, or the related Certificates may be entitled to the benefits of, certain
ancillary or incidental assets intended to provide credit enhancement for the
ultimate or timely distribution of proceeds from the Mortgage Assets to the
holders of such Certificates, including reserve accounts, insurance policies,
guaranties, surety bonds, letters of credit, guaranteed investment contracts, swap
agreements and option agreements. In addition, if so specified in the Prospectus
Supplement for a Series, one or more Classes of Certificates of such Series may
be entitled to the benefits of other credit enhancement arrangements, including
subordination, overcollateralization or cross support. Any such assets or
arrangements must be acceptable to each Rating Agency that provides, at the
request of the Seller, a rating for the Certificates of the related Series. In
addition, to the extent a significant portion of the Mortgage Loans underlying
a Series of Certificates consists of Title I Loans, the related Prospectus
Supplement will describe the features of any related credit enhancement,
including, but not limited to, any credit enhancement provided by the FHA.
The protection against losses or delays afforded by any such assets or credit
enhancement arrangements may be limited. See "Risk Factors-- Credit
Enhancement (if Available) May Be Limited" and "Credit Enhancement."
Optional Redemption........ To the extent and under the circumstances specified in the Prospectus
Supplement for a Series, the Certificates of such Series may be redeemed by the
party specified therein. See "Description of the Certificates -- Optional
Redemption."
Certain Federal Income
Tax Consequences........... The federal income tax consequences to the holders of the Certificates of any
Series will depend on, among other factors, whether an election is made to treat
the related Trust or specified portions thereof as "real estate mortgage
investment conduits" (each, a "REMIC") under the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"). See "Certain Federal Income
Tax Consequences."
REMIC. If an election is made to treat the Trust or specified portions thereof
for a Series of Certificates as a REMIC for federal income tax purposes, the
related Prospectus Supplement will specify each Class of Certificates of such
Series to be designated as regular interests in such REMIC (the "REMIC
Regular Certificates") and the Class of Certificates of such Series to be
designated as the residual interest in such REMIC (the "REMIC Residual
Certificates"). To the extent provided herein and in the related Prospectus
Supplement, Certificates representing an interest in the REMIC generally will
be considered "qualifying real property loans" within the meaning of Section
593(d) of the Code, "real estate assets" for purposes of Section 856(c)(5)(A) and
assets described in Section 7701(a)(19)(C).
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In the opinion of Arter & Hadden, special tax counsel to the Seller ("Special
Tax Counsel"), for federal income tax purposes, REMIC Regular Certificates
generally will be treated as debt obligations of the Trust with payment terms
equivalent to the terms of such Certificates. Each REMIC Regular
Certificateholder will be required to report income with respect to its Certificate
under an accrual method, regardless of its normal tax accounting method.
Original issue discount, if any, on REMIC Regular Certificates will be
includable in the income of the Certificateholders as it accrues, in advance of
receipt of the cash attributable thereto, which rate of accrual will be based on
a reasonable assumed prepayment rate. The REMIC Residual Certificates
generally will not be treated as evidences of indebtedness for federal income tax
purposes but instead will be treated as representing rights to the taxable income
or net loss of the REMIC.
Each REMIC Residual Certificateholder will be required to take into account
separately its pro rata share of the REMIC's taxable income or loss. Certain
income of a REMIC (referred to as "excess inclusions") generally may not be
offset by net operating loss carryovers or other deductions, and in the case of
a tax-exempt REMIC Residual Certificateholders, will be treated as "unrelated
business taxable income." In certain situations, particularly in the early years
of a REMIC, REMIC Residual Certificateholders may have taxable income, and
possibly tax liabilities with respect to such income, in excess of cash distributed
to them. Certain "disqualified organizations" are prohibited from acquiring or
holding any REMIC Residual Certificates or beneficial interest therein.
Grantor Trust. If no election is made to treat the Trust or specified portions
thereof for a Series of Certificates as a REMIC, the Trust will be classified as
a grantor trust for federal income tax purposes and not as an association taxable
as a corporation. In the opinion of Special Tax Counsel, Certificateholders of
any such Series ("Non-REMIC Certificates") will be treated for federal income
tax purposes, subject to the possible application of the stripped bond rules, as
owners of undivided interests in the related Mortgage Assets and generally will
be required to report as income their pro rata share of the entire gross income
(including amounts paid as reasonable servicing compensation) from such
Mortgage Assets and will be entitled, subject to certain limitations, to deduct
their pro rata share of expenses of the related Trust.
To the extent provided herein and in the related Prospectus Supplement, Non-
REMIC Certificates will represent interests in "qualifying real property loans"
within the meaning of Section 593(d) of the Code, "real estate assets" for the
purposes of Section 856(c)(5)(A) and assets described in Section 7701(a)(19)(C).
Investors are urged to consult their tax advisors concerning the application of
federal income tax laws to their particular situations and to review "Certain
Federal Income Tax Consequences" herein and, if applicable, in the related
Prospectus Supplement.
Legal Investment Matters... If so specified in the related Prospectus Supplement, the Certificates of each
Series offered by this Prospectus and such Prospectus Supplement will constitute
"mortgage-related securities" under the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") and, as such, will be "legal
investments" for certain types of institutional investors to the extent provided in
SMMEA, subject, in each case, to state laws overriding SMMEA and to any
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other regulations which may govern investments by such institutional investors. If
so specified in the related Prospectus Supplement, all or certain Classes of
Certificates may not constitute "mortgage-related securities" under SMMEA.
Securities that do not constitute "mortgage-related securities" under SMMEA will
require registration, qualification or an exemption under applicable state
securities laws and may not be "legal investments" to the same extent as
"mortgage-related securities." See "Legal Investment Matters."
ERISA Considerations....... Fiduciaries of employee benefit plans or other retirement plans or arrangements,
including individual retirement accounts, certain Keogh plans, and collective
investment funds, separate accounts and insurance company general accounts in
which such plans, accounts or arrangements are invested, that are subject to the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or
the Code, should carefully review with their legal advisors whether an
investment in Certificates will cause the assets of the related Trust to be
considered plan assets under the Department of Labor ("DOL") regulations set
forth in 29 C.F.R. Section 2510.3-101 (the "Plan Asset Regulations"), thereby
subjecting the Trustee and the Master Servicer to the fiduciary responsibility
standards of ERISA, and whether the purchase, holding or transfer of
Certificates gives rise to a transaction that is prohibited under ERISA or subject
to the excise tax provisions of Section 4975 of the Code. Certain Classes of
Certificates may not be offered for sale or transferable to Plans (as defined
herein). See "ERISA Considerations" herein and in the related Prospectus
Supplement.
Ratings . . . . . . . . . . Each Class of Certificates offered hereby and by the related Prospectus
Supplement will be rated in one of the four highest rating categories by one or
more nationally recognized statistical rating organizations (each, a "Rating
Agency").
Risk Factors. . . . . . . . .An investment in the Certificates will be subject to one or more risk factors,
including declines in the value of Mortgaged Premises, prepayment of Mortgage
Loans, limitations on credit enhancement, consumer credit laws affecting the
Mortgage Assets, the risk of higher losses with respect to particular types of
Mortgage Loans and various other factors. See "Risk Factors" herein and in
the related Prospectus Supplement.
</TABLE>
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RISK FACTORS
Prospective investors should consider, among other things, the following
risk factors and the risk factors identified in the related Prospectus
Supplement in connection with a purchase of the Certificates of any Series. See
"Risk Factors" in the related Prospectus Supplement.
Certificateholders Must Look Solely to Limited Trust Assets for Certificate
Payments
Each Trust is expected to have no significant assets other than the
Mortgage Assets and any other assets assigned to the Trust by the Seller.
Prospective purchasers of the Certificates of a Series must rely primarily upon
payments of principal and interest on the related Mortgage Assets, the security
therefor and the sources of credit enhancement, if any, identified in the
related Prospectus Supplement. Neither the Certificates nor the underlying
Mortgage Assets will be guaranteed or insured by any governmental agency or
instrumentality or by the Seller, any Servicer, any Master Servicer, any Trustee
or any of their affiliates, except as set forth in the related Prospectus
Supplement.
Credit Enhancement (if Available) May Be Limited
The credit enhancement, if any, for any Series of Certificates may be
limited in amount and in most cases will be subject to periodic reduction in
accordance with a schedule or formula. In addition, such credit enhancement may
provide only very limited coverage as to certain types of losses and may provide
no coverage as to certain other types of losses. The Trustee may be permitted to
reduce, terminate or substitute all or a portion of the credit enhancement for
any Series of Certificates to the extent specified in the related Prospectus
Supplement. See "Credit Enhancement."
Economic Developments May Adversely Affect Mortgage Asset Performance
If the residential real estate market in general or a regional or local
area where the Mortgage Loans constituting or underlying the Mortgage Assets for
a Trust are concentrated should experience an overall decline in property values
or a significant downturn in economic conditions, rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. To the extent such losses are not covered by
credit enhancement, holders of the Certificates of the related Series will have
to look primarily to the value of the Mortgaged Premises for recovery of the
outstanding principal and unpaid interest of the defaulted Mortgage Loans.
Bankruptcy Recharacterization of Mortgage Asset Transfers May Delay or Reduce
Certificate Payments
Saxon Mortgage and the Seller intend that the transfers of the Mortgage
Assets to the Seller and, in turn, to the related Trust will constitute sales
rather than pledges to secure indebtedness for insolvency purposes. If Saxon
Mortgage were to become a debtor under the federal Bankruptcy Code, however, a
creditor, trustee-in-bankruptcy or receiver of Saxon Mortgage might argue that
such transfers were pledges rather than sales. This position, if argued or
accepted by a court, could result in a delay in or reduction of distributions on
the Certificates of the related Series.
Various Laws May Delay or Reduce Certificate Payments
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 a
secured mortgage lender to realize upon its security. The Internal Revenue Code
of 1986, as amended, provides priority to certain tax liens over the lien of a
mortgage or deed of trust. Other federal and state laws provide priority to
certain tax and other liens over the lien of a mortgage or deed of trust.
Numerous federal and some state consumer protection laws impose substantive
requirements upon mortgage lenders in connection with the origination, servicing
and enforcement of mortgage loans. These laws include the federal Truth in
Lending Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity
Act, Fair Credit Billing Act, Fair Credit Reporting Act, and related statutes
and regulations. These
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federal laws and state laws impose specific statutory liabilities upon lenders
who originate or service mortgage loans and who fail to comply with the
provisions of the law. In some cases, this liability may affect assignees of the
mortgage loans. See "Certain Legal Aspects of Mortgage Loans -- Anti-Deficiency
Legislation and Other Limitations on Lenders."
Modification of Mortgage Loans May Delay or Reduce Certificate Payments
With respect to a Mortgage Loan on which a material default has occurred
or a payment default is imminent, the related Servicer, with the consent of the
Master Servicer, may enter into a forbearance or modification agreement with the
borrower. The terms of any such forbearance or modification agreement may affect
the amount and timing of principal and interest payments on the Mortgage Loan
and, consequently, the amount and timing of payments on one or more Classes of
the related Series of Certificates. For example, a modification agreement that
results in a lower Mortgage Interest Rate would lower the Pass-Through Rate of
any related Class of Certificates that accrues interest at a rate based on the
weighted average Net Rate of the Mortgage Loans. See "Servicing of Mortgage
Loans -- Modification of Mortgage Loans."
Mortgage Loan Prepayments May Affect Final Certificate Payment Date or
Certificate Yield
The prepayment experience on the Mortgage Assets underlying a particular
Series of Certificates will affect (i) the average life of each Class of such
Certificates, (ii) the extent to which the final distribution on each Class of
such Certificates occurs prior to its Final Scheduled Distribution Date and
(iii) for Certificates purchased at a price other than par, the effective yield
on such Certificates. Because prepayments will be passed through to the holders
of Certificates of each Series as distributions of principal on such
Certificates, it is likely that, in the event of such prepayments, the final
distribution on each Class of Certificates of a Series will occur prior to the
Final Scheduled Distribution Date for such Class. The timing and amount of
principal payments (including prepayments) on mortgage loans are influenced by a
variety of economic, geographic, legal, social and other factors, including
changes in interest rate levels. In general, if mortgage interest rates fall,
the rate of prepayment would be expected to increase. Conversely, if mortgage
interest rates rise, the rate of prepayment would be expected to decrease.
Prepayments may also result from foreclosure, condemnation and other
dispositions of the Mortgaged Premises (including amounts paid by insurers under
applicable insurance policies), from the repurchase of any Mortgage Loan as to
which there has been a material breach of warranty or defect in documentation
(or from the deposit of certain amounts in respect of the delivery of a
substitute Mortgage Loan), from the repurchase of Mortgage Loans modified in
lieu of refinancing, from the repurchase of any liquidated Mortgage Loan or
delinquent Mortgage Loan, if applicable, or from the repurchase by the Seller of
all the Certificates of a Series or all the Mortgage Loans or Mortgage
Certificates in certain circumstances. The yields realized by the holders of
certain Certificates of a Series with disproportionate allocations of principal
or interest will be extremely sensitive to levels of prepayments on the Mortgage
Assets of the related Trust. See "Maturity, Prepayment and Yield
Considerations."
Secondary Market for Certificates May Not Develop or Continue
There can be no assurance that a secondary market will develop for the
Certificates of any Series or, if such a market does develop, that it will
provide the holders of such Certificates with liquidity of investment or that it
will continue for the life of such Certificates. Certain Classes of Certificates
may not constitute "mortgage related securities" under SMMEA, and certain
investors may be subject to legal restrictions that preclude their purchase of
any such non-SMMEA Certificates. In addition, if so specified in the related
Prospectus Supplement, certain Classes of Certificates may be restricted as to
transferability to certain entities. Any restrictions on the purchase or
transferability of the Certificates of a Series may have a negative effect on
the development of a secondary market for such Certificates. See "Legal
Investment Matters."
Holders of Book-Entry Certificates May Experience Liquidity Problems or Payment
Delays
If so specified in the related Prospectus Supplement, certain
Certificates of a Series may initially be registered in book-entry form
("Book-Entry Certificates"). Issuance of the Certificates in book-entry form may
reduce the liquidity of such Certificates in the secondary market because
investors may be unwilling to purchase Certificates for which they cannot obtain
physical certificates. In addition, since transfers of Book-Entry Certificates
will, in most cases, be able to be effected only through persons or entities
that participate in the book-entry system,
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the ability of a Certificateholder to pledge a Book-Entry Certificate to persons
or entities that do not participate in the book-entry system, or otherwise to
take actions with respect to a Book-Entry Certificate, may be impaired since
physical certificates representing the Certificates will generally not be
available. Certificateholders may experience some delay in their receipt of
distributions of interest on and principal of the Book-Entry Certificates
because distributions may be required to be forwarded by the Trustee through
book-entry system participants which thereafter will be required to credit them
to the accounts of the applicable Certificates, whether directly or indirectly
through financial intermediaries. See "Description of the Certificates --
Book-Entry Procedures."
Certificate Ratings May Be Affected by Credit Enhancer Ratings
The rating of Certificates credit enhanced through external credit
enhancement, such as a letter of credit, financial guaranty insurance policy or
mortgage pool insurance policy, will depend primarily on the creditworthiness of
the issuer of such external credit enhancement (the "Credit Enhancer"). Any
lowering of the rating assigned to the claims-paying ability of a Credit
Enhancer below the rating initially given to the Certificates of the related
Series would likely result in a lowering of the rating assigned to such
Certificates. Any such rating is not a recommendation to buy, sell or hold
Certificates and is subject to revision or withdrawal at any time by the Rating
Agency issuing such rating. The Seller will not be obligated to obtain
additional credit enhancement if necessary to maintain the rating initially
assigned to the Certificates of any Series.
Holders of Original Issue Discount Certificates Are Subject to Special Tax Rules
Compound Interest Certificates and certain other Classes of Certificates
that are entitled only to interest distributions will be, and certain other
Classes of Certificates may be, issued with original issue discount for federal
income tax purposes. The holder of a Certificate issued with original issue
discount will be required to include original issue discount in ordinary gross
income for federal income tax purposes as it accrues, in advance of receipt of
the cash attributable to such income. Accrued but unpaid interest on such
Certificates generally will be treated as original issue discount for this
purpose. See "Certain Federal Income Tax Consequences."
Balloon Loans May Experience Relatively Higher Losses
A portion of the aggregate principal balance of the Mortgage Loans at
any time may be "balloon loans" that provide for the payment of the unamortized
principal balance of such Mortgage Loans in a single payment at maturity
("Balloon Loans"). Balloon Loans provide for equal monthly payments, consisting
of principal and interest, generally based on a 30-year amortization schedule,
and a single payment of the remaining balance of the Balloon Loan, generally
five, seven, ten or 15 years after origination. Amortization of a Balloon Loan
based on a scheduled period that is longer than the term of the loan results in
a remaining principal balance at maturity that is substantially larger than the
regular scheduled payments. The Seller does not have any information regarding
the default history or prepayment history of payments on Balloon Loans. Because
borrowers of Balloon Loans are required to make substantial single payments at
maturity, it is possible that the default risk associated with Balloon Loans is
greater than that associated with fully-amortizing Mortgage Loans.
Junior Mortgage Loans May Experience Relatively Higher Losses
If specified in the Prospectus Supplement for a Series, the Mortgage
Loans assigned and transferred to the related Trust may include Mortgage Loans
secured by second or more junior liens on residential properties. Because the
rights of a holder of a second or more junior lien are subordinate to the rights
of a senior lienholder, the position of such Trust and the holders of the
Certificates of such Series could be more adversely affected by a reduction in
the value of the Mortgaged Premises than would the position of the senior
lienholder. In the event of a default by the related borrower, liquidation or
other proceeds may be insufficient to satisfy a second or more junior lien after
satisfaction of the senior lien and the payment of any liquidation expenses. See
"The Trusts -Junior Mortgage Loans."
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Mortgage Loans Secured by Non-Owner Occupied Properties May Experience
Relatively Higher Losses
Certain of the Mortgage Premises relating to the Mortgage Loans may not
be owner occupied. It is possible that the rate of delinquencies, foreclosures
and losses on Mortgage Loans secured by non-owner occupied properties could be
higher than for Mortgage Loans secured by primary residences.
Mortgage Loans Underwritten as Non-Conforming Credits May Experience Relatively
Higher Losses
If specified in the Prospectus Supplement for a Series, the Mortgage
Loans assigned and transferred to the related Trust may include Mortgage Loans
underwritten in accordance with the underwriting standards for "non-conforming
credits," which include borrowers whose creditworthiness and repayment ability
do not satisfy FNMA or FHLMC underwriting guidelines. A mortgage loan made to a
"non-conforming credit" means a mortgage loan that is ineligible for purchase by
FNMA or FHLMC due to borrower credit characteristics, property characteristics,
loan documentation guidelines or other characteristics that do not meet FNMA or
FHLMC underwriting guidelines, including a loan made to a borrower whose
creditworthiness and repayment ability do not satisfy such FNMA or FHLMC
underwriting guidelines and a borrower who may have a record of major derogatory
credit items such as default on a prior mortgage loan, credit write-offs,
outstanding judgments or prior bankruptcies. Because the borrowers on such
Mortgage Loans are less creditworthy than borrowers who meet FNMA or FHLMC
underwriting guidelines, delinquencies and foreclosures can be expected to be
more prevalent with respect to such Mortgage Loans than with respect to mortgage
loans originated in accordance with FNMA or FHLMC underwriting guidelines. As a
result, changes in the values of the Mortgaged Premises may have a greater
effect on the loss experience of such Mortgage Loans than on mortgage loans
originated in accordance with FNMA or FHLMC underwriting guidelines. If the
values of the Mortgaged Premises decline after the dates of origination of such
Mortgage Loans, the rate of losses on such Mortgage Loans may increase and such
increase may be substantial.
See "Origination of Mortgage Loans."
Mortgage Assets May Include Delinquent and Non-Performing Mortgage Loans
If specified in the Prospectus Supplement for a Series, the Mortgage
Assets in the related Trust may include Mortgage Loans that are secured by
Mortgaged Premises acquired by foreclosure or by deed-in-lieu of foreclosure
(collectively, "REO Properties") or Mortgage Loans that are delinquent or
non-performing. Credit enhancement provided with respect to a particular Series
of Certificates may not cover all losses related to such REO Properties or to
such delinquent or non-performing Mortgage Loans. Prospective investors should
consider the risk that the inclusion of such REO Properties or such Mortgage
Loans in the Trust for a Series may cause the rate of defaults and prepayments
on the Mortgage Loans to increase and, in turn, may cause losses to exceed the
available credit enhancement for such Series and affect the yield on the
Certificates of such Series. See "The Trusts -- The Mortgage Loans -- General."
DESCRIPTION OF THE CERTIFICATES
General
The Asset Backed Certificates described herein and in the related
Prospectus Supplement (the "Certificates") will be issued from time to time in
Series pursuant to one or more trust agreements or pooling and servicing
agreements (each, an "Agreement"), a form of which has been filed as an exhibit
to the Registration Statement of which this Prospectus is a part. 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. The following summaries
describe the material provisions common to each Series of Certificates. The
summaries do not purport to be complete and are subject to the Prospectus
Supplement and the Agreement with respect to a particular Series. The material
terms of a specific Agreement will be further described in the related
Prospectus Supplement.
The Certificates of a Series will be entitled to payment only from the
assets of the related Trust. The Certificates do not represent an interest in or
obligation of the Seller, any Servicer, any Master Servicer, any Trustee or any
of their affiliates, except as set forth herein and in the related Prospectus
Supplement. Neither the
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Certificates nor the underlying Mortgage Assets will be guaranteed or insured by
any governmental agency or instrumentality or by the Seller, any Servicer, any
Master Servicer, any Trustee or any of their affiliates, except as set forth in
the related Prospectus Supplement. To the extent that delinquent payments on or
losses in respect of defaulted Mortgage Loans are not advanced by the Servicer
or any other entity or paid from any applicable credit enhancement, such
delinquencies may result in delays in the distribution of payments to the
holders of one or more Classes of Certificates and such losses may be allocated
to the holders of one or more Classes of Certificates.
The Certificates of each Series will be issued as fully registered
certificates in certificated or book-entry form in the authorized denominations
for each Class specified in the related Prospectus Supplement. The Certificates
of each Series in certificated form may be transferred (subject to the
limitations on transfer, if any, specified in the related Agreement) or
exchanged at the corporate trust office of the Trustee without the payment of
any service charge, other than any tax or other governmental charge payable in
connection therewith. If so specified in the Prospectus Supplement for a Series,
distributions of principal and interest on each Certificate in certificated form
will be made on each Distribution Date by or on behalf of the Trustee (i) by
check mailed to each holder of such a Certificate at the address of such holder
appearing on the books and records of the Trust or (ii) by wire transfer of
immediately available funds upon timely request to the Trustee in writing by any
holder of such a Certificate having an initial principal amount of at least
$1,000,000 or such other amount as may be specified in the related Prospectus
Supplement; provided, however, that the final distribution in retirement of a
Certificate of a Series in certificated form will be made only upon presentation
and surrender of such Certificates at the corporate trust office of the Trustee.
Distributions of principal and interest on each Class of Certificates in
book-entry form will be made as set forth below.
Classes of Certificates
Each Series of Certificates will be issued in one or more classes (each,
a "Class") as specified in the related Prospectus Supplement. The Certificates
of any Class of any Series (i) may be entitled to receive distributions
allocable only to principal, only to interest or to any combination of principal
and interest, (ii) may be entitled to receive distributions allocable to
prepayments of principal throughout the life of such Certificates or only during
specified periods, (iii) may be subordinated in right to receive distributions
on the Mortgage Assets and may be subject to allocation of losses on the
Mortgage Assets in favor of one or more other Classes of Certificates of such
Series, (iv) may be entitled to receive distributions on the Mortgage Assets
only after the occurrence of specified events, (v) may be entitled to receive
distributions on the Mortgage Assets in accordance with a specified schedule or
formula or on the basis of distributions on specified portions of the Mortgage
Assets, (vi) in the case of Certificates entitled to receive distributions
allocable to interest, may be entitled to receive interest at a specified rate
(a "Pass-Through Rate"), which may be fixed, variable or adjustable and may
differ from the rate at which other Classes of Certificates of such Series are
entitled to receive interest and (vii) in the case of Certificates entitled to
receive distributions allocable to interest, may be entitled to receive such
distributions only after the occurrence of specified events and may accrue
interest until such events occur, in each case as specified in the related
Prospectus Supplement.
Book-Entry Procedures
The Prospectus Supplement for a Series may specify that certain Classes
of Certificates will initially be issued in book-entry form ("Book-Entry
Certificates") in the authorized denominations specified therein. Each such
Class will be represented by a single certificate registered in the name of the
nominee of the depository, which is expected to be The Depository Trust Company
("DTC" and, together with any successor or other depository selected by the
Seller, the "Depository"). The Depository or its nominee will be registered as
the record holder of each Class of Book-Entry Certificates in the certificate
register maintained by the Trustee for the related Trust. No person acquiring a
Book-Entry Certificate (each, a "Beneficial Owner") will be entitled to receive
a physical certificate representing such Certificate.
A Beneficial Owner's ownership of a Book-Entry Certificate will be
recorded by appropriate entries on the books and records of the brokerage firm,
bank, thrift institution or other financial intermediary (each, a "Financial
Intermediary") that maintains such 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 the Depository (or of a participating firm
that acts as agent for the Financial Intermediary whose interest in turn will be
recorded on the
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records of the Depository, if the Beneficial Owner's Financial Intermediary is
not a Depository participant). Therefore, the Beneficial Owner must rely on the
foregoing procedures to evidence its beneficial ownership of a Book-Entry
Certificate, and beneficial ownership of a Book-Entry Certificate may only be
transferred by compliance with the procedures of such Financial Intermediaries
and Depository participants.
DTC, which is a New York-chartered limited-purpose trust company,
performs services for its participants, some of whom (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 the Depository and
Depository participants as in effect from time to time.
If so specified in the Prospectus Supplement for a Series, distributions
of principal and interest on the Book-Entry Certificates of such Series will be
made on each Distribution Date by or on behalf of the Trustee to the Depository.
The Depository will be responsible for crediting the amount of such
distributions to the accounts of the applicable Depository participants in
accordance with the Depository's normal procedures. Each Depository 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. As a result of the foregoing procedures, the Beneficial
Owners of the Book-Entry Certificates may experience some delay in their receipt
of payments.
Because transactions in Book-Entry Certificates can be effected only
through the Depository, participating organizations, indirect participants and
certain banks, the ability of the Beneficial Owner of a Book-Entry Certificate
to pledge such Certificate to persons or entities that do not participate in the
Depository, or otherwise to take actions in respect of such Certificate, may be
limited due to the lack of a physical certificate representing such Certificate.
Issuance of the Book-Entry Certificates in book-entry form may reduce the
liquidity of such Certificates in the secondary trading market because investors
may be unwilling to purchase Book-Entry Certificates for which they cannot
obtain physical certificates.
The Book-Entry Certificates will be issued in fully registered,
certificated form to Beneficial Owners of Book-Entry Certificates or their
nominees, rather than to the Depository or its nominee, only if (i) the Seller
advises the Trustee in writing that the Depository is no longer willing or able
to discharge properly its responsibilities as depository with respect to the
Book-Entry Certificates and the Seller is unable to locate a qualified successor
within 30 days or (ii) the Seller, at its option, elects to terminate the
book-entry system through the Depository. Upon the occurrence of either event
described in the preceding sentence, the Trustee is required to notify the
Depository, which in turn will notify all Beneficial Owners of Book-Entry
Certificates through Depository participants, of the availability of
certificated Certificates. Upon surrender by the Depository of the certificates
representing the BookEntry Certificates and receipt of instructions for
re-registration, the Trustee will reissue the Book-Entry Certificates as
certificated Certificates to the Beneficial Owners of the Book-Entry
Certificates.
Neither the Seller, the Master Servicer nor the Trustee will have any
liability for any aspect of the records relating to or payment made on account
of beneficial ownership interests of the Book-Entry Certificates held by the
Depository or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
Allocation of Distributions from Mortgage Assets
The Prospectus Supplement for each Series of Certificates will specify
(i) whether distributions of principal and/or interest on such Certificates will
be made monthly, quarterly, semi-annually or at other intervals, (ii) the date
for each such distribution (each, a "Distribution Date"), (iii) the amount of
each such distribution allocable to principal and interest and (iv) whether all
distributions will be made pro rata to Certificateholders of the Class entitled
thereto or on some other basis. All distributions with respect to each
Certificate of a Series will be made to the person in whose name such
Certificate is registered (the "Certificateholder") as of the close of business
on the record date specified in the related Prospectus Supplement.
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The amount available to be distributed on each Distribution Date with
respect to each Series of Certificates (the "Available Distribution") will be
determined as set forth in the related Agreement and will be described in the
related Prospectus Supplement. In general, the Available Distribution for a
Distribution Date will be equal to the amount of principal and interest actually
collected, advanced or received during the related Due Period or Prepayment
Period, net of applicable servicing fees, master servicing fees, special
servicing fees, administrative and guarantee fees, insurance premiums, amounts
required to reimburse any unreimbursed Advances and any other amounts specified
in the related Prospectus Supplement. The Available Distribution will be
allocated among the Classes of Certificates in the proportion and order of
application set forth in the related Agreement and described in the related
Prospectus Supplement.
"Due Period" means, with respect to any Distribution Date, the period
commencing on the second day of the calendar month preceding the calendar month
in which such Distribution Date occurs and continuing through the first day of
the calendar month in which such Distribution Date occurs, or such other period
as may be specified in the related Prospectus Supplement.
"Prepayment Period" means, with respect to any Distribution Date, the
time period specified in the Prospectus Supplement for a Series used to identify
prepayments or other unscheduled payments of principal or interest received with
respect to Mortgage Assets that will be used to pay Certificateholders of such
Series on such Distribution Date.
The Prospectus Supplement for each Series of Certificates will specify
the Pass-Through Rate, or the method for determining the Pass-Through Rate, for
each applicable Class of Certificates. REMIC Residual Certificates may or may
not have a Pass-Through Rate. REMIC Residual Certificates of a Series will
generally be entitled to receive amounts remaining after allocation of scheduled
distributions to all other outstanding Classes of Certificates of such Series
entitled to such distributions. One or more Classes of Certificates may be
represented by a notional principal amount. The notional principal amount is
used solely for purposes of determining interest distributions and certain other
rights and obligations of the holders of such Certificates and does not
represent a beneficial interest in principal payments on the Mortgage Assets in
the related Trust. One or more Classes of Certificates may provide for interest
that accrues but is not currently payable ("Compound Interest Certificates").
Any interest that has accrued but is not paid with respect to a Compound
Interest Certificate on any Distribution Date will be added to the principal
balance of such Compound Interest Certificate on such Distribution Date.
The Prospectus Supplement for each Series of Certificates will specify
the method by which the amount of principal to be distributed on each
Distribution Date will be calculated and the manner in which such amount will be
allocated among the Classes of Certificates of such Series entitled to
distributions of principal. The aggregate original principal balance of the
Certificates of each Series will equal the aggregate distributions allocable to
principal that such Certificates will be entitled to receive. One or more
Classes of Certificates may be entitled to payments of principal in specified
amounts on specified Distribution Dates, to the extent of the Available
Distribution on such Distribution Dates, or may be entitled to payments of
principal from the amount by which such Available Distribution exceeds such
specified amounts. One or more Classes of Certificates may be subordinated in
right to receive distributions on the Mortgage Assets and may be subject to
allocation of losses on the Mortgage Assets in favor of one or more other
Classes of Certificates of the same Series as specified in the related
Prospectus Supplement.
Allocation of Losses and Shortfalls
The Prospectus Supplement for each Series of Certificates will specify
the method by which realized losses or interest shortfalls with respect to the
Mortgage Loans included in the related Trust will be allocated. A loss may be
realized with respect to a Mortgage Loan (a "Realized Loss") as a result of (i)
the final liquidation of such Mortgage Loan through foreclosure sale,
disposition of the related Mortgaged Premises if acquired by deed-in-lieu of
foreclosure, or otherwise, (ii) the reduction of the unpaid principal balance of
such Mortgage Loan or the modification of the payment terms of such Mortgage
Loan in connection with a proceeding under the federal Bankruptcy Code or
otherwise, (iii) certain physical damage to the related Mortgaged Premises of a
type not covered by Standard Hazard Insurance Policies or (iv) fraud, dishonesty
or misrepresentation in the origination of such Mortgage Loan. An interest
shortfall may occur with respect to a Mortgage Loan as a result of a failure on
the part of any Servicer, the Master Servicer or the Trustee to advance funds to
cover delinquent payments of principal
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or interest on such Mortgage Loan, the application of the Soldiers' and Sailors'
Civil Relief Act of 1940 or the prepayment in full of such Mortgage Loan and the
failure of the Servicer or, in certain cases, the Master Servicer to pay
interest to month-end.
If so specified in the related Prospectus Supplement, the Senior
Certificates of a Series will not bear any realized losses on the related
Mortgage Loans until the Subordinated Certificates of such Series have borne
realized losses up to a specified amount or loss limit or until the principal
amount of the Subordinated Certificates has been reduced to zero, either through
the allocation of realized losses, the priority of distributions or both. If so
specified in the related Prospectus Supplement, interest shortfalls may result
in a reallocation to the Senior Certificates of a Series of amounts otherwise
distributable to the Subordinated Certificates of such Series.
Valuation of Mortgage Assets
The Mortgage Assets and any other assets included in the Trust for each
Series of Certificates will have an initial aggregate value ("Asset Value")
determined as set forth in the related Agreement and described in the related
Prospectus Supplement. The Asset Value of the Mortgage Assets and any other
assets included in the Trust for a Series (including amounts held in any
Pre-Funding Account for such Series) will equal or exceed the aggregate original
principal balance of the Certificates of such Series. The Asset Value of any
Mortgage Loan included in the Trust for such Series will generally equal, on any
date of determination, (i) the Scheduled Principal Balance of such Mortgage Loan
or (ii) the Scheduled Principal Balance of such Mortgage Loan multiplied by a
fraction, as specified in the related Prospectus Supplement, which is based on
the Net Rate of such Mortgage Loan. Asset Value will generally be determined
after the subtraction of applicable servicing fees, master servicing fees,
special servicing fees, administrative and guarantee fees and insurance premiums
and, if so specified in the related Prospectus Supplement, the addition of any
related reinvestment income. The Asset Value of a Mortgage Loan that is finally
liquidated through foreclosure or deed-in-lieu of foreclosure, or otherwise, or
a Mortgage Loan purchased from the Trust pursuant to the related Agreement will
be zero.
"Scheduled Principal Balance" means, with respect to any Mortgage Loan
as of any date of determination, the scheduled principal balance of such
Mortgage Loan as of the Cut-Off Date, increased by the amount of negative
amortization, if any, with respect thereto and reduced by (i) the principal
portion of all scheduled monthly payments due on or before such date of
determination, whether or not received, (ii) all amounts allocable to
unscheduled principal payments received on or before the last day of the
preceding Prepayment Period, and (iii) without duplication, the amount of any
Realized Loss that has occurred with respect to such Mortgage Loan on or before
such date of determination.
"Cut-Off Date" means, with respect to any Series, the date specified in
the related Prospectus Supplement after which payments on the Mortgage Assets
included in the related Trust are for the account of the Certificateholders of
such Series.
"Net Rate" means, with respect to any Mortgage Loan, the Mortgage
Interest Rate of such Mortgage Loan adjusted to deduct applicable servicing
fees, master servicing fees, special servicing fees, administrative and
guarantee fees and insurance premiums and, if specified in the related
Prospectus Supplement, to add any related reinvestment income (expressed, in
each case, as a percentage).
Optional Redemption
To the extent and under the circumstances specified in the Prospectus
Supplement for a Series, the Certificates of such Series may be redeemed prior
to their Final Scheduled Distribution Date at the option of the Seller or such
other party as may be specified in the related Prospectus Supplement for a
purchase price calculated as specified in such Prospectus Supplement. Upon
redemption of the Certificates, at the option of the redeeming party, (i) the
related Trust may be terminated, thereby causing the sale of the remaining
Mortgage Assets, or (ii) such Certificates may be held or resold by the
redeeming party. If so specified in the Prospectus Supplement for a Series, the
right to redeem the Certificates of such Series will be conditioned upon the
passage of a certain date specified in such Prospectus Supplement and/or the
Asset Value or Scheduled Principal Balance of the Mortgage Assets in the Trust
or the outstanding principal balance of a specified Class of Certificates at the
time of purchase aggregating less than a percentage, specified in such
Prospectus Supplement, of the Asset Value or Scheduled
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Principal Balance of the Mortgage Assets in the Trust or the outstanding
principal balance of a specified Class of Certificates at the time of the
issuance of such Series of Certificates. Notice of the redemption of the
Certificates will be given to Certificateholders as provided in the related
Agreement.
MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS
The prepayment experience on the Mortgage Assets will affect (i) the
average life of each Class of Certificates issued by the related Trust, (ii) the
extent to which the final distribution for each Class of such Certificates
occurs prior to its Final Scheduled Distribution Date and (iii) for Certificates
purchased at a price other than par, the effective yield on such Certificates.
Because prepayments will be passed through to the holders of Certificates of
each Series as distributions of principal on such Certificates, it is likely
that, in the event of such prepayments, the final distribution on each Class of
Certificates of a Series will occur prior to the Final Scheduled Distribution
Date for such Class.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model, such as the Single Monthly Mortality ("SMM")
prepayment model, the Constant Prepayment Rate ("CPR") model or the prepayment
speed assumption ("PSA") model. The Prospectus Supplement for a Series may
contain a table setting forth percentages of the original principal amount of
each Class of Certificates of such Series anticipated to be outstanding after
each of the dates shown in the table. It is unlikely that the prepayment of the
Mortgage Assets of any Trust will conform to any of the percentages of the
prepayment assumption model described in any table set forth in the related
Prospectus Supplement.
A number of social, economic, tax, geographic, demographic, legal and
other factors may influence principal prepayments. If a Trust includes Mortgage
Loans, these factors may include the age of the Mortgage Loans, the geographic
distribution of the Mortgaged Premises, the payment terms of the Mortgage Loans,
the characteristics of the borrowers, homeowner mobility, economic conditions
generally and in the geographic area in which the Mortgaged Premises are
located, enforceability of "due-on-sale" clauses, servicing decisions,
prevailing mortgage market interest rates in relation to the interest rates on
the Mortgage Loans, the availability of mortgage funds, the use of second or
home equity loans by borrowers, the availability of refinancing opportunities,
the use of the Mortgaged Premises as second or vacation homes, the net equity of
the borrowers in the Mortgaged Premises and, if the Mortgage Loans are secured
by investment properties, tax-related considerations and the availability of
other investments. The principal prepayment rate may also be subject to seasonal
variations. The Mortgage Certificates in the Trust for a Series of Certificates
may be backed by mortgage loans with different interest rates. Accordingly, the
prepayment experience of such Mortgage Certificates will to some extent be a
function of the mix of interest rates of the underlying mortgage loans.
The principal prepayment rate on pools of conventional housing loans has
fluctuated significantly in recent years. In general, if prevailing interest
rates were to fall significantly below the interest rates on the Mortgage Loans,
the Mortgage Loans would be expected to prepay at higher rates than if
prevailing interest rates were to remain at or above the interest rates on the
Mortgage Loans. Conversely, if interest rates were to rise above the interest
rates on the Mortgage Loans, the Mortgage Loans would be expected to prepay at
lower rates than if prevailing interest rates were to remain at or below
interest rates on the Mortgage Loans. In general, Junior Mortgage Loans have
smaller average principal balances than senior or first Mortgage Loans and are
not viewed by borrowers as permanent financing. Accordingly, Junior Mortgage
Loans may experience a higher rate of prepayment than senior or first Mortgage
Loans. In addition, any future limitations on the right of borrowers to deduct
interest payments on Mortgage Loans for federal income tax purposes may result
in a higher rate of prepayment of the Mortgage Loans.
Distributions of interest on the Certificates of a Series on any
Distribution Date generally will include interest accrued through a date
specified in the related Prospectus Supplement (the "Accounting Date") that
precedes such Distribution Date. Because interest generally will not be
distributed to the Certificateholders of such Series until the Distribution Date
following the Accounting Date, the effective yield to such Certificateholders
will be lower than the yield otherwise produced by the applicable Pass-Through
Rate and purchase price for such Certificates.
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The yield to maturity of any Certificate will be affected by the rate
and timing of payments of principal on the Mortgage Loans. If the purchaser of a
Certificate offered at a discount calculates the anticipated yield to maturity
of such Certificate based on an assumed rate of payment of principal that is
faster than that actually received on the Mortgage Loans (or on the mortgage
loans underlying the Mortgage Certificates), the actual yield to maturity will
be lower than that so calculated. Conversely, if the purchaser of a Certificate
offered at a premium calculates the anticipated yield to maturity of such
Certificate based on an assumed rate of payment of principal that is slower than
that actually received on the Mortgage Loans (or on the mortgage loans
underlying the Mortgage Certificates), the actual yield to maturity will be
lower than that so calculated.
The timing of changes in the rate of prepayments on the Mortgage Loans
(or on the mortgage loans underlying the Mortgage Certificates) may
significantly affect an investor's actual yield to maturity, even if the average
rate of principal payments experienced over time is consistent with such
investor's expectation. In general, the earlier a prepayment of principal on the
Mortgage Loans (or on the mortgage loans underlying the Mortgage Certificates),
the greater will be the effect on the investor's yield to maturity. As a result,
the effect on an investor's yield of principal payments occurring at a rate
higher (or lower) than the rate anticipated by the investor during the period
immediately following the issuance of the Certificates would not be fully offset
by a subsequent like reduction (or increase) in the rate of principal payments.
Because the rate of principal payments (including prepayments) on the Mortgage
Loans (or on the mortgage loans underlying the Mortgage Certificates) will
significantly affect the weighted average life and other characteristics of any
Class of Certificates, prospective investors are urged to consider their own
estimates as to the anticipated rate of future prepayments on the mortgage loans
and the suitability of the Certificates to their investment objectives.
Under certain circumstances, the Master Servicer, certain insurers, the
holders of REMIC Residual Certificates or certain other entities specified in
the related Prospectus Supplement may have the option to purchase the Mortgage
Assets and other assets of a Trust, thereby effecting earlier retirement of the
related Series of Certificates. See "The Trusts -- Repurchase of Converted
Mortgage Loans" and " -- Repurchase of Delinquent Mortgage Loans" and "The
Agreement -- Termination."
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 Loans or the Mortgage
Certificates at any time or over the lives of the Certificates.
THE TRUSTS
Assignment of Mortgage Assets
Pursuant to the applicable Agreement, the Seller will cause the Mortgage
Assets and other assets to be included in the related Trust to be assigned and
transferred to the Trustee together with all principal and interest paid on such
Mortgage Assets from the date specified in the related Prospectus Supplement.
The Trustee will deliver to the order of the Seller, in exchange for the
Mortgage Assets so transferred, Certificates of the related Series in authorized
denominations registered in such names as the Seller may request representing
the beneficial ownership interest in such Mortgage Assets. Each Mortgage Loan
and Mortgage Certificate included in a Trust will be identified in a schedule
appearing as an exhibit to the related Agreement. Such schedule will include
information as to the Scheduled Principal Balance of each Mortgage Loan or
Mortgage Certificate as of the date of issuance of the Certificates of such
Series and its interest rate, its original principal balance and certain other
information.
In addition, such steps will be taken by the Seller as are necessary to
have the Trustee become the registered owner of each Mortgage Certificate which
is included in a Trust and to provide for all payments on such Mortgage
Certificate to be made directly to the Trustee. The Seller will, as to each
Mortgage Loan, deliver or cause to be delivered to the Trustee the related
Mortgage Note endorsed to the order of the Trustee, evidence of recording of the
related mortgage or deed of trust (a "Security Instrument"), an assignment of
such Security Instrument in recordable form naming the Trustee as assignee and
certain other original documents evidencing or relating to such Mortgage Loan.
Within one year following the closing date for a Series, the Seller will cause
the
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assignments of the Mortgage Loans to be recorded in the appropriate public
office for real property records wherever necessary to protect the Trustee's
interest in the Mortgage Loans. In lieu of recording the assignments of Mortgage
Loans in a particular jurisdiction, the Seller may deliver or cause to be
delivered to the Trustee an opinion of counsel to the effect that such recording
is not required to protect the right, title and interest of the Trustee in such
Mortgage Loans. The original mortgage documents are to be held by the Trustee or
a custodian acting on its behalf except to the extent released to the Servicer
or the Master Servicer from time to time in connection with servicing the
Mortgage Loans.
The Seller will make certain customary representations and warranties in
each Agreement with respect to each related Mortgage Asset, including a
representation that it either is the owner of such Mortgage Asset or has a
first, second, or more junior (as applicable) priority perfected security
interest in such Mortgage Asset. In addition, Saxon Mortgage, Inc., a Virginia
corporation and an affiliate of the Seller ("Saxon Mortgage"), may make certain
customary representations and warranties with respect to the Mortgage Assets in
the sales agreement pursuant to which the Mortgage Assets are assigned and
transferred to the Seller. If so specified in the related Prospectus Supplement,
with respect to those Mortgage Assets which are Mortgage Loans, each Originator
that assigns and transfers Mortgage Loans to Saxon Mortgage will make certain
customary representations and warranties in the agreement assigning and
transferring such Mortgage Loans to Saxon Mortgage. See "Origination of Mortgage
Loans -- Representations and Warranties." The right of the Seller to enforce the
representations and warranties of Saxon Mortgage will be assigned to the Trustee
under the related Agreement. To the extent that Saxon Mortgage makes
representations and warranties regarding the characteristics of the Mortgage
Assets, the Seller generally will not make such representations and warranties.
In the event that the representations and warranties of the Seller or Saxon
Mortgage are breached, and such breach adversely affects the interest of the
Certificateholders in the Mortgage Assets, the Seller or Saxon Mortgage will be
required, subject to the terms imposed under the related Agreement or Sales
Agreement, (i) to cure such breach, (ii) to substitute other Mortgage Assets for
the affected Mortgage Assets or (iii) to repurchase the affected Mortgage Assets
at a price generally equal to the unpaid principal balance of such Mortgage
Assets, together with accrued and unpaid interest thereon at the related
Mortgage Interest Rate. Neither the Seller nor the Master Servicer will be
obligated to substitute Mortgage Assets or to repurchase Mortgage Assets if
Saxon Mortgage defaults upon its obligation to do so, and no assurance can be
given that Saxon Mortgage will perform such obligations with respect to Mortgage
Assets.
The following is a brief description of the Mortgage Assets expected to
be included in the Trusts. If specific information respecting the Mortgage
Assets is not known at the time the related Series of Certificates is initially
offered, more general information of the nature described below will be provided
in the Prospectus Supplement and specific information will be set forth in a
report on Form 8-K to be filed with the Commission within fifteen days after the
initial issuance of such Certificates (the "Detailed Description"). A copy of
the Agreement with respect to each Series of Certificates will be attached to
the Form 8-K and will be available for inspection at the corporate trust office
of the Trustee specified in the related Prospectus Supplement.
The Mortgage Loans -- General
The Mortgage Loans will be evidenced by promissory notes (each, a
"Mortgage Note") and will be secured by first, second or more junior liens on
(i) the related real property or leasehold interest, together with improvements
thereon, or (ii) with respect to Cooperative Loans, the shares issued by the
related Cooperative (the "Mortgaged Premises"). If so specified in the
Prospectus Supplement for a Series, the Mortgage Loans will not be insured or
guaranteed by any government agency ("Conventional Mortgage Loans"). If specific
information respecting the Mortgage Loans is not known at the time the related
Series of Certificates is initially offered, more general information of the
nature described below will be provided in the Prospectus Supplement and
specific information will be set forth in the Detailed Description.
The payment terms of the Mortgage Loans to be included in the Trust for
any Series will be described in the related Prospectus Supplement and may
include any of the following features or combinations thereof or any other
features described in such Prospectus Supplement:
(a) Interest may be payable at a fixed rate (a "Fixed Rate") or may be
payable at a rate that is adjustable from time to time on specified
adjustment dates (each, an "Interest Adjustment Date") by adding a
specified fixed percentage (the "Gross Margin") to a specified index
(the "Index") (which sum may be rounded),
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that otherwise varies from time to time, that is fixed for a period of
time or under certain circumstances and is followed by a rate that is
adjustable from time to time as described above or that otherwise varies
from time to time or that is convertible from an adjustable rate to a
fixed rate (each, an "Adjustable Rate"). Changes to an Adjustable Rate
may be subject to periodic limitations (a "Periodic Rate Cap"), maximum
rates, minimum rates or a combination of such limitations. Accrued
interest may be deferred and added to the principal of a Mortgage Loan
for such periods and under such circumstances as may be specified in the
related Prospectus Supplement. Mortgage Loans may permit the payment of
interest at a rate lower than the interest rate on the related Mortgage
Note (the "Mortgage Interest Rate") for a period of time or for the life
of the Mortgage Loan, and the amount of any difference may be
contributed from funds supplied by the seller of the related Mortgaged
Premises or another source or may be treated as accrued interest and
added to the principal balance of the Mortgage Loan.
(b) Principal may be payable on a level basis to fully amortize the
Mortgage Loan over its term, may be calculated on the basis of an
assumed amortization schedule that is significantly longer than the
original term of the Mortgage Loan or on an interest rate that is
different from the related Mortgage Interest Rate or may not be
amortized during all or a portion of such original term. Payment of all
or a substantial portion of the principal may be due at maturity.
Principal may include interest that has been deferred and added to the
principal balance of the Mortgage Loan.
(c) Payments of principal and interest may be fixed for the life of the
Mortgage Loan, may increase over a specified period of time or may
change from period to period. Mortgage Loans may include limits on
periodic increases or decreases in the amount of monthly payments and
may include maximum or minimum amounts of monthly payments.
(d) Prepayments of principal may be subject to a prepayment fee, which
may be fixed for the life of the Mortgage Loan or may adjust or decline
over time, and may be prohibited for the life of the 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 prepayment fee unless the prepayment occurs during
specified time periods. The Mortgage Loans may include due-on-sale
clauses which permit the mortgagee to demand payment of the entire
Mortgage Loan in connection with the sale or certain other transfers of
the related Mortgaged Premises. Other Mortgage Loans may be assumable by
persons meeting the then applicable underwriting standards of the
Originator.
The Mortgaged Premises (and, with respect to Cooperative Loans, the
buildings owned by Cooperatives) may be located in any state, territory or
possession of the United States (including the District of Columbia or Puerto
Rico). The Mortgaged Premises generally will be covered by standard hazard
insurance policies ("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 ("Primary Mortgage Insurance Policies")
insuring against all or a portion of any loss sustained by reason of nonpayments
by borrowers to the extent specified in the related Prospectus Supplement. If so
specified in the Prospectus Supplement for a Series, the Mortgage Loans will be
purchased by the Seller from Saxon Mortgage. If so specified in the Prospectus
Supplement for a Series, the Mortgage Loans will be originated by Saxon Mortgage
or purchased by Saxon Mortgage in the open market or in privately negotiated
transactions from savings and loan associations, savings banks, commercial
banks, credit unions, insurance companies or similar institutions that are
supervised and examined by a federal or state authority or by an institution
approved by HUD (each, including Saxon Mortgage in its capacity as an originator
of Mortgage Loans, an "Originator").
The Prospectus Supplement for each Series of Certificates will contain
information with respect to the Mortgage Loans expected to be included in the
related Trust, including, but not limited to, (i) the expected aggregate
outstanding principal balance and the expected average outstanding principal
balance of the Mortgage Loans as of the date set forth in the Prospectus
Supplement, (ii) the largest expected principal balance and the smallest
expected principal balance of any of the Mortgage Loans, (iii) the types of
Mortgaged Premises and/or other assets securing the Mortgage Loans, (iv) the
original terms to maturity of the Mortgage Loans, (v) the expected weighted
average term to maturity of the Mortgage Loans as of the date set forth in the
Prospectus Supplement and the expected range of the terms to maturity, (vi) the
earliest origination date and latest maturity date of any of the Mortgage Loans,
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(vii) the expected aggregate outstanding principal balance of Mortgage Loans
having loan-to-value ratios at origination exceeding 80%, (viii) the expected
Mortgage Interest Rates and the range of Mortgage Interest Rates, (ix) in the
case of ARM Loans, the expected weighted average of the related Adjustable
Rates, (x) the expected aggregate outstanding principal balance, if any, of
Buy-Down Loans as of the date set forth in the Prospectus Supplement, (xi) the
expected aggregate outstanding principal balance, if any, of GPM Loans as of the
date set forth in the Prospectus Supplement, (xii) the amount of any Mortgage
Pool Insurance Policy, Special Hazard Insurance Policy or Bankruptcy Bond to be
maintained with respect to the related Trust, (xiii) to the extent different
from the amounts described herein, the amount of any Standard Hazard Insurance
Policy required to be maintained with respect to each Mortgage Loan, (xiv) the
amount, if any, and terms of any other credit enhancement to be provided with
respect to all or a material portion of the Mortgage Loans and (xv) the expected
geographic location of the Mortgaged Premises (or, in the case of a Cooperative
Loan, the building owned by the related Cooperative). If specific information
respecting the Mortgage Loans is not known to the Seller at the time the related
Certificates are initially offered, more general information of the nature
described above will be provided in the Prospectus Supplement and specific
information will be set forth in the Detailed Description.
"ARM Loans" means Mortgage Loans providing for periodic adjustments to
the related Mortgage Interest Rate to equal the sum (which may be rounded) of a
Gross Margin and an Index.
"Buy-Down Loans" means Mortgage Loans as to which funds have been
provided (and deposited into an escrow account) to reduce the monthly payments
of the borrowers during the early years of such Mortgage Loans.
"GPM Loans" means Mortgage Loans providing for monthly payments during
the early years of such Mortgage Loans which are or may be less than the amount
of interest due on such Mortgage Loans and as to which unpaid interest is added
to the principal balance of such Mortgage Loans (resulting in negative
amortization) and paid, together with interest thereon, in later years.
No assurance can be given that values of the Mortgaged Premises have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the real estate market should experience an overall
decline in property values such that the outstanding principal balances of the
Mortgage Loans (plus any additional financing by other lenders on the same
Mortgaged Premises) in the related Trust become equal to or greater than the
value of such Mortgaged Premises, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry.
If specified in the Prospectus Supplement for a Series, the Mortgage
Assets in the related Trust may include Mortgage Loans that are secured by
Mortgaged Premises acquired by foreclosure or by deed-in-lieu of foreclosure
(collectively, "REO Properties") or Mortgage Loans that are delinquent or
non-performing. The inclusion of such REO Properties or such Mortgage Loans in
the Trust for a Series may cause the rate of defaults and prepayments on the
Mortgage Loans to increase and, in turn, may cause losses to exceed the
available credit enhancement for such Series and affect the yield on the
Certificates of such Series.
Single Family Loans
Single Family Loans will consist of mortgage loans secured by first,
second or more junior liens on oneto four-family residential and mixed use
properties. The Mortgaged Premises which secure Single Family Loans will consist
of detached or semi-detached one-to four-family dwelling units, townhouses, row
houses, individual condominium units in condominium buildings, individual units
in planned unit developments, and certain mixed use and other dwelling units.
Such Mortgaged Premises may include vacation and second homes or investment
properties. A portion of a dwelling unit may contain a commercial enterprise.
Cooperative Loans
Cooperative Loans generally will be secured by security interests in or
similar liens on stock, shares or membership certificates issued by Cooperatives
and in the related proprietary leases or occupancy agreements granting exclusive
rights to occupy specific dwelling units in the buildings owned by such
Cooperatives. A 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
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specific apartments or units. In general, 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
mortgage loans, real property taxes, maintenance expenses and other capital or
ordinary expenses. Those payments are in addition to any payments of principal
and interest the tenant-stockholder must make on any loans to the
tenantstockholder secured by its shares in the Cooperative. The Cooperative is
directly responsible for project management and, in most cases, payment of real
estate taxes and hazard and liability insurance. A Cooperative's ability to meet
debt service obligations on a mortgage loan on the building owned by the
Cooperative, as well as all other operating expenses, will be dependent in large
part on the receipt of maintenance payments from the tenantstockholders, as well
as any rental income from units or commercial areas the Cooperative might
control. Unanticipated expenditures may in some cases have to be paid by special
assessments on the tenant-stockholders.
Multi-Family Loans
Multi-Family Loans will consist of mortgage loans secured by first,
second or more junior liens on rental apartment buildings, mixed-use properties
or projects containing five or more residential units. The Mortgaged Premises
which secure Multi-Family Loans may include high-rise, mid-rise and garden
apartments or apartment buildings owned by Cooperatives.
Junior Mortgage Loans
If specified in the Prospectus Supplement for a Series, the Mortgage
Loans assigned and transferred to the related Trust may include Mortgage Loans
secured by second or more junior liens on residential properties ("Junior
Mortgage Loans"). Because the rights of a holder of a second or more junior lien
are subordinate to the rights of a senior lienholder, the position of such Trust
and the holders of the Certificates of such Series could be more adversely
affected by a reduction in the value of the Mortgaged Premises than would the
position of the senior lienholder. In the event of a default by the related
borrower, liquidation or other proceeds would be applied first to the payment of
court costs and fees in connection with the foreclosure, second to unpaid real
estate taxes, and third in satisfaction of all principal, interest, prepayment
or acceleration penalties, if any, and any other sums due and owing to the
senior lienholder. The claims of the senior lienholder would be satisfied in
full out of the proceeds of the liquidation of the Mortgaged Premises, if such
proceeds are sufficient, before the Trust would receive any payments. In the
event that the proceeds from a foreclosure or similar sale of Mortgaged Premises
on which the Trust holds a second or more junior lien are insufficient to
satisfy the senior mortgage loans in the aggregate, the Trust, as the holder of
the second or more junior lien, and the holders of the Certificates of the
related Series bear (i) the risk of delay in distributions while a deficiency
judgment against the borrower is obtained and (ii) the risk of loss if the
deficiency judgment is not realized upon. In addition, deficiency judgments may
not be available in certain jurisdictions.
Even if a Mortgaged Premises provides adequate security for the related
Junior Mortgage Loan, substantial delays could be encountered in connection with
the liquidation of such Junior Mortgage Loan, and corresponding delays in the
receipt of related proceeds by the holders of the Certificates of the related
Series could occur. An action to foreclose on a Mortgaged Premises securing a
Mortgage Loan is regulated by state statutes and rules and is subject to many of
the delays and expenses of other lawsuits if defenses or counterclaims are
interposed, sometimes requiring several years to complete. In addition, in some
states, an action to obtain a deficiency judgment is not permitted following a
nonjudicial sale of a Mortgaged Premises. In the event of a default by a
borrower, these restrictions, among other things, may impede the ability of the
Servicer to foreclose on or sell the Mortgaged Premises or to obtain liquidation
proceeds sufficient to repay all amounts due on the related Mortgage Loan. In
addition, the Servicer generally will be entitled to deduct from related
liquidation proceeds all expenses reasonably incurred in attempting to recover
amounts due on defaulted Mortgage Loans and not yet repaid, including payments
to senior lienholders, legal fees and costs of legal action, real estate taxes
and maintenance and preservation expenses.
Conventional Home Improvement Loans
The Conventional Home Improvement Loans will consist of secured
conventional loans, the proceeds of which generally will be used for purposes
similar to those described under the heading " -- Title I Loans." To the extent
set forth in the related Prospectus Supplement, the Conventional Home
Improvement Loans will be fully
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amortizing and will bear interest at a fixed or variable rate. To the extent a
material portion of the Mortgage Assets included in a Trust consists of
Conventional Home Improvement Loans, the related Prospectus Supplement will
describe the material provisions of such Mortgage Loans and the programs under
which they were originated.
Title I Loans
Certain of the Mortgage Loans may be partially insured by the FHA, an
agency of the United States Department of Housing and Urban Development ("HUD"),
pursuant to the Title I credit insurance program (the "Title I Loan Program")
created under the National Housing Act of 1934. Under the Title I Loan Program,
the FHA is authorized and empowered to insure qualified lending institutions
against losses on eligible loans. The Title I Loan Program operates as a
coinsurance program in which the FHA insures up to 90% of certain losses
incurred on an individual insured loan, including the unpaid principal balance
of the loan, but only to the extent of the insurance coverage available in the
lender's FHA insurance coverage reserve account. The owner of the loan bears the
uninsured loss on each loan.
The types of loans which are eligible for insurance by the FHA under the
Title I Loan Program include property improvement loans made to finance actions
or items that substantially protect or improve the basic livability or utility
of a property, including: (i) single family, multi-family and nonresidential
property improvement loans; (ii) manufactured home improvement loans, where the
home is classified as personalty; (iii) historic preservation loans; and (iv)
fire safety equipment loans in existing health care facilities. The Title I
Loans, if any, included in the related Trust will be property improvement loans.
Each insured lender is required to use prudent lending standards in
underwriting individual Title I Loans and to satisfy the applicable loan
underwriting requirements under the Title I Loan Program prior to its approval
of the loan and disbursement of loan proceeds. In general, the lender must
exercise prudence and diligence to determine whether the borrower and any
co-maker are solvent and acceptable credit risks, with a reasonable ability to
make payments on the loan obligation. The lender's credit application and review
must determine whether the borrower's income will be adequate to meet the
periodic payments required by the loan, as well as the borrower's other housing
and recurring expenses, which determination must be made in accordance with the
expense-to-income ratios published by the Secretary of HUD.
Under the Title I Loan Program, the FHA establishes an insurance
coverage reserve account for each lender which has been granted a Title I
insurance contract. The amount of insurance coverage in this account is 10% of
the amount disbursed, advanced or expended by the lender in originating or
purchasing eligible loans registered with the FHA for Title I insurance, with
certain adjustments. The balance in the insurance coverage reserve account is
the maximum amount of insurance claims the FHA is required to pay. Loans to be
insured under the Title I Loan Program will be registered for insurance by the
FHA and the insurance coverage attributable to such loans will be included in
the insurance coverage reserve account for the originating or purchasing lender
following the receipt and acknowledgment by the FHA of a loan report on the
prescribed form pursuant to the Title I regulations. The FHA charges a fee of
0.50% per annum of the net proceeds (the original balance) of any eligible loan
so reported and acknowledged for insurance by the originating lender.
To the extent a material portion of the Mortgage Assets included in a
Trust consists of Title I Loans, the related Prospectus Supplement will describe
the material provisions of such Mortgage Loans and the programs under which they
were originated.
Repurchase of Converted Mortgage Loans
If so specified in the Prospectus Supplement for a Series, the Trust for
such Series may include Mortgage Loans with respect to which the related
Mortgage Interest Rate is convertible from an Adjustable Rate to a Fixed Rate at
the option of the borrower upon the fulfillment of certain conditions. If so
specified in such Prospectus Supplement, the applicable Servicer (or other party
specified in such Prospectus Supplement) will be obligated to repurchase from
the Trust any Mortgage Loan with respect to which the related Mortgage Interest
Rate has been converted from an Adjustable Rate to a Fixed Rate (a "Converted
Mortgage Loan") at a purchase price equal to the unpaid principal balance of
such Converted Mortgage Loan plus 30 days of interest thereon at the applicable
Mortgage Interest Rate. If the applicable Servicer (other than a successor
servicer) is not obligated to purchase
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Converted Mortgage Loans, the Master Servicer will be obligated to purchase such
Converted Mortgage Loans to the extent provided in such Prospectus Supplement.
Any such purchase price will be treated as a prepayment of the related Mortgage
Loan.
Repurchase of Delinquent Mortgage Loans
If so specified in the Prospectus Supplement for a Series, the Seller
may, but will not be obligated to, repurchase from the Trust any Mortgage Loan
as to which the borrower is delinquent in payments by 90 days or more (a
"Delinquent Mortgage Loan") at a purchase price equal to the greater of the
unpaid principal balance of such Delinquent Mortgage Loan plus interest thereon
at the applicable Mortgage Interest Rate from the date on which interest was
last paid to the last day of the month in which such purchase price is to be
distributed or the fair market value of the Delinquent Mortgage Loan at the time
of its purchase. Any such purchase price will be treated as a prepayment of the
related Mortgage Loan.
Substitution of Mortgage Loans
If so specified in the Prospectus Supplement for a Series, the Seller
may, within three months of the closing date for such Series, deliver to the
Trustee other Mortgage Loans in substitution for any one or more Mortgage Loans
initially included in the Trust for such Series. In general, any substitute
Mortgage Loan must, on the date of such substitution, (i) have an unpaid
principal balance not greater than (and not more than $10,000 less than) the
unpaid principal balance of the deleted Mortgage Loan, (ii) have a Mortgage
Interest Rate not less than (and not more than one percentage point in excess
of) the Mortgage Interest Rate of the deleted Mortgage Loan, (iii) have a Net
Rate that is equal to or greater than the Net Rate of the deleted Mortgage Loan,
(iv) have a remaining term to maturity not greater than (and not more than one
year less than) that of the deleted Mortgage Loan and (v) comply with each
representation and warranty relating to the Mortgage Loans. In addition,
Mortgage Loans may not be substituted for Mortgage Certificates. If Mortgage
Loans are being substituted, the substitute Mortgage Loan must have a
loan-to-value ratio as of the first day of the month in which the substitution
occurs equal to or less than the loan-to-value ratio of the deleted Mortgage
Loan as of such date (in each case, using the value at origination and after
taking into account the payment due on such date). In general, no ARM Loan may
be substituted unless the deleted Mortgage Loan is an ARM Loan, in which case
the substituted Mortgage Loan must also (i) have a minimum lifetime Mortgage
Interest Rate that is not less than the minimum lifetime Mortgage Interest Rate
on the deleted Mortgage Loan, (ii) have a maximum lifetime Mortgage Interest
Rate that is not less than the maximum lifetime Mortgage Interest Rate on the
deleted Mortgage Loan, (iii) provide for a lowest possible Net Rate that is not
lower than the lowest possible Net Rate for the deleted Mortgage Loan and a
highest possible Net Rate that is not lower than the highest possible Net Rate
for the deleted Mortgage Loan, (iv) have a Gross Margin that is not less than
the Gross Margin of the deleted Mortgage Loan, (v) have a Periodic Rate Cap
equal to the Periodic Rate Cap on the deleted Mortgage Loan, (vi) have a next
Interest Adjustment Date that is the same as the next Interest Adjustment Date
for the deleted Mortgage Loan or occurs not more than two months prior to the
next Interest Adjustment Date for the deleted Mortgage Loan and (vii) not be a
Mortgage Loan with respect to which the Mortgage Interest Rate may be converted
from an Adjustable Rate to a Fixed Rate unless the Mortgage Interest Rate on the
deleted Mortgage Loan may be so converted. In the event that more than one
Mortgage Loan is substituted for a deleted Mortgage Asset, one or more of the
foregoing characteristics may be applied on a weighted average basis as
described in the Agreement.
Agency Securities -- General
The Agency Securities may include (i) fully modified pass-through
mortgage-backed certificates guaranteed as to timely payment of principal and
interest by the Government National Mortgage Association ("GNMA 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) mortgage participation certificates
issued and guaranteed as to timely payment of interest and, if so specified in
the related Prospectus Supplement, ultimate payment of principal by the Federal
Home Loan Mortgage Corporation ("FHLMC Certificates"), (iv) stripped
mortgage-backed securities representing an undivided interest in all or a part
of either the principal distributions (but not the interest distributions) or
the interest distributions (but not the principal distributions) or in some
specified portion of the principal and interest distributions (but not all such
distributions) on certain GNMA Certificates, FNMA Certificates, FHLMC
Certificates or other government agency or
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government-sponsored agency certificates and, if so specified in the related
Prospectus Supplement, guaranteed to the same extent as the underlying
securities, (v) another type of guaranteed pass-through certificate issued or
guaranteed by GNMA, FNMA, FHLMC or another government agency or
government-sponsored agency and described in the related Prospectus Supplement
or (vi) a combination of the Agency Securities described in clauses (i) through
(v) above.
The GNMA Certificates will be backed by the full faith and credit of the
United States. The FNMA Certificates and FHLMC Certificates will not be backed,
directly or indirectly, by the full faith and credit of the United States. To
the extent a material portion of the Mortgage Assets included in a Trust
consists of Agency Securities, the related Prospectus Supplement will describe
the program under which such Agency Securities were issued and the payment
characteristics of the mortgage loans underlying such Agency Securities.
Government National Mortgage Association; GNMA Certificates
GNMA is a wholly-owned corporate instrumentality of the United States
within the United States Department of Housing and Urban Development. Section
306(g) of Title 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 that represent an interest in a pool of mortgage loans
insured by the FHA under the Housing Act or Title V of the Housing Act of 1949
("FHA Loans"), or partially guaranteed by the United States Veterans
Administration 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 guaranty, 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.
Each GNMA Certificate held in the Trust for a Series 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 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. 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 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 30 years (but may have original maturities of
substantially less than 30 years). Each such GNMA Certificate will be based on
or 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 guaranty 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
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nominee, as registered holder of the GNMA Certificates held in the Trust for a
Series, 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.
Federal National Mortgage Association; FNMA Certificates
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 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.
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 guaranties are obligations solely of FNMA and are not backed by, nor
entitled to, the full faith and credit of the United States. Although the
Secretary of the Treasury of the United States has discretionary authority to
lend FNMA up to $2.25 billion outstanding at any time, neither the United States
nor any agency thereof is obligated to finance FNMA's operations or to assist
FNMA in any other manner. If FNMA were unable to satisfy its obligations,
distributions to holders of FNMA Certificates would consist solely of payments
and other recoveries on the underlying mortgage loans and, accordingly, monthly
distributions to holders of FNMA Certificates would be affected by delinquent
payments and defaults on such mortgage loans.
Federal Home Loan Mortgage Corporation; FHLMC Certificates
FHLMC is a publicly-held government-sponsored enterprise created
pursuant to Title III of the Emergency Home Finance Act of 1970, as amended (the
"FHLMC Act"). 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.
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 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 interest 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, unless and to
the extent specified in the Prospectus Supplement for a Series, guarantee the
timely payment of scheduled principal. Pursuant to its guaranties, FHLMC
indemnifies holders of FHLMC Certificates against any diminution in principal by
reason of
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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 borrower for accelerated payment of
principal. In taking actions regarding the collection of principal after default
on the mortgage loans underlying FHLMC Certificates, including the timing of
demand for acceleration, FHLMC reserves the right to exercise its judgment with
respect to the mortgage loans in the same manner as for mortgage loans 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 borrower, and FHLMC has not adopted standards which
require that the demand be made within any specified period.
FHLMC Certificates are not guaranteed by the United States and do not
constitute debts or obligations of the United States or any instrumentality of
the United States other than FHLMC. The obligations of FHLMC under its guaranty
are obligations solely of FHLMC and are not backed by, nor entitled to, the full
faith and credit of the United States. If FHLMC were unable to satisfy such
obligations, distributions to holders of FHLMC Certificates would consist solely
of payments and other recoveries on the underlying mortgage loans and,
accordingly, monthly distributions to holders of FHLMC Certificates would be
affected by delinquent payments and defaults on such mortgage loans.
FHLMC also issues mortgage participation certificates representing an
undivided interest in a group of multi-family residential mortgage loans or
participations in multi-family residential mortgage loans purchased by FHLMC
("FHLMC Project Certificates"). To the extent a material portion of the Mortgage
Assets included in a Trust consist of FHLMC Project Certificates, the related
Prospectus Supplement will set forth additional information regarding
multi-family residential mortgage loans that qualify for purchase by FHLMC.
Stripped Mortgage-Backed Certificates; Other Agency Securities
Agency Securities may consist of one or more stripped mortgage-backed
securities, each as described herein and in the related Prospectus Supplement.
Each such Agency Security will represent an undivided interest in all or part of
either the principal distributions (but not the interest distributions) or the
interest distributions (but not the principal distributions) or in some
specified portion of the principal and interest distributions (but not all of
such distributions) on certain GNMA Certificates, FNMA Certificates or FHLMC
Certificates. The underlying securities will be held under a trust agreement by
GNMA, FNMA or FHLMC, each as trustee, or by another trustee named in the related
Prospectus Supplement. If so specified in the Prospectus Supplement for a
Series, GNMA, FNMA or FHLMC will guarantee each stripped Agency Security to the
same extent as such entity guarantees the underlying securities backing such
stripped Agency Security.
If a material portion of the Mortgage Assets included in a Trust
consists of other mortgage pass-through certificates issued or guaranteed by
GNMA, FNMA or FHLMC, the related Prospectus Supplement will describe the
characteristics of such mortgage pass-through certificates. If so specified in
the Prospectus Supplement for a Series, a combination of different types of
Agency Securities may be included in the related Trust.
Private Mortgage-Backed Securities
The Private Mortgage-Backed Securities may include (i) mortgage
participation or pass-through certificates representing beneficial interests in
certain mortgage loans or Agency Securities or (ii) collateralized mortgage
obligations secured by certain mortgage loans. The Private Mortgage-Backed
Securities will not include participations in previously issued mortgage-backed
securities unless such securities (i) have been previously registered under the
Securities Act of 1933, as amended, or held for the required holding period
under Rule 144(k) thereunder or (ii) were acquired in a bona fide secondary
market transaction from someone other than an affiliate of the Seller. Private
Mortgage-Backed Securities will have been issued pursuant to a PMBS Agreement
(the "PMBS Agreement"). 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
Security. Mortgage loans underlying a Private Mortgage-Backed Security will be
serviced by a servicer (the "PMBS Servicer") directly or
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by one or more sub-servicers who may be subject to the supervision of the PMBS
Servicer. The PMBS Servicer will be approved by FNMA or FHLMC as a servicer and,
if FHA Loans underlie the Private Mortgage-Backed Securities, by HUD as an FHA
mortgagee.
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 or the acquisition of mortgage loans, a public
agency or instrumentality of a state, local or federal government, or a limited
purpose or other 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 Prospectus
Supplement for a Series, the PMBS Issuer may be an affiliate of the Seller. 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. If so specified in the Prospectus Supplement for a Series, 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. In addition, although 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.
The mortgage loans underlying the Private Mortgage-Backed Securities may
consist of fixed rate, level payment, fully amortizing loans or GPM Loans,
Buy-Down Loans, ARM Loans, Balloon Loans or Mortgage Loans having other special
payment features. Such mortgage loans may be secured by single family property
or multi-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. Credit support in the form of
subordination of other private mortgage certificates issued under the PMBS
Agreement, reserve funds, insurance policies, letters of credit, financial
guaranty insurance policies, guarantees or other types of credit support may be
provided with respect to the mortgage loans underlying the Private
Mortgage-Backed Securities or with respect to the Private Mortgage-Backed
Securities themselves.
If a material portion of the Mortgage Assets included in a Trust
consists of Private Mortgage-Backed Securities, the related Prospectus
Supplement will specify (i) the approximate aggregate principal amount and type
of any Private Mortgage-Backed Securities to be included in the Trust, (ii)
certain characteristics of the mortgage loans underlying the Private
Mortgage-Backed Securities including (A) the payment features of such mortgage
loans, (B) the approximate aggregate principal balance, if known, of underlying
mortgage loans insured or guaranteed by a governmental entity, (C) the servicing
fee or range of servicing fees with respect to the underlying 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, (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 terms on which the underlying mortgage loans for such
Private Mortgage-Backed Securities may, or are required to, be repurchased prior
to their stated maturity or the stated maturity of the Private Mortgage-Backed
Securities and (x) the terms on which other mortgage loans may be substituted
for those originally underlying the Private Mortgage-Backed Securities.
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Home Equity Lines of Credit
HELOCs will consist of home equity lines of credit or certain balances
thereof secured by mortgages on one- to four-family residential properties,
including condominium units and cooperative dwellings, or mixed-use properties.
The HELOCs may be subordinated to other mortgages on such properties.
As more fully described in the related Prospectus Supplement, interest
on each HELOC, excluding introductory rates offered from time to time during
promotional periods, may be computed and payable monthly on the average daily
outstanding principal balance of such loan. Principal amounts on the HELOCs may
be drawn down (up to a maximum amount as set forth in the related Prospectus
Supplement) or repaid under each HELOC from time to time. If specified in the
related Prospectus Supplement, new draws by borrowers under HELOCs automatically
will become part of the Trust for a Series. As a result, the aggregate balance
of the HELOCs will fluctuate from day to day as new draws by borrowers are added
to the Trust and principal payments are applied to such balances, and such
amounts usually will differ each day, as more specifically described in the
Prospectus Supplement. Under certain circumstances more fully described in the
related Prospectus Supplement, a borrower under a HELOC may choose an interest
only payment option and is obligated to pay only the amount of interest which
accrues on such loan during the billing cycle. An interest only payment option
may be available for a specified period before the borrower may begin paying at
least the minimum monthly payment or a specified percentage of the average
outstanding balance of the loan.
The Mortgaged Premises relating to HELOCs will include one- to
four-family residential properties, including condominium units and Cooperative
dwellings, and mixed-use properties. Mixed-use properties will consist of one-
to four-family residential dwelling units and space used for retail,
professional or other commercial uses. The Mortgaged Premises may consist of
detached individual dwellings, individual condominiums, townhouses, duplexes,
row houses, individual units in planned unit developments and other attached
dwelling units. Each oneto four-family dwelling unit will be located on land
owned in fee simple by the borrower or, if so specified in the related
Prospectus Supplement, on land leased by the borrower for a term of at least ten
years greater than the term of the related HELOC. Attached dwellings may include
owner-occupied structures where each borrower owns the land upon which the unit
is built, with the remaining adjacent land owned in common, or dwelling units
subject to a proprietary lease or occupancy agreement in a cooperatively-owned
apartment building.
The aggregate principal balance of HELOCs secured by Mortgaged Premises
that are owner-occupied will be disclosed in the related Prospectus Supplement.
If so specified in the related Prospectus Supplement, the sole basis for a
representation that a given percentage of the HELOCs are secured by one- to
four-family dwelling units that are owner-occupied will be either (i) the making
of a representation by the borrower at origination of the HELOC either that the
underlying Mortgaged Premises will be used by the borrower for a period of at
least six months every year or that the borrower intends to use the Mortgaged
Premises as a primary residence or (ii) a finding that the address of the
underlying Mortgaged Premises is the borrower's mailing address as reflected in
the Master Servicer's records. If so specified in the related Prospectus
Supplement, the Mortgaged Premises may include non-owner occupied investment
properties and vacation and second homes.
Pre-Funding Account
If so specified in the related Prospectus Supplement, a Trust may enter
into an agreement (each, a "PreFunding Agreement") with the Seller under which
the Seller will agree to transfer additional Mortgage Assets to such Trust
following the date on which such Trust is established and the related
Certificates are issued. Any PreFunding Agreement will require that any Mortgage
Loans so transferred conform to the requirements specified in such Pre-Funding
Agreement. If a Pre-Funding Agreement is used, the related Trustee will be
required to deposit in a segregated account (each, a "Pre-Funding Account") upon
receipt all or a portion of the proceeds received by the Trustee in connection
with the sale of one or more classes of Certificates of the related Series. The
additional Mortgage Assets will thereafter be transferred to the related Trust
in exchange for money released to the Seller from the related Pre-Funding
Account. Each Pre-Funding Agreement will specify a period during which any such
transfer must occur. If all moneys originally deposited in such Pre-Funding
Account are not used by the end of such specified period, then any remaining
moneys will be applied as a mandatory prepayment of one or more Classes of
Certificates as specified in the related Prospectus Supplement. The specified
period for the acquisition by a Trust of additional Mortgage Loans will not
exceed three months from the date such Trust is established and
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the maximum deposit of Mortgage Loans to the Pre-Funding Account will not exceed
thirty-five percent (35%) of the aggregate proceeds received from the sale of
all Classes of Certificates of the related Series.
Asset Proceeds Account
All payments and collections received or advanced on the Mortgage Assets
assigned or transferred to the Trust for the Certificates of a Series will be
remitted to one or more accounts (collectively, the "Asset Proceeds Account")
established and maintained in trust on behalf of the holders of such
Certificates. If so specified in the Prospectus Supplement for a Series,
reinvestment income, if any, on amounts in the Asset Proceeds Account will not
accrue for the benefit of the holders of the Certificates of such Series but
will be remitted periodically to the Master Servicer or the Servicers as
additional master servicing or servicing compensation.
If so specified in the Prospectus Supplement for a Series, payments on
the Mortgage Loans included in the related Trust will be remitted to the
Servicer Custodial Account or the Master Servicer Custodial Account and then to
the Asset Proceeds Account for such Series, net of amounts required to pay
servicing fees and any amounts that are to be included in any Reserve Fund or
other fund or account for such Series. All payments received on Mortgage
Certificates included in the Trust for a Series will be remitted to the Asset
Proceeds Account. All or a portion of the amounts in such Asset Proceeds
Account, together with reinvestment income thereon if payable to the
Certificateholders, will be available, to the extent specified in the related
Prospectus Supplement, for the payment of Trustee fees and any other fees to be
paid directly by the Trustee and for the payment of principal and interest on
each Class of Certificates of such Series in accordance with the respective
allocations set forth in the related Prospectus Supplement.
CREDIT ENHANCEMENT
General
If so specified in the Prospectus Supplement for a Series, the related
Trust may include, or the related Certificates may be entitled to the benefits
of, certain ancillary or incidental assets intended to provide credit
enhancement for the ultimate or timely distribution of proceeds from the
Mortgage Assets to the holders of such Certificates, including reserve accounts,
insurance policies, guaranties, surety bonds, letters of credit, guaranteed
investment contracts, swap agreements and option agreements. In addition, if so
specified in the Prospectus Supplement for a Series, one or more Classes of
Certificates of such Series may be entitled to the benefits of other credit
enhancement arrangements, including subordination, overcollateralization or
cross support. The protection against losses or delays afforded by any such
assets or credit enhancement arrangements may be limited. See "Risk Factors --
Credit Enhancement (if Available) May Be Limited."
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 credit enhancement,
holders of one or more Classes of Certificates will bear their allocable share
of deficiencies. If a form of credit enhancement applies to several Classes of
Certificates, and if principal payments equal to the aggregate principal
balances of certain Classes of Certificates will be distributed prior to such
distributions to other Classes of Certificates, the Classes of Certificates
which receive such distributions at a later time are more likely to bear any
losses which exceed the amount covered by credit enhancement. Coverage under any
credit enhancement may be canceled or reduced by the Master Servicer or the
Seller if such cancellation or reduction would not adversely affect the rating
of the related Certificates. The Trustee of the related Trust will have the
right to sue providers of credit enhancement if a default is made on a required
payment.
Subordination
If so specified in the related Prospectus Supplement, a Series may
include one or more Classes of Certificates (the "Subordinated Certificates")
that are subordinated in right to receive distributions on the Mortgage Assets
included in the related Trust or subject to the allocation of losses on such
Mortgage Assets in favor of one or more other Classes of Certificates of such
Series (the "Senior Certificates"). If so specified in the Prospectus
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Supplement, the distributions in respect of scheduled principal, principal
prepayments, interest or any combination thereof that otherwise would have been
payable to one or more Classes of Subordinated Certificates of a Series may
instead be payable to one or more Classes of Senior Certificates of such Series
under the circumstances and to the extent specified in such Prospectus
Supplement. If so specified in the Prospectus Supplement, delays in receipt of
scheduled payments on the Mortgage Loans and losses on defaulted Mortgage Loans
will be borne first by Classes of Subordinated Certificates and thereafter by
one or more Classes of Senior Certificates, under the circumstances and subject
to the limitations specified in such 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 payable to
the Subordinated Certificates that will be payable to the Senior Certificates on
any Distribution Date may be limited as specified in the 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 the
total amounts payable and available for distribution to holders of Subordinated
Certificates or, if applicable, were to exceed a specified maximum amount,
holders of Senior Certificates could experience losses on the Certificates.
If so specified in the related Prospectus Supplement, all or any portion
of distributions otherwise payable to the holders of Subordinated Certificates
on any Distribution Date may instead be deposited into one or more reserve
accounts established by the Trustee. If so specified in the Prospectus
Supplement, such deposits may be made on each Distribution Date, on each
Distribution Date for specified periods or until the balance in any such reserve
account has reached a specified amount and, following payments from such reserve
account to the holders of Senior Certificates or otherwise, thereafter to the
extent necessary to restore the balance of such reserve account to required
levels, in each case as specified in the Prospectus Supplement. If so specified
in the Prospectus Supplement, amounts on deposit in any such reserve account may
be released to the Seller or the holders of any Class of Certificates at the
times and under the circumstances specified in the Prospectus Supplement.
If so specified in the related Prospectus Supplement, one or more
Classes of Certificates may bear the risk of certain losses on defaulted
Mortgage Loans not covered by other forms of credit support prior to other
Classes of Certificates. Such subordination might be effected by reducing the
principal balance of the Subordinated Certificates on account of such losses,
thereby decreasing the proportionate share of distributions allocable to such
Certificates, or by another means specified in the Prospectus Supplement.
If so 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
Certificates and Subordinated Certificates, respectively, through a
cross-support mechanism or otherwise. If so specified in the Prospectus
Supplement, the same Class of Certificates may constitute Senior Certificates
with respect to certain types of payments or losses and Subordinated
Certificates with respect to other types of payments or losses.
Distributions may be allocated among Classes of Senior Certificates and
Classes of Subordinated Certificates (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 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 account will be allocated as
specified in the Prospectus Supplement.
Certificate Guaranty Insurance Policies
If so specified in the related Prospectus Supplement, one or more
certificate guaranty insurance policies (each, a "Certificate Guaranty Insurance
Policy") will be obtained and maintained for one or more Classes or Series of
Certificates. The issuer of any such Certificate Guaranty Insurance Policy (the
"Certificate Guaranty Insurer") will be named in the related Prospectus
Supplement. In general, Certificate Guaranty Insurance Policies unconditionally
and irrevocably guarantee that the full amount of the distributions of principal
and interest to which the holders of the related Certificates are entitled under
the related Agreement, as well as any other amounts specified in the related
Prospectus Supplement, will be received by an agent of the Trustee for
distribution by the
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Trustee to such holders. A form of Certificate Guaranty Insurance Policy has
been filed as an exhibit to the Registration Statement of which this Prospectus
is a part.
The specific terms of any Certificate Guaranty Insurance Policy will be
set forth in the related Prospectus Supplement. Certificate Guaranty Insurance
Policies may have limitations including, but not limited to, limitations on the
obligation of the Certificate Guaranty Insurer to guarantee the Master
Servicer's obligation to repurchase or substitute for any Mortgage Loans, to
guarantee any specified rate of prepayments or to provide funds to redeem
Certificates on any specified date. The Certificate Guaranty Insurer may be
subrogated to the rights of the holders of the related Certificates to receive
distributions of principal and interest to which they are entitled, as well as
certain other amounts specified in the related Prospectus Supplement, to the
extent of any payments made by such Certificate Guaranty Insurer under the
related Certificate Guaranty Insurance Policy.
Overcollateralization
If so specified in the related Prospectus Supplement, the aggregate
principal balance of the Mortgage Assets included in a Trust may exceed the
original principal balance of the related Certificates. In addition, if so
specified in the related Prospectus Supplement, certain Classes of Certificates
may be entitled to receive limited acceleration of principal relative to the
amortization of the related Mortgage Assets. The accelerated amortization will
be achieved by applying certain excess interest collected on the Mortgage Assets
to the payment of principal on such Classes of Certificates. This acceleration
feature is intended to create a level of overcollateralization generally equal
to the excess of the aggregate principal balances of the applicable Mortgage
Assets over the aggregate principal balances of the applicable Classes of
Certificates. The acceleration feature may continue for the life of the
applicable Classes of Certificates or may be limited. In the case of limited
acceleration, once the required level of overcollateralization is reached, and
subject to certain provisions specified in the related Prospectus Supplement,
the acceleration feature will cease unless necessary to maintain the required
overcollateralization level.
Mortgage Pool Insurance Policies
If so specified in the related Prospectus Supplement, one or more
mortgage pool insurance policies (each, a "Mortgage Pool Insurance Policy")
insuring, subject to their provisions and certain limitations, against defaults
on the related Mortgage Loans will be obtained and maintained for the related
Series in an amount specified in such Prospectus Supplement. The issuer of any
such Mortgage Pool Insurance Policy (the "Pool Insurer") will be named in the
related Prospectus Supplement. The terms of the Agreement with respect to a
Series will require the Master Servicer to maintain the Mortgage Pool Insurance
Policies, if any, for such Series in full force and effect throughout the term
of such Agreement, subject to certain conditions contained herein, and to
present or cause the Servicers to present claims thereunder on behalf of the
Seller, the Trustee and the holders of the Certificates of such Series. A
Mortgage Pool Insurance Policy for a Series will not be a blanket policy against
loss because claims thereunder may only be made for particular defaulted
Mortgage Loans and only upon satisfaction of certain conditions precedent
described in the related Prospectus Supplement. A Mortgage Pool Insurance Policy
generally will not cover losses due to a failure to pay or denial of a claim
under a Primary Mortgage Insurance Policy. A form of Mortgage Pool Insurance
Policy has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
A Mortgage Pool Insurance Policy will generally not insure (and many
Primary Mortgage Insurance Policies may not insure) against Special Hazard
Losses or losses 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 borrower, the Originator or persons
involved in the origination thereof, (ii) failure to construct Mortgaged
Premises in accordance with plans and specifications or (iii) 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 Pool Insurer. A
failure of coverage attributable to one of the foregoing events might result in
a breach of the representations and warranties of Saxon Mortgage or the Servicer
and, in such event, subject to certain limitations, might give rise to an
obligation on the part of Saxon Mortgage or the Servicer to purchase the
defaulted Mortgage Loan if the breach cannot be cured. See "Origination of
Mortgage Loans -- Representations and Warranties." In addition, if a terminated
Servicer has failed to comply with its obligation under the Servicing Agreement
to purchase a Mortgage Loan upon which coverage under a Mortgage Pool Insurance
Policy has been denied on the grounds of fraud, dishonesty or misrepresentation
(or if the Servicer has no such obligation), Saxon Mortgage may be obligated to
purchase the Mortgage Loan. See "Servicing of Mortgage Loans -- General" and
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" -- Maintenance of Insurance Policies; Claims Thereunder and Other Realization
Upon Defaulted Mortgage Loans."
The original amount of coverage under any Mortgage Pool Insurance Policy
assigned to the Trust for a Series will be reduced over the life of the
Certificates of such Series 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 Mortgaged Premises covered thereby. The amount of claims paid
includes certain expenses incurred by the Servicer or the Master Servicer of the
defaulted Mortgage Loan, as well as accrued interest on delinquent Mortgage
Loans to the date of payment of the claim. The net amounts realized by the Pool
Insurer will depend primarily on the market value of the Mortgaged Premises
securing the defaulted Mortgage Loan. The market value of the Mortgaged Premises
will be determined by a variety of economic, geographic, social, environmental
and other factors and may be affected by matters that were unknown and could not
reasonably have been anticipated at the time the original loan was made. If
aggregate net claims paid under a Mortgage Pool Insurance Policy reach the
original policy limit, coverage under the Mortgage Pool Insurance Policy will
lapse and any further losses may affect adversely distributions to holders of
the Certificates of such Series. The original amount of coverage under a
Mortgage Pool Insurance Policy assigned to the Trust for a Series may also be
reduced or canceled to the extent each Rating Agency that provides, at the
request of the Seller, a rating for the Certificates of such Series confirms
that such reduction will not result in a lowering or withdrawal of such rating.
If so specified in the related Prospectus Supplement, a Mortgage Pool
Insurance Policy may insure against losses on the Mortgage Loans assigned to
Trusts for other Series of Certificates or the mortgage loans that secure other
mortgage-backed securities or collateralized mortgage obligations issued by the
Seller or one of its affiliates; provided, however, that the extension of
coverage (and the corresponding assignment of the Mortgage Pool Insurance
Policy) to any other Series or such other securities or obligations does not, at
the time of such extension, result in the downgrade or withdrawal of any credit
rating assigned, at the request of the Seller, to the outstanding Certificates
of such Series.
Special Hazard Insurance Policies
If so specified in the related Prospectus Supplement, one or more
special hazard insurance policies (each, a "Special Hazard Insurance Policy")
insuring, subject to their provisions and certain limitations, against certain
losses not covered by Standard Hazard Insurance Policies will be obtained and
maintained for the related Series in an amount specified in such Prospectus
Supplement. The issuer of any such Special Hazard Insurance Policy (the "Special
Hazard Insurer") will be named in the related Prospectus Supplement. A Special
Hazard Insurance Policy will, subject to the limitations described below,
protect the holders of the Certificates of such Series from (i) loss by reason
of damage to the Mortgaged Premises underlying defaulted Mortgage Loans included
in the Trust for such Series caused by certain hazards (including vandalism and
earthquakes and, except where the borrower is required to obtain flood
insurance, floods and mudflows) not covered by the Standard Hazard Insurance
Policies with respect to such Mortgage Loans and (ii) loss from partial damage
to such Mortgaged Premises caused by reason of the application of the
coinsurance clause contained in such Standard Hazard Insurance Policies. A
Special Hazard Insurance Policy for a Series will not, however, cover losses
occasioned by war, nuclear reaction, nuclear or atomic weapons, insurrection,
normal wear and tear or certain other risks. A form of Special Hazard Insurance
Policy has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
Subject to the foregoing limitations, the Special Hazard Insurance
Policy with respect to a Series will provide that, when there has been damage to
the Mortgaged Premises securing a defaulted Mortgage Loan and such damage is not
covered by the Standard Hazard Insurance Policy maintained by the borrower or
the Servicer or the Master Servicer with respect to such Mortgage Loan, the
Special Hazard Insurer will pay the lesser of (i) the cost of repair of such
Mortgaged Premises or (ii) upon transfer of such Mortgaged Premises to it, the
unpaid principal balance of such Mortgage Loan at the time of the acquisition of
such Mortgaged Premises, plus accrued interest to the date of claim settlement
(excluding late charges and penalty interest), and certain expenses incurred in
respect of such Mortgaged Premises. No claim may be validly presented under a
Special Hazard Insurance Policy unless (i) hazard insurance on the Mortgaged
Premises securing the defaulted Mortgage Loan has been kept in force and other
reimbursable protection, preservation and foreclosure expenses have been paid
(all of which must be approved in advance as necessary by the Special Hazard
Insurer and (ii) the insured has acquired title to the Mortgaged Premises as a
result of default by the borrower. If the sum of the unpaid principal amount
plus accrued interest
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and certain expenses is paid by the Special Hazard Insurer, the amount of
further coverage under the Special Hazard Insurance Policy will be reduced by
such amount less any net proceeds from the sale of the Mortgaged Premises. Any
amount paid as the cost of repair of the Mortgaged Premises will reduce coverage
by such amount.
The terms of the Agreement with respect to a Series will require the
Master Servicer to maintain the Special Hazard Insurance Policies for such
Series in full force and effect throughout the term of such Agreement, subject
to certain conditions contained therein, present claims thereunder on behalf of
the Seller, the Trustee and the holders of the Certificates of such Series for
all losses not otherwise covered by the applicable Standard Hazard Insurance
Policies and take all reasonable steps necessary to permit recoveries on such
claims. See "Servicing of Mortgage Loans." To the extent specified in the
Prospectus Supplement for a Series, the Master Servicer may deposit cash, an
irrevocable letter of credit or any other instrument acceptable to each Rating
Agency that provides, at the request of the Seller, a rating for the
Certificates of such Series in the related Trust to provide protection in lieu
of or in addition to that provided by a Special Hazard Insurance Policy.
If so specified in the related Prospectus Supplement, a Special Hazard
Insurance Policy may insure against losses on Mortgage Loans assigned to Trusts
for other Series or Mortgage Loans that secure other mortgage-backed securities
or collateralized mortgage obligations issued by the Seller or one of its
affiliates; provided, however, that the extension of coverage (and the
corresponding assignment of the Special Hazard Insurance Policy) to any other
Series or such other securities or obligations does not, at the time of such
extension, result in the downgrade or withdrawal of the credit rating assigned,
at the request of the Seller, to the outstanding Certificates of such Series.
Bankruptcy Bonds
If so specified in the related Prospectus Supplement, one or more
mortgagor bankruptcy bonds (each, a "Bankruptcy Bond") covering certain losses
resulting from proceedings under the federal Bankruptcy Code will be obtained
and maintained for the related Series in an amount specified in such Prospectus
Supplement. The issuer of any such Bankruptcy Bond will be named in the related
Prospectus Supplement. Each Bankruptcy Bond will cover 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. To
the extent specified in the Prospectus Supplement for a Series, the Master
Servicer may deposit cash, an irrevocable letter of credit or any other
instrument acceptable to each Rating Agency that provides, at the request of the
Seller, a rating for the Certificates of such Series in the related Trust to
provide protection in lieu of or in addition to that provided by a Bankruptcy
Bond. See "Certain Legal Aspects of Mortgage Loans -- Anti-Deficiency
Legislation and Other Limitations on Lenders." A form of Bankruptcy Bond has
been filed as an exhibit to the Registration Statement of which this Prospectus
is a part.
Cross-Support
If so specified in the related Prospectus Supplement, the ownership
interests of separate Trusts or separate groups of assets may be evidenced by
separate Classes of the related Series of Certificates. In such case, credit
enhancement may be provided by a cross-support feature which requires that
distributions be made with respect to certain Certificates evidencing interests
in one or more Trusts or asset groups prior to distributions to other
Certificates evidencing interests in other Trusts or asset groups. If so
specified in the related Prospectus Supplement, the coverage provided by one or
more forms of credit enhancement may apply concurrently to two or more separate
Trusts or asset groups, without priority among such Trusts or asset groups,
until the credit enhancement is exhausted. If applicable, such Prospectus
Supplement will identify the Trusts or asset groups to which such credit
enhancement relates and the manner of determining the amount of the coverage
provided thereby and of the application of such coverage to the identified
Trusts or asset groups.
Reserve Funds
If so specified in the related Prospectus Supplement, cash, U.S.
Treasury securities, instruments evidencing ownership of principal or interest
payments thereon, letters of credit, surety bonds, demand notes, certificates of
deposit or a combination thereof in the aggregate amount specified in such
Prospectus Supplement will be deposited by the Seller in one or more accounts
(each, a "Reserve Fund") established and maintained with the Trustee. In
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addition, if so specified in the related Prospectus Supplement, a Reserve Fund
may be funded with all or a portion of the interest payments on the related
Mortgage Assets not needed to make distributions to Certificateholders or any
other required distributions. Such cash and the principal and interest payments
on such other investments will be used to enhance the likelihood of timely
payment of principal of, and interest on, or, if so specified in such Prospectus
Supplement, to provide additional protection against losses in respect of, the
assets in the related Trust, to pay the expenses of such Trust or for such other
purposes as may be specified in such Prospectus Supplement. Any cash in any
Reserve Fund and the proceeds of any other instrument upon maturity will be
invested in Permitted Investments. If a letter of credit is deposited with the
Trustee, such letter of credit will be irrevocable. Any instrument deposited
therein will name the Trustee as a beneficiary and will be issued by an entity
acceptable to each Rating Agency that provides, at the request of the Seller, a
rating for the Certificates of such Series. Additional information with respect
to such instruments deposited in the Reserve Funds may be set forth in the
related Prospectus Supplement.
Other Credit Enhancement
If so specified in the Prospectus Supplement for a Series, the related
Trust may include, or the related Certificates may be entitled to the benefits
of, certain other assets including reserve accounts, insurance policies,
guaranties, surety bonds, letters of credit, guaranteed investment contracts or
similar arrangements (i) for the purpose of maintaining timely payments or
providing additional protection against losses on the assets included in such
Trust, (ii) for the purpose of paying administrative expenses, (iii) for the
purpose of establishing a minimum reinvestment rate on the payments made in
respect of such assets or principal payment rates on such assets, (iv) for the
purpose of guaranteeing timely payment of principal and interest under the
Certificates or (v) for such other purposes as may be specified in such
Prospectus Supplement. These arrangements may be in addition to or in
substitution for any forms of credit enhancement described in this Prospectus.
Any such arrangement must be acceptable to each Rating Agency that provides, at
the request of the Seller, a rating for the Certificates of the related Series.
In addition, to the extent a significant portion of the Mortgage Loans
underlying a Series of Certificates consists of Title I Loans, the related
Prospectus Supplement will describe the features of any related credit
enhancement, including, but not limited to, any credit enhancement provided by
the FHA.
ORIGINATION OF MORTGAGE LOANS
General
As set forth in the related Prospectus Supplement, each Mortgage Loan
included in the Trust for a Series of Certificates will be originated by a
savings and loan association, savings bank, commercial bank, credit union,
insurance company or similar institution that is supervised and examined by a
federal or state authority. Each Mortgage Loan included in the Trust for any
Series of Certificates that constitute "mortgage-related securities" under SMMEA
will be originated by an institution approved by HUD. In originating a Mortgage
Loan, the Originator will follow either (i) its own credit approval process, to
the extent that such process conforms to underwriting standards generally
acceptable to FNMA or FHLMC, or (ii) Saxon Mortgage's various credit, appraisal
and underwriting standards and guidelines. The Prospectus Supplement will
disclose the percentage of Mortgage Loans in a Trust for a Series that are
originated using Saxon Mortgage's underwriting guidelines, and those originated
using an Originator's underwriting guidelines. The underwriting guidelines with
respect to some of Saxon Mortgage's loan programs may be less stringent than
those of FNMA or FHLMC, primarily in that they generally may permit the borrower
to have a higher debt-to-income ratio and a larger number of derogatory credit
items than do the guidelines of FNMA or FHLMC. These underwriting guidelines are
intended to provide for the origination of single family mortgage loans for
non-conforming credits. A mortgage loan made to a "non-conforming credit" means
a mortgage loan that is ineligible for purchase by FNMA or FHLMC due to borrower
credit characteristics that do not meet FNMA or FHLMC underwriting guidelines,
including a loan made to a borrower whose creditworthiness and repayment ability
do not satisfy such FNMA or FHLMC underwriting guidelines or a borrower who may
have a record of major derogatory credit items such as default on a prior
mortgage loan, credit write-offs, outstanding judgments and prior bankruptcies.
Accordingly, Mortgage Loans underwritten pursuant to these guidelines are likely
to experience rates of delinquency and foreclosure that are higher, and may be
substantially higher, than mortgage loans originated in accordance with FNMA or
FHLMC underwriting guidelines.
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The underwriting standards are applied in a manner intended to comply
with applicable federal and state laws and regulations. The purpose of applying
these standards is to evaluate each prospective borrower's credit standing and
repayment ability and the value and adequacy of the related Mortgaged Premises
as collateral.
In general, a prospective borrower is required to complete a detailed
application designed to provide pertinent credit information. The prospective
borrower generally is required to provide a current list of assets as well as an
authorization for a credit report which summarizes the borrower's credit history
with merchants and lenders as well as any suits, judgments or bankruptcies that
are of public record. The borrower may also be required to authorize
verification of deposits at financial institutions where the borrower has demand
or savings accounts.
In determining the adequacy of the Mortgaged Premises as collateral, an
appraisal is made of each property considered for financing by a qualified
independent appraiser. Appraisers are approved and selected by the Originator,
provided such appraisers shall not have been excluded from delivering appraisals
by any of FNMA, FHLMC or Saxon Mortgage. 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 and, if considered applicable by the appraiser, the estimated rental
income of the property and a replacement cost and analysis based on the current
cost of constructing a similar home. All appraisals generally are expected to
conform to FNMA or FHLMC appraisal standards then in effect.
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 (generally determined on the
basis of the monthly payments due in the year of origination) and other expenses
related to the Mortgaged Premises (such as property taxes and insurance
premiums), and (ii) to meet monthly housing expenses and other financial
obligations and monthly living expenses. The underwriting standards applied,
particularly with respect to the level of income and debt disclosure on the
application and verification, may be adjusted in appropriate cases where factors
such as low loan-to-value ratios or other favorable compensating factors exist.
A prospective borrower applying for a loan pursuant to the full
documentation program is required to provide, in addition to the above, a
statement of income, expenses and liabilities (existing or prior). An employment
verification is obtained from an independent source (typically the prospective
borrower's employer), which verification generally reports the length of
employment with that organization, the prospective borrower's current salary and
whether it is expected that the prospective borrower will continue such
employment in the future. If a prospective borrower is self-employed, the
borrower may be required to submit copies of signed tax returns. For other than
self-employed borrowers, income verification may be accomplished by W-2 forms or
pay stubs that indicate year to date earnings.
Under the limited documentation program or stated income program,
greater emphasis is placed on the value and adequacy of the Mortgaged Premises
as collateral rather than on credit underwriting, and certain credit
underwriting documentation concerning income and employment verification is
therefore waived. Accordingly, the maximum permitted loan-to-value ratios for
loans originated under such program are generally lower than those permitted for
other similar loans originated pursuant to the full documentation program.
Representations and Warranties
The Seller generally will acquire the Mortgage Loans from Saxon
Mortgage. Saxon Mortgage will make certain customary representations and
warranties with respect to the Mortgage Loans in the agreement by which Saxon
Mortgage transfers its interest in the Mortgage Loans to the Seller. If so
specified in the Prospectus Supplement for a Series, Saxon Mortgage will
represent and warrant, among other things, (i) that each Mortgage Loan has been
originated in compliance with all applicable laws, rules and regulations, (ii)
that each Primary Mortgage Insurance Policy is the valid and binding obligation
of the related mortgage insurer, (iii) that each Security Instrument constitutes
a good and valid first or, if applicable, second or more junior lien on the
related Mortgaged Premises and (iv) that the borrower holds good and marketable
title to such Mortgaged Premises. If so specified in the Prospectus Supplement
for a Series, Saxon Mortgage is required to submit to the Trustee with each
Mortgage Loan a mortgagee title insurance policy, title insurance binder,
preliminary title report, or other satisfactory evidence
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of title insurance. If a preliminary title report is delivered initially, Saxon
Mortgage is required to deliver a final title insurance policy or satisfactory
evidence of the existence of such a policy.
In the event Saxon Mortgage breaches a representation or warranty made
with respect to a Mortgage Loan or if any principal document executed by the
borrower relating to a Mortgage Loan is found to be defective in any material
respect and the breaching party cannot cure such breach or defect within the
number of days specified in the applicable agreement, the Trustee may require
such breaching party to purchase such Mortgage Loan from the related Trust upon
deposit with the Trustee of funds equal to the then unpaid principal balance of
such Mortgage Loan plus accrued interest thereon at the related Mortgage
Interest Rate through the end of the month in which the purchase occurs. In the
event of a breach by Saxon Mortgage of a representation or warranty with respect
to a Mortgage Loan or the delivery by Saxon Mortgage to the Trustee of a
materially defective document with respect to a Mortgage Loan, Saxon Mortgage
may under certain circumstances, in lieu of repurchasing such Mortgage Loan,
substitute a Mortgage Loan having characteristics substantially similar to those
of the defective Mortgage Loan. If so specified in the related Prospectus
Supplement, Saxon Mortgage's obligation to purchase a Mortgage Loan will not be
guaranteed by the Seller or any other party.
SERVICING OF MORTGAGE LOANS
General
For each Trust that includes Mortgage Loans, one or more Servicers,
which may include an affiliate of the Seller, will perform certain customary
servicing functions with respect to such Mortgage Loans pursuant to one or more
servicing agreements (each, a "Servicing Agreement") which will be assigned to
the Trustee. If specified in the Prospectus Supplement for a Series, a master
servicer (the "Master Servicer"), which may include an affiliate of the Seller,
will perform, directly or indirectly through one or more sub-servicers, certain
administrative and supervisory functions with respect to such Mortgage Loans.
The Master Servicer is deemed to be a Servicer for purposes of the following
discussion to the extent the Master Servicer is directly servicing any of the
Mortgage Loans in a Trust. The Servicers will be entitled to withhold their
servicing fees and certain other fees and charges from remittances of payments
received on Mortgage Loans serviced by them. If specified in the Prospectus
Supplement for a Series, a special servicer (a "Special Servicer") may be
appointed to service, make certain decisions with respect to and take various
actions with respect to delinquent or defaulted Mortgage Loans or related REO
Properties. The related Prospectus Supplement will describe the duties and
obligations of the Special Servicer, if any. A Special Servicer will be entitled
to a special servicing fee.
Each Servicer of one- to four-family Mortgage Loans generally will be
approved or will utilize a sub-servicer that is approved by FNMA or FHLMC as a
servicer of mortgage loans and must be approved by the Master Servicer. In
determining whether to approve a Servicer, the Master Servicer will review the
credit of the Servicer and, if necessary for the approval of the Servicer, the
sub-servicer, including capitalization ratios, liquidity, profitability and
other similar items that indicate ability to perform financial obligations. In
addition, the Master Servicer's mortgage servicing personnel will review the
Servicer's and, if necessary, the sub-servicer's servicing record and will
evaluate the ability of the Servicer and, if necessary, the sub-servicer to
conform with required servicing procedures. Generally, the Master Servicer will
not approve a Servicer unless either the Servicer or the sub-servicer, if any,
(i) has serviced conventional mortgage loans for a minimum of two years, (ii)
maintains a loan servicing portfolio of at least $300,000,000, and (iii) has
tangible net worth (determined in accordance with generally accepted accounting
principles) of at least $3,000,000. The Master Servicer will continue to monitor
on a regular basis the credit and servicing performance of the Servicer and, to
the extent the Servicer does not meet the foregoing requirements, the
sub-servicer, if any.
The duties to be performed by the Servicers with respect to the Mortgage
Loans included in the Trust for each Series will include the calculation,
collection and remittance of principal and interest payments on the Mortgage
Loans, the administration of mortgage escrow accounts, as applicable, the
collection of insurance claims, the administration of foreclosure procedures
and, if necessary, the advance of funds to the extent certain payments are not
made by the borrowers and are recoverable from late payments made by the
borrowers, under the applicable insurance policies with respect to such Series
or from proceeds of the liquidation of such Mortgage Loans. Each Servicer also
will provide such accounting and reporting services as are necessary to enable
the Master Servicer to
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provide required information to the Seller and the Trustee with respect to such
Mortgage Loans. Each Servicer is entitled to (i) a periodic servicing fee equal
to a specified percentage of the outstanding principal balance of each Mortgage
Loan serviced by such Servicer and (ii) certain other fees, including, but not
limited to, late payments, conversion or modification fees and assumption fees.
With the consent of the Master Servicer, certain servicing obligations of a
Servicer may be delegated to a sub-servicer approved by the Master Servicer;
provided, however, that the Servicer remains fully responsible and liable for
all of its obligations under the Servicing Agreement. The rights of the Seller
under each Servicing Agreement with respect to a Series will be assigned to the
Trust for such Series.
Payments on Mortgage Loans
Each Servicing Agreement with respect to a Series will require the
related Servicer to establish and maintain one or more separate, insured (to the
available limits) custodial accounts (collectively, the "Custodial Account")
into which the Servicer will be required to deposit on a daily basis payments of
principal and interest received with respect to Mortgage Loans serviced by such
Servicer included in the Trust for such Series. To the extent deposits in each
Custodial Account are required to be insured by the FDIC, if at any time the
sums in any Custodial Account exceed the limits of insurance on such account,
the Servicer will be required within one business day to withdraw such excess
funds from such account and remit such amounts (i) to a custodial account
maintained by the Trustee or at a separate institution designated by the Master
Servicer (the "Servicer Custodial Account") or (ii) to the Trustee or the Master
Servicer for deposit in either the Asset Proceeds Account for such Series or a
custodial account maintained by the Master Servicer (the "Master Servicer
Custodial Account"). The amount on deposit in any Servicer Custodial Account,
Asset Proceeds Account or Master Servicer Custodial Account will be invested in
or collateralized by Permitted Investments as described herein.
Each Servicing Agreement with respect to a Series will require the
related Servicer, not later than the day of the month specified in such
Servicing Agreement (each, a "Remittance Date"), to remit to the Master Servicer
Custodial Account (i) amounts representing scheduled installments of principal
and interest on the Mortgage Loans included in the Trust for such Series
received or advanced by the Servicer that were due during the related Due Period
and (ii) principal prepayments, insurance proceeds, guarantee proceeds and
liquidation proceeds (including amounts paid in connection with the withdrawal
from the related Trust of defective Mortgage Loans or the purchase from the
related Trust of Converted Mortgage Loans) received during the applicable
Prepayment Period, with interest to the date of prepayment or liquidation
(subject to certain limitations); provided, however, that each Servicer may
deduct from such remittance all applicable servicing fees, certain insurance
premiums, amounts required to reimburse any unreimbursed Advances and any other
amounts specified in the related Servicing Agreement. On or before each
Distribution Date, the Master Servicer will withdraw from the Master Servicer
Custodial Account and remit to the Asset Proceeds Account those amounts
allocable to the Available Distribution for such Distribution Date. In addition,
there will be deposited in the Asset Proceeds Account for such Series any
Advances of principal and interest made by the Master Servicer or the Trustee
pursuant to the Agreement to the extent such amounts were not deposited in the
Master Servicer Custodial Account or received and applied by the Servicer.
Prior to each Distribution Date for a Series, the Master Servicer will
furnish to the Trustee a statement setting forth certain information with
respect to the Mortgage Loans included in the Trust for such Series.
Advances
If so specified in the Prospectus Supplement for a Series, each
Servicing Agreement with respect to such Series will provide that the related
Servicer will be obligated to advance funds (each, an "Advance") to cover, to
the extent that such amounts are deemed to be recoverable from any subsequent
payments on the Mortgage Loans, (i) delinquent payments of principal or interest
on such Mortgage Loans, (ii) delinquent payments of taxes, insurance premiums or
other escrowed items and (iii) foreclosure costs, including reasonable
attorney's fees. The failure of a Servicer to make any required Advance under
the related Servicing Agreement constitutes a default under such Servicing
Agreement for which the Servicer may be terminated. Upon a default by the
Servicer, the Master Servicer or the Trustee may, if so provided in the
Agreement, be required to make Advances to the extent necessary to make required
distributions on certain Certificates, provided that such party deems such
amounts to be recoverable.
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As specified in the related Prospectus Supplement, the advance
obligation of the Trustee and the Master Servicer may be further limited to an
amount specified in the Agreement or the Servicing Agreement that has been
approved by each Rating Agency that provides, at the request of the Seller, a
rating for the Certificates of such Series. Any required Advances by a Servicer,
the Master Servicer or the Trustee, as the case may be, must be deposited into
the applicable Custodial Account or Master Servicer Custodial Account or into
the Asset Proceeds Account and will be due not later than the Distribution Date
to which such delinquent payment relates. Amounts so advanced by a Servicer, the
Master Servicer or the Trustee, as the case may be, will be reimbursable out of
future payments on the Mortgage Loans, insurance proceeds or liquidation
proceeds of the Mortgage Loans for which such amounts were advanced. If an
Advance made by a Servicer, the Master Servicer or the Trustee, as the case may
be, later proves to be unrecoverable, such Servicer, the Master Servicer or the
Trustee, as the case may be, will be entitled to reimbursement from funds in the
Asset Proceeds Account prior to the distribution of payments to the
Certificateholders.
Any Advances made by a Servicer, the Master Servicer or the Trustee with
respect to Mortgage Loans included in the Trust for any Series are intended to
enable the Trustee to make timely payment of the scheduled distributions of
principal and interest on the Certificates of such Series and will be due not
later than the Distribution Date on which such payments are scheduled to be
made. However, neither the Master Servicer, the Trustee nor any Servicer will
insure or guarantee the Certificates of any Series or the Mortgage Loans
included in the Trust for any Series, and their obligations to advance for
delinquent payments will be limited to the extent that such Advances, in the
judgment of the Master Servicer or the Trustee, will be recoverable out of
future payments on the Mortgage Loans, insurance proceeds or liquidation
proceeds of the Mortgage Loans for which such amounts were advanced.
Collection and Other Servicing Procedures
Each Servicing Agreement with respect to a Series will require the
related Servicer to make reasonable efforts to collect all payments required
under the Mortgage Loans included in the related Trust and, consistent with such
Servicing Agreement and the applicable insurance policies with respect to each
Mortgage Loan, to follow such collection procedures as it normally would follow
with respect to mortgage loans serviced for FNMA.
The Mortgage Note or Security Instrument used in originating a
conventional Mortgage Loan may, at the lender's option, contain a "due-on-sale"
clause. See "Certain Legal Aspects of Mortgage Loans -- "Due-On-Sale" Clauses."
The Servicer will be required to use reasonable efforts to enforce "due-on-sale"
clauses with respect to any Mortgage Note or Security Instrument containing such
a clause, provided that the coverage of any applicable insurance policy will not
be adversely affected thereby. In any case in which Mortgaged Premises have been
or are about to be conveyed by the borrower and the "due-on-sale" clause has not
been enforced or the related Mortgage Note is by its terms assumable, the
Servicer will be authorized to take or enter into an assumption agreement from
or with the person to whom such Mortgaged Premises have been or are about to be
conveyed, if such person meets certain loan underwriting criteria, including the
criteria necessary to maintain the coverage provided by the applicable Primary
Mortgage Insurance Policies or if otherwise required by law. In the event that
the Servicer enters into an assumption agreement in connection with the
conveyance of any such Mortgaged Premises, the Servicer will release the
original borrower from liability upon the Mortgage Loan and substitute the new
borrower as obligor thereon. In no event can an assumption agreement permit a
decrease in the Mortgage Interest Rate or an increase in the term of a Mortgage
Loan. Fees collected for entering into an assumption agreement will be retained
by the Servicer as additional servicing compensation.
Primary Mortgage Insurance Policies
The Mortgage Loans will be covered by primary mortgage insurance
policies ("Primary Mortgage Insurance Policies") insuring, subject to their
provisions and certain limitations, against all or a portion of any loss
sustained by reason of nonpayments by borrowers to the extent specified in the
related Prospectus Supplement. Each Conventional Mortgage Loan that has an
original loan-to-value ratio of greater than 80% will, to the extent specified
in the related Prospectus Supplement, be covered by a Primary Mortgage Insurance
Policy remaining in force until the principal balance of such Mortgage Loan is
reduced to 80% of the original fair market value of the related Mortgaged
Premises or, with the consent of the Master Servicer and the mortgage insurer,
after the related policy has been in effect for more than two years if the
loan-to-value ratio with respect to such Mortgage Loan has
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declined to 80% or less based upon the current fair market value of such
Mortgaged Premises. Certain other Mortgage Loans may also be covered by Primary
Mortgage Insurance Policies to the extent specified in the related Prospectus
Supplement.
If so specified in the Prospectus Supplement for a Series, the amount of
a claim for benefits under a Primary Mortgage Insurance Policy covering a
Mortgage Loan included in the related Trust (the "Mortgage Insurance Loss") will
consist of the insured portion of the unpaid principal balance of the covered
Mortgage Loan plus accrued and unpaid interest on such unpaid principal balance
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 are in any way related to the related
Mortgaged Premises, (ii) hazard insurance proceeds in excess of the amount
required to restore such Mortgaged Premises and which have not been applied to
the payment of such Mortgage Loan, (iii) amounts expended but not approved by
the mortgage insurer, (iv) claim payments previously made by the mortgage
insurer and (v) unpaid premiums. If so specified in the Prospectus Supplement
for a Series, the mortgage insurer will be required to pay to the insured either
(i) the Mortgage Insurance Loss or (ii) at its option under certain of the
Primary Mortgage Insurance Policies, the sum of the delinquent scheduled
payments plus any advances made by the insured, both to the date of the claim
payment, and, thereafter, scheduled payments in the amount that would have
become due under the Mortgage Loan if it had not been discharged plus any
advances made by the insured until the earlier of (A) the date the Mortgage Loan
would have been discharged in full if the default had not occurred and (B) the
date of an approved sale. Any rents or other payments collected or received by
the insured which are derived from or are in any way related to the Mortgaged
Premises securing such Mortgage Loan will be deducted from any claim payment.
Standard Hazard Insurance Policies
Each Servicing Agreement with respect to a Series will require the
related Servicer to cause to be maintained a Standard Hazard Insurance Policy
covering each Mortgaged Premises securing each Mortgage Loan covered by such
Servicing Agreement. Each Standard Hazard Insurance Policy will cover an amount
at least equal to the lesser of (i) the outstanding principal balance of the
related Mortgage Loan or (ii) 100% of the replacement value of the improvements
on the related Mortgaged Premises. All amounts collected by the Servicer or the
Master Servicer under any Standard Hazard Insurance Policy (less amounts to be
applied to the restoration or repair of the Mortgaged Premises and other amounts
necessary to reimburse the Servicer or the Master Servicer for previously
incurred advances or approved expenses, which may be retained by the Servicer or
the Master Servicer) will be deposited to the applicable Custodial Account
maintained with respect to such Mortgage Loan or the Asset Proceeds Account. See
" -- Payments on Mortgage Loans."
The Standard Hazard Insurance Policies will provide for coverage at
least equal to the applicable state standard form of fire insurance policy with
extended coverage. In general, the standard form of fire and extended coverage
policy will cover physical damage to, or destruction of, the improvements on the
Mortgaged Premises caused by fire, lightning, explosion, smoke, windstorm, hail,
riot, strike and civil commotion, subject to the conditions and exclusions
specified in each policy. Because the Standard Hazard Insurance Policies will be
underwritten by different insurers and will cover Mortgaged Premises located in
different states, such policies will not contain identical terms and conditions.
The basic terms thereof, however, generally will be determined by state law and
generally will be similar. Standard Hazard Insurance Policies typically will not
cover physical damage resulting from war, revolution, governmental actions,
floods and other water-related causes, earth movement (including earthquakes,
landslides and mudflows), nuclear reaction, wet or dry rot, vermin, rodents,
insects or domestic animals, theft or, 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 Mortgaged Premises are located in a flood
area identified by HUD pursuant to the National Flood Insurance Act of 1968, as
amended, the applicable Servicing Agreement will require that the Servicer or
the Master Servicer, as the case may be, cause to be maintained flood insurance
with respect to such Mortgaged Premises. The Seller may acquire one or more
Special Hazard Insurance Policies covering certain of the uninsured risks
described above. See "Credit Enhancement -- Special Hazard Insurance Policies."
The Standard Hazard Insurance Policies covering Mortgaged Premises
securing Mortgage Loans typically will contain a "coinsurance" clause which, in
effect, will require the insured at all times to carry insurance of a specified
percentage (generally 80% to 90%) of the full replacement value of the
dwellings, structures and other
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improvements on the Mortgaged Premises in order to recover the full amount of
any partial loss. If the insured's coverage falls below this specified
percentage, such clause will provide that the insurer's liability in the event
of partial loss will not exceed the greater of (i) the actual cash value (the
replacement cost less physical depreciation) of the dwellings, structures and
other improvements damaged or destroyed or (ii) such proportion of the loss,
without deduction for depreciation, as the amount of insurance carried bears to
the specified percentage of the full replacement cost of such dwellings,
structures and other improvements.
A Servicer may satisfy its obligation to provide a Standard Hazard
Insurance Policy with respect to the Mortgage Loans it services by obtaining and
maintaining a blanket policy insuring against fire, flood and hazards of
extended coverage on all of such Mortgage Loans, to the extent that (i) such
policy names the Servicer as loss payee and (ii) such policy provides coverage
in an amount equal to the aggregate unpaid principal balance on the Mortgage
Loans without co-insurance. If the blanket policy contains a deductible clause
and there is a loss not covered by the blanket policy that would have been
covered by a Standard Hazard Insurance Policy covering the related Mortgage
Loan, then the Servicer will remit to the Master Servicer from the Servicer's
own funds the difference between the amount paid under the blanket policy and
the amount that would have been paid under a Standard Hazard Insurance Policy
covering such Mortgage Loan.
Any losses incurred with respect to Mortgage Loans included in the Trust
for a Series due to uninsured risks (including earthquakes, landslides, mudflows
and floods) or insufficient insurance proceeds may reduce the value of the
assets included in the Trust for such Series to the extent such losses are not
covered by a Special Hazard Insurance Policy for such Series and could affect
distributions to holders of the Certificates of such Series.
Maintenance of Insurance Policies; Claims Thereunder and Other Realization Upon
Defaulted Mortgage Loans
The Master Servicer may be required to maintain with respect to a Series
one or more Mortgage Pool Insurance Policies, Special Hazard Insurance Policies
or Bankruptcy Bonds in full force and effect throughout the term of the related
Trust, subject to payment of the applicable premiums by the Trustee. The terms
of any such policy or bond and any requirements in connection therewith
applicable to any Servicer or the Master Servicer will be described in the
related Prospectus Supplement. The Master Servicer will be required to notify
the Trustee to pay from amounts in the Trust the premiums for any such Mortgage
Pool Insurance Policy, Special Hazard Insurance Policy or Bankruptcy Bonds on a
timely basis. Any such premiums may be payable on a monthly basis in advance or
pursuant to any other payment schedule acceptable to the applicable insurer. In
the event that any such Mortgage Pool Insurance Policy, Special Hazard Insurance
Policy or Bankruptcy Bond is canceled or terminated for any reason (other than
the exhaustion of total policy coverage), the Master Servicer will be obligated
to obtain from another insurer a comparable replacement policy with a total
coverage which is equal to the then existing coverage (or a lesser amount if the
Master Servicer confirms in writing with the Rating Agency that provides, at the
request of the Seller, a rating for the Certificates of such Series that such
lesser amount will not impair the rating on such Certificates) of such Mortgage
Pool Insurance Policy, Special Hazard Insurance Policy or Bankruptcy Bond.
However, if the cost of any such replacement policy or bond is greater than the
cost of the policy or bond which has been terminated, then the amount of the
coverage will be reduced to a level such that the applicable premium will not
exceed the cost of the premium for such terminated policy or bond or the Master
Servicer may secure such replacement policy or other credit enhancement at such
increased cost, so long as such increase in cost will not adversely affect
amounts available to make payments of principal or interest on the Certificates.
If any Mortgaged Premises securing a defaulted Mortgage Loan included in
the Trust for a Series is damaged and the proceeds, if any, from the related
Standard Hazard Insurance Policy or any Special Hazard Insurance Policy are
insufficient to restore the damaged Mortgaged Premises to the condition
necessary to permit recovery under the related Mortgage Pool Insurance Policy,
the Servicer will not be required to expend its own funds to restore the damaged
Mortgaged Premises unless it determines that such expenses will be recoverable
to it through insurance proceeds or liquidation proceeds. Each Servicing
Agreement and the Agreement with respect to a Series will require the Servicer
or the Master Servicer, as the case may be, to present claims to the insurer
under any insurance policy applicable to the Mortgage Loans included in the
related Trust and to take such reasonable steps as are necessary to permit
recovery under such insurance policies with respect to defaulted Mortgage Loans
or losses on the Mortgaged Premises securing the Mortgage Loans.
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If recovery under any applicable insurance policy is not available, the
Servicer or the Master Servicer nevertheless will be obligated to follow
standard practices and procedures to realize upon such defaulted Mortgage Loan.
The Servicer or the Master Servicer will sell the Mortgaged Premises pursuant to
foreclosure, or a trustee's sale or, in the event a deficiency judgment is
available against the borrower or another person, proceed to seek recovery of
the deficiency against the appropriate person. To the extent that the proceeds
of any such liquidation proceeding are less than the unpaid principal balance or
Asset Value of the defaulted Mortgage Loan, there will be a reduction in the
value of the assets of the Trust for the related Series such that holders of the
Certificates of such Series may not receive distributions of principal and
interest on such Certificates in full. See "Certain Legal Aspects of Mortgage
Loans -- Anti-Deficiency Legislation and Other Limitations on Lenders."
Modification of Mortgage Loans
With respect to a Mortgage Loan on which a material default has occurred
or a payment default is imminent, the related Servicer, with the consent of the
Master Servicer, may enter into a forbearance or modification agreement with the
borrower. The terms of any such forbearance or modification agreement may affect
the amount and timing of principal and interest payments on the Mortgage Loan
and, consequently, may affect the amount and timing of payments on one or more
Classes of the related Series of Certificates. For example, a modification
agreement that results in a lower Mortgage Interest Rate would lower the
Pass-Through Rate of any related Class of Certificates that accrues interest at
a rate based on the weighted average Net Rate of the Mortgage Loans.
As a condition to any modification or forbearance related to any
Mortgage Loan or to the substitution of a Mortgage Loan, the Master Servicer is
required to determine, in its reasonable business judgment, that such
modification, forbearance or substitution will maximize the recovery on such
Mortgage Loan on a present value basis. In determining whether to grant a
forbearance or a modification, the Servicer and, if required, the Master
Servicer will take into account the willingness of the borrower to perform on
the Mortgage Loan, the general condition of the Mortgaged Premises and the
likely proceeds from the foreclosure and liquidation of the Mortgaged Premises.
The Servicers will not exercise any discretion with respect to changes
in any of the terms of any Mortgage Loan (including, but not limited to, the
Mortgage Interest Rate and whether the term of the Mortgage Loan is extended for
a further period and the specific provisions applicable to such extension) or
the disposition of REO Properties without the consent of the Master Servicer.
Evidence as to Servicing Compliance
Within 120 days after the end of each of its fiscal years, each Servicer
must provide the Master Servicer with a copy of its audited financial statements
for such year and a statement from the firm of independent public accountants
that prepared such financial statements to the effect that, in preparing such
statements, it reviewed the results of the Servicer's servicing operations in
accordance with the Uniform Single-Audit Procedures for mortgage banks developed
by the Mortgage Bankers Association. In addition, the Servicer will be required
to deliver an officer's certificate to the effect that it has fulfilled its
obligations under the Servicing Agreement during the preceding fiscal year or
identifying any ways in which it has failed to fulfill its obligations during
such fiscal year and the steps that have been taken to correct such failure. The
Master Servicer will be required promptly to make available to the Trustee any
compliance reporting that it receives from a Servicer.
The Master Servicer will review, on an annual basis, the performance of
each Servicer under the related Servicing Agreement and the status of any
fidelity bond and errors and omissions policy required to be maintained by such
Servicer under such Servicing Agreement.
Events of Default and Remedies
If so specified in the Prospectus Supplement for a Series, events of
default under the Servicing Agreement in respect of such Series will consist of
(i) any failure by the Servicer to remit to the Master Servicer Custodial
Account any payment required to be made by a Servicer under the terms of the
Servicing Agreement that is not remedied within at least one business day; (ii)
any failure on the part of a Servicer to observe or perform in any
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material respect any of its other covenants or agreements contained in the
Servicing Agreement that continues unremedied for a specified period after the
giving of written notice of such failure to the Servicer by the Master Servicer;
(iii) certain events of insolvency, readjustment of debt, marshaling of assets
and liabilities or similar proceedings regarding the Servicer; or (iv) certain
actions by or on behalf of the Servicer indicating its insolvency or inability
to pay its obligations.
The Master Servicer will have the right pursuant to each Servicing
Agreement to terminate the related Servicer upon the occurrence of an event of
default under such Servicing Agreement. In the event of such termination, the
Master Servicer will appoint a substitute Servicer (which may be the Master
Servicer) acceptable to the Master Servicer and approved by the Trustee (which
shall be given upon receipt of written confirmation by each Rating Agency that
provides, at the request of the Seller, a rating for the Certificates of the
related Series that such appointment will not adversely effect the ratings then
in effect on the Certificates). Any successor servicer, including the Master
Servicer or the Trustee, will be entitled to compensation arrangements similar
to those provided to the Servicer.
Master Servicer Duties
If so specified in the Prospectus Supplement for a Series, the Master
Servicer will (i) administer and supervise the performance by each Servicer of
its duties and responsibilities under the related Servicing Agreement, (ii)
maintain any insurance policies (other than property specific insurance
policies) providing coverage for losses on the Mortgage Loans for such Series,
(iii) calculate amounts payable to Certificateholders on each Distribution Date,
(iv) prepare periodic reports to the Trustee or the Certificateholders with
respect to the foregoing matters, (v) prepare federal and state tax and
information returns and (vi) prepare reports, if any, required under the
Securities Exchange Act of 1934, as amended. In addition, the Master Servicer
will receive, review and evaluate all reports, information and other data
provided by each Servicer to enforce the provisions of the related Servicing
Agreement, to monitor each Servicer's servicing activities, to reconcile the
results of such monitoring with information provided by the Servicer and to make
corrective adjustments to records of the Servicer and the Master Servicer, as
appropriate. The Master Servicer may engage various independent contractors to
perform certain of its responsibilities; provided, however, that the Master
Servicer remains fully responsible and liable for all of its obligations under
each Agreement (other than those specifically undertaken by a Special Servicer).
The Master Servicer will be entitled to a monthly master servicing fee
applicable to each Mortgage Loan expressed as a fixed percentage of the
remaining Scheduled Principal Balance of such Mortgage Loan as of the first day
of the immediately preceding Due Period. The related Prospectus Supplement will
specify the amount of the master servicing fee.
The Master Servicer or the Trustee may terminate a Servicer who has
failed to comply with its covenants or breached one or more of its
representations and warranties contained in the related Servicing Agreement.
Upon termination of a Servicer by the Master Servicer or the Trustee, the Master
Servicer will assume certain servicing obligations of the terminated Servicer
or, at its option, may appoint a substitute Servicer acceptable to the Trustee
to assume the servicing obligations of the terminated Servicer. The Master
Servicer's obligation to act as a Servicer following the termination of a
Servicer will not require the Master Servicer to (i) purchase Mortgage Loans
from a Trust due to a breach by the Servicer of a representation or warranty
under the related Servicing Agreement, (ii) purchase from the Trust any
Converted Mortgage Loan (if so specified in the related Prospectus Supplement)
or (iii) advance payments of principal and interest on a delinquent Mortgage
Loan in excess of the Master Servicer's independent advance obligation under the
related Agreement. The Master Servicer for a Series may resign from its
obligations and duties under the Agreement with respect to such Series, but no
such resignation will become effective until the Trustee or a successor master
servicer has assumed the Master Servicer's obligations and duties. If specified
in the Prospectus Supplement for a Series, the Seller may appoint a stand-by
Master Servicer, which will assume the obligations of the Master Servicer upon a
default by the Master Servicer.
Special Servicing Agreement
The Master Servicer may appoint a Special Servicer to undertake certain
responsibilities of the Servicer with respect to certain defaulted Mortgage
Loans securing a Series. The Special Servicer may engage various independent
contractors to perform certain of its responsibilities; provided, however, that
the Special Servicer must
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remain fully responsible and liable for all its responsibilities under the
special servicing agreement (the "Special Servicing Agreement"). As may be
further specified in the related Prospectus Supplement, the Special Servicer, if
any, may be entitled to various fees, including, but not limited to, (i) a
monthly engagement fee applicable to each Mortgage Loan or related REO
Properties as of the first day of the immediately preceding Due Period, (ii) a
special servicing fee expressed as a fixed percentage of the remaining Scheduled
Principal Balance of each specially serviced Mortgage Loan or related REO
Properties, or (iii) a performance fee applicable to each liquidated Mortgage
Loan based upon the related liquidation proceeds.
THE AGREEMENT
The following summaries describe the material provisions common to each
Series of Certificates. The summaries do not purport to be complete and are
subject to the related Prospectus Supplement and the Agreement with respect to
such Series. The material provisions of a specific Agreement will be further
described in the related Prospectus Supplement. When particular provisions or
terms used in the Agreement are referred to, the actual provisions (including
definitions of terms) are incorporated by reference as part of such summaries.
The Trustee
The Trustee under each Agreement will be named in the related Prospectus
Supplement. The Trustee must be a corporation or a national banking association
organized under the laws of the United States or any state thereof and
authorized under the laws of the jurisdiction in which it is organized to have
corporate trust powers. The Trustee must also have combined capital and surplus
of at least $50,000,000 and be subject to regulation and examination by state or
federal regulatory authorities. Although the Trustee may not be an affiliate of
the Seller or the Master Servicer, either the Seller or the Master Servicer may
maintain normal banking relations with the Trustee if the Trustee is a
depository institution.
The Trustee may resign at any time, in which event the Seller will be
obligated to appoint a successor Trustee. The Seller will also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Agreement or if the Trustee becomes insolvent. The Trustee may also be removed
at any time by the holders of outstanding Certificates of the related Series
entitled to at least 51% of the voting rights of such Series. Any resignation or
removal of the Trustee and appointment of a successor Trustee will not become
effective until acceptance of the appointment by the successor Trustee.
Administration of Accounts
Funds deposited in or remitted to the Asset Proceeds Account, any
Reserve Fund or any other funds or accounts for a Series are to be invested by
the Trustee, as directed by the Seller, in certain eligible investments
("Permitted Investments"), which may include (i) obligations of the United
States or any agency thereof provided such obligations are backed by the full
faith and credit of the United States, (ii) within certain limitations,
securities bearing interest or sold at a discount issued by any corporation,
which securities are rated in the rating category required to support the then
applicable rating assigned to such Series, (iii) commercial paper which is then
rated in the commercial paper rating category required to support the then
applicable rating assigned to such Series, (iv) demand and time deposits,
certificates of deposit, bankers' acceptances and federal funds sold by any
depository institution or trust company incorporated under the laws of the
United States or of any state thereof, provided that either the senior debt
obligations or commercial paper of such depository institution or trust company
(or the senior debt obligations or commercial paper of the parent company of
such depository institution or trust company) are then rated in the rating
category required to support the then applicable rating assigned to such Series,
(v) demand and time deposits and certificates of deposit issued by any bank or
trust company or savings and loan association and fully insured by the Federal
Deposit Insurance Corporation (the "FDIC"), (vi) guaranteed reinvestment
agreements issued by any insurance company, corporation or other entity
acceptable to each Rating Agency that provides, at the request of the Seller, a
rating for the Certificates of such Series at the time of issuance of such
Series and (vii) certain repurchase agreements of United States government
securities.
Permitted Investments with respect to a Series will include only
obligations or securities that mature on or before the date on which the Asset
Proceeds Account, Reserve Fund and other funds or accounts for such Series
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are required or may be anticipated to be required to be applied for the benefit
of the holders of the Certificates of such Series. Any income, gain or loss from
such investments for a Series will be credited or charged to the appropriate
fund or account for such Series. Reinvestment income from Permitted Investments
may be payable to the Servicers or the Master Servicer as additional servicing
compensation and, in that event, will not accrue for the benefit of the
Certificateholders of such Series. If a reinvestment agreement is obtained with
respect to a Series, the related Agreement will require the Trustee to invest
funds deposited in the Asset Proceeds Account and any Reserve Fund or other fund
or account for such Series pursuant to the terms of the reinvestment agreement.
Reports to Certificateholders
Concurrently with each distribution on the Certificates of any Series,
there will be mailed to the holders of such Certificates a statement generally
setting forth, to the extent applicable to such Series, among other things: (i)
the aggregate amount of such distribution allocable to principal, separately
identifying the amount allocable to each Class of Certificates; (ii) the
aggregate amount of such distribution allocable to interest, separately
identifying the amount allocable to each Class of Certificates; (iii) the
aggregate principal balance of each Class of Certificates after giving effect to
distributions on the related Distribution Date; (iv) if applicable, the amount
otherwise distributable to any Class of Certificates that was distributed to any
other Class of Certificates; (v) if any Class of Certificates has priority in
the right to receive principal prepayments, the amount of principal prepayments
in respect of the related Mortgage Assets; and information regarding the levels
of delinquencies and losses on the Mortgage Loans. Customary information deemed
necessary for Certificateholders to prepare their tax returns will be furnished
annually.
Events of Default and Remedies
If so specified in the Prospectus Supplement for a Series, events of
default under the related Agreement will consist of (i) any default in the
performance or breach of any covenant or warranty of the Master Servicer under
such Agreement which continues unremedied for a specified period after the
giving of written notice of such failure to the Master Servicer by the Trustee
or by the holders of Certificates entitled to at least 25% of the aggregate
voting rights, (ii) any failure by the Master Servicer to make required Advances
with respect to delinquent Mortgage Loans in the related Trust, (iii) certain
events of insolvency, readjustment of debt, marshaling of assets and liabilities
or similar proceedings regarding the Master Servicer, if any, and (iv) certain
actions by or on behalf of the Master Servicer indicating its insolvency or
inability to pay its obligations.
So long as an event of default by the Master Servicer under an Agreement
remains unremedied, the Trustee may, and, at the direction of the holders of
outstanding Certificates of a Series entitled to at least 51% of the voting
rights, the Trustee will, terminate all the rights and obligations of the Master
Servicer under the related Agreement, except that the holders of Certificates
may not direct the Trustee to terminate the Master Servicer for its failure to
make Advances. Upon termination, the Trustee will succeed to all the
responsibilities, duties and liabilities of the Master Servicer under such
Agreement (except that if the Trustee is prohibited by law from obligating
itself to make Advances regarding delinquent Mortgage Loans, then the Trustee
will not be so obligated) and will be entitled to similar compensation
arrangements. In the event that the Trustee is unwilling or unable to act as
successor Master Servicer, the Trustee may appoint or, if the holders of
Certificates of a Series entitled to at least 51% of the voting rights of such
Series so request in writing, the Trustee shall appoint, or petition a court of
competent jurisdiction for the appointment of, any established mortgage loan
servicing institution acceptable to the Rating Agencies and having a net worth
of at least $15,000,000 to act as successor to the Master Servicer under the
Agreement. The Trustee and such successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
to the Master Servicer under the Agreement.
The Trustee will be under no obligation to exercise any of the trusts or
powers vested in it by the Agreement or to make any investigation of matters
arising thereunder or to institute, conduct or defend any litigation thereunder
or in relation thereto at the request, order or direction of any of the holders
of the Certificates of the related Series unless such Certificateholders have
offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred therein or thereby.
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Amendment
The Agreement generally may be amended by the parties thereto with the
consent of the holders of outstanding Certificates of the related Series
entitled to at least 66% of the voting rights of such Series. However, no
amendment shall (i) reduce in any manner the amount of, or delay the timing of,
payments received on the Mortgage Assets that are required to be distributed on
any Certificate without the consent of the Holder of such Certificate, (ii)
adversely affect in any material respect the interests of the Holders of any
Class of Certificates in a manner other than as described in (i) without the
consent of the Holders of Certificates of such Class evidencing 66% of the
voting rights of such class, or (iii) reduce the aforesaid percentage of
Certificateholders required to consent to any such amendment unless each holder
of a Certificate consents. The Agreement may also be amended by the parties
thereto without the consent of Certificateholders for the purpose of, among
other things, (i) curing any ambiguity, (ii) correcting or supplementing any
provisions thereof which may be inconsistent with any other provision thereof,
(iii) modifying, eliminating or adding to any of the provisions of the Agreement
to such extent as shall be necessary or appropriate to maintain the
qualification of the Trust (or certain assets thereof) either as a REMIC or as a
grantor trust under the Code at all times that any Certificates are outstanding
or (iv) making any other provision with respect to matters or questions arising
under the Agreement or matters arising with respect to the Trust which are not
covered by the Agreement and which shall not be inconsistent with the provisions
of the Agreement, provided in each case that such action shall not adversely
affect in any material respect the interests of any Certificateholder. Any such
amendment or supplement shall be deemed not to adversely affect in any material
respect any Certificateholder if there is delivered to the Trustee written
notification from each Rating Agency that provides, at the request of the
Seller, a rating for the Certificates of the related Series to the effect that
such amendment or supplement will not cause such Rating Agency to lower or
withdraw the then current rating assigned to such Certificates.
Termination
Each Agreement and the respective obligations and responsibilities
created thereby shall terminate upon the distribution to Certificateholders of
all amounts required to be paid to them pursuant to such related Agreement
following (i) to the extent specified in the related Prospectus Supplement, the
purchase of all the Mortgage Assets in such related Trust and all Mortgaged
Premises acquired in respect thereof or (ii) the later of the final payment or
other liquidation of the last Mortgage Asset remaining in the Trust or the
disposition of all Mortgaged Premises acquired in respect thereof. See
"Description of the Certificates -- Optional Redemption." In no event, however,
will any Trust continue beyond the expiration of 21 years from the death of the
survivor of certain persons described in the related Agreement. Written notice
of termination of the Agreement will be given to each Certificateholder, and the
final distribution will be made only upon surrender and cancellation of the
Certificates of the related Series at the corporate trust office of the Trustee
or its agent.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
General
The following discussion contains summaries of certain legal aspects of
mortgage loans which are general in nature. Because such legal aspects are
governed 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 Mortgage Loans
Single Family Loans, Multi-Family Loans, Conventional Home Improvement
Loans, Title I Loans and HELOCs. The Single Family Loans, Multi-Family Loans,
Conventional Home Improvement Loans, Title I Loans and HELOCs generally will be
secured by mortgages, deeds of trust, security deeds or deeds to secure debt,
depending upon the prevailing practice in the state in which the related
Mortgaged Premises is located. A mortgage creates a lien upon the real property
encumbered by the mortgage, which lien is generally not prior to liens for real
estate taxes and assessments. Priority between mortgages depends on their terms
and generally on any order of recording with a state or county office. There are
two parties to a mortgage, the mortgagor, who is the borrower
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and owner of the mortgaged premises, and the mortgagee, who is the lender. The
mortgagor delivers to the mortgagee a note or bond and the mortgage. Although a
deed of trust is similar to a mortgage, a deed of trust has three parties: the
trustor, who is the borrower and homeowner (similar to the mortgagor); the
beneficiary, who is the lender (similar to a mortgagee); and the trustee, who is
a third-party grantee. 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 mortgagee's authority under a mortgage, the trustee's
authority under a deed of trust 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.
Condominiums. Certain of the Mortgage Loans may be loans secured by
condominium units. The condominium building may include one or more multi-unit
buildings, or a group of buildings whether or not attached to each other,
located on property subject to condominium ownership. Condominium ownership is a
form of ownership of real property wherein each owner is entitled to the
exclusive ownership and possession of his or her individual condominium unit and
also owns a proportionate undivided interest in all parts of the condominium
building (other than the individual condominium units) and all areas or
facilities, if any, for the common use of the condominium units. The condominium
unit owners appoint or elect the condominium association to govern the affairs
of the condominium.
Cooperative Loans. Certain of the Mortgage Loans may be Cooperative
Loans. The Cooperative (i) owns all the real property that comprises the
project, including the land and the apartment building comprised of separate
dwelling units and common areas or (ii) leases the land generally by a long-term
ground lease and owns the apartment building. 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 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 occupants under proprietary leases or occupancy
agreements to which the 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 or 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, in the case of a Trust
including Cooperative Loans, the collateral securing the Cooperative Loans.
A 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
apartments or units. In general, 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 mortgage loans, 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 the
Cooperative shares.
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Foreclosure
Single Family Loans, Multi-Family Loans, Conventional Home Improvement
Loans, Title I Loans and HELOCs. Foreclosure of a mortgage is generally
accomplished by judicial action. A foreclosure action generally is initiated by
the service of legal pleadings upon the borrower and any party having a
subordinate interest in the real estate including any holder of a junior
encumbrance on the real estate. Delays in completion of the foreclosure
occasionally may result from difficulties in locating necessary parties
defendant. 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 may issue a judgment
of foreclosure and appoint a receiver or other officer to conduct the sale of
the Mortgaged Premises. In some states, mortgages may also be foreclosed by
advertisement, pursuant to a power of sale provided in the mortgage. Foreclosure
of a mortgage by advertisement is essentially similar to foreclosure of a deed
of trust by non-judicial power of sale.
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale under a specific provision in the deed of trust that
authorizes the trustee to sell the Mortgaged Premises to a third party 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, the trustee must
record a notice of default and send a copy to the borrower 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 party
having a subordinate interest in the real estate, including any holder of a
junior encumbrance on the real estate. 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, published for a specified 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 of
record in the property. When the beneficiary's right to foreclosure is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming.
In some states, 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. In general, 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
mortgage or 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.
See " -- Junior Mortgage Loans; Rights of Senior Mortgagees."
A sale conducted in accordance with the terms of the power of sale
contained in a mortgage or deed of trust is generally presumed to be conducted
regularly and fairly, and a conveyance of the real property by the referee
confers absolute legal title to the real property to the purchaser, free of all
junior mortgages and free of all other liens and claims subordinate to the
mortgage or deed of trust under which the sale is made (with the exception of
certain governmental liens and any redemption rights that may be granted to
borrowers pursuant to applicable state law). The purchaser's title is, however,
subject to all senior liens, encumbrances and mortgages. Thus, if the mortgage
or deed of trust being foreclosed is a junior mortgage or deed of trust, the
referee or trustee will convey title to the property to the purchaser, subject
to the underlying first mortgage or deed of trust and any other prior liens or
claims. A foreclosure under a junior mortgage or deed of trust generally will
have no effect on any senior mortgage or deed of trust, except that it may
trigger the right of a senior mortgagee or beneficiary to accelerate its
indebtedness under a "due-on-sale" clause or "due on further encumbrance" clause
contained in the senior mortgage.
In case of foreclosure under either a mortgage or a deed of trust, the
sale by the receiver or other designated officer or by the trustee is a public
sale. However, because of the difficulty a potential buyer at the sale would
have in determining the exact status of title and because the physical condition
of the Mortgaged Premises may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the Mortgaged Premises
at the foreclosure sale. Rather, it is common for the lender to purchase the
Mortgaged Premises from the receiver or trustee for an amount which may be as
great as the unpaid principal balance of the Mortgage Note, accrued and unpaid
interest thereon and the expenses of foreclosure. Thereafter, subject to the
right
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of the borrower in some states to remain in possession during the redemption
period, the lender will assume the burdens of ownership, including obtaining
hazard insurance and making such repairs at its own expense as are necessary to
render the Mortgaged Premises suitable for sale. The lender commonly will obtain
the services of a real estate broker and pay the broker a commission in
connection with the sale of the Mortgaged Premises. Depending upon market
conditions, the ultimate proceeds of the sale of the Mortgaged Premises may not
equal the lender's investment therein. Any loss may be reduced by the receipt of
insurance proceeds. See "Servicing of Mortgage Loans -- Primary Mortgage
Insurance Policies," " -- Standard Hazard Insurance Policies" and "Credit
Enhancement -- Special Hazard Insurance Policies." Mortgaged Premises that are
acquired through foreclosure must be sold by the Trustee within two years of the
date on which it is acquired in order to satisfy certain federal income tax
requirements applicable to REMICs. See "Certain Federal Income Tax
Consequences." 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 some states,
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, to any successor in interest to the
borrower-trustor, to the beneficiary of any junior deed of trust and to certain
other persons. In some states, a notice of sale must be posted in a public place
and published during a specific period of time in one or more newspapers, posted
on the property and sent to parties having an interest of record in the property
before such non-judicial sale takes place.
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. 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.
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 charter documents,
as well as the proprietary lease or occupancy agreement, and may be canceled by
the Cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges 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.
In some states, foreclosure on the Cooperative shares is accomplished by
a sale in accordance with the provisions of Article 9 of the Uniform Commercial
Code (the "UCC") and the security agreement relating to those shares. Article 9
of the UCC requires that a sale be conducted in a "commercially reasonable"
manner. Whether a foreclosure sale has been conducted in a "commercially
reasonable" manner will depend on the facts in each case.
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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 rights 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 "-- AntiDeficiency Legislation and Other
Limitations on Lenders."
Junior Mortgage Loans; Rights of Senior Mortgagees
Some of the Mortgage Loans included in a Trust may be secured by
mortgages or deeds of trust that are junior to other mortgages or deeds of trust
held by the Seller, other lenders or institutional investors. The rights of the
Trustee (and therefore the Certificateholders) as mortgagee under a junior
mortgage or beneficiary under a junior deed of trust are subordinate to those of
the mortgagee under the senior mortgage or beneficiary under the senior deed of
trust, 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 or trustor, thereby
extinguishing the junior mortgagee's or junior beneficiary's lien unless the
junior mortgagee or junior beneficiary asserts its subordinate interest in the
property in foreclosure litigation and, possibly, satisfies the defaulted senior
mortgage or deed of trust. As discussed more fully below, a junior mortgagee or
junior beneficiary 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, no notice of default is required to be given to a junior mortgagee or
junior beneficiary, and junior mortgagees or junior beneficiaries are seldom
given notice of defaults on senior mortgages. In order for a foreclosure action
in some states to be effective against a junior mortgagee or junior beneficiary,
the junior mortgagee or junior beneficiary must be named in any foreclosure
action, thus giving notice to junior lienors.
The standard form of the mortgage or deed of trust used by most
institutional lenders confers on the mortgagee or beneficiary the right under
some circumstances both to receive all proceeds collected under any Standard
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 mortgage or deed of trust 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 any underlying senior mortgage
may have the proper right to collect any insurance proceeds payable under a
Standard 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 or deeds of trust. Proceeds in excess of the amount of senior mortgage
indebtedness, in most cases, will be applied to the indebtedness of a junior
mortgage or trust deed.
A common form of mortgage or deed of trust used by institutional lenders
typically contains a "future advance" clause which provides, in essence, that
additional amounts advanced to or on behalf of the mortgagor or trustor by the
mortgagee or beneficiary are to be secured by the mortgage or deed of trust.
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 loaned under the mortgage or deed of
trust, notwithstanding that there may be 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 some
jurisdictions, has actual knowledge of the intervening junior mortgages or deeds
of trust and other liens), the advance will be subordinate to such intervening
junior mortgages or deeds of trust 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 at a "credit limit" amount stated in the
recorded mortgage.
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Other provisions sometimes included in the form of the mortgage or deed
of trust used by institutional lenders obligate the mortgagor or trustor 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
mortgage or deed of trust, 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
mortgage or deed of trust. Upon a failure of the mortgagor or trustor to perform
any of these obligations, the mortgagee or beneficiary is given the right under
certain mortgages or deeds of trust to perform the obligation itself, at its
election, with the mortgagor or trustor agreeing to reimburse the mortgagee or
beneficiary for any sums expended by the mortgagee or beneficiary on behalf of
the mortgagor or trustor. All sums so expended by the mortgagee or beneficiary
become part of the indebtedness secured by the mortgage or deed of trust.
Right of Redemption
In some states, after foreclosure of a mortgage or sale pursuant to a
deed of trust, the borrower and certain foreclosed junior lienholders are given
a statutory period in which to redeem the Mortgaged Premises from the
foreclosure sale. Depending upon state law, the right of redemption may apply to
sale following judicial foreclosure or to sale pursuant to a non-judicial power
of sale. In some states, statutory redemption may occur only upon payment of the
foreclosure purchase price, accrued interest and taxes and certain of the costs
and expenses incurred in enforcing the obligation. In some states, the right to
redeem is a statutory right and in others it is a contractual right. The effect
of a right of redemption is to diminish the ability of the lender to sell the
foreclosed Mortgaged Premises while such right of redemption is outstanding. The
exercise of a 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. The practical effect of the
redemption right is to force the lender to maintain the property and pay the
expenses of ownership until the redemption period has run.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory prohibitions which limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a mortgage.
In some states, statutes limit the right of the beneficiary or mortgagee to
obtain a deficiency judgment against the borrower following 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
amount due to the lender and the fair market value of the real property sold at
the foreclosure sale. As a result of these prohibitions, it is anticipated that
in many instances Servicers will not seek deficiency judgments against
defaulting borrowers.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws
and state laws affording relief to debtors, may interfere with or affect the
ability of the secured mortgage lender to realize upon collateral and/or enforce
a deficiency judgment. For example, if a mortgagor is in a proceeding under the
federal Bankruptcy Code, a lender may not foreclose on the mortgaged premises
without the permission of the bankruptcy court. The rehabilitation plan proposed
by the debtor may provide, if the court determines that the value of the
mortgaged premises is less than the principal balance of the mortgage loan, for
the reduction of the secured indebtedness to the value of the mortgaged premises
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. Some states also have homestead exemption laws which would protect a
principal residence from a liquidation in bankruptcy.
Federal and local real estate tax laws provide priority to certain tax
liens over the lien of a mortgage or secured party. Numerous federal and state
consumer protection laws impose substantive requirements upon mortgage lenders
in connection with the origination, servicing and enforcement of Single Family
Loans and Cooperative Loans. 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 states and
regulations.
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These federal and state laws impose specific statutory liabilities upon lenders
who fail to comply with the provisions of the law. In some cases, this liability
may affect assignees of mortgage loans.
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 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.
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% 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 incurred prior to the
commencement of military service and (iii) may have the maturity of such
obligations incurred prior to the commencement of military service extended, the
payments lowered and the payment schedule readjusted for a period of time after
the completion of military service. The benefits of (i), (ii), or (iii) above
are subject to challenge by creditors, however, 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. If a borrower's obligation to repay amounts otherwise due on a
Mortgage Loan included in the Trust for a Series is relieved pursuant to the
Soldiers' and Sailors' Civil Relief Act of 1940, neither the Servicer, the
Master Servicer nor the Trustee will be required to advance such amounts and any
loss in respect thereof may reduce the amounts available to be paid to the
holders of the Certificates of such Series. If so specified in the Prospectus
Supplement for a Series, any shortfalls in interest collections on Mortgage
Loans included in the Trust for such Series resulting from application of the
Soldiers' and Sailors' Civil Relief Act of 1940 will be allocated to each Class
of Certificates of such Series that is entitled to receive interest in respect
of such Mortgage Loans in proportion to the interest that each such Class of
Certificates would have otherwise been entitled to receive in respect of such
Mortgage Loans had such interest shortfall not occurred.
Environmental Considerations
Environmental conditions may diminish the value of the Mortgage Assets
and give rise to liability of various parties, including federal, state and
local environmental laws, regulations and ordinances concerning hazardous waste,
hazardous substances, petroleum, underground and aboveground storage tanks,
solid waste, lead and copper in drinking water, asbestos, lead-based paint and
other materials ("Adverse Environmental Conditions") under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended ("CERCLA"). A secured party which participates in management of a
facility, participates in the management of the owner of a facility, takes a
deed in lieu of foreclosure or purchases a mortgaged premises at a foreclosure
sale may become liable in certain circumstances for the costs of a remedial
action ("Cleanup Costs") if hazardous substances have been released or disposed
of on the property. Such Cleanup Costs may be substantial. The U.S.
Environmental Protection Agency (the "EPA") has established a Policy Towards
Owners of Residential Property at Superfund Sites (July 3, 1991) which provides
that EPA will not proceed against owners of residential property contaminated
with hazardous substances under certain circumstances. Similarly, EPA and the
Department of Justice have adopted a policy not to proceed against lenders which
are acting primarily to protect a security interest at the inception of loan,
during a workout, in foreclosure or after foreclosure or the taking of a deed in
lieu of foreclosure. Policy on CERCLA Enforcement Against lenders and Government
Entities that Acquire Property Involuntarily (September 22, 1995). These
policies are not binding on the EPA, a state or third parties who may have a
cause of action under CERCLA, however, and are subject to certain limitations
and conditions. Many state or local laws, regulations or ordinances may also
provide for owners or operators of property (which may include a lender in
certain circumstances) where hazardous substances, hazardous wastes, petroleum
or solid waste are released or otherwise exist to incur Cleanup Costs. It is
possible that Cleanup Costs under CERCLA or other federal, state or local laws,
regulations or ordinances could become a liability of a Trust and reduce the
amounts otherwise distributable to the Certificateholders if a Mortgaged
Premises securing a Mortgage Loan becomes the property of such Trust in certain
circumstances and if such Cleanup Costs were incurred. Moreover, certain states
or localities
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by statute or ordinance impose a lien for any Cleanup Costs incurred by such
state or locality on the property that is the subject of such Cleanup Costs (a
"Superlien"). Some Superliens take priority over all other prior recorded liens,
and others take the same priority as taxes in the jurisdiction. In both
instances, the Superlien would take priority over the security interest of the
Trustee in a Mortgaged Premises in the jurisdiction in question.
If so specified in the Prospectus Supplement for a Series, at the time
the Mortgage Loans were originated, it is possible that no environmental
assessment or a very limited environmental assessment of the Mortgaged Premises
was conducted. If so specified in such Prospectus Supplement, no representations
or warranties are made by the Seller or Saxon Mortgage as to the absence or
effect of Adverse Environmental Conditions on any of the Mortgaged Premises. In
addition, the Servicers have not made any representations or warranties or
assumed any liability with respect to the absence or effect of Adverse
Environmental Conditions on any Mortgaged Premises or any casualty resulting
from the presence or effect of Adverse Environmental Conditions, and any loss or
liability resulting from the presence or effect of such Adverse Environmental
Conditions will reduce the amounts otherwise available to pay to the holders of
the Certificates.
If so specified in the Prospectus Supplement for a Series, the Servicers
are not permitted to foreclose on any Mortgaged Premises without the approval of
the Master Servicer. The Master Servicer is not permitted to approve foreclosure
on any property which it knows or has reason to know is contaminated with or
affected by hazardous wastes or hazardous substances. The Master Servicer is
required to inquire of any Servicer requesting approval of foreclosure whether
the property proposed to be foreclosed upon is so contaminated. If a Servicer
does not foreclose on Mortgaged Premises, the amounts otherwise available to pay
the holders of the Certificates may be reduced. A Servicer will not be liable to
the holders of the Certificates if it fails to foreclose on Mortgaged Premises
that it reasonably believes may be so contaminated or affected, even if such
Mortgaged Premises are, in fact, not so contaminated or affected. In addition, a
Servicer will not be liable to the holders of the Certificates if, based on its
reasonable belief that no such contamination or effect exists, the Servicer
forecloses on Mortgaged Premises and takes title to such Mortgaged Premises and
thereafter such Mortgaged Premises are determined to be so contaminated or
affected.
"Due-on-Sale" Clauses
The forms of Mortgage Note, mortgage and deed of trust relating to
conventional Mortgage Loans may contain a "due-on-sale" clause permitting
acceleration of the maturity of a loan if the borrower transfers its interest in
the Mortgaged Premises. In recent years, court decisions and legislative actions
placed substantial restrictions on the right of lenders to enforce such clauses
in many states. Effective October 15, 1982, however, Congress enacted the
Garn-St. Germain Depository Institutions Act of 1982 (the "Act"), which, after a
three-year grace period, preempted state laws which prohibit the enforcement of
due-on-sale clauses by providing, among other matters, that "due-on-sale"
clauses in certain loans (which loans include Conventional Mortgage Loans) made
after the effective date of the Act are enforceable within certain limitations
as set forth in the Act and the regulations promulgated thereunder.
By virtue of the Act, a mortgage lender generally may accelerate any
conventional Mortgage Loan which contains a "due-on-sale" clause upon transfer
of an interest in the Mortgaged Premises. With respect to any Mortgage Loan
secured by a residence occupied or to be occupied by the borrower, this ability
to accelerate will not apply to certain types of transfers, including (i) the
granting of a leasehold interest which has a term of three years or less and
which does not contain an option to purchase, (ii) a transfer to a relative
resulting from the death of a borrower, or a transfer where the spouse or one or
more children become owners of the Mortgaged Premises, in each case where the
transferee(s) will occupy the Mortgaged Premises, (iii) a transfer resulting
from a decree of dissolution of marriage, legal separation agreement or an
incidental property settlement agreement by which the spouse becomes an owner of
the Mortgaged Premises, (iv) the creation of a lien or other encumbrance
subordinate to the lender's security instrument which does not relate to a
transfer of rights of occupancy in the Mortgaged Premises (provided that such
lien or encumbrance is not created pursuant to a contract for deed), (v) a
transfer by devise, descent or operation of law on the death of a joint tenant
or tenant by the entirety and (vi) other transfers as set forth in the Act and
the regulations thereunder. As a result, a lesser number of Mortgage Loans which
contain "due-on-sale" clauses may extend to full maturity than earlier
experience would indicate with respect to single-family mortgage loans. The
extent of the effect of the Act on the average lives and delinquency rates of
the
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Mortgage Loans, however, cannot be predicted. FHA Loans and VA Loans do not
contain due-on-sale clauses. See "Maturity, Prepayment and Yield
Considerations."
Enforceability of Certain Provisions
The forms of Mortgage Note, mortgage and deed of trust used by the
Servicers may contain provisions obligating the borrower to pay a late charge if
payments are not timely made and in some circumstances may provide for
prepayment fees or penalties if the obligation is paid prior to maturity. In
certain states, there are or may be specific limitations upon late charges which
a lender may collect from a borrower for delinquent payments. Certain states
also limit the amounts that a lender may collect from a borrower as an
additional charge if the loan is prepaid. Under each Servicing Agreement, late
charges and prepayment fees (to the extent permitted by law and not waived by
the Servicers) will be retained by the related Servicer as additional servicing
compensation.
Courts have imposed general equitable principles upon foreclosure. These
equitable principles are generally designed to relieve the borrower from the
legal effect of defaults under the loan documents. Examples of judicial remedies
that may be 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 lenders to reinstate loans or recast payment schedules to
accommodate borrowers who are suffering from temporary financial disability. In
some cases, courts have limited the right of lenders to foreclose if the default
under the security instrument is not monetary, such as the borrower failing to
adequately maintain the Mortgaged Premises or the borrower executing a second
mortgage or deed of trust affecting the Mortgaged Premises. In other cases, some
courts have been faced with the issue whether federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under deeds of trust receive notices in addition to the
statutorily-prescribed minimum requirements. 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.
THE SELLER
Saxon Asset Securities Company was incorporated in Virginia on May 6,
1996, as a wholly owned, limitedpurpose financing subsidiary of Dominion
Mortgage Services, Inc., a Virginia corporation ("Dominion Mortgage"). Dominion
Mortgage is a wholly owned subsidiary of Dominion Capital, Inc., a Virginia
corporation ("Dominion Capital"). Dominion Capital is a wholly owned subsidiary
of Dominion Resources, Inc., a Virginia corporation ("Dominion Resources"). None
of Dominion Resources, Dominion Capital, Dominion Mortgage or the Seller has
guaranteed, or is otherwise obligated with respect to, the Certificates of any
Series. The principal executive offices of the Seller are located at 4880 Cox
Road, Glen Allen, Virginia 23060, and the telephone number of the Seller is
(804) 967-7400. The Seller was formed solely for the purpose of facilitating the
financing and sale of Mortgage Assets and certain other assets. It does not
intend to engage in any business or investment activities other than issuing and
selling securities secured primarily by, or evidencing interests in, Mortgage
Assets and certain other assets and taking certain action with respect thereto.
The Seller's Articles of Incorporation, which have been filed as an exhibit to
the Registration Statement of which this Prospectus is a part, limit the
Seller's business to the foregoing and place certain other restrictions on the
Seller's activities.
USE OF PROCEEDS
Substantially all the net proceeds from the sale of the Certificates of
each Series will be applied by the Seller to purchase the Mortgage Assets
assigned to the Trust underlying such Series.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is based upon the advice of Arter & Hadden,
special tax counsel to the Seller ("Special Tax Counsel"). In their opinion, the
discussion herein of the federal income tax consequences of the purchase,
ownership, and disposition of the Certificates is accurate in all material
aspects. The discussion is based upon laws, regulations, rulings, and decisions
now in effect, all of which are subject to change (including changes in
effective dates). Because real estate mortgage investment conduit ("REMIC")
status may be elected with respect to certain Series of Certificates, the
discussion includes a summary of the federal income tax consequences to
Certificateholders of Certificates issued under such an election ("REMIC
Certificates").
The discussion does not address the federal income tax consequences for
all categories of investors, some of which may be subject to special rules. The
discussion focuses primarily on investors who will hold the Certificates as
"capital assets" (generally, property held for investment) within the meaning of
Section 1221 of the Internal Revenue Code of 1986, as amended (the "Code"),
although much of the discussion is applicable to other investors as well.
Investors should note that, although final regulations under the REMIC
provisions of the Code (the "REMIC Regulations") have been issued by the U.S.
Treasury Department (the "Treasury"), no currently effective regulations or
other administrative guidance has been issued with respect to certain provisions
of the Code that are or may be applicable to Certificateholders, particularly
the provisions dealing with market discount and stripped debt instruments.
Although the Treasury recently issued final regulations dealing with original
issue discount and premium, those regulations do not address directly the
treatment of "REMIC Regular Certificates" (as defined below) and certain other
types of Certificates. Furthermore, the REMIC Regulations do not address all of
the issues that arise in connection with the formation and operation of a REMIC.
Hence, definitive guidance cannot be provided with respect to many aspects of
the tax treatment of Certificateholders. Moreover, the summary is based on
current law, and there can be no assurance that the law will not change or that
the Internal Revenue Service (the "Service") will not take positions that would
be materially adverse to investors. Finally, the summary does not purport to
address the anticipated state income tax consequences to investors of owning and
disposing of the Certificates. Consequently, investors should consult their own
tax advisors in determining the federal, state, local, and any other tax
consequences to them of the purchase, ownership, and disposition of the
Certificates.
General
Many aspects of the federal income tax treatment of the Certificates of
a particular Series will depend upon whether an election is made to treat the
Trust, or one or more segregated pools of assets held by the Trust, as a REMIC.
The Prospectus Supplement for each Series will indicate whether such an election
is intended. For each Series with respect to which one or more REMIC elections
are to be made, Special Tax Counsel will deliver a separate opinion generally to
the effect that, assuming timely filing of a REMIC election and compliance with
the Agreement and certain other documents specified in the opinion, the Trust
(or one or more segregated pools of Trust assets) will qualify as one or more
REMICs (each, a "Series REMIC") and that if a Trust (or one or more segregated
pools of Trust assets) qualifies as a REMIC, the tax consequences to the
Certificateholders will be as described below under "REMIC Certificates." For
each Series with respect to which a REMIC election is not made, Special Tax
Counsel will deliver a separate opinion generally to the effect that, assuming
compliance with the Agreement and certain other documents, the Trust will be
treated as a grantor trust under subpart E, Part I of subchapter J of the Code
and not as an association taxable as a corporation and the tax consequences to
the Certificateholders will be as described below under "Non-REMIC
Certificates." Those opinions will be based on existing law, but there can be no
assurance that the law will not change or that contrary positions will not be
taken by the Service.
REMIC Certificates
REMIC Certificates will be classified as either "REMIC Regular
Certificates," which generally are treated as debt for federal income tax
purposes, or "REMIC Residual Certificates," which generally are not treated as
debt for such purposes, but rather as representing rights and responsibilities
with respect to the taxable income or loss of the REMIC. The Prospectus
Supplement for each Series of Certificates will indicate whether a REMIC
election will be made for that Series and which of the Certificates of such
Series will be designated as REMIC Regular Certificates, and which will be
designated as REMIC Residual Certificates.
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REMIC Certificates held by a real estate investment trust ("REIT") will
qualify as "real estate assets" within the meaning of Section 856(c)(5)(A) of
the Code, and interest on such Certificates will be considered "interest on
obligations secured by mortgages on real property" ("Qualifying REIT Interest")
for REIT qualification purposes, in the same proportion that the assets of the
Series REMIC would qualify as real estate assets for REIT purposes. Similarly,
REMIC Certificates held by a thrift institution taxed as a "mutual savings bank"
or a "domestic building and loan association" (collectively, "Thrift
Institutions") will qualify as "qualifying real property loans" for purposes of
the special bad debt reserve deduction of Section 593, and a REMIC Certificate
held by a thrift institution taxed as a "domestic building and loan association"
will qualify as a "loan secured by an interest in real property," for purposes
of the qualification requirements of domestic building and loan associations set
forth in Section 7701(a)(19), in the same proportion that the assets of the
Series REMIC would so qualify. However, if 95% or more of the assets of a given
Series REMIC constitute real estate assets for REIT purposes, the REMIC
Certificates will be treated entirely as such assets and 100% of the interest
income derived from that REMIC will be treated as Qualifying REIT Interest.
Similarly, if 95% or more of the assets of a given Series REMIC constitute
qualifying real property loans and loans secured by interests in real property,
the REMIC Certificates will be treated entirely as such assets for purposes of
the special bad debt reserve deduction and the qualification requirements of
domestic building and loan associations, respectively. In the case of a Series
for which two or more Series REMICs will be created, all Series REMICs will be
treated as a single REMIC for purposes of determining the extent to which the
related Certificates and the income thereon will be treated as qualifying assets
and income for such purposes. However, REMIC Certificates will not qualify as
"Government securities" for either REIT or regulated investment company ("RIC")
qualification purposes.
Tax Treatment of REMIC Regular Certificates
Payments received by holders of REMIC Regular Certificates ("REMIC
Regular Certificateholders") generally should be accorded the same tax treatment
under the Code as payments received on other taxable corporate debt instruments.
Except as described below for REMIC Regular Certificates issued with original
issue discount or acquired with market discount or premium, interest paid or
accrued on a REMIC Regular Certificate will be treated as ordinary income to the
REMIC Regular Certificateholder and a principal payment on such Certificate will
be treated as a return of capital to the extent that the REMIC Regular
Certificateholder's basis in such Certificate is allocable to that payment.
REMIC Regular Certificateholders or holders of REMIC Residual Certificates
("REMIC Residual Certificateholders") must report income from such Certificates
under an accrual method of accounting, even if they otherwise would have used
the cash receipts and disbursements method. The Trustee or the Master Servicer
will report annually to the Service and the Certificateholders of record with
respect to interest paid or accrued and original issue discount, if any, accrued
on the Certificates.
Under temporary Treasury regulations, holders of REMIC Regular
Certificates issued by "single-class REMICs" who are individuals, trusts,
estates, or pass-through entities in which such investors hold interests may be
required to recognize certain amounts of income in addition to interest and
discount income. A single-class REMIC, in general, is a REMIC that (i) would be
classified as an investment trust in the absence of a REMIC election or (ii) is
substantially similar to an investment trust. Under the temporary Treasury
regulations, each holder of a regular or residual interest in a single-class
REMIC is allocated (i) a share of the REMIC's "allocable investment expenses"
(i.e., expenses normally allowable under Section 212 of the Code, which may
include servicing and administrative fees and insurance premiums) and (ii) a
corresponding amount of additional income. Section 67 permits an individual,
trust or estate to deduct miscellaneous itemized expenses (including Section 212
expenses) only to the extent that such expenses, in the aggregate, exceed 2% of
its adjusted gross income. Consequently, an individual, trust or estate that
holds a regular interest in a single-class REMIC (either directly or through a
pass-through entity) will recognize additional income with respect to such
regular interest to the extent that its share of allocable investment expenses,
when combined with its other miscellaneous itemized deductions for the taxable
year, fails to exceed 2% of its adjusted gross income. Any such additional
income will be treated as interest income. In addition, Section 68 provides that
the amount of itemized deductions otherwise allowable for the taxable year for
an individual whose adjusted gross income exceeds the applicable amount
($100,000, or $50,000 in the case of a separate return by a married individual
within the meaning of Section 7703 for taxable year 1991 and adjusted for
inflation each year thereafter) will be reduced by the lesser of (i) 3% of the
excess of adjusted gross income over the applicable amount, or (ii) 80% of the
amount of itemized deductions otherwise allowable for such taxable year. The
amount of such additional taxable income recognized by holders who are subject
to the limitations of either Section 67 or Section 68 may be substantial and may
reduce or eliminate the after-tax yield to such holders
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of an investment in the Certificates of an affected Series. Non-corporate
holders of REMIC Regular Certificates evidencing an interest in a single-class
REMIC also should be aware that miscellaneous itemized deductions, including
allocable investment expenses attributable to such REMIC, are not deductible for
purposes of the alternative minimum tax ("AMT").
Original Issue Discount. Certain Classes of REMIC Regular Certificates
may be issued with "original issue discount" within the meaning of Section
1273(a) of the Code. In general, such original issue discount will equal the
difference between the "stated redemption price at maturity" of the REMIC
Regular Certificate (generally, its principal amount) and its issue price.
Holders of REMIC Regular Certificates as to which there is original issue
discount should be aware that they generally must include original issue
discount in income for federal income tax purposes on an annual basis under a
constant yield accrual method that reflects compounding. In general, original
issue discount is treated as ordinary interest income and must be included in
income in advance of the receipt of the cash to which it relates. The amount of
original issue discount required to be included in a REMIC Regular
Certificateholder's income in any taxable year will be computed in accordance
with Section 1272(a)(6). No regulatory guidance currently exists under Section
1272(a)(6). The Master Servicer or other person responsible for computing the
amount of original issue discount to be reported to a REMIC Regular
Certificateholder each taxable year (the "Tax Administrator") will base its
computations on Section 1272(a)(6) and final regulations governing the accrual
of original issue discount on debt instruments that were issued by the Treasury
on January 27, 1994, but do not address directly the treatment of instruments
that are subject to Section 1272(a)(6) (the "OID Regulations"). There can be no
assurance that such methodology represents the correct manner of calculating
original issue discount on the REMIC Regular Certificates
The amount of original issue discount on a REMIC Regular Certificate
equals the excess, if any, of the Certificate's "stated redemption price at
maturity" over its "issue price." A debt instrument's stated redemption price at
maturity is the sum of all payments provided by the instrument other than
"qualified stated interest" ("Deemed Principal Payments"). Qualified stated
interest, in general, is stated interest that is unconditionally payable in cash
or property (other than debt instruments of the issuer) at lease annually at (i)
a single fixed rate or (ii) a variable rate that meets certain requirements set
out in the OID Regulations. See "-- Variable Rate Certificates." Thus, in the
case of any REMIC Regular Certificate other than a Compound Interest
Certificate, the stated redemption price at maturity will equal the total amount
of all Deemed Principal Payments due on that Certificate. Since a Compound
Interest Certificate generally does not require unconditional payments of
interest at least annually, the stated redemption price at maturity of such a
Certificate will equal the aggregate of all payments due, whether designated as
principal, accrued interest, or current interest. The issue price of a REMIC
Regular Certificate generally will equal the initial price at which a
substantial amount of such Certificates is sold to the public.
Under a de minimis rule, a REMIC Regular Certificate will be considered
to have no original issue discount if the amount of original issue discount is
less than 0.25% of the Certificate's stated redemption price at maturity
multiplied by the weighted average maturity ("WAM") of all Deemed Principal
Payments. For that purpose, the WAM of a REMIC Regular Certificate is the sum of
the amounts obtained by multiplying the amount of each Deemed Principal Payment
by a fraction, the numerator of which is the number of complete years from the
Certificate's issue date until the payment is made, and the denominator of which
is the Certificate's stated redemption price at maturity. Although no Treasury
regulations have been issued under the relevant provisions of the Tax Reform Act
of 1986 (the "1986 Act"), it is expected that the WAM of a REMIC Regular
Certificate will be computed using the prepayment assumptions used in pricing
the REMIC Regular Certificate ("Pricing Prepayment Assumptions"). A REMIC
Regular Certificateholder will include de minimis original issue discount in
income on a pro rata basis as stated principal payments on the Certificate are
received or, if earlier, upon disposition of the Certificate, unless the
Certificateholder makes the "All OID Election" (as defined below).
REMIC Regular Certificates of certain Series may bear interest under
terms that provide for a teaser rate period, interest holiday, or other period
during which the rate of interest payable on the Certificates is lower than the
rate payable during the remainder of the life of the Certificates ("Teaser
Certificates"). The OID Regulations provide a more expansive test under which a
Teaser Certificate may be considered to have a de minimis amount of original
issue discount even though the amount of original issue discount on the
Certificate would be more than de minimis as determined under the regular test.
The expanded test applies to a Teaser Certificate only if the stated interest on
such Certificate would be qualified stated interest but for the fact that during
one or more accrual periods
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its interest rate is below the rate applicable for the remainder of its term.
Under the expanded test, the amount of original issue discount on a Teaser
Certificate that is measured against the de minimis amount of original issue
discount allowable on the Certificate is the greater of (i) the excess of the
stated principal amount of the Certificate over its issue price ("True
Discount") and (ii) the amount of interest that would be necessary to be payable
on the Certificate in order for all stated interest to be qualified stated
interest (the "Additional Interest Amount").
A REMIC Regular Certificateholder generally must include in gross income
the sum, for all days during its taxable year on which it holds the REMIC
Regular Certificate, of the "daily portions" of the original issue discount on
such Certificate. In the case of an original holder of a REMIC Regular
Certificate, the daily portions of original issue discount with respect to such
Certificate generally will be determined by allocating to each day in any
accrual period the Certificate's ratable portion of the excess, if any, of (i)
the sum of (a) the present value of all payments under the Certificate yet to be
received as of the close of such period and (b) the amount of any Deemed
Principal Payments received on the Certificate during such period over (ii) the
Certificate's "adjusted issue price" at the beginning of such period. The
present value of payments yet to be received on a REMIC Regular Certificate is
computed by using the Pricing Prepayment Assumptions and the Certificate's
original yield to maturity (adjusted to take into account the length of the
particular accrual period), and taking into account Deemed Principal Payments
actually received on the Certificate prior to the close of the accrual period.
The adjusted issue price of a REMIC Regular Certificate at the beginning of the
first accrual period is its issue price. The adjusted issue price at the
beginning of each subsequent period is the adjusted issue price of the
Certificate at the beginning of the preceding period increased by the amount of
original issue discount allocable to that period and decreased by the amount of
any Deemed Principal Payments received during that period. Thus, an increased
(or decreased) rate of prepayments received with respect to a REMIC Regular
Certificate will be accompanied by a correspondingly increased (or decreased)
rate of recognition of original issue discount by the holder of such
Certificate.
A REMIC Regular Certificate having original issue discount may be
acquired subsequently for more than its adjusted issue price. If the subsequent
holder's adjusted basis in such a REMIC Regular Certificate, immediately after
its acquisition, exceeds the sum of all Deemed Principal Payments to be received
on the Certificate after the acquisition date, the Certificate will no longer
have original issue discount, and the holder may be entitled to reduce the
amount of interest income recognized on the Certificate by the amount of
amortizable premium. See "-Amortizable Premium." If the subsequent holder's
adjusted basis in the Certificate immediately after the acquisition exceeds the
adjusted issue price of the Certificate, but is less than or equal to the sum of
the Deemed Principal Payments to be received under the Certificate after the
acquisition date, the amount of original issue discount on the Certificate will
be reduced by a fraction, the numerator of which is the excess of the
Certificate's adjusted basis immediately after its acquisition over the adjusted
issue price of the Certificate and the denominator of which is in the excess of
the sum of all Deemed Principal Payments to be received on the Certificate after
the acquisition date over the adjusted issue price of the Certificate. For that
purpose, the adjusted basis of a REMIC Regular Certificate generally is reduced
by the amount of any qualified stated interest that is accrued but unpaid as of
the acquisition date. Alternatively, the subsequent purchaser of a REMIC Regular
Certificate having original issue discount may make an All OID Election (as
defined below) with respect to the Certificate.
A Certificateholder generally may make an election (an "All OID
Election") to include in gross income all stated interest, original issue
discount, de minimis original issue discount, market discount (as described
below under "--Market Discount"), and de minimis market discount that accrues on
the Certificate (as reduced by any amortizable premium, as described below under
"Amortizable Premium," or acquisition premium, as described below) under the
constant yield method used to account for original issue discount. To make an
All OID Election, the holder of the Certificate must attach a statement to its
timely filed federal income tax return for the taxable year in which the holder
acquired the Certificate. The statement must identify the instruments to which
the election applies. An All OID Election is irrevocable unless the holder
obtains the consent of the Service. If an All OID Election is made for a debt
instrument with market discount, the holder is deemed to have made an election
to include in income currently the market discount on all of the holder's other
debt instruments with market discount, as described in "-- Market Discount"
below. In addition, if an All OID Election is made for a debt instrument with
amortizable premium, the holder is deemed to have made an election to amortize
the premium on all of the holder's other debt instruments with amortizable
premium under the constant yield method. See "-- Amortizable Premium."
Certificateholders should be aware that the law is unclear as to whether an All
OID Election is effective for a Certificate that is subject to the contingent
payment rules. See "-- Interest Weighted Certificates and Non-VRDI
Certificates."
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If the interval between the issue date of a Current Interest Certificate
and the first Distribution Date (the "First Distribution Period") contains more
days than the number of days of stated interest that are payable on the first
Distribution Date, the effective interest rate received by the Certificateholder
during the first Distribution Period will be less than the Certificate's stated
interest rate making such Certificate a Teaser Certificate. If the amount of
original issue discount on the Certificate measured under the expanded de
minimis test exceeds the de minimis amount of original issue discount allowable
on the Certificate, the amount by which the stated interest on the Certificate
exceeds the interest that would be payable on the Certificate at the effective
rate of interest for the First Distribution Period (the "Nonqualified Interest
Amount") would be treated as part of the Certificate's stated redemption price
at maturity. Accordingly, the holder of a Teaser Certificate may be required to
recognize ordinary income arising from original issue discount attributable to
the First Distribution Period in addition to any qualified stated interest that
accrues in that period.
Similarly, if the First Distribution Period is shorter than the interval
between subsequent Distribution Dates, the effective rate of interest payable on
a Certificate during the First Distribution Period will be higher than the
stated rate of interest if a Certificateholder receives interest on the first
Distribution Date based on a full accrual period. Such Certificate would be
issued with original issue discount unless the amount of original issue discount
is de minimis. However, if (i) a portion of the initial purchase price of such
Certificate is allocable to interest that has accrued under the terms of the
Certificate prior to its issue date ("Pre-Issuance Accrued Interest") and (ii)
the Certificate provides for a payment of stated interest on the first payment
date within one year of the issue date that equals or exceeds the amount of the
Pre-Issuance Accrued Interest, the Certificate's issue price may be computed by
subtracting from the issue price the amount of Pre-Issuance Accrued Interest.
Thus, such Certificate will not have original issue discount attributable to the
First Distribution Period, provided that the increased effective interest rate
for that Period is attributable solely to Pre-Issuance Accrued Interest, as
typically will be the case.
It is not entirely clear how income should be accrued with respect to
REMIC Regular Certificates, the payments on which consist entirely or primarily
of a specified nonvarying portion of the interest payable on one or more of the
qualified mortgages held by the REMIC ("Interest Weighted Certificates"). Unless
and until the Service provides contrary administrative guidance on the income
tax treatment of an Interest Weighted Certificate, the Tax Administrator intends
to take the position that an Interest Weighted Certificate does not bear
qualified stated interest, and will account for the income thereon as described
in "Interest Weighted Certificates and Non-VRDI Certificates" below. Some
Interest Weighted Certificates may provide for a relatively small amount of
principal and for interest that can be expressed as qualified stated interest at
a very high fixed rate with respect to that principal ("Superpremium
Certificates"). Superpremium Certificates technically are issued with
amortizable premium. However, because of their close similarity to other
Interest Weighted Certificates it appears more appropriate to account for
Superpremium Certificates in the same manner as for other Interest Weighted
Certificates. Consequently, in the absence of further administrative guidance,
the Tax Administrator intends to account for Superpremium Certificates in the
same manner as other Interest Weighted Certificates. However, there can be no
assurance that the Service will not assert a position contrary to that taken by
the Tax Administrator, and, therefore, holders of Superpremium Certificates
should consider making a protective election to amortize premium on such
Certificates.
In view of the complexities and current uncertainties as to the manner
of inclusion in income of original issue discount on the REMIC Regular
Certificates, each investor should consult his own tax advisor to determine the
appropriate amount and method of inclusion in income of original issue discount
on such Certificates for deferral income tax purposes.
Variable Rate Certificates. A REMIC Regular Certificate may pay interest
at a variable rate (a "Variable Rate Certificate"). A Variable Rate Certificate
that qualifies as a "variable rate debt instrument" as that term is defined in
the OID Regulations (a "VRDI") will be governed by the rules applicable to VRDIs
in the OID Regulations, which are described below. A Variable Rate Certificate
qualifies as a VRDI under the OID Regulations if (i) the Certificate is not
issued at a premium to its noncontingent principal amount in excess of the
lesser of (a) .015 multiplied by the product of such noncontingent principal
amount and the WAM (as that term is defined above in the discussion of the de
minimis rule) of the Certificate or (b) 15 percent of such noncontingent
principal amount (an "Excess Premium"); (ii) stated interest on the Certificate
compounds or is payable unconditionally at least annually at (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
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"qualified inverse floating rate," and (iii) the qualified floating rate or the
objective rate in effect during an accrual period is set at a current value of
that rate (i.e., the value of the rate on any day occurring during the interval
that begins three months prior to the first day on which that value is in effect
under the Certificate and ends one year following that day).
On June 11, 1996, the Treasury issued final regulations that both
address the federal income tax treatment of debt obligations that provide for
one or more contingent payments and would make certain changes to rules
applicable to VRDIs in the OID Regulations (the "1996 Regulations"). Pursuant to
certain of the amendments to the OID Regulations that are set forth in the 1996
Regulations, (i) a Variable Rate Certificate would qualify as a VRDI only if, in
addition to satisfying the three conditions set forth in the current OID
Regulations (and described above), such Certificate does not provide for any
principal payments that are contingent and (ii) a Variable Rate Certificate that
does not qualify as a VRDI would be treated as a debt obligation that provides
for one or more contingent payments. Those amendments to the OID Regulations
apply retroactively to debt instruments issued on or after April 4, 1994, which
is the effective date of the OID Regulations. Consequently, the Tax
Administrator will treat Variable Rate Certificates that do not qualify as VRDIs
as debt obligations that provide for one or more contingent payments, and will
account for the income thereon as described in "Interest Weighted Certificates
and Non-VRDI Certificates" below.
Under the OID Regulations, a rate is a qualified floating rate if
variations in the rate reasonably can be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the debt
instrument is denominated. A qualified floating rate may measure contemporaneous
variations in borrowing costs for the issuer of the debt instrument or for
issuers in general. Effective for debt instruments issued after August 13, 1996,
a multiple of a qualified floating rate is considered a qualified floating rate
only if the rate is equal to either (a) the product of a qualified floating rate
and a fixed multiple that is greater than 0.65 but not more than 1.35 or (b) the
product of a qualified floating rate and a fixed multiple that is greater than
0.65 but not more than 1.35, increased or decreased by a fixed rate. If a
Certificate provides for two or more qualified floating rates that reasonably
can be expected to have approximately the same values throughout the term of the
Certificate, the qualified floating rates together will constitute a single
qualified floating rate. Two or more qualified floating rates conclusively will
be presumed to have approximately the same values throughout the term of a
Certificate if the values of all rates on the issue date of the Certificate are
within 25 basis points of each other.
A variable rate will be considered a qualified floating rate if it is
subject to a restriction or restrictions on the maximum stated interest rate (a
"Cap"), a restriction or restrictions on the minimum stated interest rate (a
"Floor"), a restriction or restrictions on the amount of increase or decrease in
the stated interest rate (a "Governor"), or other similar restriction only if:
(a) the Cap, Floor, or Governor is fixed throughout the term of the related
Certificate or (b) the Cap, Floor, Governor, or similar restriction is not
reasonably expected, as of the issue date, to cause the yield on the Certificate
to be significantly less or significantly more than the expected yield on the
Certificate determined without such Cap, Floor, Governor, or similar
restriction, as the case may be. Although the OID Regulations are unclear, it
appears that a VRDI, the principal rate on which is subject to a Cap, Floor, or
Governor that itself is a qualified floating rate, bears interest at an
objective rate.
Under the OID Regulations, an objective rate is a rate (other than a
qualified floating rate) that is determined using a single fixed formula and is
based on (i) one or more qualified floating rates (e.g., a rate equal to a
multiple greater than 1.35 times a qualified floating rate), (ii) one or more
rates where each rate would be a qualified floating rate for a debt instrument
denominated in a currency other than the currency in which the debt instrument
is denominated, (iii) the yield or changes in the price of actively traded
personal property (other than stock or debt of the issuer or certain related
parties), or (iv) any combination of objective rates. Notwithstanding the
foregoing, a variable rate will not be considered an objective rate if the
average value of the rate during the first half of the Certificate's term
reasonably is expected to be either significantly less than or significantly
greater than the average value of the rate during the final half of the
instrument's term (i.e., the rate will result in a significant frontloading or
backloading of interest). Additional objective rates subsequently may be
designated by the Service in revenue rulings or revenue procedures. An objective
rate also includes a "qualified inverse floating rate" if the rate is equal to a
fixed rate minus a qualified floating rate and variations in the rate reasonably
can be expected to inversely reflect contemporaneous variations in the cost of
newly borrowed funds (disregarding any Caps, Floors, Governors, or similar
restrictions on the rate).
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Under the 1996 Regulations, an objective rate would be redefined as a
rate (other than a qualified floating rate) that (i) is determined using a
single fixed formula, (ii) is based on objective financial or economic
information, and (iii) is not based on information that either is within the
control of the issuer (or a related party) or is unique to the circumstances of
the issuer (or related party), such as dividends, profits, or the value of the
issuer's (or related party's) stock. That definition is broader than the
definition of objective rate set forth in the OID Regulations and would include,
in addition to a rate that is based on one or more qualified floating rates or
on the yield of actively traded personal property, a rate that is based on
changes in a general inflation index. In addition, a rate would not fail to be
an objective rate under the 1996 Regulations merely because it is based on the
credit quality of the issuer. The revised definition of an objective rate in the
1996 Regulations is effective for debt instruments issued on or after August 13,
1996.
Under the OID Regulations, if interest on a Variable Rate Certificate is
stated at a fixed rate for an initial period of less than one year followed by a
variable rate that is either a qualified floating rate or an objective rate for
a subsequent period, and the value of the variable rate on the issue date is
intended to approximate the fixed rate, the fixed rate and the variable rate
together constitute a single qualified floating rate or objective rate. A
variable rate conclusively will be presumed to approximate an initial fixed rate
if the value of the variable rate on the issue date does not differ from the
value of the fixed rate by more than 25 basis points.
Under the OID Regulations, all interest payable on a Variable Rate
Certificate that qualifies as a VRDI and provides for stated interest
unconditionally payable in a cash or property at least annually at a single
qualified floating rate or a single objective rate (a "Single Rate VRDI
Certificate") is treated as qualified stated interest. The amount and accrual of
OID on a Single Rate VRDI Certificate is determined, in general, by converting
such Certificate into a hypothetical fixed rate security and applying the rules
applicable to fixed rate securities described under "Original Issue Discount"
above to such hypothetical fixed rate security.
Except as provided below, the amount and accrual of OID on a Variable
Rate Certificate that qualifies as a VRDI but is not a Single Rate VRDI
Certificate (a "Multiple Rate VRDI Certificate") is determined by converting
such Certificate into a hypothetical equivalent fixed rate security that has
terms that are identical to those provided under the Multiple Rate VRDI
Certificate, except that such hypothetical equivalent fixed rate security will
provide for fixed rate substitutes in lieu of the qualified floating rates or
objective rate provided for under the Multiple Rate VRDI Certificate. A Multiple
Rate VRDI Certificate that provides for a qualified floating rate or rates or a
qualified inverse floating rate is converted to a hypothetical equivalent fixed
rate security by assuming that each qualified floating rate or the qualified
inverse floating rate will remain at its value as of the issue date. A Multiple
Rate VRDI Certificate that provides for an objective rate or rates is converted
to a hypothetical equivalent fixed rate security by assuming that each objective
rate will equal a fixed rate that reflects the yield that reasonably is expected
for the Multiple Rate VRDI Certificate. Qualified stated interest or original
issue discount allocable to an accrual period with respect to a Multiple Rate
VRDI Certificate must be increased (or decreased) if the interest actually
accrued or paid during such accrual period exceeds (or is less than) the
interest assumed to be accrued or paid during such accrual period under the
hypothetical equivalent fixed rate security.
The 1996 Regulations amend the OID Regulations to clarify that qualified
stated interest or original issue discount allocable to an accrual period with
respect to a Single Rate VRDI Certificate also must be increased (or decreased)
if the interest actually accrued or paid during such accrual period exceeds (or
is less than) the interest assumed to be accrued or paid during such accrual
period under the related hypothetical fixed rate security. Because that
amendment was intended to clarify the OID Regulations, it is effective for debt
instrument issued on or after April 4, 1994, which is the effective date of the
OID Regulations.
Under the OID Regulations, the amount and accrual of OID on a Multiple
Rate VRDI Certificate that provides for stated interest at either one or more
qualified floating rates or at a qualified inverse floating rate and in addition
provides for stated interest at a single fixed rate (other than an initial fixed
rate that is intended to approximate the subsequent variable rate) is determined
using the method described above for all other Multiple Rate VRDI Certificates
except that prior to its conversion to a hypothetical equivalent fixed rate
security, such Multiple Rate VRDI Certificate is treated as if it provided for a
qualified floating rate (or a qualified inverse floating rate), rather than the
fixed rate. The qualified floating rate (or qualified inverse floating rate)
replacing the fixed rate must be such that the fair market value of the Multiple
Rate VRDI Certificate as of its issue date would be approximately
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the same as the fair market value of an otherwise identical debt instrument that
provides for the qualified floating rate (or qualified inverse floating rate),
rather than the fixed rate.
REMIC Regular Certificates of certain Series may provide for interest
based on a weighted average of the interest rates on some or all of the Mortgage
Loans of the related Trust ("Weighted Average Certificates"). Under the OID
Regulations, it appears that Weighted Average Certificates relating to a trust
whose Mortgage Loans are exclusively ARM Loans bear interest at an "objective
rate" provided the ARM Loans themselves bear interest at qualified floating
rates. However, under the OID Regulations, Weighted Average Certificates
relating to a Trust whose Mortgage Loans do not bear interest at qualified
floating rates ("Non-Objective Weighted Average Certificates" or "NOWA
Certificates") do not bear interest at an objective or qualified floating rate
and, consequently, do not qualify as VRDIs. Accordingly, unless and until the
Service provides contrary administrative guidance on the income tax treatment of
NOWA Certificates, the Tax Administrator intends to treat such Certificates as
debt obligations that provide for one or more contingent payments, and will
account for the income thereon as described in "Interest Weighted Certificates
and Non-VRDI Certificates" below.
REMIC Regular Certificates of certain Series may provide for the payment
of interest at a rate determined as the difference between two interest rate
parameters, one of which is a variable rate and the other of which is a fixed
rate or a different variable rate ("Inverse Floater Certificates"). Under the
OID Regulations, Inverse Floater Certificates generally bear interest at
objective rates, because their rates either constitute "qualified inverse
floating rates" under those Regulations or, although not qualified floating
rates themselves, are based on one or more qualified floating rates.
Consequently, if such Certificates are not issued at an Excess Premium and their
interest rates otherwise meet the test for qualified stated interest, the income
on such Certificates will be accounted for under the rules applicable to VRDIs
described above. However, an Inverse Floater Certificate may have an interest
rate parameter equal to the weighted average of the interest rates on some or
all of the Mortgage Loans of the related Trust in a case where one or more of
those rates is a fixed rate or otherwise may not qualify as a VRDI. Unless and
until the Service provides contrary administrative guidance on the income tax
treatment of such Inverse Floater Certificates, the Tax Administrator intends to
treat such Certificates as debt obligations that provide for one or more
contingent payments, and will account for the income thereon as described in
"Interest Weighted Certificates and Non-VRDI Certificates" below.
Interest Weighted Certificates and Non-VRDI Certificates. The treatment
of a NOWA Certificate, a Variable Rate Certificate that is issued at an Excess
Premium, or any other Variable Rate Certificate that does not qualify as a VRDI
Certificate (each, a "Non-VRDI Certificate") or an Interest Weighted Certificate
is unclear under current law. The OID Regulations are ambiguous as to whether
interest payments (other than qualified stated interest) on a Non-VRDI
Certificate or an Interest Weighted Certificate are considered to be contingent
payments subject to special original issue discount rules described in the next
paragraph or whether such payments should be treated as Deemed Principal
Payments subject to the regular original issue discount rules described in
"Original Issue Discount" above. Moreover, to the extent that the contingent
payment rules are applicable, their impact on instruments that are subject to
Section 1272(a)(6) of the Code is unclear.
The 1996 Regulations contain provisions (the "Contingent Payment
Regulations") that address the federal income tax treatment of debt obligations
with one or more contingent payments ("Contingent Payment Obligations"). Under
the Contingent Payment Regulations, any variable rate debt instrument that is
not a VRDI is classified as a Contingent Payment Obligation. However, the
Contingent Payment Regulations, by their terms, do not apply to REMIC regular
interests and other instruments that are subject to Section 1272(a)(6) of the
Code. Furthermore, they are proposed to be effective only for debt instruments
issued on or after August 13, 1996. In the absence of further guidance, the Tax
Administrator will account for Non-VRDI Certificates, Interest Weighted
Certificates, and other REMIC Regular Certificates that are Contingent Payment
Obligations in accordance with Section 1272(a)(6). Income will be accrued on
such Certificates based on a constant yield that is derived from a projected
payment schedule as of the related closing date. The projected payment schedule
will take into account the Pricing Prepayment Assumptions and the interest
payments that are expected to be made based on the value of any relevant indices
on the issue date. To the extent that actual payments differ from projected
payments for a particular taxable year, appropriate adjustments to interest
income and expense accruals will be made for that year. In the case of a
Weighted Average Certificate, the projected payment schedule will be derived
based on the assumption that the principal balances of the Mortgage Loans that
collateralize the Certificate pay down pro rata.
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The method described in the foregoing paragraph for accounting for
Interest Weighted Certificates and NonVRDI Certificates is consistent with
Section 1272(a)(6) and the legislative history thereto. Because of the
uncertainty with respect to the treatment of such Certificates under the OID
Regulations and Contingent Payment Regulations, however, there can be no
assurance that the Service will not assert successfully that a method less
favorable to Certificateholders will apply. In view of the complexities and the
current uncertainties as to income inclusions with respect to Non-VRDI
Certificates and Interest Weighted Certificates, each investor should consult
his or her own tax advisor to determine the appropriate amount and method of
income inclusion on such Certificates for federal income tax purposes.
Market Discount. A subsequent purchaser of a REMIC Regular Certificate
at a discount from its outstanding principal amount (or, in the case of a REMIC
Regular Certificate having original issue discount, its "adjusted issue price")
will acquire such Certificate with market discount. The purchaser generally will
be required to recognize the market discount (in addition to any original issue
discount remaining with respect to the Certificate) as ordinary income. A person
who purchases a REMIC Regular Certificate at a price lower than the
Certificate's outstanding principal amount but higher than its adjusted issue
price does not acquire the Certificate with market discount, but will be
required to report original issue discount, appropriately adjusted to reflect
the excess of the price paid over the adjusted issue price. See "-- Original
Issue Discount. A REMIC Regular Certificate will not be considered to have
market discount if the amount of such market discount is de minimis, i.e., less
than the product of (i) 0.25% of the remaining principal amount (or, in the case
of a REMIC Regular Certificate having original issue discount, the adjusted
issue price of such Certificate), multiplied by (ii) the weighted average
maturity of the Certificate (determined as for original issue discount)
remaining after the date or purchase. Regardless of whether the subsequent
purchaser of a REMIC Regular Certificate with more than a de minimis amount of
market discount is a cash-basis or accrual-basis taxpayer, market discount
generally will be taken into income as principal payments (including, in the
case of a REMIC Regular Certificate having original issue discount, any Deemed
Principal Payments) are received, in an amount equal to the lesser of (i) the
amount of the principal payment received or (ii) the amount of market discount
that has "accrued" (as described below), but that has not yet been included in
income. The purchaser may make a special election, which generally applies to
all market discount instruments held or acquired by the purchaser in the taxable
year of election or thereafter, to recognize market discount currently on an
uncapped accrual basis (the "Current Recognition Election"). The Service has
indicated in Revenue Procedure 92-67 the manner in which a Current Recognition
Election may be made. In addition, the purchaser may make an All OID Election
with respect to a REMIC Regular Certificate purchased with market discount. See
"-- Original Issue Discount" above.
Until the Treasury promulgates applicable regulations, the purchaser of
a REMIC Regular Certificate with market discount generally may elect to accrue
the market discount either: (i) on the basis of a constant interest rate; (ii)
in the case of a REMIC Regular Certificate not issued with original issue
discount, in the ratio of stated interest payable in the relevant period to the
total stated interest remaining to be paid from the beginning of such period; or
(iii) in the case of a REMIC Regular Certificate issued with original issue
discount, in the ratio of original issue discount accrued for the relevant
period to the total remaining original issue discount at the beginning of such
period. The Service indicated in Revenue Ruling 92-67 the manner in which an
election may be made to accrue market discount on a REMIC Regular Certificate on
the basis of a constant interest rate. Regardless of which computation method is
elected, the Pricing Prepayment Assumptions must be used to calculate the
accrual of market discount.
A Certificateholder who has acquired any REMIC Regular Certificate with
market discount generally will be required to treat a portion of any gain on a
sale or exchange of the Certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of the foregoing
methods, less any accrued market discount previously reported as ordinary income
as partial principal payments were received. Moreover, such Certificateholder
generally must defer interest deductions attributable to any indebtedness
incurred or continued to purchase or carry the Certificate to the extent they
exceed income on the Certificate. Any such deferred interest expense, in
general, is allowed as a deduction not later than the year in which the related
market discount income is recognized. If a REMIC Regular Certificateholder makes
a Current Recognition Election or an all OID Election the interest deferral rule
will not apply. Under the Contingent Payment Regulations, a secondary market
purchaser of a non-VRDI Certificate or an Interest Weighted Certificate at
discount generally would continue to accrue interest and determine adjustment on
such Certificate based on the original projected payment schedule derived by the
issuer of such Certificate. See "-- Interest Weighted Certificates and Non-VRDI
Certificates" above. The holder of such
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a Certificate would be required, however, to allocate the difference between the
adjusted issue price of the Certificate and its basis in the Certificate as
positive adjustments to the accruals or projected payments on the Certificate
over the remaining term of the Certificate in a manner that is reasonable (e.g.,
based on a constant yield to maturity).
Treasury regulations implementing the market discount rules have not yet
been issued, and uncertainty exists with respect to many aspects of those rules.
For example, the treatment of a REMIC Regular Certificate subject to redemption
at the option of the Seller that is acquired at a market discount is unclear. It
appears likely, however, that the market discount rules applicable in such a
case would be similar to the rules pertaining to original issue discount. Due to
the substantial lack of regulatory guidance with respect to the market discount
rules, it is unclear how those rules will affect any secondary market that
develops for a given Class of REMIC Regular Certificate. Prospective investors
in REMIC Regular Certificates should consult their own tax advisors regarding
the application of the market discount rules to those securities.
Amortizable Premium. A Purchaser of a REMIC Regular Certificate who
purchases the Certificate at a premium over the total of its Deemed Principal
Payments may elect to amortize such premium under a constant yield method that
reflects compounding based on the interval between payments on the Certificates.
The legislative history of the 1986 Act indicates that premium is to be accrued
in the same manner as market discount. Accordingly, it appears that the accrual
of premium on a REMIC Regular Certificate will be calculated using the Pricing
Prepayment Assumptions. Under the Code, except as otherwise provided in Treasury
regulations to be issued, amortized premium would be treated as an offset to
interest income on a REMIC Regular Certificate and not as a separate deduction
item. If a holder makes an election to amortize premium on a REMIC Regular
Certificate, such election will apply to all taxable debt instruments (including
all REMIC regular interests) held by the holder at the beginning of the taxable
year in which the election is made, and to all taxable debt instruments acquired
thereafter by such holder, and will be irrevocable without the consent of the
Service. Purchasers who pay a premium for the REMIC Regular Certificates should
consult their tax advisors regarding the election to amortize premium and the
method to be employed.
Amortizable premium on a REMIC Regular Certificate that is subject to
redemption at the option of the Seller generally must be amortized as if the
optional redemption price and date were the Certificate's principal amount and
maturity date if doing so would result in a smaller amount of premium
amortization during the period ending with the optional redemption date. Thus, a
Certificateholder would not be able to amortize any premium on a REMIC Regular
Certificate that is subject to optional redemption at a price equal to or
greater than the Certificateholder's acquisition price unless and until the
redemption option expires. In cases where premium must be amortized on the basis
of the price and date of an optional redemption, the Certificate will be treated
as having matured on the redemption date for the redemption price and then
having been reissued on that date for that price. Any premium remaining on the
Certificate at the time of the deemed reissuance will be amortized on the basis
of (i) the original principal amount and maturity date or (ii) the price and
date of any succeeding optional redemption, under the principles described
above.
Under the Contingent Payment Regulations, a secondary market purchaser
of a Non-VRDI Certificate or an Interest Weighted Certificate at a premium
generally would continue to accrue interest and determine adjustments on such
Certificate based on the original projected payment schedule devised by the
issuer of such Certificate. See "-- Interest Weighted Certificates and Non-VRDI
Certificates" above. The holder of such a Certificate would allocate the
difference between its basis in the Certificate and the adjusted issue price of
the Certificate as negative adjustments to the accruals or projected payments on
the Certificate over the remaining term of the Certificate in a manner that is
reasonable (e.g., based on a constant yield to maturity).
Gain or Loss on Disposition. If a REMIC Regular Certificate is sold, the
Certificateholder will recognize gain or loss equal to the difference between
the amount realized on the sale and his adjusted basis in the Certificate. The
adjusted basis of a REMIC Regular Certificate generally will equal the cost of
the Certificate to the Certificateholder, increased by any original issue
discount or market discount previously includable in the Certificateholder's
gross income with respect to the Certificate, and reduced by the portion of the
basis of the Certificate allocable to payments on the Certificate (other than
qualified stated interest) previously received by the Certificateholder and by
any amortized premium. Similarly, a Certificateholder who receives a scheduled
or prepaid principal payment with respect to a REMIC Regular Certificate will
recognize gain or loss equal to the difference
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between the amount of the payment and the allocable portion of his adjusted
basis in the Certificate. Except to the extent that the market discount rules
apply and except as provided below, any gain or loss on the sale or other
disposition of a REMIC Regular Certificate generally will be capital gain or
loss. Such gain or loss will be long-term gain or loss if the Certificate is
held as a capital asset for more than 12 months.
If a REMIC Regular Certificateholder is a bank, thrift, or similar
institution described in Section 582 of the Code, any gain or loss on the sale
or exchange of the REMIC Regular Certificate will be treated as ordinary income
or loss. In the case of other types of holders, gain from the disposition of a
REMIC Regular Certificate that otherwise would be capital gain will be treated
as ordinary income to the extent that the amount actually includable in income
with respect to the Certificate by the Certificateholder during his holding
period is less than the amount that would have been includable in income if the
yield on that Certificate during the holding period had been 110% of a specified
U.S. Treasury borrowing rate as of the date that the Certificateholder acquired
the Certificate. Although the legislative history to the 1986 Act indicates that
the portion of the gain from disposition of a REMIC Regular Certificate that
will be recharacterized as ordinary income is limited to the amount of original
issue discount (if any) on the Certificate that was not previously includable in
income, the applicable Code provision contains no such limitation.
A portion of any gain from the sale of a REMIC Regular Certificate that
might otherwise be capital gain may be treated as ordinary income to the extent
that such Certificate is held as part of a "conversion transaction" within the
meaning of Section 1258 of the Code. A conversion transaction generally is one
in which the taxpayer has taken two or more positions in Certificates or similar
property that reduce or eliminate market risk, if substantially all of the
taxpayer's return is attributable to the time value of the taxpayer's net
investment in such transaction. The amount of gain realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable federal rate" (which rate is computed and
published monthly by the Service) at the time the taxpayer entered into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income from the transaction.
Tax Treatment of REMIC Residual Certificates
Overview. REMIC Residual Certificates will be considered residual
interests in the Series REMIC to which they relate. A REMIC is an entity for
federal income tax purposes consisting of a fixed pool of mortgages or other
mortgage-backed assets in which investors hold multiple classes of interests. To
be treated as a REMIC, the Trust (or one or more segregated pools of Trust
assets) underlying a Series must meet certain continuing qualification
requirements, and a REMIC election must be in effect. A Series REMIC generally
will be treated as a pass-through entity for federal income tax purposes, i.e.,
as not subject to entity-level tax. All interests in a Series REMIC other than
the REMIC Residual Certificates must be regular interests, i.e., REMIC Regular
Certificates. As described in "Tax Treatment of Regular Certificates" above, a
regular interest generally is an interest whose terms are analogous to those of
a debt instrument, and it generally is treated as a debt instrument for all
federal income tax purposes. The REMIC Regular Certificates will generate
interest and original issue discount deductions for the REMIC. As a residual
interest, a REMIC Residual Certificate represents the right to (i) stated
principal and interest on such Certificate, if any, and (ii) the income
generated by the REMIC assets in excess of the amount necessary to service the
regular interests and pay the REMIC's expenses.
In a manner similar to that employed in the taxation of partnerships,
REMIC taxable income or loss will be determined at the REMIC level, but passed
through to the REMIC Residual Certificateholders. Thus, REMIC taxable income or
loss will be allocated pro rata to the REMIC Residual Certificateholders, and
each REMIC Residual Certificateholder will report its share of REMIC taxable
income or loss on its own federal income tax return. Prospective investors in
REMIC Residual Certificates should be aware that the obligation to account for
the REMIC's income or loss will continue until all of the REMIC Regular
Certificates have been retired, which may not occur until well beyond the date
on which the last payments on REMIC Residual Certificates are made. In addition,
because of the way in which REMIC taxable income is calculated, a REMIC Residual
Certificateholder may recognize "phantom income" (i.e., income recognized for
tax purposes in excess of income as determined under financial accounting or
economic principles) which will be matched in later years by a corresponding tax
loss or reduction in taxable income, but which could lower the yield to REMIC
Residual Certificateholders due to the lower present value of such loss or
reduction.
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A portion of the income of REMIC Residual Certificateholders in certain
Series REMICs will be treated unfavorably in three contexts: (i) it may not be
offset by current or net operating loss deductions (except in the case of
certain thrift institutions holding REMIC Residual Certificates with significant
value); (ii) it will be considered unrelated business taxable income ("UBTI") to
tax-exempt entities; and (iii) it is ineligible for any statutory or treaty
reduction in the 30 percent withholding tax otherwise available to a foreign
REMIC Residual Certificateholder.
Taxation of REMIC Residual Certificateholders. A REMIC Residual
Certificateholder will recognize his share of the related REMIC's taxable income
or loss for each day during his taxable year on which he holds the REMIC
Residual Certificate. The amount so recognized will be characterized as ordinary
income or loss and will not be taxed separately to the REMIC. If a REMIC
Residual Certificate is transferred during a calendar quarter, REMIC taxable
income or loss for that quarter will be prorated between the transferor and the
transferee on a daily basis.
A REMIC generally determines its taxable income or loss in a manner
similar to that of an individual using a calendar year and the accrual method of
accounting. A REMIC's taxable income or loss generally will be characterized as
ordinary income or loss, and will consist of the REMIC's gross income, including
interest, original issue discount, and market discount income, if any, on the
REMIC's assets (including temporary cash flow investments), premium amortization
on the REMIC Regular Certificates, income from foreclosure property, and any
cancellation of indebtedness income due to the allocation of realized losses to
REMIC Regular Certificates, reduced by the REMIC's deductions, including
deductions for interest and original issue discount expense on the REMIC Regular
Certificates, premium amortization and servicing fees with respect to the
REMIC's assets, the administrative expenses of the REMIC and the REMIC Regular
Certificates, any tax imposed on the REMIC's income from foreclosure property,
and any bad debt deductions with respect to the Mortgage Loans. The REMIC may
not take into account any items allocable to a "prohibited transaction." See "--
REMIC-Level Taxes" below. The deduction of REMIC expenses by REMIC Residual
Certificateholders who are individuals is subject to certain limitations as
described below in "Risk Factors for Certain Types of Investors -- Individuals
and Pass-Through Entities."
The amount of the REMIC's net loss with respect to a calendar quarter
that may be deducted by a REMIC Residual Certificateholder is limited to such
Certificateholder's adjusted basis in the REMIC Residual Certificate as of the
end of that quarter (or time of disposition of the REMIC Residual Certificate,
if earlier), determined without taking into account the net loss for that
quarter. A REMIC Residual Certificateholder's basis in its REMIC Residual
Certificate initially is equal to the price paid for such Certificate. Such
basis is increased by the amount of taxable income of the REMIC reportable by
the REMIC Residual Certificateholder with respect to the REMIC Residual
Certificate and decreased (but not below zero) by the amount of distributions
made and the amount of net losses recognized with respect to that Certificate.
The amount of the REMIC's net loss allocable to a REMIC Residual
Certificateholder that is disallowed under the basis limitation may be carried
forward indefinitely, but may be used only to offset income with respect to the
related REMIC Residual Certificate. The ability of REMIC Residual
Certificateholders to deduct net losses with respect to a REMIC Residual
Certificate may be subject to additional limitations under the Code, as to which
Certificateholders should consult their tax advisors. A distribution with
respect to a REMIC Residual Certificate is treated as a non-taxable return of
capital up to the amount of the REMIC Residual Certificateholder's adjusted
basis in his REMIC Residual Certificate. If a distribution exceeds the adjusted
basis of the REMIC Residual Certificate, the excess is treated as gain from the
sale of such REMIC Residual Certificate.
Although the law is unclear in certain respects, a REMIC Residual
Certificateholder effectively should be able to recover some or all of the basis
in his REMIC Residual Certificate as the REMIC recovers the basis of its assets
through either the amortization of premium on such assets or the allocation of
basis to principal payments received on such assets. The REMIC's initial
aggregate basis in its assets will equal the sum of the issue prices of all
REMIC Residual Certificates and REMIC Regular Certificates. In general, the
issue price of a REMIC Regular Certificate of a particular Class is the initial
price at which a substantial amount of the Certificates of such Class is sold to
the public. In the case of a REMIC Regular Certificate of a Class not offered to
the public, the issue price is either the price paid by the first purchaser of
such Certificate or the fair market value of the property received in exchange
for such Certificate, as appropriate. The REMIC's aggregate basis will be
allocated among its assets in proportion to their respective fair market values.
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In the first years after the issuance of the REMIC Regular Certificates,
REMIC taxable income may include significant amounts of phantom income. Phantom
income arises from timing differences between income of the Mortgage Assets and
deductions on the REMIC Regular Certificates that result from the multiple-class
structure of the Certificates. Since phantom income will arise from timing
differences between income and deductions, it will be matched by a corresponding
loss or reduction in taxable income in later years, during which economic or
financial income will exceed REMIC taxable income. Any acceleration of taxable
income, however, could lower the yield to a REMIC Residual Certificateholder,
since the present value of the tax paid on that income will exceed the present
value of the corresponding tax reduction in the later years. The amount and
timing of any phantom income are dependent upon (i) the structure or the
particular Series REMIC and (ii) the rate of prepayment on the mortgage loans
comprising or underlying the REMIC's assets and, therefore, cannot be predicted
without reference to a particular Series REMIC.
The assets of certain Series REMICs may have bases that are less than
their principal amounts. In such a case, a REMIC Residual Certificateholder will
recover the basis in his REMIC Residual Certificate as the REMIC recovers the
portion of its basis in the assets that is attributable to the residual
interest. The REMIC's basis in the assets is recovered as it is allocated to
principal payments received by the REMIC.
A portion of a REMIC's taxable income may be subject to special
treatment. That portion (known as "excess inclusion income") generally is any
taxable income beyond that which the REMIC Residual Certificateholder would have
recognized had the REMIC Residual Certificate been a conventional debt
instrument bearing interest at 120 percent of the applicable long-term federal
rate (based on quarterly compounding) as of the date on which the REMIC Residual
Certificate was issued. Excess inclusion income generally is intended to
approximate phantom income and may result in unfavorable tax consequences for
certain investors. See "-- Limitations on Offset or Exemption of REMIC Income"
and "-- Risk Factors for Certain Types of Investors" below.
Limitations on Offset or Exemption of REMIC Income. Generally, a REMIC
Residual Certificateholder's taxable income for any taxable year may not be less
than such Certificateholder's excess inclusion income for that taxable year
unless (i) such Certificateholder is a Thrift Institution or a cooperative bank
described in Section 593 of the Code and (ii) the REMIC Residual Certificate has
significant value (as described in the following paragraph). Excess inclusion
income is equal to the excess of REMIC taxable income for the quarterly period
for such REMIC Residual Certificates over the product of (i) 120% of the
long-term applicable federal rate that would have applied to the REMIC Residual
Certificates if they were debt instruments for federal income tax purposes on
the related closing date and (ii) the adjusted issue price of such REMIC
Residual Certificates at the beginning of such quarterly period. For this
purpose, the adjusted issue price of a REMIC Residual Certificate at the
beginning of a quarter is the issue price of the REMIC Residual Certificate,
increased by the amount of the daily accruals of REMIC income for all prior
quarters, and decreased by any distributions made with respect to such REMIC
Residual Certificate prior to the beginning of such quarterly period. If the
REMIC Residual Certificateholder is an organization subject to the tax on UBTI
imposed by Section 511, the REMIC Residual Certificateholder's excess inclusion
income will be treated as UBTI. In addition, under Treasury regulations yet to
be issued, if a REIT or a RIC owns a REMIC Residual Certificate that generates
excess inclusion income, a pro rata portion of the dividends paid by the REIT or
the RIC generally will constitute excess inclusion income for their
shareholders. Finally, REMIC Residual Certificateholders who are foreign persons
will not be entitled to any exemption from the 30% withholding tax or a reduced
treaty rate with respect to their excess inclusion income from the REMIC. See
"-- Taxation of Certain Foreign Holders of REMIC Certificates -- REMIC Residual
Certificates" below.
Notwithstanding the limitations described above, a Thrift Institution or
a cooperative bank described in Section 593 of the Code that holds a REMIC
Residual Certificate with significant value may offset excess inclusion income
with deductions from other sources, including rent operating loss carryforwards.
Under the REMIC Regulations, a REMIC Residual Certificate will be considered to
have "significant value" if (i) the aggregate issue price of the REMIC Residual
Certificates is at least 2% of the aggregate issue price of all the Certificates
(both Regular and Residual) issued by the REMIC, and (ii) the anticipated
weighted average life of the REMIC Residual Certificates is at least 20% of the
anticipated weighted average life of the REMIC. The anticipated weighted average
life of a REMIC is the weighted average of the anticipated weighted average
lives of all the Certificates (both Regular and Residual) issued by the REMIC as
of the startup day. A Prospectus Supplement by which REMIC Residual Certificates
are offered will indicate whether the REMIC Residual Certificates are expected
to have significant value under the REMIC Regulations.
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Legislation has been proposed which would provide that, effective for
taxable years beginning after December 31, 1986, alternative minimum taxable
income of a REMIC Residual Certificateholder cannot be less than the
Certificateholder's excess inclusions. Legislation has also been proposed which
would, effective for taxable years beginning after December 31, 1995, eliminate
the exception to the excess inclusion rules for thrift institutions that hold
residual interests with significant value. No prediction can be made whether
such proposed legislation will be enacted.
Non-Recognition of Certain Transfers for Federal Income Tax Purposes. In
addition to the limitations specified above, the REMIC Regulations provide that
the transfer of a "noneconomic residual interest" to a United States person will
be disregarded for tax purposes unless no significant purpose of the transfer
was to impede the assessment or collection of tax. A REMIC Residual Certificate
will constitute a noneconomic residual interest unless, at the time the interest
is transferred, (i) the present value of the expected future distributions with
respect to the REMIC Residual Certificate equals or exceeds the product of the
present value of the anticipated excess inclusion income and the highest
corporate tax rate for the year in which the transfer occurs, and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the REMIC in amounts sufficient to satisfy the taxes on excess inclusion
income as they accrue. If a transfer of a residual interest is disregarded, the
transferor would continue to be treated as the owner of the REMIC Residual
Certificate and thus would continue to be subject to tax on its allocable
portion of the net income of the related REMIC. 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 (i.e., the transferor had "improper knowledge"). Under the REMIC
Regulations, a transferor is presumed not to have such improper knowledge if (i)
the transferor conducted, at the time of the transfer, a reasonable
investigation of the financial condition of the transferee and, as a result of
the investigation, the transferor found that the transferee had historically
paid in debts as they came due and found no significant evidence to indicate
that the transferee would not continue to pay its debts as they come due and
(ii) the transferee represents to the transferor that it understands that, as
the holder of a noneconomic residual interest, it may incur tax liabilities in
excess of any cash flows generated by the interest and that it intends to pay
the taxes associated with holding the residual interest as they become due. A
similar limitation exists with respect to transfers of certain residual
interests to foreign investors. See "-- Taxation of Certain Foreign Holders of
REMIC Certificates -- REMIC Residual Certificates" below.
Ownership of Residual Interests by Disqualified Organizations. The Code
contains three sanctions that are designed to prevent the direct or indirect
ownership of a REMIC residual interest (such as a REMIC Residual Certificate) by
the United States, any state or political subdivision thereof, any foreign
government, any international organization, any agency or instrumentality of any
of the foregoing, any tax-exempt organization (other than a farmers' cooperative
described in Section 521 of the Code) that is not subject to the tax on UBTI, or
any rural electrical or telephone cooperative (each, a "Disqualified
Organization"). A corporation is not treated as an instrumentality of the United
States or any state or political subdivision thereof if all of its activities
are subject to tax and, with the exception of FHLMC, a majority of its board of
directors is not selected by such governmental unit.
First, REMIC status of any REMIC created after March 31, 1988 is
dependent upon the presence of reasonable arrangements designed to prevent a
Disqualified Organization from acquiring record ownership of a residual
interest. Residual interests in Series REMICs (including REMIC Residual
Certificates) are not offered for sale to Disqualified Organizations.
Furthermore, (i) residual interests in Series REMICs will be registered as to
both principal and any stated interest with the Trustee (or its agent) and
transfer of a residual interest may be effected only (A) by surrender of the old
residual interest instrument and reissuance by the Trustee of a new residual
interest instrument to the new holder or (B) through a book entry system
maintained by the Trustee, (ii) the applicable Agreement will prohibit the
ownership of residual interests by Disqualified Organizations, and (iii) each
residual interest instrument will contain a legend providing notice of that
prohibition. Consequently, each Series REMIC should be considered to have made
reasonable arrangements designed to prevent the ownership of residual interests
by Disqualified Organizations.
Second, the Code imposes a one-time tax on the transferor of a residual
interest (including a REMIC Residual Certificate or an interest therein) to a
Disqualified Organization. The one-time tax equals the product of (i) the
present value of the total anticipated excess inclusions with respect to the
transferred residual interest for
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periods after the transfer and (ii) the highest marginal federal income tax rate
applicable to corporations. Under the REMIC Regulations, the anticipated excess
inclusions with respect to a transferred residual interest must be based on (i)
both actual prior prepayment experience and the prepayment assumptions used in
pricing the related REMIC's interests and (ii) any required or permitted clean
up calls, or required qualified liquidations provided for in the REMIC's
organizational documents. The present value of anticipated excess inclusions is
determined using a discount rate equal to the applicable federal rate that would
apply to a debt instrument that was issued on the date the Disqualified
Organization acquired the residual interest and whose term ends on the close of
the last quarter in which excess inclusions are expected to accrue with respect
to the residual interest. Where a transferee is acting as an agent for a
Disqualified Organization, the transferee is subject to the one-time tax. Upon
the request of such transferee or the transferor, the REMIC must furnish to the
requesting party and to the Service information sufficient to permit the
computation of the present value of the anticipated excess inclusions. For that
purpose, the term "agent" includes a broker, nominee, or other middleman. The
transferor of a residual interest (including a REMIC Residual Certificate or
interest therein) will not be liable for the one-time tax if the transferee
furnishes to the transferor an affidavit that states, under penalties of
perjury, that the transferee is not a Disqualified Organization, and, as of the
time of the transfer, the transferor does not have actual knowledge that such
affidavit is false. The one-time tax must be paid by the later of March 24,
1993, or April 15th of the year following the calendar year in which the
residual interest is transferred to a Disqualified Organization. The one-time
tax may be waived by the Secretary of the Treasury if, upon discovery that a
transfer is subject to the one-time tax, the Disqualified Organization promptly
disposes of the residual interest and the transferor pays any amounts that the
Secretary of the Treasury may require.
Third, the Code imposes an annual tax on any pass-through entity (i.e.,
RIC, REIT, common trust fund, partnership, trust, estate or cooperative
described in Code section 1381) that owns a direct or indirect interest in a
residual interest (including a REMIC Residual Certificate), if record ownership
of an interest in the pass-through entity is held by one or more Disqualified
Organizations. The tax imposed equals the highest corporate rate multiplied by
the share of any excess inclusion income of the pass-through entity for the
taxable year allocable to interests in the pass-through entity held by
Disqualified Organizations. The same tax applies to a nominee who acquires an
interest in a residual interest (including a REMIC Residual Certificate) on
behalf of a Disqualified Organization. For example, a broker that holds an
interest in a REMIC Residual Certificate in "street name" for a Disqualified
Organization is subject to the tax. The tax due must be paid by the later of
March 24, 1993, or the fifteenth day of the fourth month following the close of
the taxable year of the pass-through entity in which the Disqualified
Organization is a record holder. Any such tax imposed on a pass-through entity
would be deductible against that entity's ordinary income in determining the
amount of its required distributions. In addition, dividends paid by a RIC or a
REIT are not considered preferential dividends with the meaning of Section
562(c) of the Code solely because the RIC or REIT allocates such tax expense
only to the shares held by Disqualified Organizations. A pass-through entity
will not be liable for the annual tax if the record holder of the interest in
the pass-through entity furnishes to the pass-through entity an affidavit that
states, under penalties of perjury, that the record holder is not a Disqualified
Organization, and the pass-through entity does not have actual knowledge that
such affidavit is false.
The Code and the REMIC Regulations also require that reasonable
arrangements be made with respect to each REMIC to enable the REMIC to provide
the Treasury and the transferor with information necessary for the application
of the one-time tax described above. Consequently, the applicable Agreement will
provide for an affiliate to perform such information services as may be required
for the application of the one-time tax. If a REMIC Residual Certificateholder
transfers an interest in a REMIC Residual Certificate in violation of the
relevant transfer restrictions and triggers the information requirement, the
affiliate may charge such REMIC Residual Certificateholder a reasonable fee for
providing the information.
Risk Factors for Certain Types of Investors
Dealers in Certificates. REMIC Residual Certificateholders that are
dealers in securities should be aware that on January 3, 1995 the Service
released proposed Treasury regulations (the "Proposed Mark-to-Market
Regulations") that supplement and revise temporary and proposed regulations
released by the Service on December 28, 1993 (the "Temporary Mark-to-Market
Regulations"), which relate to the requirement under Section 475 of the Code
that dealers in securities use mark-to-market accounting for federal income tax
purposes. Under the Temporary Regulations, dealers in securities are not
permitted to mark to market any negative value REMIC
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residual interests ("NVRIs"), or any interests or arrangements that are
determined by the Internal Revenue Service to have substantially the same
economic effect as NVRIs. In general a residual interest is a NVRI if on the
date it is acquired, the present value of the anticipated tax liabilities
associated with holding the interest exceeds the sum of (i) the represent value
of the expected future distributions on the interest and (ii) the present value
of the anticipated tax savings associated with holding the interest as the
related REMIC generates losses. Under the Proposed Mark-to-Market Regulations,
dealers in securities would not be permitted to mark to market any REMIC
residual interests acquired on or after January 4, 1995. Prospective purchasers
of REMIC Residual Certificates should consult with their tax advisors regarding
the possible application of the Proposed Mark-to-Market Regulations.
Tax-exempt Entities. Any excess inclusion income with respect to a REMIC
Residual Certificate held by a tax-exempt entity, including a qualified
profit-sharing, pension, or other employee benefit plan, will be treated as
UBTI. Although the legislative history and statutory provisions imply otherwise,
the Treasury conceivably could take the position that, under pre-existing Code
provision, substantially all income on a REMIC Residual Certificate (including
non-excess inclusion income) is to be treated as UBTI. See "-- Taxation of REMIC
Residual Certificateholders" above.
Individuals and Pass-Through Entities. A REMIC Residual
Certificateholder who is an individual, trust, or estate will be able to deduct
its allocable share of the fees or expenses relating to servicing the assets
assigned to a Trust or administering the Series REMIC under Section 212 of the
Code only to the extent that the amount of such fees and expenses, when combined
with the REMIC Residual Certificateholder's other miscellaneous itemized
deductions for the taxable year, exceeds two percent of that holder's adjusted
gross income. That same limitation will apply to individuals, trusts, or estates
that hold REMIC Residual Certificates indirectly through a grantor trust, a
partnership, an S corporation, a common trust fund, a REMIC, or a nonpublicly
offered RIC. A nonpublicly offered RIC is a RIC other than one whose shares are
(i) continuously offered pursuant to a public offering, (ii) regularly traded on
an established securities market, or (iii) held by no fewer than 500 persons at
all times during the taxable year. In addition, that limitation will apply to
individuals, trusts, or estates that hold REMIC Residual Certificates through
any other person (i) that is not generally subject to federal income tax and
(ii) the character of whose income may affect the character of the income
generated by that person for its owners or beneficiaries. Further, Section 68
provides that the amount of itemized deductions otherwise allowable for the
taxable year for an individual whose adjusted gross income exceeds the
applicable amount ($100,000, or $50,000 in the case of a separate return by a
married individual within the meaning of Section 7703 for taxable year 1991 and
adjusted for inflation each year thereafter) will be reduced by the lesser of
(i) 3% of the excess of adjusted gross income over the applicable amount, or
(ii) 80% of the amount of itemized deductions otherwise allowable for such
taxable year. In some cases, the amount of additional income that would be
recognized as a result of the foregoing limitations by a REMIC Residual
Certificateholder who is an individual, trust, or estate could be substantial.
Non-corporate holders of REMIC Residual Certificates also should be aware that
miscellaneous itemized deductions, including allocable investment expenses
attributable to the related REMIC, are not deductible for purposes of the
alternative minimum tax. Finally, persons holding an interest in a REMIC
Residual Certificate indirectly through an interest in a RIC, common trust fund
or one of certain corporations doing business as a cooperative generally will
recognize a share of any excess inclusion allocable to that REMIC Residual
Certificate.
REITs and RICs. If the REMIC Residual Certificateholder is a REIT and
the REMIC generate excess inclusion income, a portion of REIT dividends will be
treated as excess inclusion income for the REIT's shareholders, in a manner to
be provided by regulations. Thus, shareholders in a REIT that invests in REMIC
Residual Certificates could face unfavorable treatment of a portion of their
REIT divided income for purposes of (i) using current deduction or NOL
carryovers or carrybacks, (ii) UBTI in the case of tax-exempt shareholders, and
(iii) withholding tax in the case of foreign shareholders (see "-- Taxation of
Certain Foreign Holders of REMIC Certificates -- REMIC Residual Certificates"
below). Moreover, because REMIC Residual Certificateholders may recognize
phantom income (see "-- Taxation of REMIC Residual Certificateholders" above), a
REIT contemplating an investment in REMIC Residual Certificates should consider
carefully the effect of any phantom income upon its ability to meet its income
distribution requirements under the Code. The same rules regarding excess
inclusion will apply to a REMIC Residual Certificateholder that is a RIC, common
trust fund, or one of certain corporations doing business as a cooperative.
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A REMIC Residual Certificate held by a REIT will be treated as a real
estate asset for purposes of the REIT qualification requirements in the same
proportion that the REMIC's assets would be treated as real estate assets if
held directly by the REIT, and interest income derived from such REMIC Residual
Certificate will be treated as Qualifying REIT Interest to the same extent. If
95% or more of a REMIC's assets qualify as real estate assets for REIT purposes,
100% of that REMIC's regular and residual interests (including REMIC Residual
Certificates) will be treated as real estate assets for REIT purposes, and all
of the income derived from such interests will be treated as Qualifying REIT
Interest. The REMIC regulations provide that payments of principal and interest
on Mortgage Loans that are reinvested pending distribution to the holders of the
REMIC Certificates constitute real estate assets for REIT purposes.
Notwithstanding that 95% or more of the assets of a given Series REMIC
constitute real estate assets for REIT purposes, 100% of the interest income
derived by a REIT from a residual interest in such REMIC may not be treated as
Qualifying REIT Interest if the REMIC holds Mortgage Loans that provide for
interest that is contingent on mortgagor profits or property appreciation. Two
REMICs that are part of a tiered structure will be treated as one REMIC for
purposes of determining the percentage of assets of each REMIC that constitutes
real estate assets. It is expected that at least 95% of each Series REMIC's
assets will be real estate assets throughout the REMIC's life. The amount
treated as a real estate asset in the case of a REMIC Residual Certificate
apparently is limited to the REIT's adjusted basis in the Certificate.
Significant uncertainty exists with respect to the treatment of a REMIC
Residual Certificate for purposes of the various asset composition requirements
applicable to RICs. A REMIC Residual Certificate should be treated as a
"security," but probably will not be considered a "Government security" for
purposes of Section 851(b)(4) of the Code. Moreover, it is unclear whether a
REMIC Residual Certificate will be treated as a "voting security" under that
Code section. Finally, because the REMIC will be treated as the "issuer" of the
REMIC Residual Certificate for purposes of that section, a RIC would be unable
to invest more than 25% of the value of its total assets in REMIC Residual
Certificates.
Thrift Institutions, banks, and certain other financial institutions.
REMIC Residual Certificates will be treated as qualifying real property loans
and loans secured by interests in real property (collectively, "qualifying
assets") for Thrift institutions in the same proportion that the assets of the
REMIC would be so treated. However, if 95% or more of the assets of a given
Series REMIC are qualifying assets for Thrift Institutions, 100% of that REMIC's
regular and residual interests (including REMIC Residual Certificates) would be
treated as qualifying assets. In addition, the REMIC Regulations provide that
payments of principal and interest on Mortgage Loans that are reinvested pending
their distribution to the holders of the REMIC Certificates will be treated as
qualifying real property loans for Thrift Institutions. Moreover, two REMICs
that are part of a tiered structure will be treated as one REMIC for purposes of
determining the percentage of assets of each REMIC that constitutes qualifying
assets for Thrift purposes. It is expected that at least 95% of the assets of
any Series REMIC will be qualifying assets for Thrift Institutions throughout
the REMIC's life. The amount of a REMIC Residual Certificate treated as a
qualifying asset for Thrift Institutions, however, cannot exceed the holder's
adjusted basis in that REMIC Residual Certificate.
Generally, gain or loss arising from the sale or exchange of REMIC
Residual Certificates held by certain financial institutions will give rise to
ordinary income or loss, regardless of the length of the holding period for the
REMIC Residual Certificates. Those financial institutions include banks, mutual
savings banks, cooperative banks, domestic building and loan institutions,
savings and loan institutions, and similar institutions. See "-- Disposition of
REMIC Residual Certificates" below.
Disposition of REMIC Residual Certificates
Upon the sale or exchange of a REMIC Residual Certificate, a REMIC
Residual Certificateholder will recognize gain or loss equal to the difference
between the amount realized and its adjusted basis in the REMIC Residual
Certificate. It is possible that a disqualification of the REMIC (other than an
inadvertent disqualification for which relief may be provided in Treasury
regulations) may be treated as a sale or exchange of a REMIC Residual
Certificate. If the holder has held the REMIC Residual Certificate for more than
12 months, gain or loss on its disposition generally will be characterized as
long-term capital gain or loss. In the case of banks, thrifts, and certain other
financial institutions described in Section 582 of the Code, however, gain or
loss on the disposition of a REMIC Residual Certificate will be treated as
ordinary gain or loss, regardless of the length of the holding period.
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A special version of the wash sale rules of the Code applies to
dispositions of REMIC Residual Certificates. Under that rule, losses on
dispositions of REMIC Residual Certificates generally will be disallowed where,
within six months before or after the disposition, the seller of such
Certificates acquires any residual interest in a REMIC or any interest in a
Taxable Mortgage Pool that is economically comparable to a REMIC Residual
Certificate. Treasury Regulations providing for appropriate exceptions to the
application of the wash sale rules have been authorized, but have not yet been
promulgated.
Liquidation of the REMIC
A REMIC may liquidate without the imposition of entity-level tax only in
a qualified liquidation. A liquidation is considered a "qualified liquidation"
if the REMIC (i) adopts a plan of complete liquidation, (ii) sells all of its
non-cash assets within 90 days of the date on which it adopts the plan, and
(iii) credits or distributes in liquidation all of the sale proceeds plus its
cash (other than amounts retained to meet claims against it) to its
Certificateholders within the 90-day period. An early termination of the REMIC
caused by the redemption by the Seller of all outstanding classes of the REMIC
Certificates of a particular Series, and the distribution to REMIC Residual
Certificateholders of the excess, if any, of the fair market value of the
REMIC's assets at the time of such redemption over the unpaid principal balance
of such REMIC Certificates, will constitute a complete liquidation as described
in the preceding sentence. Under the REMIC Regulations, a plan of liquidation
need not be in any special form. Furthermore, if a REMIC specifies the first day
in the 90-day liquidation period in a statement attached to its final tax
return, the REMIC will be considered to have adopted a plan of liquidation on
that date.
REMIC-Level Taxes
Income from certain transactions by the REMIC, called prohibited
transactions, will not be part of the calculation of the REMIC's income or loss
that is includable in the federal income tax returns of REMIC Residual
Certificateholders, but rather will be taxed directly to the REMIC at a 100%
rate. In addition, net income from one prohibited transaction may not be offset
by losses from other prohibited transactions. Prohibited transactions generally
include: (i) the disposition of qualified mortgages other than pursuant to (a)
the repurchase of a defective mortgage, (b) the substitution for a defective
mortgage within two years of the closing date, (c) a substitution for any
qualified mortgage within three months of the closing date, (d) the foreclosure,
default, or imminent default of a qualified mortgage, (e) the bankruptcy or
insolvency of the REMIC, (f) the sale of a convertible mortgage loan upon its
conversion for an amount equal to the mortgage loan's current principal balance
plus accrued but unpaid interest (and provided that certain other requirements
are met) or (g) a qualified liquidation of the REMIC; (ii) the receipt of income
from assets that are not the type of mortgages or investments that the REMIC is
permitted to hold; (iii) the receipt of compensation for services by the REMIC;
and (iv) the receipt of gain from disposition of cash-flow investments other
than pursuant to a qualified liquidation of the REMIC. A disposition of a
qualified mortgage or cash flow investment will not give rise to a prohibited
transaction, however, if the disposition was (i) required to prevent default on
a regular interest resulting from a default on one or more of the REMIC's
qualified mortgages or (ii) made to facilitate a clean-up call. The REMIC
Regulations define a clean-up call as the redemption of a class of regular
interests when, by reason of prior payments with respect to those interests, the
administration costs associated with servicing the class outweigh the benefits
of maintaining the class. Under those regulations, the redemption of a class for
regular interests with an outstanding principal balance of no more than 10% of
the original principal balance qualifies as a clean-up call. The REMIC
Regulations also provide that the modification of a mortgage loan generally will
not be treated as a disposition of that loan if it is occasioned by a default or
a reasonably foreseeable default, an assumption of the mortgage loan, the waiver
of a due-on-sale or encumbrance clause, or the conversion of an interest rate by
a mortgagor pursuant to the terms of a convertible adjustable rate mortgage
loan.
In addition, a REMIC generally will be taxed at a 100% rate on any
contribution to the REMIC after the closing date unless such contribution is a
cash contribution that (i) takes place within the three-month period beginning
on the closing date, (ii) is made to facilitate a clean-up call (as defined in
the preceding paragraph) or a qualified liquidation (as defined in "--
Liquidation of the REMIC" above), (iii) is a payment in the nature of a
guarantee, (iv) constitutes a contribution by the REMIC Residual
Certificateholders in the REMIC to a qualified reserve fund, or (v) is otherwise
permitted by Treasury regulations yet to be issued. The structure and operation
of Series REMICs will be designed to avoid the imposition of the 100% tax on
contributions.
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To the extent that a REMIC derives certain types of income from
foreclosure property (generally, income relating to dealer activities of the
REMIC), it will be taxed on such income at the highest corporate income tax
rate. Although the relevant law is unclear, it is not anticipated that any
Series REMIC will receive significant amounts of such income.
The organizational documents governing the REMIC Regular and REMIC
Residual Certificates will be designed to prevent the imposition of the
foregoing taxes on the related Series REMIC in any material amounts. If any of
the foregoing taxes is imposed on a Series REMIC, the Trustee will seek to place
the burden thereof on the person whose action or inaction gave rise to such
taxes. To the extent that the Trustee is unsuccessful in doing so, the burden of
such taxes will be borne by any outstanding subordinated Class of Certificates
before it is borne by a more senior Class of Certificates.
Taxation of Certain Foreign Holders of REMIC Certificates
REMIC Regular Certificates. Interest, including original issue discount,
paid on a REMIC Regular Certificate to a nonresident alien individual, foreign
corporation, or other non-United States person ("Foreign Person") generally will
be treated as "portfolio interest" and, therefore, will not be subject to any
United States withholding tax, provided that (i) such interest is not
effectively connected with a trade or business in the United States of the
Certificateholder, and (ii) the Trustee (or other person who would otherwise be
required to withhold tax) is provided with appropriate certification that the
beneficial owner of the Certificate is a Foreign Person ("Foreign Person
Certification"). If Foreign Person Certification is not provided, interest
(including original issue discount) paid on such a Certificate may be subject to
either a 30 percent withholding tax or 31 percent backup withholding. See "--
Backup Withholding" below.
REMIC Residual Certificates. Amounts paid to REMIC Residual
Certificateholders who are Foreign Persons are treated as interest for purposes
of the 30 percent (or lower treaty rate) United States withholding tax. Under
temporary Treasury Regulations, non-excess inclusion income received by REMIC
Residual Certificateholders who are Foreign Persons generally qualifies as
"portfolio interest" exempt from the 30 percent withholding tax (as described in
the preceding paragraph) only to the extent that (i) the assets of the Trust
REMIC are Mortgage Certificates that are issued in registered form and (ii) the
Mortgage Loans underlying the Mortgage Certificates were originated after July
18, 1984. Because Mortgage Loans are not issued in registered form, amounts
received by REMIC Residual Certificateholders who are Foreign Persons will not
be exempt from the 30 percent withholding tax to the extent such amounts relate
to Mortgage Loans held directly (rather than indirectly through Mortgage
Certificates) by the Series REMIC. If the portfolio interest exemption is
unavailable, such amounts generally will be subject to United States withholding
tax when paid or otherwise distributed (or when the REMIC Residual Certificate
is disposed of) under rules similar to those for withholding on debt instruments
that have original issue discount. However, the Code grants the Treasury
authority to issue regulations requiring that those amounts be taken into
account earlier than otherwise provided where necessary to prevent avoidance of
tax (i.e., where the REMIC Residual Certificates, as a Class, do not have
significant value). Further a REMIC Residual Certificateholder will not be
entitled to any exemption from the 30 percent withholding tax or a reduced
treaty rate on excess inclusion income.
Under the REMIC Regulations, the transfer of a REMIC Residual
Certificate that has tax avoidance potential to a Foreign Person will be
disregarded for all federal income tax purposes. A REMIC Residual Certificate is
deemed to have "tax avoidance potential" under those regulations unless, at the
time of the transfer, the transferor reasonably expects that, for each accrual
of excess inclusion, the REMIC will distribute to the transferee an amount that
will equal at least 30% of the excess inclusion, and that each such amount will
be distributed no later than the close of the calendar year following the
calendar year of accrual (the "30% Test"). A transferor of a REMIC Residual
Certificate to a Foreign Person will be presumed to have had a reasonable
expectation that the REMIC Residual Certificate satisfies the 30% Test if that
test would be satisfied for all Mortgage Loan prepayment rates between 50% and
200% of the Pricing Prepayment Assumption. See "-- Tax Treatment of REMIC
Regular Certificates -- Original Issue Discount," above. The REMIC Regulations
concerning transfers of residual interests to Foreign Persons generally are
effective for transfers that occur after April 20, 1992. If a Foreign Person
transfers a REMIC Residual Certificate to a United States person and the
transfer, if respected, would permit avoidance of withholding tax on accrued
excess inclusion income, that transfer also will be disregarded for federal
income tax purposes and distributions with respect to the REMIC Residual
Certificate will continue to
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be subject to 30% withholding as though the Foreign Person still owned the REMIC
Residual Certificate. Investors who are Foreign Persons should consult their own
tax advisors regarding the specific tax consequences to them of owning and
disposing of a REMIC Residual Certificate.
Backup Withholding. Under federal income tax law, a Certificateholder
may be subject to "backup withholding" under certain circumstances. Backup
withholding applies to a Certificateholder who is a United States person if the
Certificateholder, among other things, (i) fails to furnish his social security
number or other taxpayer identification number ("TIN") to the Trustee, (ii)
furnishes the Trustee an incorrect TIN, (iii) fails to report properly interest
and dividends, or (iv) under certain circumstances, fails to provide the Trustee
or the Certificateholder's securities broker with a certified statement, signed
under penalties of perjury, that the TIN provided to the Trustee is correct and
that the Certificateholder is not subject to backup withholding. Backup
withholding applies, under certain circumstances, to a Certificateholder who is
a foreign person if the Certificateholder fails to provide the Trustee or the
Certificateholder's securities broker with a Foreign Person certification (as
described in "Taxation of Certain Foreign Holders of REMIC Certificates -- REMIC
Regular Certificates" above). Backup withholding applies to "reportable
payments," which include interest payments and principal payments to the extent
of accrued original issue discount, as well as distributions of proceeds from
the sale of REMIC Regular Certificates or REMIC Residual Certificates. The
backup withholding rate for reportable payments made on or after January 1, 1993
is 31%. Backup withholding, however, does not apply to payments on a Certificate
made to certain exempt recipients, such as tax-exempt organizations, and to
certain Foreign Persons. Certificateholders should consult their tax advisors
for additional information concerning the potential application of backup
withholding to payments received by them with respect to a Certificate.
Reporting and Tax Administration
REMIC Regular Certificates. Reports will be made at least annually to
holders of record of REMIC Regular Certificates (other than those with respect
to whom reporting is not required) and to the Internal Revenue Service as may be
required by statute, regulation, or administrative ruling with respect to (i)
interest paid or accrued on the Certificates, (ii) original issue discount, if
any, accrued on the Certificates, and (iii) information necessary to compute the
accrual of any market discount or the amortization of any premium on the
Certificates.
REMIC Residual Certificates. For purposes of federal income tax
reporting and administration, a Series REMIC generally will be treated as a
partnership, and the related REMIC Residual Certificateholders as its partners.
A Series REMIC will file an annual return on Form 1066 and will be responsible
for providing information to REMIC Residual Certificateholders sufficient to
enable them to report properly their shares of the REMIC's taxable income or
loss, although it is anticipated that such information actually will be supplied
by the Trustee or the Master Servicer. The REMIC Regulations require reports to
be made by a REMIC to its REMIC Residual Certificateholders each calendar
quarter in order to permit such Certificateholders to compute their taxable
income accurately. A person that holds a REMIC Residual Certificate as a nominee
for another person is required to furnish those quarterly reports to the person
for whom it is a nominee within 30 days of receiving such reports. A REMIC is
required to file all such quarterly reports for a taxable year with the Service
as an attachment to the REMIC's income tax return for that year. As required by
the Code, a Series REMIC's taxable year will be the calendar year.
REMIC Residual Certificateholders should be aware that their
responsibilities as holders of the residual interest in a REMIC, including the
duty to account for their shares of the REMIC's income or loss on their returns,
continue for the life of the REMIC, even after the principal and interest on
their REMIC Residual Certificates have been paid in full.
The Treasury has issued temporary and final regulations concerning
certain aspects of REMIC tax administration. Under those regulations, a REMIC
Residual Certificateholder must be designated as the REMIC's tax matters person
("TMP"). The TMP generally has responsibility for overseeing and providing
notice to the other REMIC Residual Certificateholders of certain administrative
and judicial proceedings regarding the REMIC's tax affairs, although other
holders of the REMIC Residual Certificates of the same Series would be able to
participate in such proceedings in appropriate circumstances. If so specified in
the related Prospectus Supplement, the Seller or an affiliate thereof either
will acquire a portion of the residual interest in each Series REMIC in order to
permit it to be designated as TMP for the REMIC or will obtain from the REMIC
Residual Certificateholders an
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irrevocable appointment to perform the functions of the REMIC's TMP and will
prepare and file the REMIC's federal and state income tax and information
returns.
Treasury regulations provide that a REMIC Residual Certificateholder is
not required to treat items on its return consistently with their treatment on
the REMIC's return if the Certificateholder owns 100% of the REMIC Residual
Certificates for the entire calendar year. Otherwise, each REMIC Residual
Certificateholder is required to treat items on its return consistently with
their treatment on the REMIC's return, unless the Certificateholder either files
a statement identifying the inconsistency or establishes that the inconsistency
resulted from incorrect information received from the REMIC. The Service may
assess a deficiency resulting from a failure to comply with the consistency
requirement without instituting an administrative proceeding at the REMIC level.
A Series REMIC typically will not register as a tax shelter pursuant to Section
6111 of the Code because it generally will not have a net loss for any of the
first five taxable years of its existence. Any person that holds a REMIC
Residual Certificate as nominee for another person may be required to furnish
the REMIC, in a manner to be provided in treasury regulations, with the name and
address of such person and other specified information.
Non-REMIC Certificates
Treatment of the Trust for Federal Income Tax Purposes
In the case of Series with respect to which a REMIC election is not
made, the Trust will be classified as a grantor trust under Subpart E, Part I of
subchapter J of the Code and not as an association taxable as a corporation.
Thus, the owner of a Non-REMIC Certificate will be treated as the beneficial
owner of an appropriate portion of the principal and interest payments
(according to the characteristics of the Certificate in question) to be received
on the Mortgage Assets assigned to a Trust for federal income tax purposes.
Taxable Mortgage Pools
Corporate income tax can be imposed on the net income of certain
entities issuing Non-REMIC debt obligations secured by real estate mortgages
("Taxable Mortgage Pools"). Under those provisions, any entity other than a
REMIC or a REIT will be considered to be a Taxable Mortgage Pool if (i)
substantially all of the assets of the entity consist of debt obligations and
more than 50% of such obligations consist of real estate mortgages, (ii) such
entity is the obligor under debt obligations with two or more maturities, and
(iii) under the terms of the debt obligations on which the entity is the
obligor, payments on such obligations bear a relationship to payment on the
obligations held by the entity. Furthermore, a group of assets held by an entity
can be treated as a separate Taxable Mortgage Pool if the assets are expected to
produce significant cash flow that will support one or more of the entity's
issues of debt obligations. The Seller generally will structure offerings of
Non-REMIC Certificates to avoid the application of the Taxable Mortgage Pool
rules.
Treatment of the Non-REMIC Certificates for Federal Income Tax Purposes
Generally
The types of Non-REMIC Certificates offered in a Series may include: (i)
securities evidencing ownership interests only in the interest payments on the
Mortgage Assets assigned to a Trust, net of certain fees, ("IO Certificates");
(ii) securities evidencing ownership interests in the principal, but not the
interest, payments on the Mortgage Assets ("PO Certificates"); (iii) securities
evidencing ownership interests in differing percentages of both the interest
payments and the principal payments on the Mortgage Assets ("Ratio
Certificates"); and (iv) securities evidencing ownership in equal percentages of
the principal and interest payments on the Mortgage Assets ("PassThrough
Certificates"). The federal income tax treatment of Non-REMIC Certificates other
than Pass-Through Certificates ("Strip Certificates") will be determined in part
by Section 1286 of the Code. Little administrative guidance has been issued
under that section and, thus, many aspects of its operation are unclear,
particularly the interaction between that section and the rules pertaining to
discount and premium. Hence, significant uncertainty exists with respect to the
federal income tax treatment of the Strip Certificates, and potential investors
should consult their own tax advisors concerning such treatment.
Several Code Sections provide beneficial treatment to certain taxpayers
that invest in certain types of mortgage assets. For purposes of those Code
Sections, Pass-Through Certificates will be characterized with reference to the
Mortgage Assets in the Trust, but it is not clear whether the Strip Certificates
will be so
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characterized. The Service could take the position that the character of the
Mortgage Assets is not attributable to the Strip Certificates for purposes of
those Sections. However, because the Strip Certificates represent sold ownership
rights in the principal and interest payments on the Mortgage Assets, the Strip
Certificates, like the PassThrough Certificates, should be characterized with
reference to the Mortgage Assets in the Trust. Accordingly, all Non-REMIC
Certificates should be treated as qualifying assets for Thrift Institutions, and
as real estate assets for REITs in the same proportion that the Mortgage Assets
in the Trust would be so treated. Similarly, the interest income attributable to
Non-REMIC Certificates should be considered Qualifying REIT Interest for REIT
purposes to the extent that the Mortgage Assets in the Trust qualify as real
estate assets for REIT purposes.
One or more Classes of Certificates may be subordinated to one or more
other Classes of Certificates of the same Series. In general, such subordination
should not affect the federal income tax treatment of either the subordinated or
senior Certificates. However, to the extent indicated in the relevant Prospectus
Supplement, holders of the subordinated Certificates will be allocated losses
that otherwise would have been borne by the holders of the more senior
Certificates. Holders of the subordinated Certificates should be able to
recognize any such losses no later than the taxable year in which they become
Realized Losses. Employee benefit plans subject to the ERISA, should consult
their own tax advisors before purchasing any subordinated Certificate. See
"ERISA Considerations" herein and in the Prospectus Supplement.
Treatment of Pass-Through Certificates
The holder of a Pass-Through Certificate generally will be treated as
owning a pro rata undivided interest in each of the Mortgage Loans, Mortgage
Certificates or other assets of the Trust. Accordingly, each Pass-Through
Certificateholder will be required to include in income its pro rata share of
the entire income from the Trust assets, including interest and discount income,
if any. Such Certificateholder generally will be able to deduct from its income
its pro rata share of the administrative fees and expenses incurred with respect
to the Trust assets (provided that such fees and expenses represent reasonable
compensation for the services rendered). An individual, trust, or estate that
holds a Pass-Through Certificate directly or through a pass-through entity will
be entitled to deduct such fees and expenses under Section 212 of the Code only
to the extent that the amount of the fees and expenses, when combined with its
other miscellaneous itemized deductions for the taxable year in question,
exceeds two percent of its adjusted gross income. In addition, Section 68
provides that the amount of itemized deductions otherwise allowable for the
taxable year for an individual whose adjusted gross income exceeds the
applicable amount ($100,000, or $50,000 in the case of a separate return by a
married individual within the meaning of Section 7703 for taxable year 1991,
adjusted each year thereafter for inflation) will be reduced by the lesser of
(i) 3% of the excess of adjusted gross income over the applicable amount, or
(ii) 80% of the amount of itemized deductions otherwise allowable for such
taxable year. Each Pass-Through Certificateholder generally will determine its
net income or loss with respect to the Trust in accordance with its own method
of accounting, although income arising from original issue discount must be
taken into account under the accrual method even though the Certificateholder
otherwise would use the cash receipts and disbursements method.
The Code provisions concerning original issue discount, market discount,
and amortizable premium will apply to the Trust assets. The rules regarding
discount and premium that are applicable to Non-REMIC Certificates generally are
the same as those that apply to REMIC Certificates. See "-- REMIC Certificates
- -- "Tax Treatment of REMIC Regular Certificates -- Original Issue Discount," "--
Market Discount," and "-- Amortizable Premium".
For instruments to which it applies, Section 1272(a)(6) of the Code
requires the use of an income tax accounting methodology that utilizes (i) a
single constant yield to maturity and (ii) the Pricing Prepayment Assumptions.
Unlike in the case of REMIC Regular Certificates, Section 1272(a)(6) technically
does not apply to Non-REMIC Certificates. Although the Treasury has authority to
apply that section to securities such as the NonREMIC Certificates, it has not
yet done so. Nonetheless, unless and until the release of administrative
guidance to the contrary, the Tax Administrator intends to account for the
Non-REMIC Certificates as though Section 1272(a)(6) applied to them. Thus, the
Tax Administrator will account for a class of Non-REMIC Certificates in the same
manner as it would account for a class of REMIC Regular Certificates with the
same terms. There can be no assurance, however, that the Service ultimately will
sanction the Tax Administration's position.
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The original issue discount rules generally apply to residential
mortgage loans originated after March 2, 1984, and the market discount rules
apply to any such loans originated after July 18, 1984. The rules allowing for
the amortization of premium are available with respect to mortgage loans
originated after September 27, 1985. It is anticipated that most or all of the
Mortgage Assets securing any Series will be subject to the original issue
discount, market discount, and amortizable premium rules. Although most mortgage
loans nominally are issued at their original principal amounts, original issue
discount could arise from the payment of points or certain other origination
charges by the borrower if the discount attributable to such payments exceeds
the de minimis amount. If the Trust contains Mortgage Assets purchased for
prices below their outstanding principal amounts, Pass-Through
Certificateholders will be required to take into account original issue discount
not previously accrued to the prior holder of such Mortgage Assets. Moreover, if
such Mortgage Assets were purchased for less than their adjusted issue prices,
Pass-Through Certificateholders generally will be required to take into account
market discount, unless the amount of such market discount is de minimis under
the market discount rules. Finally, Pass-Through Certificateholders generally
may elect to amortize any premium paid for Mortgage Assets over the aggregate
adjusted issue price of such Mortgage Assets. For a more complete elaboration of
the rules pertaining to original issue discount, market discount, and
acquisition premium, see the discussion under "Tax Treatment of REMIC Regular
Certificates."
Treatment of Strip Certificates
Many aspects of the federal income tax treatment of the Strip
Certificates are uncertain. The discussion below describes the treatment that
Special Tax Counsel believes is appropriate, but there can be no assurance that
the Service will not take a contrary position. Potential investors, therefore,
should consult their own tax advisors with respect to the federal income tax
treatment of the Strip Certificates.
Under Section 1286 of the Code, 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 on such obligation
results in the creation of "stripped coupons" with respect to the separated
rights to interest payments and "stripped bonds" with respect to the principal
and any undetached interest payments associated with that principal. The
issuances of IO or PO Certificates effects a separation of the ownership of the
interest and principal payments on some or all of the Mortgage Assets in the
Trust. In addition, the issuance of Ratio Certificates effectively separates and
reallocates the proportionate ownership of the interest and principal payments
on the Mortgage Assets. Therefore, Strip Certificates will be subject to Section
1286.
For federal income tax account purposes, Section 1286 of the Code treats
a stripped bond or a stripped coupon as a new debt instrument issued (i) on the
date that the stripped interest is purchased and (ii) at a price equal to its
purchase price or, if more than one stripped interest is purchased, the share of
the purchase price allocable to such stripped interest. Each stripped bond or
coupon generally will have original issue discount equal to the excess of its
stated redemption price at maturity (or, in the case of a stripped coupon, the
amount payable on the due date of such coupon) over its issue price. Treasury
regulations under Section 1286 (the "Stripping Regulations"), however, provide
that the original issue discount on a stripped bond or stripped coupon is zero
if the amount of the original issue discount would be de minimis under rules
generally applicable to debt instruments. For purposes of that determination,
(i) the number of complete years to maturity is measured from the date the
stripped bond or stripped coupon is purchased, (ii) an aggregation approach
similar to the Aggregation Rule (as described in "-- REMIC Certificates -- Tax
Treatment of REMIC Regular Certificates -- Original Issue Discount" above) may
be applied, and (iii) unstripped coupons may be treated as stated interest with
respect to the related bonds and, therefore, may be excluded from stated
redemption price at maturity in appropriate circumstances. In addition, the
Stripping Regulations provide that, in certain circumstances, the excess of a
stripped bond's stated redemption price at maturity over its issue price is
treated as market discount, rather than as original issue discount.
See "-- Determination of Income With Respect to Strip Certificates" below.
The application of Section 1286 of the Code to the Strip Certificates is
not entirely clear under current law. It could be interpreted as causing: (i) in
the case of an IO Certificate, each interest payment due on the Mortgage Assets
to be treated as a separate debt instrument; (ii) in the case of a Ratio
Certificate entitled to a disproportionately high share of principal, each
excess principal amount (i.e., the portion of each principal payment on such
assets that exceeds the amount to which the Ration Certificateholder would have
been entitled if he had held an undivided interest in the Mortgage Assets) to be
treated as a separate debt instrument; and (iii) in the case of a
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Ratio Certificate entitled to a disproportionately high share of interest, each
excess interest amount to be treated as a separate debt instrument. In addition,
Section 1286 would require the purchase price of a Strip Certificate to be
allocated among each of the rights to payment on the Mortgage Assets to which
the Certificateholder is entitled that are treated as separate debt instruments.
Despite the foregoing, it may be appropriate to treat stripped coupons and
stripped bonds issued to the same holder as a single debt instrument under an
aggregation approach, depending on the facts and circumstances surrounding the
issuance. Facts and circumstances considered relevant for this purpose should
include the likelihood of the debt instruments trading as a unit and the
difficulty of allocating the purchase price of the unit among the individual
payments. Strip Certificates are designed to trade as whole investment units
and, to the extent that the Underwriter develops a secondary market for the
Strip Certificates, it anticipates that the Strip Certificates would trade in
such market as whole units. In addition, because no market exists for individual
payments on Mortgage Assets, the proper allocation of the Certificate's purchase
price to each separate payment on the Mortgage Assets in the Trust would be
difficult and burdensome to determine. Based on those facts and circumstances,
it appears that all payments of principal and interest to which the holder of a
Strip Certificate is entitled should be treated as a single installment
obligation. Although the OID Regulations do not refer directly to debt
instruments that are governed by Section 1286, the application of the OID
Regulations to such instruments is consistent with the overall statutory and
regulatory scheme. Therefore, the Seller intends to treat each Strip Certificate
as a single debt instrument for income tax accounting purposes.
Determination of Income With Respect to Strip Certificates
For purposes of determining the amount of income on a Strip Certificate
that accrues in any period, the rules described under "-- REMIC Certificates --
Tax Treatment of REMIC Regular Certificates -- Original Issue Discount," "--
Variable Rate Certificates," "-- Interest Weighted Certificates and Non-VRDI
Certificates," "-Market Discount," and "-- Amortizable Premium" will apply. PO
Certificates, and certain Classes of Ratio Certificates, will be issued at a
price that is less than their stated principal amount and thus generally will be
issued with original issue discount. A Strip Certificate that would meet the
definition of an Interest-Weighted Certificate or a Weighted Average Certificate
if it were a REMIC Regular Certificate is subject to the same tax accounting
considerations applicable to the REMIC Regular Certificate to which it
corresponds. Thus, as described in "-REMIC Certificates -- Tax Treatment of
REMIC Regular Certificates -- Interest Weighted Certificates and NonVRDI
Certificates," certain aspects of the tax accounting treatment of such a Strip
Certificate are unclear. Unless and until the Service provides administrative
guidance to the contrary, the Tax Administrator will account for such Strip
Certificate in the manner described for the corresponding REMIC Regular
Certificate. See "-- REMIC Certificates -- Tax Treatment of REMIC Regular
Certificates -- Interest Weighted Certificates and Non-VRDI Certificates."
If a PO Certificate or a Ratio Certificate that is not considered a
Contingent Payment Obligation (an "Ordinary Ratio Certificate") subsequently is
sold, the purchaser apparently would be required to treat the difference between
the purchase price and the stated redemption price at maturity as original issue
discount. The holders of such securities generally will be required to include
such original issue discount in income as described in "-REMIC Certificates --
Tax Treatment of REMIC Regular Certificates -- Original Issue Discount." PO
Certificates and Ratio Certificates issued at a price less than their stated
principal amount will be treated as issued with market discount rather than with
original issue discount if, after the most recent disposition of the related
Certificate, either (i) the amount of original issue discount on the Certificate
is considered to be de minimis under the Stripping Regulations or (ii) the
annual stated rate of interest payable on the Certificate is no more than one
percent lower than the annual stated rate of interest payable on the Mortgage
Loan from which the Certificate was stripped. The holders of such securities
generally would be required to include market discount in income in the manner
described in "-- REMIC Certificates -- Tax Treatment of REMIC Regular
Certificates -- Market Discount."
Limitations on Deductions With Respect to Strip Certificates
The holder of a Strip Certificate will be treated as owning an interest
in each of the Mortgage Loans, Mortgage Certificates, or other assets of the
Trust and will recognize an appropriate share of the income and expenses
associated with those assets. Accordingly an individual, trust, or estate that
holds a Strip Certificate directly or through a pass-through entity will be
subject to the same limitations on deductions with respect to such Certificate
as are applicable to holders of Pass-Through Certificates. See "-- Treatment of
Pass-Through Certificates" above.
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Sale of a Non-REMIC Certificate
A sale of a Non-REMIC Certificate prior to its maturity will result in
gain or loss equal to the difference between the amount received and the
holder's adjusted basis in such Certificate. The Rules for computing the
adjusted basis of a Non-REMIC Certificate are the same as in the case of a REMIC
Regular Certificate. See "-REMIC Certificates -- Tax Treatment of REMIC Regular
Certificates -- Gain or Loss on Disposition." Gain or loss from the sale or
other disposition of a Non-REMIC Certificate generally will be capital gain or
loss to a Certificateholder if the Certificate is held as a "capital asset"
within the meaning of Section 1221 of the Code, and will be long-term or
short-term depending on whether the Certificate has been held for the long-term
capital gain holding period (currently, more than twelve months). Ordinary
income treatment, however, will apply to the extent mandated by the original
issue discount and market discount rules or if the Certificateholder is a
financial institution described in Section 582. See "-- REMIC Certificates --
Tax Treatment of REMIC Regular Certificates -- Gain or Loss on Disposition."
Taxation of Certain Foreign Holders of Non-REMIC Certificates
Interest, including original issue discount, paid on a Non-REMIC
Certificate to a Foreign Person generally is treated as "portfolio interest"
and, therefore, is not subject to any United States tax, provided that (i) such
interest is not effectively connected with a trade or business in the United
States of the Certificateholder, and (ii) the Trustee (or other person who would
otherwise be required to withhold tax) is provided with Foreign Person
Certification (as described in "-- REMIC Certificates -- Taxation of Certain
Foreign Holders of REMIC Certificates -- REMIC Regular Certificates" above). If
Foreign Person Certification is not provided, interest (including original issue
discount) paid on a Non-REMIC Certificate may be subject to either a 30 percent
withholding tax or 31 percent backup withholding. See "-- Backup Withholding,"
below.
In the case of certain Series, portfolio interest treatment will not be
available for interest paid with respect to certain classes of Non-REMIC
Certificates. Interest on debt instruments issued on or before July 18, 1984
does not qualify as "portfolio interest" and, therefore, is subject to United
States withholding tax at a 30 percent rate (or lower treaty rate, if
applicable). IO Certificates and PO Certificates generally are treated, and
Ratio Certificates generally should be treated, as having been issued when they
are sold to an investor. In the case of Pass-Through Certificates, however, the
issuance date of the Certificate is determined by the issuance date of the
mortgage loans underlying the Trust. Thus, to the extent that the interest
received by a holder of a Pass-Through Certificate is attributable to mortgage
loans issued on or before July 18, 1984, such interest will be subject to the 30
percent withholding tax. Moreover, to the extent that a Ratio Certificate is
characterized as a pass-through type security and the underlying mortgage loans
were issued on or before July 18, 1984, interest generated by the Certificate
may be subject to the withholding tax. Although recently enacted tax legislation
denies portfolio interest treatment to certain types of contingent interest,
that legislation generally applies only to interest based on the income,
profits, or property values of the debtor. Accordingly, it is not anticipated
that such legislation will apply to deny portfolio interest treatment to
Certificateholders who are Foreign Persons. However, because the scope of the
new legislation is not entirely, clear, investors who are Foreign Persons should
consult their tax advisors regarding the potential application of the
legislation before purchasing a Certificate.
Backup Withholding
The application of backup withholding to Non-REMIC Certificates
generally is the same as in the case of REMIC Certificates. See "-- REMIC
Certificates -- Taxation of Certain Foreign Holders of REMIC Certificates --
Backup Withholding" above.
Reporting and Tax Administration
For the purposes of reporting and tax administration, the holders of
Non-REMIC Certificates will be treated in the same fashion as the holders of
REMIC Regular Certificates. See "-- REMIC Certificates -- Reporting and Tax
Administration" above.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO
CERTIFICATEHOLDERS, POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS
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REGARDING THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE ACQUISITION, OWNERSHIP,
AND DISPOSITION OF THE CERTIFICATES.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described above,
potential investors should consider the state income tax consequences of the
acquisition, ownership, and disposition of the Certificates. State income tax
law may differ substantially from the corresponding federal law, and this
discussion does not purport to describe any aspect of the income tax laws of any
state. Therefore, potential investors should consult their own tax advisors with
respect to the various state tax consequences of an investment in the
Certificates.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain requirements and restrictions on employee benefit
plans within the meaning of Section 3(3) of ERISA (including collective
investment funds, separate accounts and insurance company general accounts in
which such plans are invested). ERISA also imposes certain duties on those
persons who are fiduciaries with respect to employee benefit plans that are
subject to ERISA. Investments by employee benefit plans covered by ERISA are
subject to the general fiduciary requirements of ERISA, including the
requirement of investment prudence and diversification, and the requirement that
the employee benefit plan's investments be made in accordance with the documents
governing the employee benefit plan.
In addition, employee benefit plans subject to ERISA (including
collective investment funds, separate accounts and insurance company general
accounts in which such plans are invested), and individual retirement accounts
and annuities or certain types of Keogh plans not subject to ERISA but subject
to Section 4975 of the Code (each, a "Plan"), are prohibited from engaging in a
broad range of transactions involving Plan assets and persons having certain
specified relationships to a Plan ("parties in interest" under ERISA and
"disqualified persons" under the Code). Such transactions are treated as
"prohibited transactions" under Sections 406 and 407 of ERISA and excise taxes
are imposed upon disqualified persons by Section 4975 of the Code (or, in some
cases, a civil penalty may be assessed pursuant to Section 502(i) of ERISA). The
Seller, the Credit Enhancer, the Underwriters and the Trustee, and certain of
their affiliates, might be considered parties in interest or disqualified
persons with respect to a Plan. If so, the acquisition or holding or transfer of
Certificates by or on behalf of such Plan could be considered to give rise to a
prohibited transaction within the meaning of ERISA and the Code unless an
exemption is available. The United States Department of Labor ("DOL") has issued
a regulation (29 C.F.R. Section 2510.3- 101) concerning the definition of what
constitutes the assets of a Plan (the "Plan Asset Regulations"). Under the Plan
Asset Regulations, the underlying assets and properties of corporations,
partnerships, trusts and certain other entities in which a Plan makes an "equity
interest" investment could be deemed for purposes of ERISA to be assets of the
investing Plan unless certain exceptions apply. If an investing Plan's assets
were deemed to include an interest in the Mortgage Assets and any other assets
of a Trust and not merely an interest in the Certificates, the assets of the
Trust would become subject to the fiduciary responsibility standards of ERISA,
and transactions occurring between the Seller, the Servicer, the Credit
Enhancer, the Underwriters and the Trustee, or any of their affiliates, might
constitute prohibited transactions, unless an administrative exemption applies.
Certain such exemptions which may be applicable to the acquisition and holding
of the Certificates or to the servicing of the Mortgage Assets are discussed
below.
DOL has issued an administrative exemption, Prohibited Transaction Class
Exemption 83-1 ("PTCE 83-1"), which, under certain conditions, exempts from the
application of the prohibited transaction rules of ERISA and the excise tax
provisions of Section 4975 of the Code transactions involving a Plan in
connection with the operation of a "mortgage pool" and the purchase, sale and
holding of "mortgage pool pass-through certificates." A "mortgage pool" is
defined as an investment pool which is held in trust and which consists solely
of interest bearing obligations secured by first or second mortgages or deeds of
trust on single-family residential property, property acquired in foreclosure
and undistributed cash. A "mortgage pool pass-through certificate" is defined as
a certificate which represents a beneficial undivided fractional interest in a
mortgage pool which entitles the holder to pass-through payments of principal
and interest from the mortgage loans, less any fees retained by the pool
sponsor.
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For the exemption to apply, PTCE 83-1 requires that (i) the Seller and
the Trustee maintain a system of insurance or other protection for the pooled
mortgage loans and the property securing such loans, and for indemnifying
holders of Certificates against reductions in pass-through payments due to
defaults in loan payments or property damage in an amount at least equal to the
greater of 1% of the aggregate principal balance of the covered pooled mortgage
loans and 1% of the principal balance of the largest covered pooled mortgage
loan; (ii) the Trustee may not be an affiliate of the Seller; and (iii) the
payments made to and retained by the Seller in connection with the Trust,
together with all funds inuring to its benefit for administering the Trust,
represent no more than "adequate consideration" for selling the mortgage loans,
plus reasonable compensation for services provided to the Trust.
In addition, PTCE 83-1 exempts the initial sale of Certificates to a
Plan with respect to which the Seller, the Servicer, the Credit Enhancer or the
Trustee is a party in interest if the Plan does not pay more than fair market
value for such Certificates and the rights and interests evidenced by such
Certificates are not subordinated to the rights and interests evidenced by other
Certificates of the same pool. PTCE 83-1 also exempts from the prohibited
transaction rules transactions in connection with the servicing and operation of
the Trust, provided that any payments made to the Servicer in connection with
the servicing of the Trust are made in accordance with a binding agreement,
copies of which must be made available to prospective investors before they
purchase Certificates.
In the case of any Plan with respect to which the Seller, the Servicer,
the Credit Enhancer or the Trustee is a fiduciary, PTCE 83-1 will only apply if,
in addition to the other requirements: (i) the initial sale, exchange or
transfer of Certificates is expressly approved by an independent fiduciary who
has authority to manage and control those plan assets being invested in
Certificates; (ii) the Plan pays no more for the Certificates than would be paid
in an arm's length transaction; (iii) no investment management, advisory or
underwriting fee, sale commission, or similar compensation is paid to the Seller
with regard to the sale, exchange or transfer of Certificates to the Plan; (iv)
the total value of the Certificates purchased by the Plan does not exceed 25% of
the amount issued; and (v) at least 50% of the aggregate amount of Certificates
is acquired by persons independent of the Seller, the Servicer, the Credit
Enhancer or the Trustee.
Before purchasing Certificates, a fiduciary of a Plan should confirm
that the Trust is a "mortgage pool," that the Certificates constitute "mortgage
pool pass-through certificates," and that the conditions set forth in PTCE 83-1
would be satisfied. In addition to making its own determination as to the
availability of the exemptive relief provided in PTCE 83-1, the Plan fiduciary
should consider the availability of any other prohibited transaction exemptions.
The Plan fiduciary also should consider its general fiduciary obligations under
ERISA in determining whether to purchase any Certificates on behalf of a Plan.
In addition, DOL has granted to certain underwriters and/or placement
agents individual prohibited transaction exemptions which may be applicable to
avoid certain of the prohibited transaction rules of ERISA with respect to the
initial purchase, the holding and the subsequent resale in the secondary market
by Plans of pass-through certificates representing a beneficial undivided
ownership interest in the assets of a trust that consist of certain receivables,
loans and other obligations that meet the conditions and requirements of PTCE
83-1 which may be applicable to the Certificates.
One or more other prohibited transaction exemptions issued by the DOL
may be available to a Plan investing in Certificates, depending in part upon the
type of Plan fiduciary making the decision to acquire a Certificate and the
circumstances under which such decision is made, including, but not limited to,
PTCE 90-1, regarding investments by insurance company pooled separate accounts,
PTCE 91-38, regarding investments by bank collective investment funds and PTCE
95-60, regarding investments by insurance company general accounts. However,
even if the conditions specified in PTCE 83-1 or one or more of these other
exemptions are met, the scope of the relief provided might not cover all acts
which might be construed as prohibited transactions.
Certain Classes of Certificates may not be offered for sale or be
transferable to Plans. The Prospectus Supplement for each Series will indicate
which Classes of Certificates are subject to restrictions on transfer to Plans.
Any Plan fiduciary considering the purchase of a Certificate should
consult with its counsel with respect to the potential applicability of ERISA
and the Code to such investment. Moreover, each Plan fiduciary should determine
whether, under the general fiduciary standards of investment prudence and
diversification, an investment
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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 MATTERS
If so specified in the Prospectus Supplement for a Series, the
Certificates of such Series will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"), so
long as they are rated in one of the two highest rating categories by one or
more nationally recognized statistical rating organizations, and, as such, will
be legal investments for persons, trusts, corporations, partnerships,
associations, business trusts and business entities (including, but not limited
to, state-chartered savings banks, commercial banks, savings and loan
associations and insurance companies, as well as trustees and state government
employee retirement systems) created pursuant or existing under the laws of the
United States or any state, territory or possession of the United States
(including the District of Columbia or Puerto Rico) whose authorized investments
are subject to state regulation to the same extent that, under applicable law,
obligations issued by or guaranteed as to principal and interest by the United
States or any agency or instrumentality thereof constitute legal investments for
such entities. Pursuant to SMMEA, a number of states enacted legislation, on or
before the October 3, 1991 cut-off for such enactments, limiting to varying
extents the ability of certain entities (in particular, insurance companies) to
invest in "mortgage related securities," in most cases by requiring the affected
investors to rely solely upon existing state law and not SMMEA. Accordingly, the
investors affected by such legislation will be authorized to invest in the
Certificates only to the extent provided in 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 with mortgage
related securities without limitation as to the percentage of their assets
represented thereby; federal credit unions may invest in mortgage related
securities; and national banks may purchase mortgage related securities for
their own account without regard to the limitations generally applicable to
investment securities set forth in 12 U.S.C. ss. 24 (Seventh), subject in each
case to such regulations as the applicable federal regulatory authority may
prescribe. Federal credit unions should review National Credit Union
Administration (the "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.
The NCUA has adopted rules, effective December 2, 1991, which prohibit federal
credit unions from investing in certain mortgage related securities, possibly
including certain series or classes of Certificates, except under limited
circumstances.
If specified in the Prospectus Supplement for a Series, one or more
Classes of Certificates of such Series will not constitute "mortgage related
securities" for purposes of SMMEA. In such event, persons whose investments are
subject to state or federal regulation may not be legally authorized to invest
in such Classes of Certificates.
All depository institutions considering an investment in the
Certificates should review the "Supervisory Policy Statement on Securities
Activities" dated January 28, 1992 (the "Policy Statement") of the Federal
Financial Institution Examination Council. The Policy Statement, which has been
adopted by the Board of Governors of the Federal Reserve System, the FDIC, the
Comptroller of the Currency and the Office of Thrift Supervision, effective
February 10, 1992, and by the NCUA (with certain modifications) effective June
26, 1992, prohibits depository institutions from investing in certain "high-risk
mortgage securities" (possibly including certain Certificates), except under
limited circumstances, and sets forth certain investment practices deemed to be
unsuitable for regulated institutions.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by such authorities before purchasing Certificates, as
certain Certificates may be deemed unsuitable investments, or may otherwise be
restricted, under such rules, policies or guidelines, in certain instances
irrespective of SMMEA.
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, provisions which
may restrict or prohibit investments
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in securities which are not "interest-bearing" or "income-paying," and, with
regard to any Book-Entry Certificates, provisions which may restrict or prohibit
investments in securities which are issued in book-entry form.
Prospective investors should consult their own legal advisors in
determining whether and to what extent the Certificates constitute legal
investments for such investors.
PLAN OF DISTRIBUTION
The Seller may sell the Certificates offered hereby and by the related
Prospectus Supplement either directly or through one or more underwriters or
underwriting syndicates (the "Underwriters"). The Prospectus Supplement for each
Series will set forth the terms of the offering of such Series and of each Class
of such Series, including the name or names of the Underwriters, the proceeds to
and their use by the Seller and either the initial public offering price, the
discounts and commissions to the Underwriters and any discounts or concessions
allowed or reallowed to certain dealers or the method by which the price at
which the Underwriters will sell the Certificates will be determined.
The Certificates of a Series may be acquired by the Underwriters for
their own account and may be resold from time to time in one or more
transactions, including negotiated transactions, at a fixed public offering
price or at varying prices determined at the time of sale. The obligations of
the Underwriters will be subject to certain conditions precedent, and the
Underwriters will be severally obligated to purchase all the Certificates of a
Series described in the related Prospectus Supplement if any are purchased. If
Certificates of a Series are offered other than through Underwriters, the
related Prospectus Supplement will contain information regarding the nature of
such offering and any agreements to be entered into between the Seller and the
purchasers of the Certificates of such Series.
The place and time of delivery for the Certificates of a Series in
respect of which this Prospectus is delivered will be set forth in the related
Prospectus Supplement.
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INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
<TABLE>
<S> <C>
1986 Act.............................................................................................57
1996 Regulations.....................................................................................60
30% Test.............................................................................................73
Accounting Date......................................................................................17
Act..................................................................................................53
Additional Interest Amount...........................................................................58
Adjustable Rate......................................................................................20
Advance..............................................................................................38
Advances..............................................................................................5
Adverse Environmental Conditions.....................................................................52
Agency Securities.....................................................................................3
Agreement.........................................................................................2, 12
All OID Election.....................................................................................58
AMT..................................................................................................57
ARM Loans............................................................................................21
Asset Proceeds Account............................................................................5, 30
Asset Value.......................................................................................2, 16
Available Distribution............................................................................2, 15
Balloon Loans........................................................................................11
Bankruptcy Bond......................................................................................34
Beneficial Owner.....................................................................................13
Book-Entry Certificates..............................................................................10
Buy-Down Loans.......................................................................................21
Cap..................................................................................................60
CERCLA...............................................................................................52
Certificate Guaranty Insurance Policy................................................................31
Certificate Guaranty Insurer.........................................................................31
Certificateholder....................................................................................14
Certificates...................................................................................i, 1, 12
Charter Act..........................................................................................26
Class.........................................................................................ii, 1, 13
Cleanup Costs........................................................................................52
Code..............................................................................................6, 55
Commission...........................................................................................ii
Compound Interest Certificates.......................................................................15
Contingent Payment Obligations.......................................................................62
Contingent Payment Regulations.......................................................................62
Conventional Home Improvement Loans...................................................................3
Conventional Mortgage Loans.......................................................................3, 18
Converted Mortgage Loan..............................................................................23
Cooperative Loans.....................................................................................2
Cooperatives..........................................................................................2
CPR..................................................................................................17
Credit Enhancer......................................................................................11
Current Recognition Election.........................................................................63
Custodial Account....................................................................................38
Cut-Off Date.........................................................................................16
Deemed Principal Payments............................................................................57
Delinquent Mortgage Loan.............................................................................24
Depository...........................................................................................13
Detailed Description.................................................................................19
Disqualified Organization............................................................................68
Distribution Date.................................................................................2, 14
DOL................................................................................................. 80
Dominion Capital..................................................................................1, 54
Dominion Mortgage.................................................................................1, 54
Dominion Resources................................................................................1, 54
DTC..................................................................................................12
Due Period...........................................................................................15
EDGAR................................................................................................ii
EPA..................................................................................................52
ERISA.............................................................................................8, 80
Excess Premium.......................................................................................59
FDIC.................................................................................................44
FHA...................................................................................................3
FHA Loans............................................................................................25
FHLMC.................................................................................................3
FHLMC Act............................................................................................26
FHLMC Certificate Group..............................................................................26
FHLMC Certificates................................................................................4, 24
FHLMC Project Certificates...........................................................................27
Final Scheduled Distribution Date....................................................................ii
Financial Intermediary...............................................................................13
First Distribution Period............................................................................59
Fixed Rate...........................................................................................19
Floor................................................................................................60
FNMA..................................................................................................3
FNMA Certificates.................................................................................4, 24
Foreign Person.......................................................................................73
Foreign Person Certification.........................................................................73
GNMA..................................................................................................3
GNMA Certificates.................................................................................4, 24
GNMA Issuer..........................................................................................25
Governor.............................................................................................60
GPM Loans............................................................................................21
Gross Margin.........................................................................................19
Guaranty Agreement...................................................................................25
HELOCs................................................................................................3
Housing Act..........................................................................................25
HUD...............................................................................................3, 23
Index................................................................................................19
Interest Adjustment Date.............................................................................19
Interest Weighted Certificates.......................................................................59
Inverse Floater Certificates.........................................................................62
IO Certificates......................................................................................75
Junior Mortgage Loans................................................................................22
Lockout Periods......................................................................................20
Master Servicer...................................................................................5, 37
Master Servicer Custodial Account....................................................................38
Mortgage Assets.......................................................................................i
Mortgage Certificates.................................................................................3
Mortgage Insurance Loss..............................................................................40
Mortgage Interest Rate...............................................................................20
Mortgage Loans........................................................................................3
Mortgage Note.....................................................................................3, 19
Mortgage Pool Insurance Policy.......................................................................32
Mortgaged Premises................................................................................3, 19
Multi-Family Loans....................................................................................3
Multiple Rate VRDI Certificate.......................................................................61
NCUA.................................................................................................82
Net Rate.............................................................................................16
Non-Objective Weighted Average Certificates..........................................................62
Nonqualified Interest Amount.........................................................................59
Non-REMIC Certificates............................................................................7, 55
Non-VRDI Certificate...................................................................................
NOWA Certificates....................................................................................62
NVRIs................................................................................................70
OID Regulations......................................................................................57
Ordinary Ratio Certificate...........................................................................78
Originator........................................................................................3, 20
Pass-Through Certificates............................................................................75
Pass-Through Rate.................................................................................1, 13
Periodic Rate Cap....................................................................................20
Permitted Investments................................................................................44
Plan.................................................................................................80
Plan Asset Regulations............................................................................8, 80
PMBS Agreement.......................................................................................27
PMBS Issuer..........................................................................................27
PMBS Servicer........................................................................................27
PMBS Trustee.........................................................................................27
PO Certificates......................................................................................75
Policy Statement.....................................................................................82
Pool Insurer.........................................................................................32
Pre-Funding Account...............................................................................5, 29
Pre-Funding Agreement.............................................................................5, 29
Pre-Issuance Accrued Interest........................................................................59
Prepayment Period....................................................................................15
Pricing Prepayment Assumptions.......................................................................57
Primary Mortgage Insurance Policies...............................................................3, 39
Private Mortgage-Backed Securities....................................................................3
Proposed Mark-to-Market Regulations..................................................................69
PSA..................................................................................................17
PTCE 83-1............................................................................................80
Qualifying REIT Interest.............................................................................56
Rating Agency.........................................................................................8
Ratio Certificates...................................................................................75
Realized Loss........................................................................................15
REIT.................................................................................................56
REMIC.........................................................................................ii, 6, 55
REMIC Certificates...................................................................................55
REMIC Regular Certificateholders.....................................................................56
REMIC Regular Certificates........................................................................6, 55
REMIC Regulations....................................................................................55
REMIC Residual Certificateholders....................................................................56
REMIC Residual Certificates.......................................................................6, 55
Remittance Date......................................................................................38
REO Properties....................................................................................5, 21
Reserve Fund.........................................................................................34
RIC..................................................................................................56
Saxon Mortgage....................................................................................3, 19
Scheduled Principal Balance..........................................................................16
Security Instrument..................................................................................18
Seller.............................................................................................i, 1
Senior Certificates..................................................................................30
Series.............................................................................................i, 1
Series REMIC.........................................................................................55
Service..............................................................................................55
Servicer..............................................................................................5
Servicer Custodial Account...........................................................................38
Servicing Agreement..................................................................................37
Single Family Loans...................................................................................2
Single Rate VRDI Certificate.........................................................................61
SMM..................................................................................................17
SMMEA.............................................................................................7, 82
Special Hazard Insurance Policy......................................................................33
Special Hazard Insurer...............................................................................33
Special Servicer..................................................................................5, 37
Special Servicing Agreement..........................................................................44
Special Tax Counsel...............................................................................6, 55
Standard Hazard Insurance Policies................................................................3, 20
Strip Certificates...................................................................................75
Stripping Regulations................................................................................77
Subordinated Certificates............................................................................30
Superlien............................................................................................53
Superpremium Certificates............................................................................59
Tax Administrator....................................................................................57
Taxable Mortgage Pools...............................................................................75
Teaser Certificates..................................................................................57
Temporary Mark-to-Market Regulations.................................................................69
Thrift Institutions..................................................................................56
TIN..................................................................................................74
Title I Loan Program..............................................................................3, 23
Title I Loans.........................................................................................2
TMP..................................................................................................74
Treasury.............................................................................................55
True Discount.......................................................................................558
Trust..............................................................................................i, 1
Trustee...............................................................................................1
UBTI.................................................................................................66
UCC..................................................................................................49
Underwriters.........................................................................................83
VA Loans.............................................................................................25
Variable Rate Certificate............................................................................59
VRDI.................................................................................................59
WAM..................................................................................................57
Weighted Average Certificates........................................................................62
</TABLE>
No dealer, salesman or any other person has been authorized to give any
information or to make any representations not contained in this Prospectus
Supplement and the Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Seller
or by the Underwriters. This Prospectus Supplement and the Prospectus do not
constitute an offer to sell, or a solicitation of an offer to buy, the
Certificates offered hereby to anyone in any jurisdiction in which the person
making such offer or solicitation is not qualified to do so or to anyone to whom
it its unlawful to make any such offer or solicitation. Neither the delivery of
this Prospectus Supplement nor any sale made hereunder shall, under any
circumstances, create an implication that information herein or therein is
correct as of any time since the date of this Prospectus Supplement or the
Prospectus.
TABLE OF CONTENTS
Prospectus Supplement
Summary........................................................S- 1
Risk Factors...................................................S-13
Use of Proceeds................................................S-15
The Mortgage Loan Pool.........................................S-15
Prepayment and Yield Considerations............................S-24
Description of the Class A Certificates........................S-30
The Certificate Insurance Policies and the Certificate Insurer.S-40
The Agreement..................................................S-44
Certain Federal Income Tax Consequences........................S-48
ERISA Considerations...........................................S-48
Ratings........................................................S-50
Legal Investment Considerations................................S-51
Underwriting...................................................S-51
Report of Experts..............................................S-52
Certain Legal Matters..........................................S-52
Global Clearance, Settlement and
Tax Documentation Procedures...........................Annex I
Index to Location of Principal Defined Terms....................A-1
Prospectus
Prospectus Summary................................................1
Risk Factors......................................................9
Description of the Certificates..................................12
Maturity, Prepayment and Yield Considerations....................17
The Trusts.......................................................18
Credit Enhancement...............................................30
Origination of Mortgage Loans....................................35
Servicing of Mortgage Loans......................................37
The Agreement....................................................44
Certain Legal Aspects of Mortgage Loans..........................46
The Seller.......................................................54
Use of Proceeds..................................................54
Certain Federal Income Tax Consequences..........................55
State Tax Considerations.........................................80
ERISA Considerations.............................................80
Legal Investment Matters.........................................82
Plan of Distribution.............................................83
Index to Location of Principal Defined Terms.....................84
Until 90 days after the date of this Prospectus Supplement, all dealers
effecting transactions in the related Certificates, whether or not participating
in the distribution thereof, may be required to deliver this Prospectus
Supplement and the related Prospectus. This delivery requirement is in addition
to the obligation of dealers to deliver a Prospectus Supplement and Prospectus
when acting as underwriters and with respect to their unsold allotments or
subscriptions.
$438,238,000
(Approximate)
SAXON ASSET SECURITIES TRUST 1996-2
SAXON ASSET SECURITIES COMPANY,
AS SELLER
$55,500,000 6.375% Class A-1 Certificates
$47,500,000 6.475% Class A-2 Certificates
$17,000,000 6.750% Class A-3 Certificates
$20,500,000 7.025% Class A-4 Certificates
$19,329,000 7.185% Class A-5 Certificates
$278,409,000 Variable Rate Class A-6 Certificates
Mortgage Loan Asset Backed Certificates,
Series 1996-2
------------------------------------------
PROSPECTUS SUPPLEMENT
------------------------------------------
PRUDENTIAL SECURITIES INCORPORATED
LEHMAN BROTHERS
MERRILL LYNCH & CO.
PAINEWEBBER INCORPORATED
November 27, 1996
