As filed with the Securities and Exchange Commission on May 21, 1996
Registration No. 33-_____
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
SAXON ASSET SECURITIES COMPANY
(Seller)
(Exact name of registrant as specified in its charter)
Virginia Applied For
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification number)
4880 Cox Road
Glen Allen, Virginia 23060
(804) 967-7400
(Address, including zip code, and telephone
number, including area code, of registrant's principal executive offices)
Andrew Sirkis
Saxon Asset Securities Company
4880 Cox Road
Glen Allen, Virginia 23060
(804) 967-7400
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Thomas F. Farrell, II, Esquire Robert L. Burrus, Jr., Esquire
Dominion Resources, Inc. McGuire, Woods, Battle & Boothe, L.L.P.
Riverfront Plaza, West Tower One James Center
901 East Bryd Street, 17th Floor 901 East Cary Street
Richmond, Virginia 23219 Richmond, Virginia 23219
(804) 775-5807 (804) 775-1000
Approximate date of commencement of proposed sale to the public: As soon
as practicable on or after the effective date of this registration statement.
If the only securities registered on this Form are to be offered
pursuant to dividend or interest reinvestment plans, please check the following
box. ( )
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. (X)
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.( )
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.( )
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box.( )
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED
TITLE OF SECURITIES AMOUNT TO BE OFFERING PRICE MAXIMUM AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED PER CERTIFICATE* OFFERING PRICE* REGISTRATION FEE
<S> <C>
Asset Backed Certificates $1,000,000 100% $1,000,000 $344.83
</TABLE>
* Estimated solely for the purpose of calculating the registration fee.
The Registrant hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
NAME AND CAPTION IN FORM S-3 CAPTION IN PROSPECTUS
<S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus.... Front Cover Page of Registration Statement;
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus...................................... Inside Front Cover Page; Outside Back Cover Page
of Prospectus
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges......... Prospectus Summary; Risk Factors; The Trusts;
Certain Legal Aspects of Mortgage Loans
4. Use of Proceeds............................ Use of Proceeds
5. Determination of Offering Price............ *
6. Dilution................................... *
7. Selling Security Holders................... *
8. Plan of Distribution....................... Plan of Distribution
9. Description of Securities to be Registered. Prospectus Summary; The Trusts; Description of
the Certificates
10. Interests of Named Experts and Counsel..... Legal Investment Matters
11 Material Changes................................ *
12. Incorporation of Certain Documents by
Reference....................................... Incorporation of Certain Documents by Reference
13. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities.. *
14. Other Expenses of Issuance and Distribution..... Part II
15. Indemnification of Directors and Officers....... Part II
16. Exhibits........................................ Part II
17. Undertakings.................................... Part II
</TABLE>
* Not applicable.
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 21, 1996
PROSPECTUS
SAXON ASSET SECURITIES COMPANY
(Seller)
ASSET BACKED CERTIFICATES
(Issuable in Series)
This Prospectus relates to Asset Backed Certificates (the
"Certificates") which may be sold 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. The Certificates of each Series will evidence beneficial ownership
interests in one or more segregated pools of mortgage-related assets (the
"Mortgage Assets") and certain other assets described herein assigned or
transferred by the Seller to one or more trusts (collectively, a "Trust") or, 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.
The Mortgage Assets will consist of one or more of the following: (i)
one- to four-family mortgage loans secured by first, second or more junior liens
on residential 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 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
residential 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"). The Seller may
also assign or transfer to the Trust for a Series certain reserve accounts,
insurance policies, guaranties, surety bonds, letters of credit, guaranteed
investment contracts or other assets, including a Pre-Funding Account to be used
to purchase additional Mortgage Assets for such Trust from time to time during a
specified funding period, in each case as described herein and in the related
Prospectus Supplement. The Mortgage Assets and other assets included in each
Trust will be held for the benefit of the holders of the Certificates of the
related Series pursuant to an Agreement as more fully described herein. 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.
Each Series of Certificates will be issued in one or more classes
(each, a "Class"). Each Class of Certificates will evidence a beneficial
ownership interest in a specified percentage or portion of future principal
payments and a specified percentage or portion of future interest payments on
the Mortgage Assets in the related Trust. 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 assigned to the related Trust. Neither the Seller nor any
affiliate of the Seller will have any other obligation with respect to any
Series of Certificates.
<PAGE>
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.
An election may be made to treat certain Trusts or specified portions
thereof as real estate mortgage investment conduits (each, a "REMIC"). See
"Certain Federal Income Tax Consequences." A Series of Certificates for which a
REMIC election has been made will include one or more Classes of regular
interests in each REMIC ("REMIC Regular Certificates") and will include one
Class of residual interest in each REMIC ("REMIC Residual Certificates").
Certain risk factors should be considered by prospective purchasers of
the Certificates offered hereby. See "Risk Factors" herein at page 11 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.
------------------------------
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.
-------------------------------
Offers of the Certificates of any Series 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 and in the related Prospectus Supplement.
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.
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of Certificates unless accompanied by a Prospectus
Supplement.
------------------------------
The date of this Prospectus is____________, 1996.
<PAGE>
RED HERRING:
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED WITHOUT THE DELIVERY OF A FINAL PROSPECTUS SUPPLEMENT
AND PROSPECTUS. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS SHALL
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL
THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the Series of Certificates covered by such Prospectus
Supplement, whether or not participating in the distribution thereof, may be
required to deliver such Prospectus Supplement and this Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus Supplement and
Prospectus when acting as underwriters of the Series of Certificates covered by
such Prospectus Supplement and with respect to their unsold allotments or
subscriptions.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon as having been authorized. This
Prospectus and any Prospectus Supplement with respect hereto do not constitute
an offer to sell or a solicitation of an offer to buy any securities other than
the Certificates offered hereby and thereby nor an offer to sell or a
solicitation of an offer to buy the Certificates to any person in any state or
other jurisdiction in which such offer or solicitation would be unlawful.
Neither delivery of this Prospectus or any Prospectus Supplement with respect
hereto nor any sale made hereunder and thereunder shall, under any
circumstances, create any implication that the information herein or therein is
correct as of any time subsequent to the date of such information.
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)
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 optional redemption features pertaining to such Certificates, (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 the related Trust to be treated as a REMIC
and (ix) 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 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, 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.
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 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.
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUMMARY.............................................6
RISK FACTORS..................................................15
DESCRIPTION OF THE CERTIFICATES...............................18
General..............................................18
Classes of Certificates..............................18
Book-Entry Procedures................................19
Allocation of Distributions from
Mortgage Assets.................................20
Allocation of Losses and Shortfalls..................20
Valuation of Mortgage Assets.........................21
Optional Redemption..................................21
MATURITY, PREPAYMENT AND YIELD
CONSIDERATIONS.......................................22
THE TRUSTS....................................................24
Assignment of Mortgage Assets........................24
The Mortgage Loans -- General........................25
Single Family Loans and Cooperative Loans............27
Multi-Family Loans...................................27
Home Equity Loans....................................27
Conventional Home Improvement Loans..................28
Title I Loans........................................28
Repurchase of Converted Mortgage Loans...............29
Repurchase of Delinquent Mortgage Loans..............29
Substitution of Mortgage Loans. .....................29
Agency Securities -- General.........................30
Government National Mortgage
Association; GNMA Certificates.................30
Federal National Mortgage Association;
FNMA Certificates...............................31
Federal Home Loan Mortgage Corporation;
FHLMC Certificates..............................32
Stripped Mortgage-Backed Certificates;
Other Agency Securities........................32
Private Mortgage-Backed Securities...................33
Home Equity Lines of Credit..........................34
Pre-Funding Account..................................35
Asset Proceeds Account...............................35
CREDIT ENHANCEMENT............................................35
General..............................................35
Subordination . . . . . . . . . . . .................36
Certificate Guaranty Insurance Policies..............36
Overcollateralization................................37
Mortgage Pool Insurance Policies.....................37
Special Hazard Insurance Policies....................38
Bankruptcy Bonds.....................................39
Cross-Support........................................39
Reserve Funds........................................39
Other Credit Enhancement.............................39
ORIGINATION OF MORTGAGE LOANS.................................40
General..............................................41
Representations and Warranties.......................41
SERVICING OF MORTGAGE LOANS...................................41
General..............................................41
Payments on Mortgage Loans...........................43
Advances.............................................43
Collection and Other Servicing Procedures............44
Primary Mortgage Insurance Policies..................44
Standard Hazard Insurance Policies...................45
Maintenance of Insurance Policies; Claims
Thereunder and Other Realization
Upon Defaulted Mortgage Loans...................46
Modification of Mortgage Loans.......................47
Evidence as to Servicing Compliance..................47
Events of Default and Remedies.......................47
Master Servicer Duties...............................48
Special Servicing Agreement..........................48
THE AGREEMENT.................................................48
The Trustee..........................................49
Administration of Accounts...........................49
Reports to Certificateholders........................49
Events of Default and Remedies.......................50
Amendment............................................50
Termination..........................................51
CERTAIN LEGAL ASPECTS OF MORTGAGE
LOANS................................................51
General..............................................51
The Mortgage Loans...................................51
Foreclosure..........................................52
Junior Mortgages; Rights of Senior
Mortgagees......................................54
Right of Redemption..................................55
Anti-Deficiency Legislation and Other
Limitations on Lenders..........................56
Soldiers' and Sailors' Civil Relief Act
of 1940.........................................56
Environmental Considerations.........................57
"Due-on-Sale" Clauses................................58
Enforceability of Certain Provisions.................58
THE SELLER....................................................60
USE OF PROCEEDS...............................................60
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES.........................................60
General..............................................60
REMIC Certificates...................................61
Non-REMIC Certificates...............................80
STATE TAX CONSIDERATIONS......................................85
ERISA CONSIDERATIONS..........................................85
LEGAL INVESTMENT MATTERS......................................87
PLAN OF DISTRIBUTION..........................................88
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the Seller 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
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."
<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.
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"). None of 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."
Securities 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 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, 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.
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 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 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 residential
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............... Unless otherwise specified in the Prospectus
Supplement for a Series, the Mortgage Loans
included in the related Trust will be
evidenced by promissory notes (each, a
"Mortgage Note") and will be secured by
first, second or more junior liens on one-
to four-family or multi-family residential
properties (the "Mortgaged Premises").
Unless specified in the Prospectus
Supplement for a Series, the Mortgage Loans
included in the related Trust 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 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. Unless
otherwise 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"). Unless otherwise 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
(each, including Saxon Mortgage in its
capacity as an originator of Mortgage Loans,
an "Originator"). 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. 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
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. 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, unless otherwise 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, unless otherwise
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.
Unless otherwise specified in the Prospectus
Supplement relating to a Series, 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 ................. Unless otherwise specified in the Prospectus
Supplement for a Series, 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 subordinatedto 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 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") 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. In general, 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")
will perform certain customary servicing
functions with respect to the Mortgage Loans
included in the Trust for any Series of
Certificates. Meritech Mortgage Services,
Inc., a Texas corporation and an affiliate
of the Seller ("Meritech"), may act as
Servicer with respect to the Mortgage Loans.
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. Unless otherwise
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 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......................... Unless otherwise 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 limited to
amounts deemed to be recoverable from late
payments or liquidation proceeds, to amounts
due holders of Senior 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 related Prospectus
Supplement, the Mortgage Assets in a Trust
or one or more Classes of Certificates will
have the benefit of one or more types of
credit enhancement. The protection against
losses afforded by any such credit
enhancement may be limited. See "Risk
Factors -- Credit Enhancement Limitations"
and "Credit Enhancement."
A. Subordination . . . . ....... If so specified in the related Prospectus
Supplement, a Series will include one or
more Classes of Certificates ("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 ("Senior Certificates"). If so
specified in the related Prospectus
Supplement, the same Class of Certificates
may constitute Senior Certificates with
respect to certain types of distributions or
losses and Subordinated Certificates with
respect to other types of distributions or
losses. If so specified in the related
Prospectus Supplement, subordination may
apply only in the event of certain types of
losses not covered by other forms of credit
support, such as hazard losses not covered
by Standard Hazard Insurance Policies or
losses due to the bankruptcy of a borrower
not covered by a Bankruptcy Bond.
If so specified in the related Prospectus
Supplement, all or any portion of the
distributions otherwise payable to the
holders of Subordinated Certificates on any
Distribution Date will instead be deposited
into one or more reserve accounts for a
specified period of time or until a
specified level is reached. The related
Prospectus Supplement will set forth
information concerning the amount of
subordination of each Class of Subordinated
Certificates in a Series, the circumstances
in which such subordination will be
applicable, the manner, if any, in which the
amount of subordination will decrease over
time, the manner of funding any such reserve
account and the conditions under which
amounts in any such reserve account will be
used to make distributions to the holders of
Senior Certificates or released to the
holders of Subordinated Certificates. See
"Credit Enhancement -Subordination."
B. 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. 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 Trustee to such holders. Certificate
Guaranty Insurance Policies may have certain
limitations set forth in the related
Prospectus Supplement, including, but not
limited to, limitations on the insurer's
obligation 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. See "Credit
Enhancement -- Certificate Guaranty
Insurance Policies."
C. Overcollateralization........ 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. See "Credit
Enhancement -- Overcollateralization."
D. 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. See "Credit
Enhancement -- Mortgage Pool Insurance
Policies."
E. 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. See "Credit
Enhancement -- Special Hazard Insurance
Policies."
F. 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 a reduction by
a bankruptcy court of scheduled payments of
principal or interest on a Mortgage Loan or
a reduction by such court of the principal
amount of a Mortgage Loan and certain unpaid
interest on the amount of such a principal
reduction will be obtained and maintained
for the related Series in an amount
specified in such Prospectus Supplement. See
"Credit Enhancement -- Bankruptcy Bonds."
G. 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, without priority among such
Trusts, 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. See
"Credit Enhancement -- Cross-Support."
H. Reserve Funds................. If so specified in the related Prospectus
Supplement, cash or certain instruments will
be deposited by the Seller in one or more
accounts (each, a "Reserve Fund")
established and maintained with the Trustee.
Such cash and the principal and interest
payments on such instruments 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. See "Credit
Enhancement -- Reserve Funds."
I. Other Credit
Enhancement................ If so specified in the related Prospectus
Supplement, other credit enhancement
arrangements, including, but not limited to,
reserve funds, insurance policies,
guaranties, surety bonds, letters of credit,
guaranteed investment contracts or similar
arrangements, may be used to provide
coverage for certain defaults or losses.
These arrangements may be in addition to or
in substitution for any forms of credit
support 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. See "Credit
Enhancement -- Reserve Funds; -- Other
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 a
"real estate mortgage investment conduit"
("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).
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 beneficial interest in REMIC
Residual Certificates.
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. Certificateholders of any
such Series ("Non-REMIC Certificates") will
be treated for such 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 and to review "Certain Federal
Income Tax Consequences" herein.
Legal Investment Matters......... Unless otherwise 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
any 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. See "ERISA
Considerations."
Rating. . . . . . . . . . . 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").
<PAGE>
RISK FACTORS
Prospective investors should consider, among other things, the
following risk factors in connection with a purchase of the Certificates of any
Series.
Limited Assets
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 Limitations
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 Conditions
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.
Certain Matters Relating to Insolvency
Saxon Mortgage and the Seller intend that the transfer of the Mortgage
Assets to the Seller and, in turn, to the related Trust constitute a sale rather
than a pledge 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
transfer was a pledge rather than a sale. 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.
Other Legal Considerations
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 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
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. See "Servicing of Mortgage Loans -- Modification of Mortgage
Loans."
Prepayment Considerations
The prepayment experience on the Mortgage Loans constituting or
underlying the Mortgage Assets for a Trust will affect the average life of the
Certificates of the related Series. Prepayments may be influenced by a variety
of economic, geographic, 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 of the Certificates of a Series or all of 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."
Limited Liquidity
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."
Book-Entry Registration
If so specified in the related Prospectus Supplement, the 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 since 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 DTC system, the ability of a Certificateholder to pledge a
Book-Entry Certificate to persons or entities that do not participate in the DTC
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 since distributions may be required to be forwarded by the Trustee
to DTC, in which case DTC will be required to credit such distributions to the
accounts of its 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
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
reduction in 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 is not obligated to obtain additional
credit enhancement if necessary to maintain the rating initially assigned to the
Certificates of any Series.
Original Issue Discount
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 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."
Risk of Higher Default Rates for Balloon Loans
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 Mortgages
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 -- Home Equity Loans."
Non-Owner Occupied Properties
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.
Non-Conforming Credits
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 may 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."
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."
<PAGE>
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"), the 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 certain provisions common to each Series of
Certificates. The summaries do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, the related Prospectus
Supplement and the Agreement with respect to such Series.
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 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 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.
Unless otherwise specified in the Prospectus Supplement for a Series, the
Trustee will make distributions of principal and interest to each Class of
Certificates of a Series in certificated form (i) by check mailed to each holder
of Certificates 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 Certificates 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 each Class of Certificates 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. The Trustee will make
such payments with respect to Certificates in book-entry form 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.
<PAGE>
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 (a "Beneficial Owner") will be entitled to receive a
certificate representing such Certificate.
A Beneficial Owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains 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 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.
The Trustee will make distributions of principal and interest on the
Book-Entry Certificates on each Distribution Date 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 Book-Entry 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.
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 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. Unless otherwise specified
in the related Prospectus Supplement, the Asset Value of any Mortgage Loan
included in the Trust for a 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. In each case, Asset Value will be determined after
the subtraction of applicable servicing fees, master servicing fees, special
servicing fees, administrative and guarantee fees and insurance premiums and, if
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 shall
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).
Reinvestment income for a Series may, if distributable to
Certificateholders, be based on contractually specified interest rates pursuant
to guaranteed reinvestment agreements with one or more institutions acceptable
to each Rating Agency that provides, at the request of the Seller, a rating for
the Certificates of such Series. A specified interest rate acceptable to each
such Rating Agency may be set forth in the related Prospectus Supplement for
purposes of certain assumptions regarding reinvestment income if required in the
calculation of distributions to Certificateholders.
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. Upon
redemption of the Certificates, at the option of the redeeming party, (i) the
related REMIC or trust, as applicable, 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. Unless otherwise 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 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. In the event the option to
redeem the Certificates is exercised, the purchase price distributed with
respect to each Certificate offered hereby and by the related Prospectus
Supplement will generally equal 100% of its then outstanding principal amount
plus accrued and unpaid interest thereon at the applicable Pass-Through Rate,
net of any unreimbursed Advances and unrealized losses allocated to such
Certificate. 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) the effective
yield on each Class of 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 mortgages 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
stated certificate rate on certain Mortgage Certificates may be up to 3% less
than the stated interest rate on 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, Home Equity Loans have smaller
average principal balances than senior or first Mortgage Loans and are not
viewed by borrowers as permanent financing. Accordingly, Home Equity 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 generally
will include interest accrued through a date specified in the related Prospectus
Supplement (the "Accounting Date") that precedes the related Distribution Date.
Because distributions to the Certificateholders of such Series generally will
not be made 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.
The yield to maturity of any Certificate will be affected by the rate
and timing of payment of principal of 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 an
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 repayments) on the Mortgage
Loans (or on the mortgage loans underlying the Mortgage Certificates) may
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.
<PAGE>
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
pool of Mortgage Assets will constitute one or more trusts held by the Trustee
for the benefit of the holders of the Certificates of such Series representing
the ownership interest therein. 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 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 local 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 representations and warranties in the
Agreement with respect to the Mortgage Assets, including representations that it
either is the owner of the Mortgage Assets or has a first priority perfected
security interest in the Mortgage Assets. In addition, Saxon Mortgage may make
certain 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. Unless otherwise 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 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 (i) to cure such breach, (ii) to substitute Mortgage Assets in
accordance with the criteria set forth herein 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
Unless otherwise specified in the Prospectus Supplement for a Series,
the Mortgage Loans included in the related Trust will be evidenced by promissory
notes (each, a "Mortgage Note") and will be secured by first, second or more
junior liens on one- to four-family or multi-family residential properties (the
"Mortgaged Premises"). Unless specified in the Prospectus Supplement for a
Series, the Mortgage Loans included in the related Trust 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), 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 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.
Unless otherwise 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"). Unless
otherwise 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 (each, including Saxon Mortgage in its capacity as an
originator of Mortgage Loans, an "Originator"). 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.
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,
(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. 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. An overall decline in the market value of real
estate, the general condition of the Mortgaged Premises or other factors could
adversely affect the values of the Mortgaged Premises such that the outstanding
balances of the Mortgage Loans, together with any additional liens on the
Mortgaged Premises, equal or exceed the value of the Mortgaged Premises. Under
such circumstances, 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 and Cooperative Loans
Single Family Loans will consist of mortgage loans secured by first,
second or more junior liens on one- to four-family residential properties. If so
specified in the related Prospectus Supplement, the Single Family Loans may
include loans or participations therein secured by mortgages or deeds of trust
on condominium units in low-rise condominium buildings together with such
condominium units' appurtenant interests in the common elements of the
condominium buildings. 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.
The Mortgaged Premises which secure Single Family Loans will consist of
detached or semi-detached one-to four-family dwelling units, townhouses,
rowhouses, individual condominium units in low-rise 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.
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. 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. Those payments are in addition to any payments of principal
and interest the tenant-stockholder must make on any loans to the
tenant-stockholder 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 Multi-Family Loan, as well as all other operating
expenses, will be dependent in large part on the receipt of maintenance payments
from the tenant-stockholders, 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.
Home Equity 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 ("Home Equity
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, third in satisfaction of all principal, interest, prepayment or
acceleration penalties, if any, and fourth to 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
Home Equity Loan, substantial delays could be encountered in connection with the
liquidation of such Home Equity 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 amortizing and will bear interest at a fixed or
variable annual percentage 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 ("Property
Improvement Loans") and manufactured home loans ("Manufactured Home Loans"). A
Property Improvement Loan is a loan made to finance actions or items that
substantially protect or improve the basic livability or utility of a property
and includes: (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. A Manufactured Home
Loan is a loan for the purchase or refinancing of a manufactured home and/or the
lot on which to place such home and includes: (i) manufactured home purchase
loans; (ii) manufactured home lot loans; and (iii) combination loans. Unless
otherwise specified in the Prospectus Supplement for a Series, 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. Unless
otherwise specified in such Prospectus Supplement, the applicable Servicer 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
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
Unless otherwise specified in the Prospectus Supplement for a Series,
the applicable Servicer may, but will not be obligated to, repurchase from the
Trust any Mortgage Loan as to which the borrower has failed to make in full
three or more scheduled payments of principal and interest (a "Delinquent
Mortgage Loan") at a purchase price equal to 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 first day of
the month in which such purchase price is to be distributed, net of any
unreimbursed Advances of principal or interest on such Delinquent Mortgage Loan
made by such Servicer. Any such purchase price will be treated as a prepayment
of the related Mortgage Loan.
Substitution of Mortgage Loans
Unless otherwise 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, except as
otherwise specified in the related Prospectus Supplement, 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 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 addition, except as otherwise specified in the
related Prospectus Supplement, 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, unless otherwise
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, unless otherwise 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 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 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. 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, unless otherwise specified in the related
Prospectus Supplement.
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. 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 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, the PMBS Issuer may be an affiliate of the Company. The obligations
of the PMBS Issuer will generally be limited to certain representations and
warranties with respect to the assets conveyed by it to the related Trust.
Unless otherwise specified in the related Prospectus Supplement 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.
Home Equity Lines of Credit
Unless otherwise specified in the related Prospectus Supplement, 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 one- to four-family dwelling unit will be located on land
owned in fee simple by the borrower or on land leased by the borrower for the
term of at least ten years (unless otherwise specified in the related Prospectus
Supplement) 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.
Unless otherwise specified in the 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. To the extent 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 "Pre-Funding 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 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") 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. In general, 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.
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. Unless otherwise 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 a Series
but will be remitted periodically to the Master Servicer or the Servicers as
additional master servicing or servicing compensation.
Unless otherwise 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
The Mortgage Assets in a Trust or one or more Classes of Certificates
may have the benefit of one or more types of credit enhancement. Credit
enhancement may be provided through the subordination of one or more Classes of
Certificates, overcollateralization, Certificate Guarantee Insurance Policies,
Mortgage Pool Insurance Policies, Special Hazard Insurance Policies, Bankruptcy
Bonds, Reserve Funds, letters of credit, financial guaranty insurance policies,
third party guarantees, other methods of credit enhancement described in the
related Prospectus Supplement or any combination of the foregoing. 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, 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 will 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 specified in the 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 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 Trustee to such holders.
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, 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 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 "
- -- 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.
Unless otherwise 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.
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 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.
Unless otherwise specified in the Prospectus Supplement for a Series, 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."
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
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 related Prospectus Supplement, other credit
enhancement arrangements, including, but not limited to, insurance policies,
guaranties, surety bonds, letters of credit, guaranteed investment contracts or
similar arrangements, will be obtained (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 stricter underwriting guidelines. As discussed further in
the related Prospectus Supplement, Saxon Mortgage's underwriting guidelines 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.
However, Saxon Mortgage's underwriting guidelines require that the property
appraisals conform to FNMA or FHLMC appraisal standards then in effect.
Both sets of 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 approved by FNMA or FHLMC. 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 are required 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 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. Except as otherwise 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. Except as otherwise 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 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. Saxon Mortgage's obligation to purchase a
Mortgage Loan will not be guaranteed by the Seller or any other party, unless
otherwise specified in the related Prospectus Supplement.
SERVICING OF MORTGAGE LOANS
General
For each Trust that includes Mortgage Loans, one or more Servicers,
which may include Meritech Mortgage Services, Inc., a Texas corporation and an
affiliate of the Seller ("Meritech"), or Saxon Mortgage, 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 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.
A form of Servicing Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. The rights of the
Seller under each Servicing Agreement with respect to a Series will be assigned
as assets to the Trust for such Series. The descriptions contained herein do not
purport to be complete and are qualified in their entirety by reference to the
form of the Servicing Agreement.
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
Unless otherwise specified in the Prospectus Supplement for a Series,
each Servicing Agreement with respect to such Series generally 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 will 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.
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. A form of Primary Mortgage Insurance Policy has
been filed as an exhibit to the Registration Statement of which this Prospectus
is a part. 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 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.
Unless otherwise 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. Unless otherwise 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. A form of Standard Hazard Insurance Policy has been filed
as an exhibit to the Registration Statement of which this Prospectus is a part.
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 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.
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, the 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
Unless otherwise specified in the Prospectus Supplement for a Series,
events of default under the Servicing Agreement in respect of a Series of
Certificates 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 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
Unless otherwise 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 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.
The summaries of the obligations of the Master Servicer contained
herein do not purport to be complete and are subject to, and qualified in their
entirety by reference to, the Agreement.
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 remain fully responsible and liable for all of its
requirements 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 certain provisions of the Agreement.
The summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the Agreement for each Series.
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 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
Certificate holders 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
Unless otherwise 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 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 of the rights and obligations of the Master Servicer
under the related Agreement, except that the Trustee may elect not to terminate
the Master Servicer for its failure to make Advances. Upon termination, either
an affiliate of the Seller or the Trustee will succeed to all the
responsibilities, duties and liabilities of the Master Servicer under such
Agreement (except that if the Trustee is to so succeed the Master Servicer but
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 either an
affiliate of the Seller or the Trustee would be obligated to succeed the Master
Servicer but is unwilling or unable so to act, 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, a mortgage
loan servicing or other housing and home finance institution with a net worth of
at least $15,000,000 to act as successor to the Master Servicer under the
Agreement or may provide cash, a letter of credit, a standby master servicing
agreement or another arrangement consistent with the then current rating of the
Certificates of such Series. 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.
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 that (i) reduces in any manner or delays the timing of payments on the
Mortgage Assets or distributions to the Certificateholders or (ii) reduces the
percentage of Certificateholders required to authorize an amendment to the
Agreement may be made unless each holder of a Certificate affected by such
amendment 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 as a REMIC under the Code at all times that any REMIC
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 summaries are qualified in their
entirety by reference to the applicable federal and state laws governing the
Mortgage Loans.
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 and owner of the
mortgaged property, 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 liability of the Cooperative to refinance this mortgage and its consequent
inability to make such final payment could lead to foreclosure by the mortgagee
providing the financing. A foreclosure in either event by the holder of the
blanket mortgage could eliminate or significantly diminish the value of any
collateral held by the lender who financed the purchase by an individual
tenant-stockholder of Cooperative shares or, in the case of a Trust 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.
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 Mortgages; 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 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. 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. 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 "-- Anti-Deficiency Legislation and Other
Limitations on Lenders."
Junior Mortgages; Rights of Senior Mortgagees
Some of the Home Equity 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 (including the Seller) 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.
Other provisions sometimes included in the form of the mortgage or deed
of trust used by institutional lenders (and included in some of the forms used
by the Seller) 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 the Servicer 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, in a preceding 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. 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. Unless otherwise 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 property 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 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.
Unless otherwise 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. Unless otherwise 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.
Unless otherwise specified in the related 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 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 __,
1996, as 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"). None of 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 of 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.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the anticipated material
federal income tax consequences of the purchase, ownership, and disposition of
the Certificates. The summary 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, McGuire, Woods, Battle & Boothe, L.L.P., counsel to the Seller
("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"). For each Series with respect to which a REMIC election is not
made, 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. 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.
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 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 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."
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 "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 December 16, 1994, the Treasury issued proposed 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 "1994 Proposed Regulations").
Pursuant to certain of the amendments to the OID Regulations that are set forth
in the 1994 Proposed 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 proposed
amendments to the OID Regulations would apply retroactively to debt instruments
issued on or after April 4, 1994, which is the effective date of the OID
Regulations. Consequently, unless and until the Service provides contrary
administrative guidance on the income tax treatment of Variable Rate
Certificates that do not qualify as VRDIs, 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.
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. 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 zero but not
more than 1.35 or (b) the product of a qualified floating rate and a fixed
multiple that is greater than zero 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).
Under the 1994 Proposed 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 1994 Proposed Regulations merely because it is
based on the credit quality of the issuer. The revised definition of an
objective rate in the 1994 Proposed Regulations is proposed to be effective for
debt instruments issued on or after the date that is 60 days after the date on
which such regulations are published as final regulations in the Federal
Register.
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 1994 Proposed Regulations would 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 is intended to clarify the OID Regulations, it
is proposed to be 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 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 1994 Proposed Regulations contain provisions (the "Proposed
Contingent Payment Regulations") that address the federal income tax treatment
of debt obligations with one or more contingent payments ("Contingent Payment
Obligations"). Under the Proposed Contingent Payment Regulations, any variable
rate debt instrument that is not a VRDI is classified as a Contingent Payment
Obligation. However, the Proposed 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 60 days or more after such
Regulations are finalized. 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.
The method described in the foregoing paragraph for accounting for
Interest Weighted Certificates and Non-VRDI 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 Proposed 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 Proposed 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 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 Proposed 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 includible 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 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 includible in income
with respect to the Certificate by the Certificateholder during his holding
period is less than the amount that would have been includible 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 includible 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.
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.
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.
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 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 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.
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.
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.
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 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. Unless otherwise
indicated 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 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 ("Pass-Through
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 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 Pass-Through Certificates, unless
otherwise specified in the Prospectus Supplement, 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 Non-REMIC 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.
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
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 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 Non-VRDI
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.
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 AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO
MANY ASPECTS OF THOSE RULES, POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE TAX TREATMENT 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 invests in an
"equity interest" will 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.
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.
Unless otherwise specified in the Prospectus Supplement, the Agreement
will provide the REMIC Residual Certificate of any Series of Certificates with
respect to which a REMIC Loan has been made may not be acquired by a Plan.
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 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
Unless otherwise 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 "Supervisor 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 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.
<PAGE>
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
1986 Act
1994 Proposed Regulations
30% Test
Accounting Date
Act
Additional Interest Amount
Adjustable Rate
Advance
Advances
Adverse Environmental Conditions
Agency Securities
Agreement
All OID Election
AMT
ARM Loans
Asset Proceeds Account
Asset Value
Available Distribution
Balloon Loans
Bankruptcy Bond
Beneficial Owner
Book-Entry Certificates
Buy-Down Loans
Cap
CERCLA
Certificate Guaranty Insurance Policy
Certificate Guaranty Insurer
Certificateholder
Certificates
Charter Act
Class
Cleanup Costs
Code
Commission
Compound Interest Certificates
Contingent Payment Obligations
Conventional Home Improvement Loans
Conventional Mortgage Loans
Converted Mortgage Loan
Cooperative Loans
Cooperatives
Counsel
Credit Enhancer
Current Recognition Election
Custodial Account
Deemed Principal Payments
Delinquent Mortgage Loan
Depository
Detailed Description
Disqualified Organization
Distribution Date
DOL
Dominion Capital
Dominion Mortgage
DTC
Due Period
EPA
ERISA
Excess Premium
FDIC
FHA
FHA Loans
FHLMC
FHLMC Act
FHLMC Certificate Group
FHLMC Certificates
FHLMC Project Certificates
Final Scheduled Distribution Date
Financial Intermediary
First Distribution Period
Fixed Rate
Floor
FNMA
FNMA Certificates
Foreign Person
Foreign Person Certification
GNMA
GNMA Certificates
GNMA Issuer
Governor
GPM Loans
Gross Margin
Guaranty Agreement
HELOCs
Home Equity Loans
Housing Act
HUD
Index
Interest Adjustment Date
Interest Weighted Certificates
Inverse Floater Certificates
IO Certificates
Lockout Periods
Manufactured Home Loans
Master Servicer
Master Servicer Custodial Account
Meritech
Mortgage Assets
Mortgage Certificates
Mortgage Insurance Loss
Mortgage Interest Rate
Mortgage Loans
Mortgage Note
Mortgage Pool Insurance Policy
Mortgaged Premises
Multi-Family Loans
Multiple Rate VRDI Certificate
NCUA
Net Rate
Non-Objective Weighted Average Certificates
Nonqualified Interest Amount
Non-VRDI Certificate
NOWA Certificates
NVRIs
OID Regulations
Ordinary Ratio Certificate
Originator
Participant
Pass-Through Certificates
Pass-Through Rate
Periodic Rate Cap
Permitted Investments
Plan
Plan Asset Regulations
PMBS Agreement
PMBS Issuer
PMBS Servicer
PMBS Trustee
PO Certificates
Policy Statement
Pool Insurer
Pre-Funding Account
Pre-Funding Agreement
Pre-Issuance Accrued Interest
Prepayment Period
Pricing Prepayment Assumptions
Primary Mortgage Insurance Policies
Private Mortgage-Backed Securities
Property Improvement Loans
Proposed Contingent Payment Regulations
Proposed Mark-to-Market Regulations
PTCE 83-1
Qualifying REIT Interest
Rating Agency
Ratio Certificates
REIT
REMIC
REMIC Certificates
REMIC Regular Certificateholder
REMIC Regular Certificates
REMIC Regulations
REMIC Residual Certificateholder
REMIC Residual Certificates
Remittance Date
REO Properties
Reserve Fund
RIC
Saxon Mortgage
Scheduled Principal Balance
Security Instrument
Seller
Senior Certificates
Series
Series REMIC
Service
Servicer
Servicer Custodial Account
Servicing Agreement
Single Family Loans
Single Rate VRDI Certificate
SMMEA
Special Hazard Insurance Policy
Special Hazard Insurer
Special Servicer
Special Servicing Agreement
Standard Hazard Insurance Policies
Strip Certificates
Stripping Regulations
Subordinated Certificates
Superlien
Superpremium Certificates
Tax Administrator
Taxable Mortgage Pools
Teaser Certificates
Temporary Mark-to-Market Regulations
Thrift Institutions
TIN
Title I Loan Program
Title I Loans
TMP
Treasury
True Discount
Trust
Trustee
UBTI
UCC
Underwriters
VA Loans
Variable Rate Certificate
VRDI
WAM
Weighted Average Certificates
<PAGE>
PART II
Item 14. Other Expenses of Issuance and Distribution
The following is an itemized list of the estimated expenses to be
incurred in connection with the offering of the securities being offered
hereunder other than underwriting discounts and commissions.
Registration Fee................................. $________
Printing and Engraving........................... ________
Trustee's Fees................................... ________
Legal Fees and Expenses.......................... ________
Blue Sky Fees and Expenses....................... ________
Accountants' Fees and Expenses................... ________
Rating Agency Fees............................... ________
Miscellaneous Fees...............................
Total . . . ................................. $
========
Item 15. Indemnification of Directors and Officers
Article 10 of the Virginia Stock Corporation Act provides in substance
that Virginia corporations shall have the power, under specified circumstances,
to indemnify their directors, officers, employees and agents in connection with
actions, suits or proceedings brought against them by a third party or in the
right of the corporation, by reason of the fact that they were or are such
directors, officers, employees or agents, against expenses incurred in any such
action, suit or proceeding. The Virginia Stock Corporation Act also provides
that Virginia corporations may purchase insurance on behalf of any such
director, officer, employee or agent.
Under certain sales agreements entered into by the Seller and various
transferors of mortgage-related collateral, such transferors are obligated to
indemnify the Seller against certain expenses and liabilities.
Reference is made to the Standard Terms to Underwriting Agreement filed
as an exhibit hereto for provisions relating to the indemnification of
directors, officers and controlling persons of the Seller against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
Item 16. Exhibits and Financial Statements
(a) Exhibits
<TABLE>
<S> <C>
1.1* -- Form of Underwriting Agreement.
3.1* -- Articles of Incorporation.
3.2* -- Bylaws.
4.1* -- Form of Agreement (including Form of Certificates).
5.1* -- Opinion of McGuire, Woods, Battle & Boothe, L.L.P.
8.1* -- Opinion of McGuire, Woods, Battle & Boothe, L.L.P. with respect to tax matters.
24.1* -- Consent of McGuire, Woods, Battle & Boothe, L.L.P. (included in its opinion filed as
Exhibit 5.1).
24.2* -- Consent of McGuire, Woods, Battle & Boothe, L.L.P. (included in its opinion filed as
Exhibit 8.1).
99.1* -- Form of Servicing Agreement.
99.2* -- Form of Primary Mortgage Insurance Policy.
99.3* -- Form of Standard Hazard Insurance Policy.
</TABLE>
<PAGE>
99.4* -- Form of Mortgage Pool Insurance Policy.
99.5* -- Form of Special Hazard Insurance Policy.
99.6* -- Form of Bankruptcy Bond.
*To be filed by amendment.
(b) Financial Statements
All financial statements, schedules and historical financial
information have been omitted as they are not applicable.
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement: (i) to
include any prospectus required by Section 10(a)(3) of the Securities Act of
1933; (ii) to reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement;
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change in such information in the registration statement; provided,
however, that (a)(i) and (a)(ii) will not apply if the information required to
be included in a post-effective amendment thereby is contained in periodic
reports filed pursuant to Section 13 or Section 15(d) of the Securities Exchange
Act of 1934 that are incorporated by reference in this registration statement.
(b) That, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(d) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual report pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(e) To provide to the underwriters at the closing specified in
the underwriting agreements certificates in such denominations and registered in
such names as are required by the underwriters to permit prompt delivery to each
purchaser.
(f) That, insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions described under
Item 15 above, or otherwise, the registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(g) That, for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of the registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(i) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to
be part of the registration statement as of the time it was declared effective.
(h) That, for purposes of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Richmond, Commonwealth of Virginia on May 21,
1996.
SAXON ASSET SECURITIES COMPANY
By: /s/ Andrew Sirkis
Andrew Sirkis
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed on May 21, 1996 by the following
persons in the capacities indicated.
Signature Title
<TABLE>
<S> <C>
/s/ Andrew Sirkis Principal Executive Officer and Director
Andrew Sirkis
/s/ Robert Partlow Principal Financial Officer and Controller
Robert Partlow
/s/ David L. Heavenridge Director
David L. Heavenridge
/s/ Charles E. Coudriet Director
Charles E. Coudriet
/s/ Hayden D. McMillian Director
Hayden D. McMillian
/s/ Bryan S. Reid Director
Bryan S. Reid
</TABLE>
