FILED PURSUANT TO RULE 424(B)(5)
FILE NO. 333-4127
PROSPECTUS SUPPLEMENT
(To Prospectus Dated February 19, 1997)
<TABLE>
<CAPTION>
$600,308,000
Saxon Asset Securities Trust 1997-3
<S> <C>
$124,075,000 Class AF-1 Certificates $20,832,000 Class AF-6 Certificates $124,125,000 Class AV-1 Certificates
$22,000,000 Class AF-2 Certificates $10,533,000 Class MF-1 Certificates $178,938,000 Class AV-2 Certificates
$10,000,000 Class AF-3 Certificates $9,363,000 Class MF-2 Certificates $28,384,000 Class MV-1 Certificates
$15,000,000 Class AF-4 Certificates $5,852,000 Class BF Certificates $21,974,000 Class MV-2 Certificates
$16,414,000 Class AF-5 Certificates $12,818,000 Class BV Certificates
</TABLE>
[LOGO]
Mortgage Loan Asset Backed Certificates, Series 1997-3
Saxon Asset Securities Company
as Depositor
-----------------
The Mortgage Loan Asset Backed Certificates, Series 1997-3, will
consist of: (a) the following Group I Certificates: (i) Class AF-1, Class AF-2,
Class AF-3, Class AF-4, Class AF-5 and Class AF-6 Certificates (collectively,
the "Class A Group I Certificates"), (ii) Class MF-1 and Class MF-2 Certificates
(collectively, the "Mezzanine Group I Certificates") and (iii) Class BF
Certificates (collectively, with the Mezzanine Group I Certificates, the
"Subordinated Group I Certificates"); (b) the following Group II Certificates:
(i) Class AV-1 and Class AV-2 Certificates (the "Class A Group II
Certificates"), (ii) Class MV-1 and Class MV-2 Certificates (collectively, the
"Mezzanine Group II Certificates") and (iii) Class BV Certificates (collectively
with the Mezzanine Group II Certificates, the "Subordinated Group II
Certificates"); and (c) Class C and Class R Certificates (the "Retained
Certificates"). Only the Group I Certificates and the Group II Certificates
(collectively, the "Offered Certificates") are offered hereby.
Interest will accrue on the Class AF-2, Class AF-3, Class AF-4, Class
AF-6, Class MF-1 and Class MF-2 Certificates at the respective fixed
Pass-Through Rates set forth herein and on the Class AF-5 and Class BF
Certificates at the respective Pass-Through Rates equal to the lesser of (i) the
applicable fixed interest rate set forth herein and (ii) the weighted average
net Mortgage Interest Rates on the Mortgage Loans in Group I. The Pass-Through
Rates for the Class AF-1 Certificates and for the Group II Certificates will
adjust monthly and with respect to the first Distribution Date will be
determined on November 10, 1997, by the Paying Agent.
For a discussion of significant matters affecting investment in the
Offered Certificates, see "Risk Factors" beginning on page S-10 herein and
beginning on page 5 in the Prospectus.
The Certificates will represent undivided ownership interests in pools
of mortgage loans (the "Mortgage Loans") held by a trust (the "Trust") created
pursuant to a Trust Agreement dated as of November 1, 1997 (the "Agreement"),
among Saxon Asset Securities Company (the "Depositor"), Texas Commerce Bank
National Association, as Master Servicer (the "Master Servicer"), and Citibank,
N.A., as trustee (the "Trustee"). The Mortgage Loans will be acquired by the
Depositor from Saxon Mortgage, Inc. ("the Seller"), an affiliate of the
Depositor which originated or acquired the Mortgage Loans from various mortgage
banking institutions.(Cover continued on next page)
----------------------
THE OFFERED CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN THE TRUST ONLY AND DO
NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR, THE MASTER SERVICER,
THE TRUSTEE, ANY SELLER, ANY SERVICER OR ANY OF THEIR AFFILIATES.
NEITHER THE OFFERED CERTIFICATES NOR THE MORTGAGE LOANS ARE
INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
The Offered Certificates will be purchased by the Underwriters from the
Depositor and will be offered by the Underwriters from time to time in
negotiated transactions or otherwise, at varying prices to be determined at the
time of sale. Proceeds to the Depositor are expected to be approximately
$598,751,759, plus accrued interest, before deducting expenses payable by the
Depositor estimated to be $460,000. See "Underwriting" herein.
The Offered Certificates are offered by the Underwriters, subject to
prior sale, withdrawal, cancellation or modification of the offer without
notice, to delivery and acceptance by the Underwriters and certain other
conditions. It is expected that delivery of the Offered Certificates in
book-entry form will be made on or about November 13, 1997, only through the
facilities of The Depository Trust Company, CEDEL S.A. and the Euroclear System.
---------------------------
Prudential Securities Incorporated
Merrill Lynch & Co.
J.P. Morgan & Co.
Morgan Stanley Dean Witter
---------------------------
The date of this Prospectus Supplement is November 6, 1997
<PAGE>
(Cover continued from previous page)
The assets of the Trust will include two pools (each, a "Mortgage Loan
Group" or "Group") of mortgage loans (the "Mortgage Loans") secured by first or
second mortgages or deeds of trust (the "Mortgages") on residential properties,
including investment properties, which may be detached, attached, a two-to-four
family dwelling, condominiums, townhouses, manufactured housing or units in a
planned unit development (the "Mortgaged Premises"), to be conveyed by the
Depositor to the Trust on the Closing Date. Substantially all the Mortgage Loans
will be serviced by Meritech Mortgage Services, Inc., an affiliate of the
Depositor. Distributions in respect of the Group I Certificates will generally
be calculated with reference to a pool of fixed-rate first or second lien
Mortgage Loans ("Group I"). Distributions in respect of the Group II
Certificates will generally be calculated with reference to a pool of
adjustable-rate first lien Mortgage Loans ("Group II"). See "DESCRIPTION OF THE
OFFERED CERTIFICATES " in this Prospectus Supplement.
All the Mortgage Loans were originated or acquired in accordance with
the Seller's loan programs for non-conforming credits. See "RISK FACTORS -- Risk
of Higher Delinquencies Associated With Underwriting Standards" in this
Prospectus Supplement.
Distributions of principal and interest to each Class of the Offered
Certificates will be made on the 25th day of each month or, if the 25th day is
not a business day, the first business day thereafter (each, a "Distribution
Date"), beginning on November 25, 1997. Distributions on the Subordinated
Certificates and the Retained Certificates are subordinate to distributions on
the Class A Certificates to the extent described herein.
One or more elections will be made to treat certain assets of the Trust
as real estate mortgage investment conduits ("REMIC") for federal income tax
purposes. As described more fully herein, each Class of Offered Certificates
will constitute a "regular interest" in a REMIC. See "CERTAIN FEDERAL INCOME TAX
Consequences" in this Prospectus Supplement and "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES -- REMIC Certificates" in the Prospectus. Only the Class AV-1,
Class AV-2 and Class MV-1 Certificates will constitute "mortgage related
securities" for purposes of SMMEA (as defined herein). See "LEGAL INVESTMENT
CONSIDERATIONS" in this Prospectus Supplement.
There is currently no secondary market for the Offered Certificates.
Each Underwriter intends to make a secondary market in the Offered Certificates
offered by such Underwriter but has no obligation to do so. There can be no
assurance that a secondary market for the Offered Certificates will develop or,
if it does develop, that it will continue.
TABLE OF CONTENTS
Prospectus Supplement
PAGE
SUMMARY....................................................................S-1
RISK FACTORS...............................................................S-10
THE MORTGAGE LOAN POOL.....................................................S-13
General...............................................................S-13
Underwriting Standards................................................S-13
Characteristics of the Mortgage Loans.................................S-14
Additional Information................................................S-17
Servicing of the Mortgage Loans.......................................S-18
Servicing and Other Compensation and Payment of
Expenses; Repurchase..............................................S-19
Advances and Month End Interest.......................................S-19
Interest Payments on the Mortgage Loans...............................S-19
The Master Servicer...................................................S-20
USE OF PROCEEDS............................................................S-20
PREPAYMENT AND YIELD CONSIDERATIONS........................................S-20
General...............................................................S-20
Prepayments and Yields for Offered Certificates.......................S-21
Payment Delay Feature of Group I Certificates.........................S-27
DESCRIPTION OF THE OFFERED CERTIFICATES....................................S-27
General...............................................................S-27
Distributions.........................................................S-28
Overcollateralization and Crosscollateralization
Provisions........................................................S-32
Calculation of One Month LIBOR........................................S-33
Book Entry Registration of the Offered Certificates...................S-33
THE AGREEMENT..............................................................S-34
Formation of the Trust................................................S-34
Reports to Certificateholders.........................................S-34
Delivery and Substitution of Mortgage Loans...........................S-35
The Trustee, the Certificate Registrar and the Paying Agent...........S-35
Voting Rights.........................................................S-35
Termination...........................................................S-35
Sale of Mortgage Loans................................................S-35
Events of Default.....................................................S-36
Governing Law.........................................................S-36
CERTAIN FEDERAL INCOME TAX CONSEQUENCES....................................S-36
REMIC Elections.......................................................S-36
ERISA CONSIDERATIONS.......................................................S-37
RATINGS....................................................................S-39
LEGAL INVESTMENT CONSIDERATIONS............................................S-39
UNDERWRITING...............................................................S-40
CERTAIN LEGAL MATTERS......................................................S-40
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS..............................A-1
-------------------------------------
The Certificates offered by this Prospectus Supplement will be part of
a separate series of Certificates being offered by the Seller pursuant to its
Prospectus dated February 19, 1997, of which this Prospectus Supplement is a
part and which accompanies this Prospectus Supplement. The Prospectus contains
important information regarding this offering which is not contained herein, and
prospective investors are urged to read the Prospectus and this Prospectus
Supplement in full.
Information under "THE MORTGAGE LOAN POOL -- Servicing of Mortgage
Loans" and "PREPAYMENT AND YIELD CONSIDERATIONS" in this Prospectus Supplement
includes "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933. Such statements are qualified by the important factors
discussed under such captions that could cause actual results to differ
materially from those in the forward-looking statements.
<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus. Reference is made to the "Index to Location of
Principal Defined Terms" in this Prospectus Supplement and in the Prospectus for
the definitions of certain capitalized terms.
<TABLE>
<CAPTION>
<S> <C>
Trust: Saxon Asset Securities Trust 1997-3 (the "Trust").
Certificates: The Mortgage Loan Asset Backed Certificates, Series 1997-3, will consist of: (a) the
following Group I Certificates: (i) Class AF-1, Class AF-2, Class AF-3, Class AF-4,
Class AF-5 and Class AF-6 Certificates (collectively, the "Class A Group I
Certificates"), (ii) Class MF-1 and Class MF-2 Certificates (collectively, the
"Mezzanine Group I Certificates") and (iii) Class BF Certificates (collectively, with
the Mezzanine Group I Certificates, the "Subordinated Group I Certificates"); (b) the
following Group II Certificates: (i) Class AV-1 and Class AV-2 Certificates (the
"Class A Group II Certificates"), (ii) Class MV-1 and Class MV-2 Certificates
(collectively, the "Mezzanine Group II Certificates") and (iii) Class BV Certificates
(collectively with the Mezzanine Group II Certificates, the "Subordinated Group II
Certificates"); and (c) Class C and Class R Certificates (the "Retained
Certificates"). Only the Group I Certificates and the Group II Certificates
(collectively, the "Offered Certificates") are offered hereby. References to Class A,
Class M-1, Class M-2, Class B, Mezzanine and Subordinated Certificates are, as the
context requires, references to Certificates of either or both Groups of similar
designations.
Certificates Offered: The Initial Certificate Principal Balances, the Pass-Through Rates and the Last
Scheduled Distribution Dates for the Offered Certificates are as follows:
Initial Certificate Pass-Through Last Scheduled
Class Principal Balance(1) Rates Distribution Date(2)
--------------- ------------------- ------------- ---------------------
Group I
Class AF-1 $124,075,000 (3) October 25, 2020
Class AF-2 $ 22,000,000 6.715% August 25, 2023
Class AF-3 $ 10,000,000 6.775% August 25, 2024
Class AF-4 $ 15,000,000 6.950% January 25, 2026
Class AF-5 $ 16,414,000 7.065%(4) April 25, 2027
Class AF-6 $ 20,832,000 6.730% February 25, 2027
Class MF-1 $ 10,533,000 6.935% February 25, 2027
Class MF-2 $ 9,363,000 7.115% December 25, 2026
BF $ 5,852,000 7.460%(4) September 25, 2026
Group II
Class AV-1 $124,125,000 (3) August 25, 2027
Class AV-2 $178,938,000 (3) August 25, 2027
Class MV-1 $ 28,384,000 (3) July 25, 2027
Class MV-2 $ 21,974,000 (3) June 25, 2027
Class BV $ 12,818,000 (3) April 25, 2027
</TABLE>
(1) As of any Distribution Date, the "Certificate Principal Balance" of each
Class of Offered Certificates is the aggregate principal amount thereof
immediately prior to such Distribution net of (i) all amounts to be applied
on such Distribution Date to reduce principal and (ii) in the case of the
Subordinated Classes of Certificates, Applied Realized Loss Amounts
allocated in respect of such Class. See "DESCRIPTION OF THE
CERTIFICATES--Overcollateralization and Crosscollateralization
Provisions--Realized Losses" in this Prospectus Supplement.
(2) Calculated in accordance with the assumptions for the determination of Last
Scheduled Distribution Date set forth under "PREPAYMENT AND YIELD
CONSIDERATIONS--Prepayments and Yields for Offered Certificates" in this
Prospectus Supplement. It is expected that the actual last Distribution Date
for each Class of Certificates will occur significantly earlier.
(3) The Pass-Through Rates for the Class AF-1 Certificates and for the Group II
Certificates adjust monthly as described on the next page.
(4) The Pass-Through Rates for the indicated Classes of the Group I Certificates
on any Distribution Date will equal the lesser of (i) the per annum rate for
such Class set forth above (increased, for the Class AF-5 Certificates, by
0.50% for any Distribution Date after the Initial Optional Termination Date
(as defined under "Optional Termination" in this Summary)) and (ii) the
weighted average Interest Rates on the Mortgage Loans in Group I less the
Servicing Fee Rate and the Master Servicing Fee Rate.
<PAGE>
The Pass-Through Rates per annum for the
Class AF-1 Certificates and for the Group II
Certificates will be equal to the least of
(i) the London interbank offered rate for
one month United States dollar deposits
("One Month LIBOR") (calculated as described
under "DESCRIPTION OF THE OFFERED
CERTIFICATES -- Calculation of One Month
LIBOR" in this Prospectus Supplement) as of
the second business day prior to the
immediately preceding Distribution Date
(November 10, 1997, for the first
Distribution Date) plus the Applicable
Spread per annum, (ii) the weighted average
of the Mortgage Interest Rates on the
Mortgage Loans in Group I (in the case of
the Class AF-1 Certificates) or the weighted
average of the maximum lifetime Mortgage
Interest Rates on the Mortgage Loans in
Group II (in the case of the Group II
Certificates) less, in each case, the
applicable Servicing Fee Rate and the Master
Servicing Fee Rate and (iii) the applicable
Available Funds Cap. The "Class AF-1
Available Funds Cap" is defined as a per
annum rate equal to (w)(i) the total
scheduled interest on the Mortgage Loans in
Group I for the related Due Period less (ii)
the Servicing Fees and Master Servicing Fee
for such Due Period divided by (x) the
Certificate Principal Balance of the Group I
Certificates divided by (y) the actual
number of days in the related Accrual Period
and (z) multiplied by 360. The "Group II
Available Funds Cap" is defined as a per
annum rate equal to (w)(i) the total
scheduled interest on the Mortgage Loans in
Group II for the related Due Period less
(ii) the Servicing Fees and Master Servicing
Fee for such Due Period divided by (x) the
Certificate Principal Balance of the Group
II Certificates divided by (y) the actual
number of days in the related Accrual Period
and (z) multiplied by 360.
The Applicable Spread is as follows: for any
Distribution Date before the Step Up Date:
Class AF-1, 0.16%; Class AV-1, 0.18%; Class
AV-2, 0.19%; Class MV-1, 0.375%; Class MV-2,
0.60% and Class BV 1.00%; and for any
Distribution Date on or after the Step Up
Date: Class AV-1, 0.36%; Class AV-2, 0.38%;
Class MV-1, 0.5625%; Class MV-2, 0.90%; and
Class BV, 1.50%.
If on any Distribution Date the Pass-Through
Rate for a Class of the Group II
Certificates is based upon the Group II
Available Funds Cap, the excess of (i) the
amount of interest that such Class would
have been entitled to receive on such
Distribution Date had the Variable
Pass-Through Rate for that Class not been
calculated based on the Group II Available
Funds Cap over (ii) the amount of interest
such Class received on such Distribution
Date based on the Group II Available Funds
Cap, together with the unpaid portion of any
such excess from prior Distribution Dates
(and interest accrued thereon at the then
applicable Pass-Through Rate, without giving
effect to the Group II Available Funds Cap),
is the "Group II Certificates Carryover" for
such Class. Any Group II Certificates
Carryover will be payable on future
Distribution Dates (to the extent available
funds are sufficient therefor but only on or
prior to the last Distribution Date with
respect to a Class) as described herein. The
rating of the Group II Certificates does not
address the likelihood of the payment of any
Group II Certificates Carryover. No such
carryover amounts will be payable with
respect to the Class AF-1 Certificates in
the event the Pass-Through Rate for such
Certificates is limited on any Distribution
Date by the Class AF-1 Available Funds Cap.
Agreement: The Certificates will be issued pursuant
to a trust agreement to be dated as of
November 1, 1997, among the Depositor, the
Master Servicer and the Trustee.
Denominations: The Offered Certificates are issuable in
book entry form in minimum denominations of
$1,000 in original principal amount and
integral multiples thereof.
<PAGE>
Depositor: Saxon Asset Securities Company, a Virginia
corporation and wholly owned limited purpose
financing subsidiary of Dominion Mortgage
Services, Inc. The Depositor's principal
executive offices are located at 4880 Cox
Road, Glen Allen, Virginia 23060, and its
phone number is (804) 967-7400.
Seller: Saxon Mortgage, Inc., a Virginia corporation
and an affiliate of the Depositor.
Master Servicer: Texas Commerce Bank National Association
Trustee: Citibank, N.A., a national banking
association.
Certificate Registrar and
Paying Agent: Texas Commerce Bank National Association, a
national banking association.
Servicers: Meritech Mortgage Services, Inc., an
affiliate of the Depositor ("Meritech"),
will service approximately 99% of the
Mortgage Loans. Ameriquest Mortgage Company
(formerly Long Beach Mortgage Company) will
service the balance of the Mortgage Loans.
Each of them is referred to as a "Servicer".
Closing Date: On or about November 13, 1997.
Cut-Off Date: As of the close of business on October 1,
1997.
Trust Assets: Trust assets will include two pools (each,
a "Mortgage Loan Group" or "Group") of
mortgage loans (the "Mortgage Loans")
secured by mortgages or deeds of trust
(the "Mortgages") on residential properties
including investment properties, which may
be detached, attached, two-to-four family
dwellings, condominium units, townhouses,
manufactured housing or units in a
planned unit development (the "Mortgaged
Premises"), to be conveyed to the Trust on
the Closing Date .
Distributions on the Group I Certificates
will generally be made from payments on a
pool of fixed-rate first or second lien
Mortgage Loans ("Group I"). Distributions on
the Group II Certificates will generally be
made from payments on a pool of
adjustable-rate first lien Mortgage Loans
("Group II"). See "DESCRIPTION OF THE
OFFERED CERTIFICATES" in this Prospectus
Supplement.
All the Mortgage Loans will be originated or
acquired by the Seller in accordance with
its mortgage loan program. As a general
matter, the Seller's mortgage loan program
consists of the origination (or purchase)
and packaging of mortgage loans relating to
non-conforming credits. A non-conforming
credit means a mortgage loan which is
ineligible for purchase by Federal
National Mortgage Association ("FNMA") due
to credit characteristics that do not meet
FNMA guidelines. Mortgage loans originated
under the Seller's mortgage loan program
are likely to experience rates of
delinquency, bankruptcy and loss that are
higher (perhaps significantly) than mortgage
loans originated under FNMA guidelines.
See "RISK FACTORS" in this Prospectus
Supplement.
Mortgage Loans: Wherever reference is made herein to the
characteristics of the Mortgage Loans (or to
the Mortgage Loans in a Group) or to a
percentage thereof, the reference is
approximate and is based on the Scheduled
Principal Balances of the Mortgage Loans (or
the Mortgage Loans in a Group) as of the
Cut-Off Date. See "THE MORTGAGE LOAN
POOL-- Additional Information" in this
Prospectus Supplement.
The Mortgage Loans consist of 5,155
fixed-rate and adjustable-rate Mortgage
Loans of which less than 1% were 30 days or
more delinquent as of the Cut-Off Date. See
"RISK FACTORS-- Risk of Higher Delinquencies
Associated with Underwriting Standards" in
this Prospectus Supplement.
<PAGE>
<TABLE>
<CAPTION>
Group I. The following summarizes the
characteristics of the Mortgage Loans in
Group I (percentages are based on the
aggregate Scheduled Principal Balances of
Group I):
<S> <C>
Aggregate Scheduled Principal Balances $234,069,402.87
Average Scheduled Principal Balance $90,165
Range of Scheduled Principal Balances $9,933-$3,083,360
Range of Mortgage Interest Rates 7.7%-16.5%
Weighted Average Mortgage Interest Rate 10.1%
Weighted Average Loan-to-Value Ratio 73.2%
Weighted Average Combined Loan-to-Value Ratio 76.7%
Weighted Average Remaining Amortization Term 336 Months
Range of Remaining Amortization Terms 114-360 Months
Second Liens 6.2%
Balloon Mortgage Loans 14.6%
Mortgaged Premises
Single-family detached dwellings 83.1%
Single-family attached dwellings 2.7%
Planned unit developments 3.3%
Condominiums 3.9%
Weighted Average Servicing Fee Rate 0.50%
Master Servicing Fee Rate 0.029%
Group II. The following summarizes the
characteristics of the Mortgage Loans in
Group II (percentages are based on the
aggregate Scheduled Principal Balances of
Group II):
Aggregate Scheduled Principal Balances $366,239,036.94
Average Scheduled Principal Balance $143,118
Range of Scheduled Principal Balances $14,907-$1,700,000
Mortgage Interest Rates(4)
Weighted Average By Type of Index:
Six Month LIBOR 8.9%
3/27 and 2/28/LIBOR 9.8%
Two Step/LIBOR 9.7%
One Year CMT 8.9%
Gross Margin Range:
Six Month LIBOR 3.0%-9.8%
3/27 and 2/28/LIBOR 2.8%-8.8%
Two Step/LIBOR 5.3%-6.0%
One Year CMT 2.8%-9.0%
Current Weighted Average Mortgage Interest Rate 9.5%
Range of Current Mortgage Interest Rates 5.71%-14.75%
Weighted Average Maximum Lifetime Mortgage Interest Rate 15.9%
Range of Maximum Lifetime Mortgage Interest Rates 11.71%-20.75%
Weighted Average Lifetime Minimum Mortgage Interest Rate 9.3%
Range of Minimum Lifetime Mortgage Interest Rates 4.00%-14.75%%
Weighted Average Loan-to-Value Ratio 79.8%
Weighted Average Remaining Amortization Term 357 Months
Range of Remaining Amortization Terms 120-360 Months
Second Lien Mortgage Loans None
Mortgage Premises
Single-family detached dwelling 84.4%
Single-family attached dwelling 1.6%
Planned unit developments 6.8%
Condominiums 4.1%
Weighted Average Servicing Fee Rate 0.50%
Master Servicing Fee Rate 0.029%
See "THE MORTGAGE LOAN POOL --
Characteristics of the Mortgage Loans" in
this Prospectus Supplement.
</TABLE>
(1) All the Mortgage Loans in Group II are expected to be subject to periodic
interest rate adjustment caps, lifetime interest rate ceilings and lifetime
interest rate floors. Substantially all such Mortgage Loans had interest
rates which were not fully indexed (i.e., the Mortgage Interest Rates did
not equal the sum of the gross margin and the applicable index) as of the
Cut-Off Date. Six Month LIBOR Mortgage Loans bear interest at a rate that
adjusts semiannually based on the London interbank offered rate for six
month United States Dollar deposits in the London market based on quotations
of major banks as published in The Wall Street Journal ("Six Month LIBOR");
3/27/LIBOR Mortgage Loans and 2/28/LIBOR Mortgage Loans bear interest
initially at a rate fixed at origination for three (or two) years and
thereafter at a rate that adjusts semiannually based on Six Month LIBOR; Two
Step/LIBOR Mortgage Loans bear interest initially at a rate fixed at
origination for six months, then at the initial rate plus 1.5% for two years
and thereafter at a rate that adjusts One Year CMT Mortgage Loans bear
interest at a rate that adjusts annually based on the weekly average yield
on United States Treasury Securities adjusted to a constant maturity of one
year as made available by the Federal Reserve Board ("One Year CMT").
<PAGE>
Distributions, Generally: Distributions on the Certificates will be
made on the 25th day of each calendar month,
or if such day is not a business day, the
next succeeding business day (each, a
"Distribution Date") commencing on
November 25, 1997, to the holders of record
as of the last business day of the month
immediately preceding the calendar month
in which such Distribution Date occurs,
or the Closing Date in the case of the
first Distribution Date (each a "Record
Date").
Distributions of Interest: On each Distribution Date, interest
distributable with respect to the Group
I Certificates (other than the Class AF-1
Certificates) is the interest which has
accrued thereon at the related Pass-Through
Rate during the calendar month immediately
preceding the calendar month in which
such Distribution Date occurs; interest
distributable with respect to the
Class AF-1 Certificates and the Group
II Certificates is the interest which has
accrued thereon at the then applicable
related Pass-Through Rate from and
including the preceding Distribution
Date (or from the Closing Date in the case
of the first Distribution Date) to and
including the day prior to the current
Distribution Date. Each period referred to
in the prior sentence relating to the
accrual of interest is the "Accrual
Period" for the related Class of Offered
Certificates.
All calculations of interest on the Group
I Certificates (except for the Class AF-1
Certificates) will be made on the basis of
a 360-day year assumed to consist of twelve
30-day months. All calculations of interest
on the Class AF-1 Certificates and on the
Group II Certificates will be made on the
basis of the actual number of days and a
year of 360 days.
Distributions of Principal: On each Distribution Date, monthly
distributions in reduction of the
Certificate Principal Balances of the
Offered Certificates: (i) will
generally reflect collections of
principal in respect of the Mortgage Loans
in the related Group; and (ii) until
certain overcollateralization levels have
been reached, will include excess interest;
provided, however, to the extent described
herein, amounts distributable in respect of
principal to the Class AV-1 and Class AV-2
Certificates will represent collections of
principal in respect of the Mortgage Loans
in Subgroup A ("Subgroup A") and Subgroup B
("Subgroup B"), respectively, of Group
II. See "DESCRIPTION OF THE OFFERED
CERTIFICATES -- Distributions" and
"-- Overcollateralization and
Crosscollateralization Provisions" in this
Prospectus Supplement.
Credit Enhancement: The Credit Enhancement provided for the
benefit of the Holders of the Offered
Certificates consists of (x) with respect
to the Class A Certificates and, to a
limited extent, the Mezzanine
Certificates, the provisions with
respect to preferential distributions of
principal and interest described herein
and (y) the application of excess interest
on the Mortgage Loans under the
overcollateralization and
crosscollateralization mechanics of the
Trust.
Preferential Distributions: Initially
principal will be distributed exclusively
to the Class A Certificates of a Group (in
the manner described herein) until the
excess of the aggregate Scheduled
Principal Balances of the Mortgage Loans
of the related Group over the Class A
Certificate Principal Balances of such
Group is equal to or exceeds 27.00% for
Group I (40.00% for Group II) of such
Scheduled Principal Balances; thereafter,
principal is required to be distributed so
as to maintain that ratio.
After the principal of the Class A
Certificates of a Group has been reduced
to the extent described above (and not
before the Distribution Date in November
2000, unless the Certificate Principal
Balance of the related Class A Certificates
has been reduced to zero), principal not
required to be distributed with respect
to the Class A Certificates of that Group
will be distributed to the Class M-1
Certificates of that Group generally until
the excess of the aggregate Scheduled
<PAGE>
Principal Balances of the Mortgage Loans in
the related Group over the sum of the
Class A and Class M-1 Certificate
Principal Balances of the related Group is
equal to or exceeds 18.00% for Group I
(24.50% for Group II) of such Scheduled
Principal Balances; thereafter, principal
not required to be distributed with
respect to the Class A and Class M-1
Certificates will be distributed to the
Class M-2 Certificates generally until
the excess of the aggregate Scheduled
Principal Balances of the Mortgage Loans
in the related Group over the sum of the
Class A, Class M-1 and Class M-2
Certificate Principal Balances of the
related Group is equal to or exceeds
10.00% for Group I (12.50% for Group II) of
such Scheduled Principal Balances;
thereafter principal not required to be
distributed with respect to the Class A,
Class M-1 and Class M-2 Certificates will
be distributed to the Class B Certificates
of the related Group generally until the
excess of the aggregate Scheduled
Principal Balances of the Mortgage Loans
in the related Group over the sum of the
Class A, Class M-1, Class M-2 and Class B
Certificate Principal Balances of the
related Group is equal to or exceeds 5.00%
for Group I (5.50% for Group II) of
such Scheduled Principal Balances;
thereafter principal not required to be
distributed to the Offered Certificates will
be distributed to the Retained Certificates.
Notwithstanding the foregoing, (i) while
a Trigger Event (as defined herein) with
respect to a Group exists, principal will
be distributed exclusively to the Class A
Certificates of the related Group (and,
after the Certificate Principal Balance of
the related Class A Certificates has been
reduced to zero, exclusively to the Class
M-1 Certificates of the related Group, and,
after the Certificate Principal Balance of
the related Class M-1 Certificates has been
reduced to zero, exclusively to the Class
M-2 Certificates of the related Group and,
after the Certificate Principal Balance of
the related Class M-2 Certificates has
been reduced to zero, exclusively to the
Class B Certificates of the related Group),
(ii) if the Certificate Principal Balance
of the Class A Certificates of a Group has
been reduced to zero before November
2000, principal will be distributed
exclusively to the Class M-1 Certificates of
the related Group until November 2000 (or
until the Certificate Principal Balance
thereof has been reduced to zero), and, if
the Certificate Principal Balance of the
related Class M-1 Certificates has been
reduced to zero before November 2000,
exclusively to the Class M-2 Certificates
of the related Group until November 2000
(or until the Certificate Principal Balance
thereof has been reduced to zero) and, if
the Certificate Principal Balance of the
related Class M-2 Certificates has been
reduced to zero before November 2000,
exclusively to the Class B Certificates of
the related Group until November 2000 (or
until the Certificate Principal Balance
thereof has been reduced to zero); and
(iii) while a Subordinated Trigger Event
(as defined herein) with respect to a Group
exists, principal otherwise distributable
to the Retained Certificates will be
distributed to the related Subordinated
Certificates (in inverse order of
seniority).
See "DESCRIPTION OF OFFERED CERTIFICATES--
Distributions-- Distributions of Principal"
in this Prospectus Supplement.
Overcollateralization and
Crosscollateralization. The distribution
priorities provided by the Agreement are
expected to result initially in an
increased rate of amortization of the
Offered Certificates with respect to a
Mortgage Loan Group relative to the
amortization of the related Mortgage Loans
through the application of excess interest
to the payment of the principal of such
Offered Certificates until a required
level of overcollateralization is
achieved. In addition, under certain
circumstances, excess interest generated
by one Mortgage Loan Group will be applied
with respect to the other Mortgage Loan
Group. As a result, the aggregate
Scheduled Principal Balances of the
Mortgage Loans in
<PAGE>
each Mortgage Loan Group are expected,
from time to time, to exceed the Certificate
Principal Balances of the related Offered
Certificates. Generally, once the required
level of overcollateralization is reached,
the increased rate of amortization of the
Offered Certificates will cease.
See "DESCRIPTION OF THE OFFERED
CERTIFICATES -- Overcollateralization and
Crosscollateralization Provisions" in this
Prospectus Supplement.
Realized Losses. If on any Distribution
Date the Certificate Principal Balances of
the Offered Certificates of a Group exceed
the Scheduled Principal Balances of the
Mortgage Loans in the related Group, the
Certificate Principal Balances of the
related Subordinated Certificates (but not
the Class A Certificates) will be
reduced, in reverse order of seniority
(first the Class B Certificates, until the
Certificate Principal Balance thereof has
been reduced to zero, second the Class M-2
Certificates, until the Certificate
Principal Balance thereof has been reduced
to zero, and third the Class M-1
Certificates until the Certificate
Principal Balance thereof has been reduced
to zero), by the amount of the excess; any
such excess is referred to as an "Applied
Realized Loss Amount". Thereafter, such
Subordinated Certificates will only be
entitled to distributions of interest
and principal with respect to their
Certificate Principal Balances as so
reduced, and the amounts representing any
Applied Realized Loss Amount will be
distributable to the applicable Class of
Subordinated Certificates only to the
extent of future excess cash flow as
described herein. See "DESCRIPTION OF
THE OFFERED CERTIFICATES --
Overcollateralization and
Crosscollateralization-- Realized Losses".
Advances and Month
End Interest: Each Servicer will be obligated to make
advances with respect to delinquent
payments of interest (at the related
Mortgage Interest Rate less the Servicing
Fee, as defined below) and scheduled
principal due on each Mortgage Loan
serviced by it if it is determined, in
good faith, that such advances will be
recoverable. See "SERVICING OF MORTGAGE
LOANS-- Advances" in the Prospectus. In
addition, each Servicer will be required
to deposit an amount equal to Month End
Interest (as defined herein) with respect
to the preceding prepayment period but only
to the extent of the Servicing Fee payable
with respect to the related remittance date.
Servicing Fee: Each Servicer will be entitled to (i) a
monthly servicing fee with respect to
each Mortgage Loan serviced by it (the
"Servicing Fee"), in an amount equal to
one-twelfth of a fixed percentage per annum
(the "Servicing Fee Rate") multiplied by
the Scheduled Principal Balance of such
Mortgage Loan on the first day of the Due
Period (the period from and including the
second day of a month to and including the
first day of the following month) with
respect to each Distribution Date and (ii)
additional servicing compensation described
herein. See "THE MORTGAGE LOAN POOL--
Servicing and Other Compensation and
Payment of Expenses" in this Prospectus
Supplement and "SERVICING OF THE MORTGAGE
LOANS" in the Prospectus.
Master Servicing Fee: The Master Servicer will be entitled to a
monthly fee with respect to each Mortgage
Loan (the "Master Servicing Fee"),
payable on each Distribution Date, in an
amount equal to one-twelfth of the Master
Servicing Fee Rate multiplied by the
Scheduled Principal Balance of such
Mortgage Loan on the first day of the Due
Period with respect to each Distribution
Date. The Master Servicer will pay the
Trustee, the Paying Agent and the
Certificate Registrar their monthly fees
out of the Master Servicing Fee. See "THE
MORTGAGE LOAN POOL-- The Master Servicer"
in this Prospectus Supplement and
"SERVICING OF MORTGAGE LOANS -- Master
Servicer Duties" in the Prospectus.
<PAGE>
Optional Termination: Meritech will have the right to purchase
all the Mortgage Loans on any Distribution
Date when the aggregate Scheduled
Principal Balances of the Mortgage Loans
have declined to less than 10% of the
aggregate Scheduled Principal Balances
of the Mortgage Loans as of the Closing Date
(the first such Distribution Date, the
"Initial Optional Termination Date"). Any
such repurchase will result in the early
retirement of the Offered Certificates. See
"THE AGREEMENT-- Termination" in this
Prospectus Supplement.
Ratings: It is a condition of the original
issuance of the Offered Certificates
that the Offered Certificates receive
ratings by Moody's Investors Service, Inc.
("Moody's"), and Fitch Investors Service,
L.P. ("Fitch"), as follows:
Group I Certificates Moody's Fitch
Class AF-1 Aaa AAA
Class AF-2 Aaa AAA
Class AF-3 Aaa AAA
Class AF-4 Aaa AAA
Class AF-5 Aaa AAA
Class AF-6 Aaa AAA
Class MF-1 Aa2 AA
Class MF-2 A2 A
Class BF Baa2 BBB
Group II Certificates Moody's Fitch
Class AV-1 Aaa AAA
Class AV-2 Aaa AAA
Class MV-1 Aa2 AA
Class MV-2 A2 A
Class BV Baa2 BBB
A security rating is not a recommendation to
buy, sell or hold securities and may be
subject to revision or withdrawal at any
time by the assigning entity. The ratings do
not represent any assessment of the
likelihood or rate of principal prepayments,
or the likelihood that any Group II
Certificates Carryover will be paid. See
"PREPAYMENT AND YIELD CONSIDERATIONS" and
"RATINGS" in this Prospectus Supplement and
"MATURITY, PREPAYMENT AND YIELD
CONSIDERATIONS" in the Prospectus.
Book-Entry Registration of
the Offered Certificates: The Offered Certificates will initially
be issued in book-entry form. Persons
acquiring beneficial ownership interests in
Offered Certificates ("Beneficial Owners")
may elect to hold their interests through
The Depository Trust Company ("DTC"), in
the United States, or CEDEL Bank, S.A.
("CEDEL") or the Euroclear System
("Euroclear"), in Europe. Transfers within
DTC, CEDEL or Euroclear, as the case may
be, will be made in accordance with the
usual rules and operating procedures of the
relevant system. So long as the Offered
Certificates are Book-Entry Certificates
(as defined in the Prospectus), such
Certificates will be evidenced by one
or more Certificates registered in the
name of Cede & Co. ("Cede"). Cross-market
transfers between persons holding directly
or indirectly through DTC, on the one
hand, and counterparties holding directly
or indirectly through CEDEL or
Euroclear, on the other, will be effected
in DTC through Citibank, N.A.
("Citibank") or The Chase Manhattan Bank
("Chase", and together with Citibank,
the "European Depositaries"), the
relevant depositaries of CEDEL and
Euroclear, respectively, and each a
participating member of DTC. No Beneficial
Owner will be entitled to receive a
definitive certificate representing such
person's interest, except in the event that
Definitive Certificates (as defined herein)
are issued under the limited circumstances
described herein. All references in this
Prospectus Supplement to any Offered
Certificates reflect the rights of
Beneficial Owners only as such rights may
be exercised through DTC and its
participating organizations for so long as
such Offered Certificates are held by DTC.
See "DESCRIPTION OF THE OFFERED
CERTIFICATES-- Book-Entry Registration of
the Offered Certificates" and "--Global
Clearance, Settlement and Tax Documentation
Procedures" in the Prospectus.
Federal Income Tax Aspects: For Federal income tax purposes one or more
elections will be made to treat certain
assets of the Trust as a "real estate
mortgage investment conduit" ("REMIC").
Each Class of the Offered Certificates and
the Class C Certificates will be designated
as a "regular interest" in a REMIC and
generally will be treated as a debt
instrument of the Trust for federal income
tax purposes. The REMICs will also issue
the Class R Certificates, which will be
designated as the sole class of "residual
interests" in the REMICs. See "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES" in
this Prospectus Supplement and in the
Prospectus.
ERISA Considerations: Fiduciaries of employee benefit plans
subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"),
or plans subject to Section 4975 of the
Internal Revenue Code of 1986 (the "Code")
should carefully review with their legal
advisors whether the purchase or holding of
the Class A Certificates could give rise to
a transaction prohibited or not otherwise
permissible under ERISA or the Code. The
Subordinated Certificates may not be
purchased by employee benefit plans that
are subject to ERISA except as provided
herein. See "ERISA CONSIDERATIONS" in
this Prospectus Supplement and in the
Prospectus.
Legal Investment
Considerations: The Class AV-1, Class AV-2 and Class MV-1
Certificates will constitute "mortgage
related securities" for purposes of the
Secondary Mortgage Market Enhancement Act
of 1984 ("SMMEA") for so long as they
are rated in one of the two highest
rating categories by one or more nationally
recognized statistical rating
organizations. As such, they will be legal
investments for certain entities to the
extent provided in SMMEA, subject to state
laws overriding SMMEA. In addition,
institutions whose investment activities
are subject to review by federal or state
regulatory authorities may be or may become
subject to restrictions, which may be
retroactively imposed by such regulatory
authorities, on the investment by such
institutions in certain forms of mortgage
related securities. Furthermore, certain
states have enacted legislation overriding
the legal investment provisions of SMMEA.
Although the Class A Certificates in
Group I and the Class MF-1 Certificates
are expected to be rated in one of the two
highest rating categories by Moody's and
Fitch, they will not constitute "mortgage
related securities" for purposes of SMMEA
because some of the Mortgage Loans in Group
I are secured by second liens. Accordingly,
many institutions with legal authority to
invest in comparably rated securities may
not be legally authorized to invest in
those.
<PAGE>
RISK FACTORS
Prospective investors in the Offered Certificates should consider the
following factors (as well as the factors set forth under "RISK FACTORS" in the
Prospectus) in connection with the purchase of the Offered Certificates.
Risk of Mortgage Loan Interest Rates Reducing Pass-Through Rate for
Group II Certificates. Subject to the Group II Available Funds Cap, the
Pass-Through Rates for the Group II Certificates are based upon the value of an
index (One Month LIBOR) which is different from the value of the indices
applicable to the Mortgage Loans in Group II, as described in this Prospectus
Supplement (either as a result of the use of a different index rate,
determination date, rate adjustment date, rate cap or rate floor). Group II
contains Mortgage Loans the interest rates on which adjust semi-annually based
upon Six Month LIBOR, annually based upon One Year CMT or semi-annually based
upon Six Month LIBOR beginning from two to three years after origination,
whereas the Pass-Through Rates on the Group II Certificates adjust monthly based
upon One Month LIBOR, subject to the Group II Available Funds Cap. Consequently,
the Pass-Through Rate for any Distribution Date may not equal the rate
determined on the basis of One Month LIBOR plus the applicable margin on the
Group II Certificates during the related Accrual Period. In particular, the
Pass-Through Rates adjust monthly, while the interest rates of the Mortgage
Loans in Group II adjust less frequently, with the result that the Group II
Available Funds Cap may be lower than the otherwise applicable Pass-Through
Rates for extended periods in a rising interest rate environment. In addition,
One Month LIBOR and the indices applicable to such Mortgage Loans may respond to
different economic and market factors, and there is not necessarily any
correlation between them. Thus, it is possible, for example, that One Month
LIBOR may rise during periods in which such indices are stable or are falling or
that, even if One Month LIBOR and such indices rise during the same period, One
Month LIBOR may rise much more rapidly than such indices. If, on any
Distribution Date, the Pass-Through Rates on one or more classes of Group II
Certificates are limited by application of the Group II Available Funds Cap, a
Group II Certificates Carryover will result and, to the extent funds are
available (as to which no assurances can be given) on subsequent Distribution
Dates in accordance with the priority of payment provisions set forth in the
Agreement, will be distributed to the Group II Certificates. The ratings on the
Group II Certificates do not represent an assessment of the likelihood of
payment of any Group II Certificates Carryover.
Risk of Reduction in Class AF-1 Certificate Pass-Through Rate. The
Pass-Through Rate for the Class AF-1 Certificates is based upon an index (One
Month LIBOR) whereas the interest rates on the Mortgage Loans in Group I are
fixed. Thus, if One Month LIBOR rises above the weighted average interest rate
on the Mortgage Loans in Group I, the Pass-Through Rate on the Class AF-1
Certificates will be limited by application of the Class AF-1 Available Funds
Cap. No interest carryover amounts will be payable with respect to the Class
AF-1 Certificates in the event the Pass-Through Rate for such Certificates is
limited on any Distribution Date by the Class AF-1 Available Funds Cap.
Risk of Higher Delinquencies Associated with Underwriting Standards.
All the Mortgage Loans will be originated or acquired by the Seller in
accordance with its mortgage loan program as described herein and in the
Prospectus. As a general matter, the Seller's mortgage loan program consists of
the origination (or purchase) and packaging of mortgage loans relating to
non-conforming credits. A non-conforming credit means a mortgage loan which is
ineligible for purchase by Federal National Mortgage Association ("FNMA") due to
credit characteristics that do not meet FNMA guidelines. Mortgage loans
originated under the Seller's mortgage loan program are likely to experience
rates of delinquency, bankruptcy and loss that are higher (perhaps
significantly) than mortgage loans originated under FNMA guidelines.
Nevertheless, approximately 75.8% and approximately 86.2% (by aggregate
Scheduled Principal Balances as of the Cut-off Date) of the Mortgage Loans in
Group I and Group II, respectively, had a first monthly payment due on or before
October 1, 1997. Therefore, it was not possible for any Mortgage Loan other than
such Mortgage Loans to have had a monthly payment that was delinquent 30 days or
more.
Subordination--Limited Protection Afforded to Class A Certificates. The
rights of the Class M-1 Certificates of each Group to receive distributions with
respect to the Mortgage Loans of such Group will be subordinate to the rights of
the Class A Certificates of such Group to receive such distributions, the rights
of the Class M-2 Certificates to receive distributions with respect to the
Mortgage Loans of such Group will be subordinate to the rights of the Class A
and the Class M-1 Certificates of such Group to receive such distributions and
the rights of the Class B Certificates of such Group to receive distributions
with respect to the Mortgage Loans of such Group will be subordinate to the
rights of the Class A, Class M-1 and Class M-2 Certificates of such Group to
receive such distributions. The subordination of the Subordinated Certificates
of each Group relative to the Class A Certificates of such Group (and of the
more lower-ranking Classes of the Subordinates Certificates of each Group to the
higher-ranking Classes thereof) is intended to enhance the likelihood of regular
receipt by each Class of the Class A Certificates (and such higher ranking
Classes) of the full amount of the monthly distributions allocable to them and
to afford protection against losses.
Subordination--Allocation of Losses to Subordinated Certificates. If
Realized Losses are incurred with respect to the Mortgage Loans in a Group to
the extent that the aggregate Certificate Principal Balances of the Offered
Certificates
<PAGE>
of such Group exceed the Scheduled Principal Balances of the Mortgage Loans in
such Group, the Certificate Principal Balances of the Subordinated Certificates
of such Group will be reduced in reverse order of seniority (first Class B,
second Class M-2 and third Class M-1) by the amount of the excess. SEE
"DESCRIPTION OF THE OFFERED CERTIFICATES -- Overcollateralization and
Crosscollateralization Provisions". Consequently, the yields actually realized
on the Mezzanine Certificates and Class B Certificates of each Group will be
sensitive, in varying degrees, to defaults on the Mortgage Loans in such Group
(and the timing thereof). Investors should fully consider the risks associated
with an investment in the Mezzanine Certificates or Class B Certificates,
including the possibility that such investors may not fully recover their
initial investment as a result of Realized Losses on the Mortgage Loans. See
"DESCRIPTION OF THE OFFERED CERTIFICATES -- Overcollateralization and
Crosscollateralization Provisions" and "-- Risk of Higher Delinquencies
Associated with Underwriting Standards".
Risk of Higher Default Rates Associated with California Real Property.
Because the Mortgaged Premises for approximately 27.7% of the Mortgage Loans
(approximately 37.2% by Scheduled Principal Balance) in Group II and
approximately 14.7% of the Mortgage Loans (approximately 20.4% by Scheduled
Principal Balance) in Group I are located in California, an overall decline in
the California residential real estate market could adversely affect the values
of the Mortgaged Premises securing such Mortgage Loans, causing the Scheduled
Principal Balances of the related Mortgage Loans to equal or exceed the value of
such Mortgaged Premises.
The standard hazard insurance policy required to be maintained under
the terms of each Mortgage Loan does not insure against physical damage arising
from earth movement (including earthquakes, landslides and mudflows). See
"SERVICING OF MORTGAGE LOANS -- Standard Hazard Insurance Policies" in the
Prospectus. Accordingly, if any such event causes losses in respect of the
Mortgage Loans and the protection afforded by the overcollateralization and
cross-collateralization of the Certificates is insufficient, the Holders of the
Offered Certificates could experience a loss on their investment.
Risk of Higher Default Rates Associated with Second Liens; Decline in
Market Value; Breaches of Representations. Because approximately 6.2% of the
aggregate Scheduled Principal Balance of the Mortgage Loans in Group I are
secured by second liens subordinate to the rights of the mortgagee or
beneficiary under the related first mortgage or deed of trust, the proceeds from
any liquidation, insurance or condemnation proceedings with respect to such
Mortgage Loans will be available to satisfy the outstanding balance of such a
Mortgage Loan only to the extent that the claims of such first mortgagee or
beneficiary have been satisfied in full, including any related foreclosure
costs. In addition, a second mortgagee may not foreclose on the property
securing a second mortgage unless it forecloses subject to the first mortgage,
in which case it must either pay the entire amount due on the first mortgage to
the first mortgagee at or prior to the foreclosure sale or undertake the
obligation to make payments on the first mortgage in the event the mortgagor is
in default thereunder. The Trust will have no source of funds to satisfy the
first mortgage or make payments due to the first mortgagee. See "MORTGAGE LOAN
POOL -- Advances and Month-End Investment" herein.
An overall decline in the residential real estate market, the general
condition of Mortgaged Premises, or other factors, could adversely affect the
values of the Mortgage Premises such that the outstanding balances of the
Mortgage Loans, together with any senior liens on the Mortgage Premises, equal
or exceed the value of the Mortgaged Premises. A decline in the value of
Mortgaged Premises would affect the interest of the Trust in the Mortgaged
Premises before having any effect on the interest of the related first
mortgagee, and could cause the Trust's interest in the Mortgage Premises to be
extinguished. If such a decline occurs, the actual rates of delinquencies,
foreclosures and losses on the Mortgage Loans could be higher than those
currently experienced in the mortgage lending industry in general. In addition,
adverse economic conditions (which may or may not affect real property values)
may affect the timely payment by borrowers of scheduled payments of principal
and interest on the Mortgage Loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to the Trust.
Under the Sales Agreement, the Seller will represent and warrant that,
upon default by a borrower and subsequent foreclosure of each Mortgaged
Premises, the holder of the related Mortgage Loan will be able to obtain good
and merchantable title to the related Mortgaged Premises; however, for a second
Mortgage Loan with a balance of less than $50,000, the Seller may not have
obtained title insurance. In the event of an uncured breach of such
representation and warranty that materially and adversely affects the interests
of Certificateholders, the Seller will be required to repurchase the affected
Mortgage Loan or substitute another mortgage loan therefor.
Risk of Higher Default Rates for Balloon Loans. Approximately 14.6% of
the aggregate Scheduled Principal Balance of the Mortgage Loans in Group I are
"balloon loans" that provide for the payment of the unamoritized principal
balance in a single payment at maturity ("Balloon Loans"). Balloon Loans provide
for equal monthly payments, consisting of principal and interest, generally
based on a 30-year amortization schedule, and a single payment of the remaining
balance of the Balloon Loan, generally five, seven, ten or 15 years after
origination. Amortization of a Balloon Loan based on a
<PAGE>
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 Depositor does not have any information regarding the
default history or prepayment history of payments on Balloon Loans. Because
borrowers of Balloon Loans are required to make substantial single payments at
maturity and because the ability to repay such amounts is frequently dependent
upon the ability to obtain refinancing, it is possible that the default risk
associated with Balloon Loans is greater than that associated with
fully-amortizing Mortgage Loans. Neither the Servicers nor the Master Servicer
will be required to advance defaulted payments at maturity on Balloon Loans.
Other Legal Considerations; Litigation. Applicable state laws generally
regulate interest rates and other charges, require certain disclosures, and
require licensing of the Seller and the other originators. In addition, other
state laws, public policy and general principles of equity relating to the
protection of consumers, unfair and deceptive practices and debt collection
practices may apply to the origination, servicing and collection of the Mortgage
Loans. The Seller has represented that all applicable federal and state laws
were complied with in connection with the origination of the Mortgage Loans. If
such representation is breached in respect of any Mortgage Loan in a manner that
materially and adversely affects Certificateholders, the Seller will be
obligated to repurchase the affected Mortgage Loan at a price equal to the
unpaid principal balance thereof plus accrued interest or to substitute a new
mortgage loan in place of the affected Mortgage Loan. Unscheduled recoveries of
principal of Mortgage Loans due to any such repurchase by the Seller, depending
on the magnitude thereof and the availability of funds therefor, will accelerate
the timing of principal distributions to holders of the related Certificates and
thereby affect the yields and weighted average lives of such Certificates,
especially those purchased at a premium. See "PREPAYMENT AND YIELD
CONSIDERATIONS" herein. In addition, depending on the provisions of the
applicable law and the specific facts and circumstances involved, violations of
these laws, policies and principles may limit the ability of the Trust to
collect all or part of the principal of or interest on the Mortgage Loans, may
entitle the borrower to a refund of amounts previously paid and, in addition,
could subject the Depositor to damages and administrative enforcement. See
"CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS -- Anti-Deficiency Legislation and
Other Limitations on Lenders" in the Prospectus.
In November 1996, the Seller and another mortgage lending institution
were served with a complaint in which the plaintiffs alleged: (a) in obtaining
mortgage loans from bankers, the Seller and the other mortgage lending
institution paid brokers "yield spread premiums", which the plaintiffs alleged
are illegal under the Real Estate Settlement Procedures Act of 1974 ("RESPA");
(b) although the yield spread premiums paid to the brokers were in most
instances disclosed on the HUD-1 settlement sheets, they were not made available
prior to closing in the good faith estimates; and (c) payment of such excess
amounts is prohibited under RESPA regardless of disclosure. The complaint
requested certification of a class of similarly situated persons and damages
equal to three times the settlement charges. In January 1997, the court
dismissed the part of the complaint based on the alleged failure to disclose the
excess amounts on the good faith estimate. In response to a preliminary motion
filed by the other mortgage lending institution involved in the case, the court
indicated that payment of the excess amounts was prohibited by RESPA but that
the availability to the defendants of the RESPA "safe harbor" for acts done in
good faith conformity with applicable regulations could not be resolved at that
time; subsequently, the court indicated that it had not reached a final decision
about the legality of the payment of the excess amounts. In July 1997 the court
denied the plaintiffs' motion to certify a class and the defendants settled with
the original plaintiffs; subsequently another person asserting that she was a
member of the class appealed the denial of the request for certification of the
class as to the Seller, and the defendants appealed the denial of their motion
to dismiss the decision allowing the new alleged class member to intervene in
the litigation. A number of major mortgage lending institutions have been sued
on the basis of similar allegations. The Seller requires that the brokers from
which it purchases mortgage loans provide evidence that the payment of excess
amounts has been disclosed in the good faith estimate and does not believe that
the resolution of the lawsuit will have a material adverse effect on its
business. To the extent, however, that a class of plaintiffs is certified which
includes borrowers under the Mortgage Loans and the court ultimately determines
that payment of the excess amounts was prohibited by RESPA, the related Mortgage
Loans may be subject to repurchase as described in the preceding paragraph.
Higher Balance Mortgage Loans. Certain of the Mortgage Loans are
expected to have high principal balances (in one case, $3,083,360 as of the
Cut-Off Date). As a result, the payment experience on any such Mortgage Loan may
have a disproportionate effect on the amortization of the related Certificates,
the default experience of the Subordinate Certificates and, in the case of the
Group I Certificates, the related Pass-Through Rates thereof.
Risk of Seller Insolvency. The Seller believes that the transfer of the
Mortgage Loans by the Seller to the Depositor and by the Depositor to the Trust
constitute sales by the Seller to the Depositor and by the Depositor to the
Trust and, accordingly, that the Mortgage Loans will not be part of the assets
of the Seller or the Depositor in the event of the insolvency of the Seller and
will not be available to the creditors of the Seller. Nevertheless, in the event
of an insolvency, it is possible that a bankruptcy trustee or a creditor of the
Seller may argue that the transaction between the Seller and the Depositor was a
pledge of such Mortgage Loans in
<PAGE>
connection with a borrowing by the Seller rather than a true sale. Such an
attempt, even if unsuccessful, could result in delays in distributions on the
Certificates.
On the Closing Date, the Trustee, the Depositor and the Rating Agencies
will have received an opinion of Arter & Hadden, counsel to the Depositor, with
respect to the true sale of the Mortgage Loans from the Seller to the Depositor
and from the Depositor to the Trust, in form and substance satisfactory to the
Rating Agencies.
THE MORTGAGE LOAN POOL
General
All the Mortgage Loans will be originated or acquired by the Seller in
accordance with its mortgage loan program as described herein or in the
Prospectus. As a general matter, the Seller's mortgage loan program consists of
the origination and packaging of mortgage loans relating to non-conforming
credits. A non-conforming credit means a mortgage loan which is ineligible for
purchase by FNMA due to credit characteristics that do not meet FNMA guidelines.
Mortgage loans originated or purchased under the Seller's mortgage loan program
are likely to experience rates of delinquency, bankruptcy and loss that are
higher (perhaps significantly) than mortgage loans originated under FNMA
guidelines.
Underwriting Standards
The following is a description of the underwriting procedures
customarily employed by the Seller with respect to mortgage loans which it
purchases or originates. The Seller's underwriting guidelines are designed to
determine: (i) the borrower's ability and willingness to repay a loan according
to its terms and (ii) whether the value of the property securing the loan will
allow the lender to recover its investment if a loan default occurs. Each loan
is underwritten individually with the underwriting decision based on the risk
profile of the loan, even in instances where the Seller purchases a group of
mortgage loans in bulk. In a portion of such bulk purchases, the Seller engages
contract underwriters to underwrite individual mortgage loans under the direct
supervision of the Seller's senior underwriting staff.
The Seller has established classifications with respect to the credit
profile of the applicant. The terms of the loans and the maximum loan-to-value
ratios and debt-to-income ratios vary based on the classification of the
applicant. Loan applicants with less favorable credit ratings are generally
offered loans with higher interest rates and lower loan-to-value ratios than
applicants with more favorable credit ratings. The general guidelines used by
the Seller's underwriting staff in classifying loan applicants are set forth
below.
<TABLE>
<CAPTION>
A+ A A- B C D
<S> <C>
Mortgage History
No late payments No late payments Maximum of two Maximum of four Maximum of five Maximum of six
30-day late 30-day late 30-day and one 30-day, two
payments in last payments or two 60-day late 60-day and one
12 months 30-day and one payments or four 90-day late
(maximum of one 60-day late 30-day and one payments
30-day late payments in last 90-day late
payment if LTV 12 months payments in last
is greater than 12 months
85%)
Secondary Credit
Maximum of two Maximum of three Maximum of three Maximum of four Discretionary Discretionary
30-day late 30-day late 30-day late 30-day and one
payments on payments on payments on 60-day late
revolving credit; revolving credit; revolving payments on
one 30-day late three 30-day late credit; three revolving credit;
payment on payments on 30-day late three 30-day and
installment installment payments on one 60-day late
credit credit installment payments on
credit (isolated installment
60-day late credit (isolated
payments 90-day late
acceptable) payments
acceptable)
Bankruptcy Filings
Chapters Chapter 7- Chapter 7- Chapter 7- Chapter 7- Chapter 7-
7 & 13 - Discharged Discharged Discharged 2 Discharged Discharged
Discharged 2 years 2 years years Chapter 2 years 2 years
3 years Chapter 13- Chapter 13- 13-Discharged Chapter 13- Chapter 13-
(re-estab- Discharged Discharged 1 year (good Discharged 1 Discharged
lished credit 1 year 1 year (re- credit since year (fair 1 year
since the (re-established established discharge) credit since (fair to poor
discharge) credit since credit since discharge) credit since
discharge) discharge) discharge)
Debt-To-Income Ratio
28%/38% If LTV is less than 45% 50% 55% 60%
or equal to 80%,
33%/40%
If LTV is greater
than 80%, 33%/38%
Maximum Loan-To-Value
95% 95% 90% 85% 80% 65%
</TABLE>
The Seller's underwriting philosophy is to analyze the overall
situation of the borrower, and to take into account compensating factors
which may be used to offset certain areas of weakness. Specific compensating
factors include loan-to-value, mortgage payment history, employment stability
and years at residence.
The Seller's underwriting standards are applied in accordance with
applicable federal and state laws and regulations and require a qualified
appraisal of the mortgaged property which conforms to Federal Home Loan Mortgage
Corporation ("FHLMC") and Federal National Mortgage Corporation ("FNMA")
standards. Each appraisal includes a market data analysis
<PAGE>
based on recent sales of comparable homes in the area and a replacement cost
analysis based on the current cost of constructing a similar home. The appraisal
is required to be no more than 180 days old on the day the loan is originated.
In most instances, a second drive-by appraisal is required in connection with
properties that have a value of $300,000 to $500,000 and a second full appraisal
is required in connection with properties that have a value over $500,000.
The Seller has four loan documentation programs: (i) Full
Documentation, (ii) Limited Documentation, (iii) Stated Income and (iv) No
Ratio. Under the Full Documentation program, the underwriter reviews the
borrower's credit report, handwritten loan application, property appraisal, and
the documents that are provided to verify employment and bank deposits (e.g.,
W-2's and paystubs, or signed tax returns for the past two years). The Limited
Documentation program is only available for self-employed borrowers. Under the
Limited Documentation program, six months of personal and/or business bank
statements are acceptable documentation of the borrower's stated cash flow.
The Stated Income program is also only available for self-employed
borrowers. Under the Stated Income program, the borrower's income as stated on
the loan application must be reasonable for the related occupation because the
income is not independently verified. The Seller does, however, verify the
existence of the business; and the business must have been in existence for at
least two years. The No Ratio program was specifically created for borrowers
that want to be qualified based primarily on their equity positions in their
homes and their individual credit profiles. The Stated Income and the No Ratio
programs are not available to borrowers that fall under the A+ credit
classification. In addition, the Seller may, from time-to-time, apply
underwriting criteria which are either more stringent or more flexible depending
on the economic conditions of a particular market.
The following table shows the distribution of the Mortgage Loans in
relation to the classifications described above:
<TABLE>
<CAPTION>
Group I Group II
--------------------------------------------- -------------------------------------------------
Saxon Credit Number of Number of Current Current Number of Number of Current Current
Grade Loans Loans(%) Balance Balance(%) Loans Loans(%) Balance Balance(%)
<S> <C>
A+ 135 5.20 $ 13,864,704.52 5.92 58 2.27 $ 12,498,047.05 3.41
A 978 37.67 101,060,636.40 43.18 282 11.02 45,115,536.98 12.32
A- 913 35.17 81,624,510.74 34.87 1,506 58.85 222,877,688.80 60.86
B 351 13.52 24,792,043.02 10.59 418 16.33 53,745,199.79 14.67
C 161 6.20 9,576,916.30 4.09 213 8.32 23,818,343.85 6.50
D 58 2.23 3,150,591.89 1.35 82 3.20 8,184,220.47 2.23
------- ---- ------------ -------------- ---- ------------ ----
2,596 100 $234,069,402.87 100 2,559 100 $366,239,036.94 100
======= === =============== === ====== === =============== ===
</TABLE>
The Mortgaged Premises consist of residential properties which may be
detached, attached, two- to- four family dwellings, condominium units,
townhouses, manufactured housing, or units in a planned unit development. The
Mortgaged Premises may be owner-occupied (which includes second and vacation
homes) or non-owner occupied investment properties. The Mortgage Loans are
secured by first and second lien mortgages on the Mortgaged Premises.
The Mortgage Loans satisfy certain criteria including: a remaining term
to stated maturity of no more than 360 months; and a Mortgage Interest Rate as
of the Cut-Off Date of at least 7.7% with respect to Group I; and at least 5.7%
with respect to Group II. Substantially all the Mortgage Loans had a
loan-to-value ratio not in excess of 95% and were originated less than six
months prior to the Cut-Off Date. Each Mortgage Loan in the Trust will be
assigned to one of the two Mortgage Loan Groups comprised of Mortgage Loans
which bear fixed interest rates only, in the case of Group I, and Mortgage Loans
which bear adjustable interest rates only, in the case of Group II. Subject to
the crosscollateralization provisions described herein, the Group I Certificates
represent undivided ownership interests in all Mortgage Loans contained in Group
I, and the Group II Certificates represent undivided ownership interests in all
Mortgage Loans contained in Group II.
Characteristics of the Mortgage Loans
The information in the following tables (including the textual
information beneath each table) has been based solely on the Mortgage Loans as
of the Cut-Off Date. Totals may not sum to 100% due to rounding. All of the
calculations are a percent of the given pool.
<PAGE>
1) Current Scheduled Principal Balance
Group II Group I
-------- -------
No. of Scheduled No. of Scheduled
Current Scheduled Mortgage Principal Mortgage Principal
Principal Balance Loans(%) Balance(%) Loans(%) Balance(%)
$50,000 and below 7.8 2.1 34.8 13.0
50,001- 100,000 33.1 17.7 37.7 29.9
100.001 - 150,000 27.5 23.5 16.1 21.8
150,001 - 200,000 13.5 16.5 5.0 9.6
200,001 - 250,000 7.8 12.1 2.4 5.9
250,001 - 300,000 3.8 7.1 1.2 3.5
300,001 - 350,000 1.9 4.4 0.7 2.6
350,001 - 400,000 1.4 3.7 0.2 0.7
400,001 - 450,000 0.9 2.7 0.5 2.4
450,001 - 500,000 0.8 2.6 0.5 2.9
500,001 - 550,000 0.5 1.7 0.2 0.9
550,001 - 600,000 0.4 1.6 0.3 1.7
600,001 - 650,000 0.2 1.0 0.0 0.3
650,001 - 700,000 0.2 0.7 0.2 1.1
700,001 - 750,000 0.2 0.8 0.0 0.0
750,001 - 800,000 0.0 0.0 0.0 0.0
800,001 - 850,000 0.0 0.0 0.0 0.3
850,001 - 900,000 0.0 0.0 0.0 0.0
900,001 - 950,000 0.0 0.0 0.0 0.4
950,001 - 1,000,000 0.0 0.3 0.0 0.4
over 1,000,000 0.2 1.6 0.1 2.4
--- --- --- ---
Totals: 100 100 100 100
=== === === ===
The average Scheduled Principal Balance is (a) $116,452 for the Mortgage Loans,
(b) $143,118 for Group II ($108,617 for Subgroup A and $183,564 for Subgroup B)
and (c) $90,165 for Group I. The minimum and maximum Scheduled Principal
Balances of the Mortgage Loans are $9,933 and $3,083,360, respectively. The
minimum and maximum Scheduled Principal Balances are $18,700 and $213,665,
respectively, for Subgroup A and $14,907 and $1,700,000, respectively, for
Subgroup B.
2) Current Mortgage Interest Rates
Group II Group I
-------- -------
Current No. of Scheduled No. of Scheduled
Mortgage Interest Mortgage Principal Mortgage Principal
Rate(%) Loans(%) Balance(%) Loans(%) Balance(%)
5.500 - 5.999 0.1 0.1 0.0 0.0
6.000 - 6.499 0.0 0.0 0.0 0.0
6.500 - 6.999 0.6 0.6 0.0 0.0
7.000 - 7.499 1.1 1.8 0.0 0.0
7.500 - 7.999 4.8 6.7 0.2 0.3
8.000 - 8.499 5.2 6.5 1.3 1.6
8.500 - 8.999 17.0 18.4 6.5 8.9
9.000 - 9.499 12.3 13.1 12.2 17.8
9.500 - 9.999 26.3 26.2 20.6 25.8
10.000 - 10.499 10.3 9.2 12.9 13.6
10.500 - 10.999 12.2 10.2 14.5 12.3
11.000 - 11.499 4.8 3.6 9.9 7.3
11.500 - 11.999 3.4 2.4 8.7 5.9
12.000 - 12.499 0.8 0.4 5.8 3.2
12.500 - 12.999 0.7 0.4 3.2 1.8
13.000 - 13.499 0.1 0.1 2.1 0.8
13.500 - 13.999 0.2 0.1 1.1 0.4
14.000 - 14.499 0.0 0.1 0.3 0.1
14.500 - 14.999 0.0 0.0 0.3 0.1
15.000 - 15.499 0.0 0.0 0.2 0.1
15.500 - 15.999 0.0 0.0 0.1 0.0
16.000 - 16.499 0.0 0.0 0.0 0.0
16.500 and above 0.0 0.0 0.1 0.0
--- --- --- ---
Totals: 100 100 100 100
=== === === ===
The weighted average current Mortgage Interest Rate is (a) 9.7% per annum for
the Mortgage Loans, (b) 9.5% per annum for Group II (9.54% for Subgroup A and
9.43% for Subgroup B) and (c) 10.1% per annum for Group I. The minimum and
maximum current Mortgage Interest Rates are 5.71% and 13.00%, respectively, for
Subgroup A and 6.25% and 14.75%, respectively, for Subgroup B.
3) Maximum Lifetime Mortgage Interest Rates on
Group II
Maximum Lifetime No. of Scheduled
Mortgage Interest Mortgage Principal
Rates(%) Loans(%) Balance(%)
11.500 - 11.999 0.1 0.1
12.000 - 12.499 0.1 0.1
12.500 - 12.999 0.7 0.8
13.000 - 13.499 1.0 1.6
13.500 - 13.999 3.6 5.4
14.000 - 14.499 3.3 4.2
14.500 - 14.999 10.8 12.3
15.000 - 15.499 8.6 9.8
15.500 - 15.999 19.7 19.5
16.000 - 16.499 10.1 9.3
16.500 - 16.999 19.0 18.1
17.000 - 17.499 7.3 6.5
17.500 - 17.999 8.9 7.6
18.000 - 18.499 3.4 2.5
18.500 - 18.999 2.4 1.6
19.000 - 19.499 0.4 0.2
19.500 - 19.999 0.4 0.1
20.000 - 20.499 0.1 0.1
20.500 - 20.999 0.1 0.0
--- ---
Totals: 100 100
=== ===
The weighted average maximum lifetime Mortgage Interest Rate is 15.9%. One Group
II Mortgage Loan does not have a cap on the Mortgage Interest Rate.
4) Minimum Lifetime Mortgage Interest Rates on Group II
Minimum Lifetime No. of Scheduled
Mortgage Interest Mortgage Principal
Rates(%) Loans(%) Balance(%)
4.000 - 4.499 0.1 0.1
4.500 - 4.999 0.1 0.3
5.000 - 5.499 0.4 1.0
5.500 - 5.999 1.1 2.0
6.000 - 6.499 0.5 0.9
6.500 - 6.999 1.9 1.9
7.000 - 7.499 1.9 2.4
7.500 - 7.999 4.9 5.6
8.000 - 8.499 5.0 5.9
8.500 - 8.999 16.0 17.2
9.000 - 9.499 11.4 11.7
9.500 - 9.999 25.2 25.5
10.000 - 10.499 10.1 9.0
10.500 - 10.999 12.1 10.1
11.000 - 11.499 4.2 3.0
11.500 - 11.999 3.2 2.3
12.000 - 12.499 0.7 0.4
12.500 - 12.999 0.7 0.4
13.000 - 13.499 0.0 0.0
13.500 - 13.999 0.2 0.0
14.000 - 14.499 0.0 0.1
14.500 - 14.999 0.0 0.0
--- ---
Totals: 100 100
=== ===
The weighted average minimum lifetime Mortgage Interest Rate for Group II is
9.3% per annum. Substantially all the Group II Mortgage Loans have a minimum
lifetime Mortgage Interest Rate greater than the applicable Gross Margin.
<PAGE>
5) Next Interest Adjustment Date (Group II)
Interest No. of Scheduled
Adjustment Date Mortgage Loans(%) Principal Balance(%)
November 1, 1997 3.0 3.4
December 1, 1997 0.9 1.0
January 1, 1998 5.5 5.3
February 1, 1998 5.5 5.6
March 1, 1998 6.9 6.9
April 1, 1998 6.1 6.5
May 1, 1998 1.2 1.6
June 1, 1998 0.3 0.3
July 1, 1998 1.4 2.0
August 1, 1998 0.5 0.5
September 1, 1998 0.7 1.1
October 1, 1998 1.4 1.4
November 1, 1998 1.1 0.8
December 1, 1998 0.1 0.1
January 1, 1999 0.3 0.2
February 1, 1999 0.2 0.1
March 1, 1999 0.5 0.4
April 1,1999 1.1 1.2
May 1, 1999 3.4 3.0
June 1, 1999 6.4 6.0
July 1, 1999 15.6 15.3
August 1, 1999 17.6 17.0
September 1, 1999 14.0 13.5
October 1, 1999 4.5 5.2
November 1, 1999 0.4 0.3
December 1, 1999 0.0 0.0
May 1, 2000 0.1 0.1
June 1, 2000 0.2 0.2
July 1, 2000 0.4 0.3
August 1, 2000 0.2 0.1
September 1, 2000 0.5 0.5
October 1, 2000 0.0 0.0
--- ---
Totals: 100 100
=== ===
The weighted average next Interest Adjustment Date for Group II is February 1,
1999.
6) Gross Margins on Group II
No. of Scheduled
Gross Margin (%) Mortgage Loans(%) Principal
Balance(%)
2.500 - 2.999 0.2 0.2
3.000 - 3.499 0.7 1.2
3.500 - 3.999 2.1 3.4
4.000 - 4.499 2.3 3.2
4.500 - 4.999 4.5 4.1
5.000 - 5.499 11.7 10.8
5.500 - 5.999 26.1 26.8
6.000 - 6.499 19.0 18.5
6.500 - 6.999 24.0 23.8
7.000 - 7.499 6.0 5.3
7.500 - 7.999 3.0 2.3
8.000 - 8.499 0.4 0.3
8.500 - 8.999 0.1 0.1
9.000 - 9.499 0.0 0.0
9.500 - 9.999 0.0 0.0
--- ---
Totals: 100 100
=== ===
The weighted average Gross Margin for Group II is 5.9%.
7) Original Loan-to-Value Ratios(1)
Group II Group I
-------- -------
No. of Scheduled No. of Scheduled
Original Loan-to- Mortgage Principal Mortgage Principal
Value Ratio(%) Loans(%) Balance(%) Loans(%) Balance(%)
50.00 and below 2.7 2.1 20.0 11.4
50.01 -55.00 1.5 1.1 2.1 2.2
55.01 -60.00 2.7 2.1 3.3 5.0
60.01 -65.00 4.7 4.9 4.5 5.2
65.01 -70.00 7.4 7.1 6.9 6.3
70.01 -75.00 14.6 13.9 12.5 13.9
75.01 -80.00 21.7 23.8 21.2 25.2
80.01 -85.00 13.4 13.4 8.5 7.4
85.01 -90.00 30.6 31.0 18.1 20.3
90.01 -95.00 0.7 0.7 2.8 3.3
95.01+ 0.0 0.0 0.1 0.1
---- ---- ---- ----
Totals: 100 100 100 100
=== === === ===
(1) The Loan-to-Value Ratio of a Mortgage Loan (including second Mortgage Loans)
is equal to the ratio (expressed as a percentage) of the original Scheduled
Principal Balance of the Mortgage Loan and the fair market value of the
Mortgaged Premises at the time of origination. The fair market value is the
lower of (i) the purchase price and (ii) the appraised value in the case of
purchases and is the appraised value in all other cases. The weighted average
original loan-to-value ratio is 73.2% for Group I and 79.8% for Group II.
8) Occupancy Type of Mortgaged Premises
Group II Group I
-------- -------
No. of Scheduled No. of Scheduled
Mortgage Principal Mortgage Principal
Occupancy Type(1) Loans(%) Balance(%) Loans(%) Balance(%)
Primary Home 92.3 94.3 88.0 90.7
Second Home 2.3 1.5 2.0 1.6
Investor 5.4 4.2 9.9 7.7
---- ---- ---- ------
Totals: 100 100 100 100
=== === === ===
(1) As represented by the borrowers on their Mortgage Loan applications.
9) Origination Program
Group II Group I
-------- -------
No. of Scheduled No. of Scheduled
Mortgage Principal Mortgage Principal
Origination Program Loans(%) Balance(%) Loans(%) Balance(%)
Full Documentation 77.3 72.1 75.2 64.6
Limited 8.4 13.3 10.5 15.6
Documentation(1)
Stated Income(2) 13.6 14.2 11.6 16.5
No Ratio 0.6 0.4 2.7 3.2
---- ---- --- ----
Totals: 100 100 100 100
=== === === ===
(1) Limited documentation is used for self-employed borrowers only. The
borrower is asked for six months of bank statements.
(2) Stated income is the amount of income stated by the borrower on its loan
application. A reduced loan-to-value ratio is used for mortgage loans made on
the basis of stated income.
10) Mortgage Loan Purpose
Group II Group I
-------- -------
No. of Scheduled No. of Scheduled
Mortgage Principal Mortgage Principal
Loan Purpose Loans(%) Balance(%) Loans(%) Balance(%)
Purchase 39.1 39.4 25.3 27.7
Refinance 41.6 40.3 59.8 53.2
(Cash-Out)
Refinance (No Cash- 19.3 20.3 14.9 19.2
Out) ---- ---- ---- ----
Totals: 100 100 100 100
=== === === ===
<PAGE>
11) Remaining Amortization Term
Group II Group I
No. of Scheduled No. of Scheduled
Remaining Mortgage Principal Mortgage Principal
Term (Months) Loans(%) Balance(%)Loans(%) Balance(%)
------------- -------- ------------------ ----------
360 12.2 13.8 19.5 21.2
359 21.2 21.7 15.8 17.7
358 23.4 22.9 16.7 18.3
357 22.4 22.8 13.3 14.7
356 7.7 7.4 4.7 4.7
355 6.3 6.2 3.2 3.4
354 2.5 2.3 1.8 2.1
238-353 3.5 2.6 3.4 6.3
178-237 0.4 0.1 13.0 7.1
less than 178 0.4 0.1 8.6 4.5
--- --- --- ---
Totals: 100 100 100 100
=== === === ===
The weighted average remaining amortization term is 336 months for Group I and
357 months for Group II.
12) Property Types of Mortgage Premises
Group II Group I
-------- -------
No. of Scheduled No. of Scheduled
Mortgage Principal Mortgage Principal
Property Type Loans(%) Balance(%) Loans(%) Balance(%)
Single-Family 82.7 84.4 81.1 83.1
Detached
2.2 1.6 3.5 2.7
Attached
De Minimis PUD 0.1 0.3 0.1 0.1
PUD 4.6 6.5 1.8 3.1
Condominium Low Rise 5.3 4.0 4.0 3.4
Manufactured Housing 2.7 1.2 4.7 2.8
Condominium High Rise 0.2 0.2 0.6 0.6
Townhouse 0.2 0.2 0.4 0.3
2-4 Family 2.0 1.7 3.8 3.9
--- ---- ---- ----
Totals: 100 100 100 100
=== === === ===
13) State Distribution of Mortgage Premises
<TABLE>
<CAPTION>
Group II Group I
-------- -------
State No. of Mortgage Scheduled Principal No. of Mortgage Scheduled Principal
Loans(%) Balance(%) Loans(%) Balance(%)
<S> <C>
Alaska 0.0 0.0 0.0 0.0
Alabama 0.0 0.0 0.1 0.1
Arizona 3.0 3.5 2.2 2.0
Arkansas 0.1 0.0 0.4 0.2
California 27.7 37.2 14.7 20.4
Colorado 9.4 8.2 2.0 2.0
Connecticut 1.1 1.1 1.0 1.0
Delaware 0.1 0.1 0.5 0.5
District of Columbia 0.2 0.4 0.3 0.4
Florida 4.1 3.6 11.2 10.8
Georgia 1.8 1.7 3.7 3.5
Hawaii 0.1 0.3 0.4 2.6
Idaho 1.0 0.7 1.0 1.0
Illinois 2.5 2.7 2.1 2.5
Indiana 0.4 0.3 2.9 1.6
Iowa 0.2 0.1 0.2 0.2
Kansas 0.4 0.2 0.9 0.6
Kentucky 0.5 0.3 0.6 0.4
Louisiana 0.5 0.2 0.9 0.5
Maryland 1.2 1.5 2.3 2.7
Massachusetts 0.1 0.1 0.1 0.1
Michigan 3.4 2.9 2.2 1.5
Minnesota 2.7 2.3 1.6 1.5
Mississippi 0.1 0.1 0.8 0.4
Missouri 0.9 0.4 1.8 1.5
Montana 0.4 0.2 0.4 0.3
Nevada 1.0 0.8 0.9 1.3
New Hampshire 0.0 0.0 0.2 0.1
New Jersey 0.6 0.5 1.6 1.9
New Mexico 0.7 0.5 1.4 1.5
New York 0.4 0.6 1.7 2.4
North Carolina 1.7 1.3 3.2 2.5
Ohio 1.7 1.2 4.6 3.1
Oklahoma 0.5 0.2 1.1 0.8
Oregon 5.5 4.8 3.9 4.3
Pennsylvania 2.9 2.0 6.8 4.6
South Carolina 0.6 0.4 3.4 2.2
South Dakota 0.0 0.0 0.0 0.0
Tennessee 1.3 0.9 4.6 3.5
Texas 2.9 2.2 3.0 2.9
Utah 9.1 7.9 3.4 3.8
Virginia 1.8 1.8 3.2 4.2
Washington 6.6 6.5 1.7 2.0
West Virginia 0.2 0.1 0.2 0.1
Wisconsin 0.2 0.1 0.3 0.3
Wyoming 0.2 0.1 0.3 0.4
--- --- --- ---
Totals: 100 100 100 100
=== === === ===
</TABLE>
Additional Informationnt Mortgage Loans
The description in this Prospectus Supplement of the Mortgage Loans and
the Mortgaged Premises is based upon the pool of Mortgage Loans, as constituted
at the close of business on the Cut-Off Date. Mortgage Loans may be removed
prior to closing as a result of incomplete documentation or non-compliance with
representations and warranties set forth in the Agreement or if the Depositor
deems such removal necessary or appropriate, and the Depositor may substitute
other Mortgage Loans subject to certain terms and conditions set forth in the
Agreement.
<PAGE>
Neither the deletion of Mortgage Loans nor the addition of Mortgage Loans are
expected to cause material variances from the information set forth herein.
A current report on Form 8-K will be available to purchasers of the
Offered Certificates and will be filed with the Commission, together with the
Agreement, within fifteen days after the initial issuance of the Offered
Certificates. Any Mortgage Loans that are added to, or removed from, the pool as
set forth in the preceding paragraph will be noted in the current report on Form
8-K. Also, the Depositor intends to file certain additional yield tables and
other computational materials with the Commission in a report on Form 8-K. Such
tables and materials were prepared by the Underwriters at the request of certain
prospective investors, based on assumptions provided by, and satisfying the
special requirements of, such prospective investors. Such tables and assumptions
may be based on assumptions that differ from the Modeling Assumptions; see
"PREPAYMENT AND YIELD CONSIDERATIONS" in this Prospectus Supplement.
Accordingly, such tables and other materials may not be relevant to or
appropriate for investors other than those specifically requesting them.
Servicing of the Mortgage Loans
General. Meritech Mortgage Services, Inc., an affiliate of the
Depositor ("Meritech"), will service approximately 99% of the Mortgage Loans.
Ameriquest Mortgage Company (formerly Long Beach Mortgage Company) will service
the balance of the Mortgage Loans. Each of them is referred to as a "Servicer".
The Servicers are (a) HUD-approved originators and (b) approved by and in good
standing with FNMA and FHLMC. The Servicers will provide customary servicing
functions with respect to the Mortgage Loans. Among other things, each Servicer
is obligated under certain circumstances to advance delinquent payments of
principal and interest with respect to the Mortgage Loans and to pay Month End
Interest with respect to Mortgage Loans serviced by it. Each servicing agreement
requires the related Servicer to obtain approvals of the Master Servicer with
respect to certain servicing activities. See "SERVICING OF THE MORTGAGE LOANS"
in the Prospectus.
Meritech. Meritech Mortgage Services, Inc. ("Meritech") commenced
its servicing operations in 1960 and operated under the name Cram Mortgage
Service, Inc., prior to September 1994. The principal offices of Meritech
are located in Fort Worth, Texas.
As of September 30, 1997, Meritech serviced a portfolio of
approximately 17,681 one- to- four family conventional residential mortgage
loans totaling approximately $2,104 million. The following tables set forth
certain unaudited information concerning the delinquency experience (including
loans in foreclosure) and mortgage loans foreclosed with respect to Meritech's
conventional loan servicing portfolio as of the end of the indicated period. The
indicated periods of delinquency are based on the number of days past due on a
contractual basis. No mortgage loan is considered delinquent for these purposes
until 31 days past due on a contractual basis.
<TABLE>
<CAPTION>
Percentage of Total Portfolio
-------------------------------------------------------------------------------------------
September 30, 1997 December 31, 1996 December 31, 1995 December 31, 1994
------------------ ----------------- ----------------- -----------------
By No. of By Dollar By No. By Dollar By No. By Dollar By No. of By Dollar
Loans Amount of Loans Amount of Loans Amount Loans Amount
<S> <C>
Period of delinquency
(including foreclosure)
31 to 60 days 4.04 3.87 3.72% 3.10% 3.56% 3.25% 2.18% 1.75%
61 to 90 days 1.31 1.52 1.02 1.03 0.65 0.71 0.28 0.14
91 days or more 1.29 1.18 1.33 1.48 1.57 2.30 0.40 0.21
Percentage of Total
Portfolio
Delinquent 6.65 6.58 6.08 5.62 5.79 6.27 2.87 2.12
Foreclosed 1.60 2.18 0.91 1.31 0.73 0.99 0.71 0.41
</TABLE>
(1)Totals may not sum due to rounding.
The above statistics represent the recent experience of Meritech. There
can be no assurance, however, that the delinquency and foreclosure experience of
the Mortgage Loans will be comparable. In addition, the foregoing statistics are
based on all the one-to-four family residential mortgage loans in Meritech's
servicing portfolio, including mortgage loans with a variety of payment and
other characteristics, including geographic locations and underwriting
standards. Not all the mortgage loans in Meritech's servicing portfolio
constitute non-conforming credits. Accordingly, there can be no assurance that
the delinquency and foreclosure experience of the Meritech Mortgage Loans in the
future will correspond to the future delinquency and foreclosure experience of
Meritech's one-to-four family conventional residential mortgage loan servicing
portfolio. The actual delinquency and foreclosure experience of the Mortgage
Loans will depend, among other things, upon the value of real estate securing
such Mortgage Loans and the ability of borrowers to make required payments.
<PAGE>
Servicing and Other Compensation and Payment of Expenses; Repurchase
The Servicing Fee Rate applicable to each Mortgage Loan equals one
twelfth of a fixed percentage per annum of the Scheduled Principal Balance of
such Mortgage Loan with respect to each Distribution Date. In addition, late
payment fees with respect to the Mortgage Loans, and any interest or other
income earned on collections with respect to the Mortgage Loans pending
remittance to the Asset Proceeds Account, will be paid to or retained by each
Servicer as additional servicing compensation. Each Servicer is obligated to pay
certain insurance premiums and certain ongoing expenses associated with the
Mortgage Loans and expenses incurred by each Servicer in connection with its
responsibilities under the related servicing agreement. Each Servicer, may
transfer its servicing to successor servicers that meet the criteria for
servicers approved by the Rating Agencies.
Each Servicer and/or the Depositor will have the right, but not the
obligation, to repurchase from the Trust any Mortgage Loan delinquent as to
three consecutive scheduled payments, at a price equal to the unpaid principal
balance thereof plus accrued interest thereon.
Advances and Month End Interest
Prior to each Distribution Date, each Servicer is, and any successor
servicer will be, obligated to advance its own funds with respect to delinquent
payments of principal of and interest on the Mortgage Loans, net of the
Servicing Fees with respect to any Mortgage Loan for which it is making an
advance, unless the Servicer deems such advance "non-recoverable". Advances of
principal and interest will be deemed to be non-recoverable only to the extent
such amounts are not reimbursable from late collections, insurance proceeds,
liquidation proceeds and other assets of the Trust. Any failure by a Servicer to
make any such required advance will constitute an event of default under the
related servicing agreement. If a Servicer fails to make a required advance of
principal and interest, the Master Servicer will be obligated to make such
advance. The total advance obligations of the Master Servicer may be subject to
a dollar limitation that is acceptable to the Rating Agencies as set forth in
the Agreement. See "SERVICING OF MORTGAGE LOANS -- Advances" in the Prospectus.
In addition, each Servicer will be required to deposit in its Custodial
Account on or before each remittance date (as defined in its servicing
agreement), an amount equal to Month End Interest with respect to the preceding
prepayment period (as defined in its servicing agreement) but only to the extent
of the Servicing Fee payable with respect to the remittance date. "Month End
Interest" means, with respect to any Mortgage Loan prepaid in full during a
prepayment period, the difference between the interest that would have been paid
on such Mortgage Loan through the last day of the month in which such
liquidation or prepayment occurred and interest actually received by the
applicable Servicer with respect to such Mortgage Loan, in each case net of the
Servicing Fee (except that Month End Interest does not accrue with respect to a
prepayment of a Mortgage Loan during the period from the first day of a month
through the last day of the prepayment period ending during such month). The
Master Servicer is not obligated to pay Month End Interest.
Interest Payments on the Mortgage Loans
There are a number of Mortgage Loans in Group I on which interest is
charged at the interest rate on the outstanding principal balance calculated
based on the number of days elapsed between receipt of the last payment through
receipt of the most current payment (such Mortgage Loans, "Simple Interest
Loans"). Such interest is deducted from the payment amount and the remainder, if
any, of the payment is applied as a reduction to the outstanding principal
balance. Although the equal monthly payments are required to be remitted on a
specified monthly payment date that would reduce the outstanding principal
balance to zero at the maturity date, if one or more payments are made more than
one month after the respective preceding payment date, the outstanding principal
balance not to be reduced to zero on its maturity date. In such a case, an
additional principal payment would be required to be made at the maturity date.
On the other hand, if one or more payments (other than a Prepayment) are made
early, the reduction in the outstanding principal balance would occur over a
shorter period of time than would have occurred had it been based on the
schedule of amortization. Accordingly, the timing of payments to Holders of the
Offered Certificates may be affected by the fact that actual payments on Simple
Interest Loans may not be made on the specified date therefor.
The Mortgage Loans which are not Simple Interest Loans (the "Actuarial
Loans") provide that interest is charged thereunder, and payments are due, as of
a scheduled day of each month which is fixed at the time of origination.
<PAGE>
Scheduled monthly payments made on the Actuarial Loans either earlier or later
than the scheduled due dates thereof will not affect the amortization schedule
or the relative application of such payments to principal and interest.
The Master Servicer
Texas Commerce Bank National Association will act as master servicer of
the Mortgage Loans (in such capacity, the "Master Servicer"). The Master
Servicer has limited experience master servicing mortgage loans. The Master
Servicer will supervise the servicing of the Mortgage Loans, provide certain
reports to the Trustee regarding the Mortgage Loans, make advances to the extent
described herein with respect to the Mortgage Loans if the Servicer fails to
make a required advance and appoint a successor servicer if a Servicer is
terminated. The Master Servicer is entitled to the Master Servicing Fee, payable
on each Distribution Date, in the amount equal to one-twelfth of the Master
Servicing Fee Rate multiplied by the Scheduled Principal Balance of such
Mortgage Loan on the first day of the Due Period with respect to each
Distribution Date. The Master Servicer will pay the Trustee, the Paying Agent
and the Certificate Registrar their monthly fees out of the Master Servicing
Fee.
USE OF PROCEEDS
The Depositor will sell the Mortgage Loans to the Trust concurrently
with the delivery of the Certificates. Net proceeds from the sale of the Offered
Certificates will (together with the Retained Certificates retained by the
Depositor or its affiliates) represent the purchase price to be paid by the
Trust to the Depositor for the Mortgage Loans.
PREPAYMENT AND YIELD CONSIDERATIONS
General
The weighted average life of, and, if purchased at other than par, the
yield to maturity on each Class of the Offered Certificates will be directly
related: (i) principally to the rate of payment of principal of the Mortgage
Loans in the related Mortgage Loan Group (and, in the case of the Class AV-1 and
Class AV-2 Certificates, the related Subgroup), including payments in full prior
to stated maturity, liquidations due to defaults, casualties and condemnations,
and repurchases of Mortgage Loans by the Depositor and (ii) to a lesser degree,
to the timing of the distribution of excess spread (interest received on the
Mortgage Loans in excess of interest distributable on the Certificates) to
reduce the principal of the Offered Certificates as described herein. The actual
rate of principal prepayments on pools of mortgage loans is influenced by a
variety of economic, tax, geographic, demographic, social, legal and other
factors and has fluctuated considerably in recent years. In addition, the rate
of principal prepayments may differ among pools of mortgage loans at any time
because of specific factors relating to the mortgage loans in the particular
pool, including, among other things, the age of the mortgage loans, the
geographic locations of the properties securing the loans, the extent of the
mortgagors' equity in such properties, and changes in the mortgagors' housing
needs, job transfers and employment status.
The timing of changes in the rate of prepayments may significantly
affect the actual yield to investors who purchase the Offered Certificates at
prices other than par, even if the average rate of principal prepayments is
consistent with the expectations of investors. In general, the earlier the
payment of principal of the Mortgage Loans the greater the effect on an
investor's yield to maturity. As a result, the effect on an investor's yield of
principal prepayments occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the issuance
of the Offered Certificates may not be offset by a subsequent like reduction (or
increase) in the rate of principal prepayments. Investors must make their own
decisions as to the appropriate prepayment assumptions to be used in deciding
whether to purchase any of the Offered Certificates. The Depositor does not make
any representations or warranties as to the rate of prepayment or the factors to
be considered in connection with such determination.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a Certificate until each dollar of principal
of such Certificate will be distributed to the investor. As described above, the
weighted average life and yield to maturity (if purchased at a price other than
par) of each class of the Offered Certificates will be influenced by the rate at
which principal payments on the Mortgage Loans in the related Mortgage Loan
Group are paid, which may be in the form of scheduled amortization or
prepayments (for this purpose, the term "prepayment" includes prepayments,
liquidations due to default or early termination of the Trust) and will also be
<PAGE>
significantly influenced by the amount of excess spread generated by the
Mortgage Loans and applied in reduction of the Certificate Principal Balances of
such Certificates. The level of excess spread available on any Distribution Date
to be applied in reduction of the Certificate Principal Balances of the Offered
Certificates will be influenced by, among other factors, (i) the
overcollateralization level of the assets in the Trust at such time (i.e., the
extent to which interest on the Mortgage Loans is accruing on a higher Scheduled
Principal Balance than the Certificate Principal Balance of the Certificates);
(ii) the delinquency and default experience of the Mortgage Loans (i.e., excess
spread will be applied to interest shortfalls on the Certificates before it is
distributed in reduction of the Certificate Principal Balances thereof); (iii)
the level of One Month LIBOR and the indices for the adjustable rate Mortgage
Loans (i.e., for the Mortgage Loans in Group II excess spread is largely a
function of the extent to which the values of the indices applicable to those
Mortgage Loans plus the applicable gross margin exceed the applicable
Pass-Through Rates); and (iv) the provisions of the Agreement that permit excess
spread to be distributed to the Retained Certificates when required
overcollateralization levels have been met. To the extent that greater amounts
of excess spread are distributed in reduction of the Certificate Principal
Balances of a Class of Certificates, the weighted average life thereof can be
expected to shorten. No assurance, however, can be given as to the amount of
excess spread distributed at any time or in the aggregate. See "DESCRIPTION OF
THE OFFERED CERTIFICATES -- Overcollateralization and Crosscollateralization
Provisions" in this Prospectus Supplement.
The Class AF-6 Certificates will not be entitled to distributions of
principal (either scheduled or unscheduled) until November 2000 (except as
otherwise described herein). Thereafter, the relative entitlement of the Class
AF-6 Certificates to payments in respect of principal is subject to increase in
accordance with the calculation of the Class AF-6 Distribution Amount. See
"DESCRIPTION OF THE OFFERED CERTIFICATES -- Distributions -- Distributions of
Principal" in the Prospectus Supplement.
Prepayments and Yields for Class A Certificates
Generally, if purchased at other than par, the yield to maturity on the
Offered Certificates will be affected by the rate of the payment of principal of
the Mortgage Loans in the related Mortgage Loan Group (and, in the case of the
Class AV-1 and Class AV-2 Certificates, the related Subgroup). If the actual
rate of payments on the Mortgage Loans in a Mortgage Loan Group is slower than
the rate anticipated by an investor who purchases related Offered Certificates
at a discount, the actual yield to such investor will be lower than such
investor's anticipated yield. If the actual rate of payments on the Mortgage
Loans in a Mortgage Loan Group is faster than the rate anticipated by an
investor who purchases related Offered Certificates at a premium, the actual
yield to such investor will be lower than such investor's anticipated yield.
All the Mortgage Loans in Group I are fixed rate Mortgage Loans. The
rate of prepayments with respect to conventional fixed rate mortgage loans has
fluctuated significantly in recent years. In general, if prevailing interest
rates fall significantly below the interest rates on fixed rate mortgage loans,
such mortgage loans are likely to be subject to higher prepayment rates than if
prevailing rates remain at or above the interest rates on such mortgage loans.
Conversely, if prevailing interest rates rise appreciably above the interest
rates on fixed rate mortgage loans, such mortgage loans are likely to experience
a lower prepayment rate than if prevailing rates remain at or below the interest
rates on such mortgage loans.
The Pass-Through Rate applicable to the Class AF-5 and Class BF
Certificates on any Distribution Date will equal the lesser of (x) a fixed rate
applicable thereto as set forth herein and (y) the weighted average Mortgage
Interest Rate of the Mortgage Loans in Group I, net of Servicing Fees and Master
Servicing Fees, for such Distribution Date (the "Weighted Average Net Rate"). As
a result, payments of principal on the Mortgage Loans in Group I having net
Mortgage Interest Rates which exceed the Weighted Average Net Rate may reduce
the Pass-Through Rates and yields on such Certificates. The Mortgage Interest
Rates of the Mortgage Loans in Group I are expected to range from 7.7% to 16.5%
per annum and, under certain scenarios, it is likely that principal prepayments
will be concentrated among Mortgage Loans with higher Mortgage Interest Rates,
thus potentially reducing the Pass-Through Rates on such Certificates. The
Weighted Average Net Rate of Group I as of the Cut-Off Date is expected to be
approximately 9.56% per annum.
The Pass-Through Rate applicable to the Class AF-1 Certificates is
equal to One Month LIBOR plus the Applicable Spread, subject to the Class AF-1
Available Funds Cap, whereas the Mortgage Interest Rates on the Mortgage Loans
in Group I are fixed. Thus, if One Month LIBOR rises above the Weighted Average
Net Interest Rate for Group I, the Pass-Through Rate on the Class AF-1
Certificates will be limited by application of the Class AF-1 Available Funds
Cap.
<PAGE>
All the Mortgage Loans in Group II are adjustable rate Mortgage Loans.
As is the case with conventional fixed rate mortgage loans, adjustable rate
mortgage loans may be subject to a greater rate of principal prepayments in a
declining interest rate environment. For example, if prevailing interest rates
fall significantly, adjustable rate mortgage loans could be subject to higher
prepayment rates than if prevailing interest rates remain constant because the
availability of fixed rate mortgage loans at lower interest rates may encourage
mortgagors to refinance their adjustable rate mortgage loans to a lower fixed
interest rate. Nevertheless, no assurance can be given as to the level of
prepayments that the Mortgage Loans will experience.
The Last Scheduled Distribution Date for each Class of the Offered
Certificates (see "SUMMARY -- Certificates Offered" in this Prospectus
Supplement) is the date on which the Certificate Principal Balance thereof would
be reduced to zero assuming, among other things, that no prepayments are
received on the Mortgage Loans in the related Group and that scheduled monthly
payments of principal of and interest on each of such Mortgage Loans are timely
received and that excess interest is used to make accelerated payments of
principal. The actual final Distribution Date with respect to each Class of
Offered Certificates could occur significantly earlier than its Last Scheduled
Distribution Date because (i) prepayments are likely to occur which will be
applied to the payment of the Certificate Principal Balances thereof and (ii)
Meritech will have the right to purchase all the Mortgage Loans on any
Distribution Date when the aggregate Scheduled Principal Balances of the
Mortgage Loans have declined to less than 10% of the aggregate Scheduled
Principal Balances of the Mortgage Loans as of the Closing Date. The actual
final Distribution Date with respect to each Class of the Offered Certificates
could, depending on the default and recovery experience of the Mortgage Loans,
occur after its Last Scheduled Distribution Date.
Prepayments on mortgage loans are commonly measured relative to a
prepayment model or standard. For Group I, the model used in this Prospectus
Supplement ("Home Equity Prepayment" or "HEP") is a prepayment assumption which
represents an assumed rate of prepayment each month relative to the then
outstanding principal balance of a pool of mortgage loans for the life of such
mortgage loans. 20% HEP (Scenario IV for Group I) assumes prepayment rates of 2%
per annum of the then outstanding principal balance of the related Mortgage
Loans in the first month of the life of such Mortgage Loans and an additional 2%
per annum in each month thereafter up to and including the tenth month.
Beginning in the eleventh month and in each month thereafter during the life of
such Mortgage Loans, 20% HEP assumes a constant prepayment rate of 20% per
annum. For Group II, the model used in this Prospectus Supplement ("Constant
Prepayment Rate" or "CPR") represents an assumed rate of constant prepayment
relative to the then outstanding principal balance of the pool of mortgage loans
for the life of such mortgage loans. 30% CPR (Scenario IV for Group II) assumes
a constant prepayment rate of 30% per annum. As used in the table below, 0%
Prepayment Assumption (Scenario I for each Group below) assumes prepayment rates
equal to 0% of the Prepayment Assumption, i.e., no prepayments on the mortgage
loans having the characteristics described below. Neither prepayment assumption
purports to be a historical description of prepayment experience or a prediction
of the anticipated rate of prepayment of any pool of mortgage loans, including
the related Mortgage Loans.
The following tables have been prepared on the basis of the following
assumptions (collectively, the "Modeling Assumptions"): (i) the Mortgage Loans
of the related Mortgage Loan Groups prepay at the indicated percentage of the
related prepayment assumption; (ii) distributions on the Offered Certificates
are received, in cash, on the 25th day of each month, commencing November 1997,
in accordance with the payment priorities defined herein; (iii) no defaults or
delinquencies in, or modifications, waivers or amendments respecting, the
payment by the Mortgagors of principal and interest on the Mortgage Loans occur;
(iv) scheduled payments are assumed to be received on the first day of each Due
Period commencing on November 1, 1997, and prepayments represent payment in full
of individual Mortgage Loans and are assumed to be received on the last day of
each prepayment period, commencing October 1997, and include 30 days' interest
thereon; (v) the level of Six-Month LIBOR remains constant at 5.8125%; (vi) the
level of One Year CMT remains constant at 5.35%; (vii) the Pass-Through Rates
for the Group II Certificates remain constant (based on One-Month LIBOR of
5.65625%); (viii) the Closing Date for the Certificates is November 13, 1997;
(ix) the Mortgage Interest Rate for each Mortgage Loan in Group II is adjusted
on its next Mortgage Interest Rate change date (and on subsequent Mortgage
Interest Rate change dates, if necessary) to equal the sum of (a) the assumed
level of the applicable index and (b) the respective gross margin (such sum
being subject to the applicable periodic adjustment caps and floors); (x)
overcollateralization levels are initially set as specified in the Agreement,
and thereafter decrease in accordance with the provisions of the Agreement; (xi)
the Offered Certificates are redeemed on the Initial Optional Termination Date;
<PAGE>
(xii) credit enhancement percentages for each Group were derived from the
Certificate Principal Balances of the Certificates set forth herein; and (xiii)
each Mortgage Loan Group consists of Mortgage Loans having the approximate
characteristics described below:
FIXED RATE GROUP
<TABLE>
<CAPTION>
Original Remaining Original Remaining
Amortization Current Net Amortization Amortization Term to Term to
Methodology Balance WAC WAC Term Term Balloon Balloon
<S> <C>
Balloon $ 289,523.25 9.840% 9.266% 180 177 60 57
Balloon 34,001,524.74 10.913 10.335 360 358 180 178
Level 24,984,599.17 10.257 9.674 178 176 N.A. N.A.
Level 174,793,755.71 9.912 9.394 356 354 N.A. N.A.
</TABLE>
VARIABLE RATE GROUP
<TABLE>
<CAPTION>
Subgroup A
Initial
Current Net Original Remaining Gross Periodic Periodic Net Net Reset Next
Balance WAC WAC Term Term Margin Cap Cap Life Cap Floor Frequency Reset
<S> <C>
Six Month LIBOR Loans
$ 4,355,550.23 9.119% 8.590% 360 357 5.626% 1.050% 1.162% 15.174% 8.071% 6 3
8,316,555.83 8.849 8.320 358 356 6.022 1.000 1.000 14.616 8.103 6 4
10,589,870.40 8.715 8.186 359 358 6.206 1.039 1.041 14.340 8.056 6 5
5,291,463.77 8.641 8.112 357 352 5.766 1.079 1.129 14.351 8.051 6 1
10,488,122.13 9.188 8.659 358 357 5.950 1.014 1.038 15.131 8.444 6 6
9,142,999.49 9.460 8.931 360 356 5.834 1.260 3.074 15.843 8.793 6 20
19,335,674.44 9.835 9.306 359 356 5.928 1.185 2.968 15.987 9.214 6 21
29,567,451.90 9.834 9.305 360 358 5.896 1.113 2.946 15.774 9.202 6 22
24,181,496.20 9.897 9.368 360 359 5.971 1.103 2.989 15.946 9.340 6 23
7,985,875.59 9.553 9.024 360 354 5.956 1.421 2.936 15.941 9.024 6 18
8,949,249.32 9.850 9.321 360 360 6.035 1.040 2.957 15.738 9.132 6 24
2,340,149.85 9.858 9.329 360 357 4.946 1.082 2.944 15.979 8.630 6 33
One Year CMT Loans
9,455,642.22 9.414 8.885 360 359 5.677 2.000 2.000 15.562 8.216 12 11
Subgroup B
Six Month LIBOR Loans
14,663,548.55 8.721 8.192 360 357 5.976 1.020 1.027 14.338 7.911 6 3
11,512,084.68 9.107 8.578 360 358 6.069 0.997 0.997 14.736 8.322 6 4
14,760,518.10 9.129 8.600 359 358 6.179 1.006 1.006 14.684 8.440 6 5
10,769,204.54 8.685 8.156 360 354 5.617 1.050 1.070 14.164 7.771 6 1
18,959,279.84 8.937 8.408 358 356 5.799 1.040 1.040 14.723 7.915 6 6
12,933,585.08 9.606 9.079 360 356 5.926 1.390 2.959 15.829 9.080 6 20
36,839,992.91 9.705 9.176 360 357 6.015 1.584 2.833 15.628 9.170 6 21
32,793,182.34 9.807 9.278 360 358 6.218 1.114 2.977 15.784 9.259 6 22
25,431,848.60 9.847 9.318 360 359 6.023 1.107 2.960 15.928 9.236 6 23
11,069,554.03 9.657 9.129 360 354 6.055 1.827 2.815 15.728 9.066 6 18
11,240,085.00 10.076 9.547 360 360 6.284 1.099 2.996 15.979 9.387 6 24
2,264,150.28 10.446 9.917 360 358 6.061 1.084 3.000 16.917 9.913 6 34
One Year CMT Loans
13,001,901.62 8.586 8.057 360 357 4.649 2.000 2.017 14.322 6.721 12 10
</TABLE>
PREPAYMENT SCENARIOS
Scenario Scenario Scenario Scenario Scenario Scenario
I II III IV V VI
Group I (HEP): 0% 10% 15% 20% 25% 30%
Group II (CPR): 0% 15% 25% 30% 35% 40%
The following tables set forth the approximate percentages of the
initial principal amount of the Offered Certificates that would be outstanding
after each of the dates shown, and the approximate weighted average life years
of the Offered Certificates, based on prepayment scenarios described in the
table entitled "Prepayment Scenarios." The percentages have been rounded to the
nearest 1%.
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
Class AF-1 Scenario
--------------------------------------
I II III IV V VI
Initial Percent 100 100 100 100 100 100
11/25/98 94 79 72 65 57 50
11/25/99 92 61 46 32 19 6
11/25/00 90 44 24 6 0 0
11/25/01 88 30 7 0 0 0
11/25/02 85 17 0 0 0 0
11/25/03 83 6 0 0 0 0
11/25/04 80 0 0 0 0 0
11/25/05 78 0 0 0 0 0
11/25/06 76 0 0 0 0 0
11/25/07 73 0 0 0 0 0
11/25/08 70 0 0 0 0 0
11/25/09 66 0 0 0 0 0
11/25/10 62 0 0 0 0 0
11/25/11 57 0 0 0 0 0
11/25/12 34 0 0 0 0 0
11/25/13 31 0 0 0 0 0
11/25/14 27 0 0 0 0 0
11/25/15 23 0 0 0 0 0
11/25/16 18 0 0 0 0 0
11/25/17 14 0 0 0 0 0
11/25/18 10 0 0 0 0 0
11/25/19 5 0 0 0 0 0
11/25/20 0 0 0 0 0 0
11/25/21 0 0 0 0 0 0
11/25/22 0 0 0 0 0 0
11/25/23 0 0 0 0 0 0
11/25/24 0 0 0 0 0 0
11/25/25 0 0 0 0 0 0
11/25/26 0 0 0 0 0 0
11/25/27 0 0 0 0 0 0
Weighted 13.1 2.8 2.0 1.5 1.2 1.0
Average Life
Years(1)
Class AF-2 Scenario
--------------------------------------
I II III IV V VI
Initial Percent 100 100 100 100 100 100
11/25/98 100 100 100 100 100 100
11/25/99 100 100 100 100 100 100
11/25/00 100 100 100 100 42 0
11/25/01 100 100 100 50 0 0
11/25/02 100 100 73 0 0 0
11/25/03 100 100 28 0 0 0
11/25/04 100 97 0 0 0 0
11/25/05 100 76 0 0 0 0
11/25/06 100 54 0 0 0 0
11/25/07 100 30 0 0 0 0
11/25/08 100 7 0 0 0 0
11/25/09 100 0 0 0 0 0
11/25/10 100 0 0 0 0 0
11/25/11 100 0 0 0 0 0
11/25/12 100 0 0 0 0 0
11/25/13 100 0 0 0 0 0
11/25/14 100 0 0 0 0 0
11/25/15 100 0 0 0 0 0
11/25/16 100 0 0 0 0 0
11/25/17 100 0 0 0 0 0
11/25/18 100 0 0 0 0 0
11/25/19 100 0 0 0 0 0
11/25/20 99 0 0 0 0 0
11/25/21 67 0 0 0 0 0
11/25/22 31 0 0 0 0 0
11/25/23 0 0 0 0 0 0
11/25/24 0 0 0 0 0 0
11/25/25 0 0 0 0 0 0
11/25/26 0 0 0 0 0 0
11/25/27 0 0 0 0 0 0
Weighted 24.4 9.1 5.5 4.0 3.1 2.4
Average Life
Years(1)
Class AF-3 Scenario
--------------------------------------
I II III IV V VI
Initial Percent 100 100 100 100 100 100
11/25/98 100 100 100 100 100 100
11/25/99 100 100 100 100 100 100
11/25/00 100 100 100 100 100 16
11/25/01 100 100 100 100 57 0
11/25/02 100 100 100 79 0 0
11/25/03 100 100 100 0 0 0
11/25/04 100 100 83 0 0 0
11/25/05 100 100 50 0 0 0
11/25/06 100 100 7 0 0 0
11/25/07 100 100 0 0 0 0
11/25/08 100 100 0 0 0 0
11/25/09 100 68 0 0 0 0
11/25/10 100 22 0 0 0 0
11/25/11 100 0 0 0 0 0
11/25/12 100 0 0 0 0 0
11/25/13 100 0 0 0 0 0
11/25/14 100 0 0 0 0 0
11/25/15 100 0 0 0 0 0
11/25/16 100 0 0 0 0 0
11/25/17 100 0 0 0 0 0
11/25/18 100 0 0 0 0 0
11/25/19 100 0 0 0 0 0
11/25/20 100 0 0 0 0 0
11/25/21 100 0 0 0 0 0
11/25/22 100 0 0 0 0 0
11/25/23 79 0 0 0 0 0
11/25/24 0 0 0 0 0 0
11/25/25 0 0 0 0 0 0
11/25/26 0 0 0 0 0 0
11/25/27 0 0 0 0 0 0
Weighted 26.3 12.4 7.9 5.3 4.1 3.0
Average Life
Years(1)
Class AF-4 Scenario
--------------------------------------
I II III IV V VI
Initial Percent 100 100 100 100 100 100
11/25/98 100 100 100 100 100 100
11/25/99 100 100 100 100 100 100
11/25/00 100 100 100 100 100 100
11/25/01 100 100 100 100 100 52
11/25/02 100 100 100 100 57 0
11/25/03 100 100 100 93 8 0
11/25/04 100 100 100 50 0 0
11/25/05 100 100 100 0 0 0
11/25/06 100 100 100 0 0 0
11/25/07 100 100 76 0 0 0
11/25/08 100 100 0 0 0 0
11/25/09 100 100 0 0 0 0
11/25/10 100 100 0 0 0 0
11/25/11 100 86 0 0 0 0
11/25/12 100 0 0 0 0 0
11/25/13 100 0 0 0 0 0
11/25/14 100 0 0 0 0 0
11/25/15 100 0 0 0 0 0
11/25/16 100 0 0 0 0 0
11/25/17 100 0 0 0 0 0
11/25/18 100 0 0 0 0 0
11/25/19 100 0 0 0 0 0
11/25/20 100 0 0 0 0 0
11/25/21 100 0 0 0 0 0
11/25/22 100 0 0 0 0 0
11/25/23 100 0 0 0 0 0
11/25/24 87 0 0 0 0 0
11/25/25 14 0 0 0 0 0
11/25/26 0 0 0 0 0 0
11/25/27 0 0 0 0 0 0
Weighted 27.5 14.6 9.9 7.1 5.2 4.0
Average Life
Years(1)
- ---------------------------------------------------------
(1) The weighted average life of the Offered Certificates is determined by (i)
multiplying the amount of each principal payment by the number of years from the
date of issuance to the related Distribution Date, (ii) adding the results, and
(iii) dividing the sum by the initial respective Certificate Principal Balance
for such Class of Offered Certificates.
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
Class AF-5 Scenario
--------------------------------------
I II III IV V VI
Initial Percent 100 100 100 100 100 100
11/25/98 100 100 100 100 100 100
11/25/99 100 100 100 100 100 100
11/25/00 100 100 100 100 100 100
11/25/01 100 100 100 100 100 100
11/25/02 100 100 100 100 100 84
11/25/03 100 100 100 100 100 0
11/25/04 100 100 100 100 0 0
11/25/05 100 100 100 0 0 0
11/25/06 100 100 100 0 0 0
11/25/07 100 100 100 0 0 0
11/25/08 100 100 0 0 0 0
11/25/09 100 100 0 0 0 0
11/25/10 100 100 0 0 0 0
11/25/11 100 100 0 0 0 0
11/25/12 100 0 0 0 0 0
11/25/13 100 0 0 0 0 0
11/25/14 100 0 0 0 0 0
11/25/15 100 0 0 0 0 0
11/25/16 100 0 0 0 0 0
11/25/17 100 0 0 0 0 0
11/25/18 100 0 0 0 0 0
11/25/19 100 0 0 0 0 0
11/25/20 100 0 0 0 0 0
11/25/21 100 0 0 0 0 0
11/25/22 100 0 0 0 0 0
11/25/23 100 0 0 0 0 0
11/25/24 100 0 0 0 0 0
11/25/25 100 0 0 0 0 0
11/25/26 0 0 0 0 0 0
11/25/27 0 0 0 0 0 0
Weighted 28.6 14.8 10.0 7.9 6.4 5.2
Average
Life Years(1)
Class AF-6 Scenario
--------------------------------------
I II III IV V VI
Initial Percent 100 100 100 100 100 100
11/25/98 100 100 100 100 100 100
11/25/99 100 100 100 100 100 100
11/25/00 100 100 100 100 100 100
11/25/01 99 94 90 89 89 91
11/25/02 99 87 83 80 78 77
11/25/03 97 77 72 66 61 0
11/25/04 95 68 60 52 0 0
11/25/05 89 46 35 0 0 0
11/25/06 83 32 20 0 0 0
11/25/07 76 21 11 0 0 0
11/25/08 69 14 0 0 0 0
11/25/09 62 9 0 0 0 0
11/25/10 54 6 0 0 0 0
11/25/11 47 4 0 0 0 0
11/25/12 15 0 0 0 0 0
11/25/13 13 0 0 0 0 0
11/25/14 12 0 0 0 0 0
11/25/15 10 0 0 0 0 0
11/25/16 8 0 0 0 0 0
11/25/17 6 0 0 0 0 0
11/25/18 5 0 0 0 0 0
11/25/19 4 0 0 0 0 0
11/25/20 3 0 0 0 0 0
11/25/21 2 0 0 0 0 0
11/25/22 1 0 0 0 0 0
11/25/23 1 0 0 0 0 0
11/25/24 0 0 0 0 0 0
11/25/25 0 0 0 0 0 0
11/25/26 0 0 0 0 0 0
11/25/27 0 0 0 0 0 0
Weighted 13.1 8.1 7.1 6.4 5.7 5.0
Average
Life Years(1)
Class MF-1 Scenario
--------------------------------------
I II III IV V VI
Initial Percent 100 100 100 100 100 100
11/25/98 100 100 100 100 100 100
11/25/99 100 100 100 100 100 100
11/25/00 100 100 100 100 100 100
11/25/01 100 100 100 83 65 50
11/25/02 100 100 87 66 48 35
11/25/03 100 100 73 52 36 0
11/25/04 100 90 61 41 0 0
11/25/05 100 79 51 0 0 0
11/25/06 100 70 42 0 0 0
11/25/07 100 62 35 0 0 0
11/25/08 100 54 0 0 0 0
11/25/09 100 47 0 0 0 0
11/25/10 100 41 0 0 0 0
11/25/11 100 35 0 0 0 0
11/25/12 100 0 0 0 0 0
11/25/13 100 0 0 0 0 0
11/25/14 100 0 0 0 0 0
11/25/15 100 0 0 0 0 0
11/25/16 100 0 0 0 0 0
11/25/17 96 0 0 0 0 0
11/25/18 90 0 0 0 0 0
11/25/19 83 0 0 0 0 0
11/25/20 75 0 0 0 0 0
11/25/21 66 0 0 0 0 0
11/25/22 57 0 0 0 0 0
11/25/23 46 0 0 0 0 0
11/25/24 35 0 0 0 0 0
11/25/25 22 0 0 0 0 0
11/25/26 0 0 0 0 0 0
11/25/27 0 0 0 0 0 0
Weighted 25.2 11.4 7.8 6.0 4.9 4.2
Average Life
Years(1)
Class MF-2 Scenario
--------------------------------------
I II III IV V VI
Initial Percent 100 100 100 100 100 100
11/25/98 100 100 100 100 100 100
11/25/99 100 100 100 100 100 100
11/25/00 100 100 100 100 100 100
11/25/01 100 100 100 83 65 50
11/25/02 100 100 87 66 48 35
11/25/03 100 100 73 52 36 0
11/25/04 100 90 61 41 0 0
11/25/05 100 79 51 0 0 0
11/25/06 100 70 42 0 0 0
11/25/07 100 62 35 0 0 0
11/25/08 100 54 0 0 0 0
11/25/09 100 47 0 0 0 0
11/25/10 100 41 0 0 0 0
11/25/11 100 35 0 0 0 0
11/25/12 100 0 0 0 0 0
11/25/13 100 0 0 0 0 0
11/25/14 100 0 0 0 0 0
11/25/15 100 0 0 0 0 0
11/25/16 100 0 0 0 0 0
11/25/17 96 0 0 0 0 0
11/25/18 90 0 0 0 0 0
11/25/19 83 0 0 0 0 0
11/25/20 75 0 0 0 0 0
11/25/21 66 0 0 0 0 0
11/25/22 57 0 0 0 0 0
11/25/23 46 0 0 0 0 0
11/25/24 35 0 0 0 0 0
11/25/25 22 0 0 0 0 0
11/25/26 0 0 0 0 0 0
11/25/27 0 0 0 0 0 0
Weighted 25.2 11.4 7.8 6.0 4.9 4.2
Average Life
Years(1)
- ----------------------------
(1) The weighted average life of the Offered Certificates is determined by (i)
multiplying the amount of each principal payment by the number of years from the
date of issuance to the related Distribution Date, (ii) adding the results, and
(iii) dividing the sum by the initial respective Certificate Principal Balance
for such Class of Offered Certificates.
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
Class BF Scenario
--------------------------------------
I II III IV V VI
Initial Percent 100 100 100 100 100 100
11/25/98 100 100 100 100 100 100
11/25/99 100 100 100 100 100 100
11/25/00 100 100 100 100 100 100
11/25/01 100 100 100 83 65 50
11/25/02 100 100 87 66 48 35
11/25/03 100 100 73 52 36 0
11/25/04 100 90 61 41 0 0
11/25/05 100 79 51 0 0 0
11/25/06 100 70 42 0 0 0
11/25/07 100 62 35 0 0 0
11/25/08 100 54 0 0 0 0
11/25/09 100 47 0 0 0 0
11/25/10 100 41 0 0 0 0
11/25/11 100 35 0 0 0 0
11/25/12 100 0 0 0 0 0
11/25/13 100 0 0 0 0 0
11/25/14 100 0 0 0 0 0
11/25/15 100 0 0 0 0 0
11/25/16 100 0 0 0 0 0
11/25/17 96 0 0 0 0 0
11/25/18 90 0 0 0 0 0
11/25/19 83 0 0 0 0 0
11/25/20 75 0 0 0 0 0
11/25/21 66 0 0 0 0 0
11/25/22 57 0 0 0 0 0
11/25/23 46 0 0 0 0 0
11/25/24 35 0 0 0 0 0
11/25/25 22 0 0 0 0 0
11/25/26 0 0 0 0 0 0
11/25/27 0 0 0 0 0 0
Weighted 25.2 11.4 7.8 6.0 4.9 4.1
Average Life
Years(1)
Class AV-1 Scenario
--------------------------------------
I II III IV V VI
Initial Percent 100 100 100 100 100 100
11/25/98 96 78 66 60 54 48
11/25/99 95 62 43 34 26 19
11/25/00 95 49 26 17 8 1
11/25/01 94 38 22 17 8 1
11/25/02 93 31 17 12 8 1
11/25/03 92 26 12 8 5 0
11/25/04 91 22 9 6 0 0
11/25/05 90 19 7 0 0 0
11/25/06 89 16 5 0 0 0
11/25/07 88 13 4 0 0 0
11/25/08 86 11 0 0 0 0
11/25/09 84 9 0 0 0 0
11/25/10 83 8 0 0 0 0
11/25/11 80 6 0 0 0 0
11/25/12 78 0 0 0 0 0
11/25/13 75 0 0 0 0 0
11/25/14 72 0 0 0 0 0
11/25/15 69 0 0 0 0 0
11/25/16 65 0 0 0 0 0
11/25/17 60 0 0 0 0 0
11/25/18 55 0 0 0 0 0
11/25/19 50 0 0 0 0 0
11/25/20 44 0 0 0 0 0
11/25/21 37 0 0 0 0 0
11/25/22 32 0 0 0 0 0
11/25/23 27 0 0 0 0 0
11/25/24 21 0 0 0 0 0
11/25/25 14 0 0 0 0 0
11/25/26 0 0 0 0 0 0
11/25/27 0 0 0 0 0 0
Weighted 20.1 4.4 2.6 2.0 1.6 1.2
Average Life
Years(1)
Class AV-2 Scenario
--------------------------------------
I II III IV V VI
Initial Percent 100 100 100 100 100 100
11/25/98 96 78 66 60 54 48
11/25/99 95 62 43 34 26 19
11/25/00 95 49 26 17 8 1
11/25/01 94 38 22 17 8 1
11/25/02 93 31 17 12 8 1
11/25/03 92 26 12 8 5 0
11/25/04 91 22 9 6 0 0
11/25/05 90 19 7 0 0 0
11/25/06 89 16 5 0 0 0
11/25/07 88 13 4 0 0 0
11/25/08 86 11 0 0 0 0
11/25/09 84 9 0 0 0 0
11/25/10 83 8 0 0 0 0
11/25/11 80 6 0 0 0 0
11/25/12 78 0 0 0 0 0
11/25/13 75 0 0 0 0 0
11/25/14 72 0 0 0 0 0
11/25/15 69 0 0 0 0 0
11/25/16 65 0 0 0 0 0
11/25/17 60 0 0 0 0 0
11/25/18 55 0 0 0 0 0
11/25/19 50 0 0 0 0 0
11/25/20 44 0 0 0 0 0
11/25/21 37 0 0 0 0 0
11/25/22 32 0 0 0 0 0
11/25/23 27 0 0 0 0 0
11/25/24 21 0 0 0 0 0
11/25/25 14 0 0 0 0 0
11/25/26 0 0 0 0 0 0
11/25/27 0 0 0 0 0 0
Weighted 20.1 4.4 2.6 2.0 1.6 1.2
Average Life
Years(1)
Class MV-1 Scenario
---------------------------------------
I II III IV V VI
Initial Percent 100 100 100 100 100 100
11/25/98 100 100 100 100 100 100
11/25/99 100 100 100 100 100 100
11/25/00 100 100 100 100 100 100
11/25/01 100 100 62 52 80 100
11/25/02 100 86 46 33 23 58
11/25/03 100 73 34 23 15 0
11/25/04 100 61 26 16 0 0
11/25/05 100 52 19 0 0 0
11/25/06 100 43 14 0 0 0
11/25/07 100 36 10 0 0 0
11/25/08 100 31 0 0 0 0
11/25/09 100 26 0 0 0 0
11/25/10 100 21 0 0 0 0
11/25/11 100 18 0 0 0 0
11/25/12 100 0 0 0 0 0
11/25/13 100 0 0 0 0 0
11/25/14 100 0 0 0 0 0
11/25/15 100 0 0 0 0 0
11/25/16 100 0 0 0 0 0
11/25/17 100 0 0 0 0 0
11/25/18 100 0 0 0 0 0
11/25/19 100 0 0 0 0 0
11/25/20 100 0 0 0 0 0
11/25/21 100 0 0 0 0 0
11/25/22 88 0 0 0 0 0
11/25/23 73 0 0 0 0 0
11/25/24 57 0 0 0 0 0
11/25/25 38 0 0 0 0 0
11/25/26 0 0 0 0 0 0
11/25/27 0 0 0 0 0 0
Weighted 27.1 9.0 5.5 4.8 4.7 4.9
Average Life
Years(1)
- ----------------------------------------------------
(1) The weighted average life of the Offered Certificates is determined by (i)
multiplying the amount of each principal payment by the number of years from the
date of issuance to the related Distribution Date, (ii) adding the results, and
(iii) dividing the sum by the initial respective Certificate Principal Balance
for such Class of Offered Certificates.
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
Class MV-2 Scenario
--------------------------------------
I II III IV V VI
Initial Percent 100 100 100 100 100 100
11/25/98 100 100 100 100 100 100
11/25/99 100 100 100 100 100 100
11/25/00 100 100 100 100 100 100
11/25/01 100 100 62 47 35 35
11/25/02 100 86 46 33 23 15
11/25/03 100 73 34 23 15 0
11/25/04 100 61 26 16 0 0
11/25/05 100 52 19 0 0 0
11/25/06 100 43 14 0 0 0
11/25/07 100 36 10 0 0 0
11/25/08 100 31 0 0 0 0
11/25/09 100 26 0 0 0 0
11/25/10 100 21 0 0 0 0
11/25/11 100 18 0 0 0 0
11/25/12 100 0 0 0 0 0
11/25/13 100 0 0 0 0 0
11/25/14 100 0 0 0 0 0
11/25/15 100 0 0 0 0 0
11/25/16 100 0 0 0 0 0
11/25/17 100 0 0 0 0 0
11/25/18 100 0 0 0 0 0
11/25/19 100 0 0 0 0 0
11/25/20 100 0 0 0 0 0
11/25/21 100 0 0 0 0 0
11/25/22 88 0 0 0 0 0
11/25/23 73 0 0 0 0 0
11/25/24 57 0 0 0 0 0
11/25/25 38 0 0 0 0 0
11/25/26 0 0 0 0 0 0
11/25/27
Weighted 27.1 9.0 5.5 4.7 4.2 4.0
Average
Life Years(1)
Class BV Scenario
--------------------------------------
I II III IV V VI
Initial Percent 100 100 100 100 100 100
11/25/98 100 100 100 100 100 100
11/25/99 100 100 100 100 100 100
11/25/00 100 100 100 100 100 100
11/25/01 100 100 62 47 35 25
11/25/02 100 86 46 33 23 13
11/25/03 100 73 34 23 12 0
11/25/04 100 61 26 14 0 0
11/25/05 100 52 19 0 0 0
11/25/06 100 43 11 0 0 0
11/25/07 100 36 04 0 0 0
11/25/08 100 31 0 0 0 0
11/25/09 100 26 0 0 0 0
11/25/10 100 21 0 0 0 0
11/25/11 100 17 0 0 0 0
11/25/12 100 0 0 0 0 0
11/25/13 100 0 0 0 0 0
11/25/14 100 0 0 0 0 0
11/25/15 100 0 0 0 0 0
11/25/16 100 0 0 0 0 0
11/25/17 100 0 0 0 0 0
11/25/18 100 0 0 0 0 0
11/25/19 100 0 0 0 0 0
11/25/20 100 0 0 0 0 0
11/25/21 100 0 0 0 0 0
11/25/22 88 0 0 0 0 0
11/25/23 73 0 0 0 0 0
11/25/24 57 0 0 0 0 0
11/25/25 38 0 0 0 0 0
11/25/26 0 0 0 0 0 0
11/25/27
Weighted 27.1 9.0 5.4 4.5 4.0 3.7
Average
Life Years(1)
- --------------------------------------------------
(1) The weighted average life of the Offered Certificates is determined by (i)
multiplying the amount of each principal payment by the number of years from the
date of issuance to the related Distribution Date, (ii) adding the results, and
(iii) dividing the sum by the initial respective Certificate Principal Balance
for such Class of Offered Certificates.
There is no assurance that prepayments will occur at any constant
percentage or in accordance with any of the aforementioned Prepayment
Assumptions.
Payment Delay Feature of Fixed Rate Certificates
The effective yield to the Holders of the Group I Certificates (other
than the Class AF-1 Certificates) will be lower than the yield otherwise
produced by the related Certificate Pass-Through Rate and the purchase price of
such Certificates because principal and interest distributions will not be
payable to such holders until at least the 25th day of the month following the
month of accrual (without any additional distributions of interest or earnings
thereon in respect of such delay).
DESCRIPTION OF THE OFFERED CERTIFICATES
General
The Certificates will consist of the Group I Certificates (which are
comprised of the Class A Group I Certificates and the Subordinated Group I
Certificates), and the Group II Certificates (which are comprised of the Class A
Group II Certificates and the Subordinated Group II Certificates), and the
Retained Certificates. The Certificates will be issued by Saxon Asset Securities
Trust 1997-3, pursuant to the Agreement. Only the Offered Certificates are
offered hereby. The Retained Certificates will be retained initially by the
Depositor or its affiliates and are not being offered hereby.
Persons in whose name Certificates are registered in the Certificate
Register maintained by the Certificate Registrar are the "Holders" of the
Certificates. For so long as the Offered Certificates are in book-entry form
with DTC, the only "Holder" of the Offered Certificates as the term "Holder" is
used in the Agreement will be Cede & Co., a nominee of DTC. No Beneficial Owners
will be entitled to receive a definitive certificate representing such person's
interest in the Trust, except in the event that physical Certificates are issued
under limited circumstances set forth in the Agreement. All references herein to
the Holders of Offered Certificates shall mean and include the rights of Holders
as such rights may be exercised through DTC and its participating organizations,
except as otherwise specified in the Agreement.
<PAGE>
As described under "THE MORTGAGE LOAN POOL" in this Prospectus
Supplement, the Mortgage Loan Pool is divided into Group I, which contains
Mortgage Loans having fixed interest rates, and Group II, which contains
Mortgage Loans having adjustable interest rates.
The Agreement requires that the Trustee create an Asset Proceeds
Account and a Distribution Account. All funds therein are required to be
invested and reinvested as directed by the Master Servicer, in Permitted
Investments (as defined in the Prospectus). See "THE AGREEMENT -- Administration
of Accounts" in the Prospectus.
One business day prior to the related Distribution Date (or, if such
day is not a business day, the immediately preceding business day) (the "Master
Servicer Remittance Date") the Master Servicer is required to withdraw from the
Master Servicer Custodial Account and remit to the Asset Proceeds Account and
then to the Distribution Account an amount equal to the Interest Funds and
Principal Funds with respect to each Group.
The "Interest Funds" with respect to each Mortgage Loan Group and
Master Servicer Remittance Date, to the extent actually deposited in the Master
Servicer Custodial Account, are equal to the sum, without duplication, of (i)
all scheduled interest collected by the Servicers during the related Due Period
less the related Servicing Fee and Master Servicing Fee, (ii) all Advances
relating to interest, (iii) all Month End Interest and (iv) liquidation proceeds
(to the extent such liquidation proceeds relate to interest) less all
non-recoverable Advances relating to interest and certain expenses reimbursed
during the related Due Period.
The "Principal Funds" with respect to each Mortgage Loan Group and
Master Servicer Remittance Date, to the extent actually deposited in the Master
Servicer Custodial Account, are equal to the sum, without duplication, of (i)
the scheduled principal collected by the Servicers during the related Due Period
or advanced on or before such Master Servicer Remittance Date, (ii) prepayments
collected by the Servicers in the applicable prepayment period, (iii) the
Scheduled Principal Balance of each Mortgage Loan that was repurchased by the
Depositor, (iv) any Substitution Shortfall (the amount, if any, by which the
aggregate unpaid principal balance of any substitute Mortgage Loans is less than
the aggregate unpaid principal balance of any deleted Mortgage Loans) delivered
by the Depositor in connection with a substitution of Mortgage Loans and (v) all
liquidation proceeds collected by the Servicer during the related Due Period (to
the extent such liquidation proceeds related to principal) less all
non-recoverable advances relating to principal reimbursed during the related Due
Period.
Distributions
General. Distributions on each Class of the Certificates will be made
on each Distribution Date to Holders of each Class of the Certificates as of the
immediately preceding Record Date in an amount equal to the product of such
Holder's Percentage Interest and the amount to be distributed to each such Class
on such Distribution Date. The "Percentage Interest" represented by any
Certificate will be equal to the percentage obtained by dividing the Certificate
Principal Balance of such Certificate by the Certificate Principal Balance of
all Certificates of the same Class.
Distributions of Interest. On each Distribution Date, interest
distributable with respect to the Group I Certificates (other than the Class
AF-1 Certificates) is the interest which has accrued thereon at the related
Pass-Through Rate during the calendar month immediately preceding the calendar
month in which such Distribution Date occurs; interest distributable with
respect to the Class AF-1 Certificates and the Group II Certificates is the
interest which has accrued thereon at the then applicable related Pass-Through
Rate from and including the preceding Distribution Date (or from the Closing
Date in the case of the first Distribution Date) to and including the day prior
to the current Distribution Date. Each period referred to in the prior sentence
relating to the accrual of interest is the "Accrual Period" for the related
Class of Offered Certificates.
All calculations of interest on the Group I Certificates (except for
the Class AF-1 Certificates) will be made on the basis of a 360-day year assumed
to consist of twelve 30-day months. All calculations of interest on the Class
AF-1 Certificates and on the Group II Certificates will be made on the basis of
the actual number of days and a year of 360 days.
On each Distribution Date, the Interest Funds for such Distribution
Date with respect to each Mortgage Loan Group are required to be distributed in
the following order of priority until such Interest Funds have been fully
distributed:
<PAGE>
(i) to each Class of the Class A Certificates of such Group, the
Current Interest and any Interest Carry Forward Amount for
such Class; provided, however, if the Interest Funds are not
sufficient to make a full distribution of the Current Interest
and any Interest Carry Forward Amount with respect to the
Class A Certificates of each Group, the related Interest Funds
will be distributed pro rata among each Class of the Class A
Certificates of such Group based on the ratio of (x) the
Current Interest and Interest Carry Forward Amount for such
Class to (y) the total amount of Current Interest and any
Interest Carry Forward Amount for the Class A Certificates of
such Group;
(ii) to the Class M-1 Certificates of such Group, the Current
Interest for such Class;
(iii) to the Class M-2 Certificates of such Group, the Current
Interest for such Class;
(iv) to the Class B Certificates of such Group, the Current
Interest for such Class; and
(v) any remainder to be distributed as described below
under "-- Overcollateralization and
Crosscollateralization Provisions".
"Current Interest", with respect to each Class of the Offered
Certificates and each Distribution Date, is the interest accrued on the
Certificate Principal Balance of such Class immediately prior to such
Distribution Date during the applicable Accrual Period at the applicable
Pass-Through Rate plus any amount previously distributed with respect to
interest for such Class that is recovered as a voidable preference by a trustee
in bankruptcy.
"Interest Carry Forward Amount", with respect to each Class of the
Offered Certificates and each Distribution Date, is the sum of (i) the excess of
(A) Current Interest for such Class with respect to prior Distribution Dates
(excluding any Group II Certificates Carryover) over (B) the amount actually
distributed to such Class with respect to interest on such prior Distribution
Dates and (ii) interest on such excess at the applicable Pass-Through Rate.
Distributions of Principal. Initially principal will be distributed
exclusively to the Class A Certificates of a Group (in the manner described
herein) until the excess of the aggregate Scheduled Principal Balances of the
Mortgage Loans of the related Group over the Class A Certificate Principal
Balances of such Group is equal to or exceeds 27.00% for Group I (40.00% for
Group II) of such Scheduled Principal Balances; thereafter, principal is
required to be distributed so as to maintain that ratio.
After the principal of the Class A Certificates of a Group has been
reduced to the extent described above (and not before the Distribution Date in
November 2000, unless the Certificate Principal Balance of the related Class A
Certificates has been reduced to zero), principal not required to be distributed
with respect to the Class A Certificates of that Group will be distributed to
the Class M-1 Certificates of that Group generally until the excess of the
aggregate Scheduled Principal Balances of the Mortgage Loans in the related
Group over the sum of the Class A and Class M-1 Certificate Principal Balances
of the related Group is equal to or exceeds 18.00% for Group I (24.50% for Group
II) of such Scheduled Principal Balances; thereafter, principal not required to
be distributed with respect to the Class A and Class M-1 Certificates will be
distributed to the Class M-2 Certificates generally until the excess of the
aggregate Scheduled Principal Balances of the Mortgage Loans in the related
Group over the sum of the Class A, Class M-1 and Class M-2 Certificate Principal
Balances of the related Group is equal to or exceeds 10.00% for Group I (12.50%
for Group II) of such Scheduled Principal Balances; thereafter principal not
required to be distributed with respect to the Class A, Class M-1 and Class M-2
Certificates will be distributed to the Class B Certificates of the related
Group generally until the excess of the aggregate Scheduled Principal Balances
of the Mortgage Loans in the related Group over the sum of the Class A, Class
M-1, Class M-2 and Class B Certificate Principal Balances of the related Group
is equal to or exceeds 5.00% for Group I (5.50% for Group II) of such Scheduled
Principal Balances; thereafter principal not required to be distributed to the
Offered Certificates will be distributed to the Retained Certificates.
Notwithstanding the foregoing, (i) while a Trigger Event (as defined
herein) with respect to a Group exists, principal will be distributed
exclusively to the Class A Certificates of the related Group (and, after the
Certificate Principal Balance of the related Class A Certificates has been
reduced to zero, exclusively to the Class M-1 Certificates of the related Group,
and, after the Certificate Principal Balance of the related Class M-1
Certificates has been reduced to zero, exclusively to the Class M-2 Certificates
of the related Group and, after the Certificate Principal Balance of the related
Class M-2 Certificates has been reduced to zero, exclusively to the Class B
Certificates of the related Group), (ii) if the Certificate Principal Balance of
the Class A Certificates of a Group has been reduced to zero before November
2000, principal will be distributed exclusively to the Class M-1 Certificates of
the related Group until November 2000 (or until the Certificate Principal
Balance thereof has been reduced to zero), and, if the Certificate Principal
Balance of the related Class M-1 Certificates has been reduced to zero before
November 2000, exclusively to the Class M-2 Certificates of the related Group
until November 2000 (or until the Certificate Principal Balance thereof has been
reduced to zero) and, if the Certificate Principal Balance of the related Class
<PAGE>
M-2 Certificates has been reduced to zero before November 2000, exclusively to
the Class B Certificates of the related Group until November 2000 (or until the
Certificate Principal Balance thereof has been reduced to zero); and (iii) while
a Subordinated Trigger Event (as defined herein) with respect to a Group exists,
principal otherwise distributable to the Retained Certificates will be
distributed to the related Subordinated Certificates (in inverse order of
seniority).
On each Distribution Date, the Principal Distribution Amount for such
Distribution Date with respect to each Mortgage Loan Group is required to be
distributed as follows until such Principal Distribution Amount has been fully
distributed:
(i) to the Class A Certificates of such Group, the Class A
Principal Distribution Amount for such Group; the Class A
Principal Distribution Amount for Group I is required to be
distributed as follows: first, the Class AF-6 Distribution
Amount to the Class AF-6 Certificates, and then the balance
of such Class A Distribution Amount sequentially to the
Class AF-1, Class AF-2, Class AF-3, Class AF-4, Class AF-5
and Class AF-6 Certificates so that no such distribution
will be made to any such Class until the Certificate
Principal Balances of all Class A Group I Certificates with
a lower numeral denomination shall have been reduced to zero;
and the Class A Principal Distribution Amount for Group II
is required to be distributed as follows: first, amounts
constituting Principal Funds attributable to Subgroup A to
the Class AV-1 Certificates and amounts constituting
Principal Funds attributable to Subgroup B to the Class AV-2
Certificates, and then the excess of the Class A Principal
Distribution Amount over the amounts distributed in the
preceding clause will be prorated between the Class AV-1
and Class AV-2 Certificates; provided, however, if the
Certificate Principal Balance of the Class AV-1 Certificates
or the Class AV-2 Certificates is reduced to zero, the
Class A Principal Distribution Amount shall be distributed
to the remaining Class A Group II Certificates; and
provided, further, that, on any Distribution Date on which
the Certificate Principal Balances for the Class A Group I
Certificates are equal to or greater than the Scheduled
Principal Balances of the Mortgage Loans in such Group, the
Class A Principal Distribution Amount for Group I will be
distributed pro rata and not sequentially to the Class A
Group I Certificates;
(ii) to the Class M-1 Certificates of such Group, the Class M-1
Principal Distribution Amount for such Class;
(iii) to the Class M-2 Certificates of such Group, the Class M-2
Principal Distribution Amount for such Class;
(iv) to the Class B Certificates of such Group, the Principal
Class B Distribution Amount for such Class; and
(v) any remainder to be distributed as described below
under "-- Overcollateralization and
Crosscollateralization Provisions".
"Principal Distribution Amount", with respect to each Distribution Date
and Mortgage Loan Group, is the sum of (i) the Principal Funds for such
Distribution Date and such Group and (ii) any Extra Principal Distribution
Amount for such Distribution Date and such Group.
"Class A Principal Distribution Amount" for a Mortgage Loan Group is
(i) with respect to any Distribution Date prior to the Stepdown Date or as to
which a Trigger Event exists, 100% of the Principal Distribution Amount for such
Group and such Distribution Date and (ii) with respect to any Distribution Date
on or after the Stepdown Date and as to which a Trigger Event does not exist,
the excess of (A) the related Class A Certificate Principal Balance immediately
prior to such Distribution Date over the lesser of (I) 73.00% for Group I
(60.00% for Group II) of the Scheduled Principal Balances of the Mortgage Loans
in such Group on the preceding Due Date and (II) the Scheduled Principal
Balances of the Mortgage Loans in such Group on the preceding Due Date less
$1,170,347 for Group I ($1,831,195 for Group II).
<PAGE>
"Class AF-6 Distribution Amount", for any Distribution Date, is the
product of (i) a fraction, the numerator of which is the Class AF-6 Certificate
Principal Balance and the denominator of which is the Class A Certificate
Principal Balance for Group I, in each case immediately prior to such
Distribution Date, (ii) the Class A Principal Distribution Amount with respect
to Group I for such Distribution Date and (iii) the applicable percentage for
such Distribution Date set forth in the following table:
Distribution Date Percentage
November 1997 - October 2000 0%
November 2000 - October 2002 45%
November 2002 - October 2003 80%
November 2003 - October 2004 100%
November 2004 and thereafter 300%
"Class M-1 Principal Distribution Amount", for a Mortgage Loan Group
and with respect to any Distribution Date on or after the related Stepdown Date
and as long as a Trigger Event is not in effect for such Group (as described
above), is the excess of (i) the sum for such Group of (A) the related Class A
Certificate Principal Balance and (B) the related Class M-1 Certificate
Principal Balance immediately prior to such Distribution Date over (ii) the
lesser of (A) 82.00% for Group I (75.50% for Group II) of the Scheduled
Principal Balances of the Mortgage Loans in such Group on the preceding Due Date
and (B) the Scheduled Principal Balances of the Mortgage Loans in such Group on
the preceding Due Date less $1,170,347 for Group I ($1,831,195 for Group II).
"Class M-2 Principal Distribution Amount", for a Mortgage Loan Group
and with respect to any Distribution Date on or after the related Stepdown Date
and as long as a Trigger Event is not in effect for such Group (as described
above), is the excess of (i) of the sum for such Group of (A) the related Class
A Certificate Principal Balance, (B) the related Class M-1 Certificate Principal
Balance, and (C) the related Class M-2 Certificate Principal Amount immediately
prior to such Distribution Date over the lesser of (A) 90.00% for Group I
(87.50% for Group II) of the aggregate Scheduled Principal Balances of the
Mortgage Loans in such Group and (B) the Scheduled Principal Balances of the
Mortgage Loans in such Group on the preceding Due Date less $1,170,347 for Group
I ($1,831,195 for Group II).
"Class B Principal Distribution Amount", for a Mortgage Loan Group and
with respect to any Distribution Date on or after the related Stepdown Date and
as long as a Trigger Event is not in effect for such Group (as described above),
is the excess of (i) the sum for such Group of (A) the related Class A
Certificate Principal Balance, (B) the related Class M-1 Certificate Principal
Balance, (C) the related Class M-2 Certificate Principal Balance and (D) the
related Class B Certificate Principal Balance immediately prior to such
Distribution Date over the lesser of (A) 95.00% for Group I (94.50% for Group
II) of the Scheduled Principal Balances of the Mortgage Loans in such Group on
the preceding Due Date and (B) the Scheduled Principal Balances of the Mortgage
Loans in such Group on the preceding Due Date less $1,170,347 for Group I
($1,831,195 for Group II).
"Extra Principal Distribution Amount", for a Mortgage Loan Group and
with respect to any Distribution Date, is (i) prior to the Stepdown Date, the
excess of (A) the sum of (I) the aggregate Certificate Principal Balances of the
Certificates of such Group and (II) approximately $5,851,735 for Group I
(approximately $10,071,574 for Group II) over (B) the Scheduled Principal
Balances of the Mortgage Loans in such Group and (ii) on and after the Stepdown
Date, the excess of (A) the sum of (I) the aggregate Certificate Principal
Balances of the Certificates of such Group and (II) the greater of (x) 5.00% for
Group I (5.50% for Group II) of the Scheduled Principal Balances of the Mortgage
Loans in such Group and (y) approximately $1,170,347 for Group I (approximately
$1,831,195 for Group II) over (B) the Scheduled Principal Balances of the
Mortgage Loans in such Group.
"Stepdown Date", with respect to each Group, is the earlier to occur of
(i) the later to occur of (A) the Distribution Date in November 2000 and (B) the
first Distribution Date on which (I) the Class A Certificate Principal Balance
of such Group (less the Principal Funds for such Group on such date) is less
than or equal to (II) 73.00% for Group I (60.00% for Group II) of the Scheduled
Principal Balances of the Mortgage Loans in such Group and (ii) the Distribution
Date on which the Certificate Principal Balance of the related Class A
Certificates has been reduced to zero.
A "Trigger Event", with respect to each Group and a Distribution Date
after the Stepdown Date, exists if the product, expressed as a percentage, of
(i) two times for Group I (2.5 times for Group II) (ii) the quotient of (A) the
aggregate Scheduled Principal Balance of all 60 and over day delinquent Mortgage
Loans for such Group and (B) the Scheduled Principal Balance of that Group as of
the preceding Master Servicer Remittance Date equals or exceeds 27.00% for Group
I (40.00% for Group II).
<PAGE>
Overcollateralization and Crosscollateralization Provisions
As set forth below, Interest Funds and Principal Funds with respect to
each Group not otherwise required to be distributed with respect to principal of
and interest on the Offered Certificates will be required to be applied as an
Extra Principal Distribution Amount with respect to a Mortgage Loan Group
whenever the Scheduled Principal Balances of the Mortgage Loans in such Group do
not exceed, by the required amount, the aggregate Certificate Principal Balances
of the related Certificates.
Realized Losses. If on any Distribution Date, after giving effect to
any Extra Principal Distribution Amount, the aggregate Certificate Principal
Balances of the Offered Certificates with respect to a Mortgage Loan Group
exceed the Scheduled Principal Balances of the Mortgage Loans in such Group, the
Certificate Principal Balances of the Subordinated Certificates (but not the
Class A Certificates) of such Group will be reduced, in inverse order of
seniority, by an amount equal to such excess; such that any such excess will be
applied first to reduce the Certificate Principal Balances of the related Class
B Certificates until the Certificate Principal Balances thereof have been
reduced to zero; second, to the related Class M-2 Certificates until the
Certificate Principal Balances thereof have been reduced to zero; and finally,
to the Class M-1 Certificates until the Certificate Principal Balances thereof
have been reduced to zero. If the Certificate Principal Balance of a Class of
Subordinated Certificates is reduced, that Class thereafter will be entitled to
distributions of interest and principal only with respect to the Certificate
Principal Balance as so reduced. On subsequent Distribution Dates, however, as
described below, Interest Funds and Principal Funds with respect to each Group
not otherwise required to be distributed with respect to principal of and
interest on the Offered Certificates will be applied to reduce Unpaid Realized
Loss Amounts in direct order of seniority.
On each Distribution Date, Interest Funds and Principal Funds with
respect to each Group not otherwise required to be distributed with respect to
principal of and interest on the Offered Certificates as described above will be
required to be distributed as follows until fully distributed:
(i) the Extra Principal Distribution Amount for such Group;
(ii) to the Class M-1 Certificates of such Group, the Class M-1
Interest Carry Forward Amount for such Class;
(iii) to the Class M-1 Certificates of such Group, the Class M-1
Unpaid Realized Loss Amount for such Class;
(iv) to the Class M-2 Certificates of such Group, the Class M-2
Interest Carry Forward Amount for such Class;
(v) to the Class M-2 Certificates of such Group, the Class M-2
Unpaid Realized Loss Amount for such Class;
(vi) to the Class B Certificates of such Group, the Class B
Interest Carry Forward Amount for such Class;
(vii) to the Class B Certificates of such Group, the Class B Unpaid
Realized Loss Amount for such Class;
(viii) for distribution to the other Group to the extent that any of
the amounts listed above with respect to the other Group have
not otherwise been distributed in full for such Distribution
Date in accordance with the priorities set forth above;
(ix) in the case of Group II, to the Group II Certificates, in the
order in which distributions of Current Interest are made, the
Group II Certificates Carryover;
(x) if a Subordinated Trigger Event exists with respect to such
Group, the excess of the related Principal Funds over the sum
of the related Class A, Class M-1, Class M-2 and Class B
Principal Distribution Amounts to the Subordinated
Certificates of such Group in reverse order of seniority; and
(xi) to the Retained Certificates, the remaining amount.
"Applied Realized Loss Amount", with respect to any Class of the
Subordinated Certificates and as to any Distribution Date, means the sum of the
Realized Losses with respect to Mortgage Loans which have been applied in
reduction of the Certificate Principal Balance of such Class.
<PAGE>
"Realized Loss" is the excess of the Scheduled Principal Balance of a
defaulted Mortgage Loan over the liquidation proceeds with respect thereto that
are allocated to principal.
"Unpaid Realized Loss Amount", with respect to any Class of
Subordinated Certificates and as to any Distribution Date, is the excess of (i)
Applied Realized Loss Amounts with respect to such Class over (ii) the sum of
all distributions in reduction of the Applied Realized Loss Amounts to such
Class on all previous Distribution Dates. Any amounts distributed to a Class of
Subordinated Certificates in respect of any Unpaid Realized Loss Amount will not
further reduce the Certificate Principal Balance of such Class.
A "Subordinated Trigger Event", with respect to each Group and a
Distribution Date after the Stepdown Date, exists if (a) Realized Losses since
the Cut-Off Date with respect to the Mortgage Loans in that Group as a
percentage of the initial Scheduled Principal Balance of the Group exceed the
percentage set out below with respect to such Distribution Date and (b) the
Scheduled Principal Balance of the Mortgage Loans in that Group that, as of such
Distribution Date are 60 or more days delinquent as a percentage of the
Scheduled Principal Balance of the Mortgage Loans in that Group exceeds the
Delinquency Percentage set out below with respect to such Distribution Date:
<TABLE>
<CAPTION>
Distribution Date (inclusive) Realized Loss Percentage Delinquency Percentage
----------------------------- ---------------------------- -------------------------
Group I Group II Group I Group II
------- -------- -------- --------
<S> <C>
November 1999 - October 2000 1.60 2.20 5.00 5.50
November 2000 - October 2001 2.70 3.70 5.00 5.50
November 2001 - October 2002 3.40 4.70 7.50 8.25
November 2002 - October 2003 3.90 5.30 7.50 8.25
November 2003 - October 2004 4.20 5.70 10.00 11.00
November 2004 and thereafter 4.40 6.00 10.00 11.00
</TABLE>
Calculation of One Month LIBOR
On the second business day preceding each Distribution Date other than
the first Distribution Date (each such date, an "Interest Determination Date"),
the Paying Agent will determine One Month LIBOR (as defined below).
"One Month LIBOR" means, as of any Interest Determination Date, the
rate for one-month U.S. dollar deposits ("LIBOR") which appears in the Telerate
Page 3750, as of 11:00 a.m., (London time) on such Interest Determination Date.
If such rate does not appear on Telerate Page 3750, the rate for that day will
be determined on the basis of the rates at which deposits in United States
dollars are offered by the Reference Banks (as defined below) at approximately
11:00 a.m., London time, on that day to prime banks in the London interbank
market for a period equal to the relevant Accrual Period (commencing on the
first day of such Accrual Period). The Paying Agent will request the principal
London office of each of the Reference Banks to provide a quotation of its rate.
If at least two such quotations are provided, the rate for that day will be the
arithmetic-mean of the quotations. If fewer than two quotations are provided as
requested, the rate for that day will be the arithmetic-mean of the rates quoted
by major banks in New York City, selected by the Paying Agent, at approximately
11:00 a.m., New York City time, on that day for loans in United States dollars
to leading European banks for a period equal to the relevant Accrual Period
(commencing on the first day of such Accrual Period).
"Telerate Page 3750" means the display page currently so designated on
the Dow Jones Telerate Service (or such other page as may replace that page on
that service for the purpose of displaying comparable rates or prices) and
"Reference Banks" means leading banks selected by the Paying Agent and engaged
in transactions in Eurodollar deposits in the international Eurocurrency market.
Book Entry Registration of the Class A Certificates
The Offered Certificates will be book-entry Certificates (the
"Book-Entry Certificates"). Beneficial Owners may elect to hold their Book-Entry
Certificates directly through DTC in the United States, or CEDEL or Euroclear
(in Europe) if they are participants of such systems ("Participants"), or
indirectly through organizations which are Participants. The Book-Entry
Certificates will be issued in one or more certificates per Class of Offered
Certificates which in the aggregate equal the principal balance of such Offered
Certificates and will initially be registered in the name of Cede & Co., the
nominee of DTC. See "DESCRIPTION OF THE CERTIFICATES -- Book Entry Procedures"
and -- Global Clearance Settlement and Tax Documentation Procedures" in the
Prospectus.
<PAGE>
THE AGREEMENT
In addition to the provisions of the Agreement summarized elsewhere in
this Prospectus Supplement, there is set forth below a summary of certain other
provisions of the Agreement. See also "THE AGREEMENT -- The Trustee", "--
Administration of Accounts", "-- Events of Default and Remedies", "--
Amendment", and "-- Termination" in the Prospectus.
Formation of the Trust
On the Closing Date, the Trust will be created and established pursuant
to the Agreement. On such date, the Depositor will sell without recourse the
Mortgage Loans to the Trust and the Trust will issue the Certificates pursuant
to the Agreement. Reference is made to the Prospectus for important additional
information regarding the terms and conditions of the Certificates. The
Depositor will provide to any prospective or actual Holder of Offered
Certificates, upon written request, a copy (without exhibits) of the Agreement.
Requests should be addressed to Saxon Asset Securities Company, 4880 Cox Road,
Glen Allen, Virginia 23060, Attention: Secretary.
The Trust created pursuant to the Agreement will consist of (a) the
Mortgage Loans, (b) such assets as from time to time are identified as deposited
in any account held for the benefit of the Certificateholders, (c) any Mortgaged
Premises acquired on behalf of the Certificateholders by foreclosure or by deed
in lieu of foreclosure, (d) the rights of the Trustee to receive the proceeds of
applicable insurance policies and funds, if any, required to be maintained
pursuant to the Agreement, (e) certain rights of the Depositor to the
enforcement of representations and warranties made by the Seller relating to the
Mortgage Loans and (f) the servicing agreements.
The Offered Certificates will not represent an interest in or an
obligation of, nor will the Mortgage Loans be guaranteed by, the Seller, the
Depositor, the Servicers, the Master Servicer or the Trustee.
Reports to Certificateholders
On each Distribution Date the Master Servicer is required to report in
writing to each Holder of an Offered Certificate:
(i) with respect to each Class of Offered Certificates
(based on a Certificate in the original principal
amount of $1,000):
(a) the amount of the distribution on such
Distribution Date;
(b) the amount of such distribution allocable to
interest;
(c) the amount of such distribution allocable to
principal, separately identifying the aggregate
amount of any prepayments, Substitution
Shortfalls, repurchase amounts or other
recoveries of principal included therein and any
Extra Principal Distribution Amount and any
Applied Realized Loss Amount with respect to,
and any Unpaid Realized Loss at, such
Distribution Date;
(d) the principal balance after giving effect to any
distribution allocable to principal; and
(e) any Interest Carry Forward Amount;
(ii) the weighted average of the mortgage interest
rates on the Mortgage Loans in each Group less the
Servicing and Master Servicing Fee Rates;
(iii) the largest Mortgage Loan balance outstanding in each
Group;
(iv) the Servicing Fees and Master Servicing Fees
allocable to each Group;
(v) One-Month LIBOR on the most recent Interest
Determination Date; and
(vi) the Pass-Through Rates for the Class AF-1
Certificates and the Group II Certificates for the
urrent Accrual Period.
Delivery and Substitution of Mortgage Loans
If any Mortgage Loan proposed to be included in the Mortgage Loan
Groups is not delivered with all the required documentation on the Closing Date,
the Depositor will be required to repurchase any such Mortgage Loan on or before
a specified Distribution Date. Under the limited circumstances specified in the
Agreement, certain
<PAGE>
mortgage loans may be substituted for Mortgage Loans initially delivered. It is
anticipated that any permitted substitution will not materially change the
characteristics of the Mortgage Pools, as set forth above. See "THE TRUSTS --
The Mortgage Assets -- Substitution of Mortgage Assets" in the Prospectus.
The Trustee, Certificate Registrar, Paying Agent and the Custodian
Citibank, N.A., a national banking association, will act as Trustee of
the Trust and the mailing address of its Corporate Trust Office is 120 Wall
Street, New York, New York 10043, and its telephone number is (212) 412-6179.
Texas Commerce Bank National Association will act as Certificate Registrar and
Paying Agent and the mailing address of its Corporate Trust Office is 601
Travis, Houston, Texas 77002 and its telephone number is (713) 216-4181.
Voting Rights
The voting rights of the Trust will be allocated as follows: 1% to each
Class of the Retained Certificates and 98% to the Classes of Offered
Certificates in proportion to their respective outstanding Certificate Principal
Balances.
Termination of the Trust
The Agreement provides that the Trust will terminate upon the payment
to the Holders of all Certificates of all amounts required to be paid to such
Holders upon the last to occur of: (a) the final payment or other liquidation
(or any advance made with respect hereto) of the last Mortgage Loan, (b) the
disposition of all property acquired in respect of any Mortgage Loan remaining
in the Trust and (c) at any time when a qualified liquidation (as defined in the
Code) of the Trust is effected as described below.
By Meritech. At its option, Meritech may, on any Distribution Date when
the aggregate outstanding Scheduled Principal Balances of the Mortgage Loans are
less than 10% of the Mortgage Loans as of the Closing Date (the first such
Distribution Date, "Initial Optional Termination Date"), purchase from the Trust
all (but not fewer than all) remaining Mortgage Loans, in whole only, and other
property acquired by foreclosure, deed in lieu of foreclosure, or otherwise then
constituting the Trust at a price equal to 100% of the aggregate Schedule
Principal Balances of the Mortgage Loans plus one month's interest computed as
provided in the Agreement.
Termination Upon Loss of REMIC Status. Following a final determination
by the Internal Revenue Service or by a court of competent jurisdiction, in
either case from which no appeal is taken within the permitted time for such
appeal, or if any appeal is taken, following a final determination of such
appeal from which no further appeal may be taken, to the effect that each REMIC
established under the Agreement does not and will no longer qualify as a "REMIC"
pursuant to Section 860D of the Code (the "Final Determination"), at any time on
or after the date which is 30 calendar days following such Final Determination,
Holders of a majority in Percentage Interests represented by the Offered
Certificates then outstanding may direct the Trustee on behalf of the Trust to
adopt a plan of complete liquidation.
Sale of Mortgage Loans
In connection with the sale of Mortgage Loans, the Depositor will be
required to deliver a file with respect to each Mortgage Loan consisting of (i)
the original note endorsed in blank or to the order of the Trustee or a
Custodian acting on behalf of the Trustee with all prior and intervening
endorsements; (ii) the original recorded security instrument or a certified
copy, or if the original security instrument has been submitted for recordation
but has not been returned by the applicable public recording office, a photocopy
certified by an officer of the related Servicer, title company,
closing/settlement-escrow agent or closing attorney; (iii) each original
recorded intervening assignment of the security instrument as may be necessary
to show a complete chain of title to the related Servicer, Trustee or custodian
(the Seller, in some instances, having instructed the party selling a Mortgage
Loan to the Seller to record an assignment directly to such custodian) or if any
such assignment has been submitted for recordation but has not been returned
from the applicable public recording office or is otherwise not available, a
copy certified by an officer of the related Servicer; (iv) if an assignment of
the security instrument to the related Servicer has been recorded or sent for
recordation, an original assignment of the security instrument from such
Servicer in blank or to the Trustee or custodian in recordable form; (v) except
as to any second Mortgage Loan with a balance of less than $50,000, an original
title insurance policy, certificate of title insurance or written commitment or
a copy certified as true and correct by the insurer; and (vi) if indicated on
the applicable schedule, the original or certified copies of each assumption
agreement, modification agreement, written assurance or substitution agreement,
if any. The custodian is required to review each such file on or before the
Closing Date and again prior to the first anniversary of the Closing Date and to
deliver to the Depositor and the Master Servicer a certification as to the
completeness of the file for each Mortgage Loan, with any applicable exceptions
noted.
<PAGE>
On the Closing Date, the Depositor will also assign to the Trustee all
the Depositor's right, title and interest in the Sales Agreement insofar as it
relates to the representations and warranties made therein by the Seller in
respect of the origination of the Mortgage Loans and the remedies provided for
breach of such representations and warranties. Upon discovery by the Trustee or
the Master Servicer of a breach of any such representation, warranty or covenant
which materially and adversely affects the interests of the Holders of the
Certificates, such party will promptly notify the Depositor and the Seller. The
Seller will have 60 days from its discovery or its receipt of such notice to
cure such breach or, if required, to repurchase the Mortgage Loan or to
substitute a qualified substitute mortgage loan.
Events of Default
The Master Servicer will have the right to direct the termination of a
Servicer in the event of a breach by such Servicer under its servicing
agreement. In the event of such termination, the Master Servicer will be
required to appoint a successor servicer to assume the obligations of such
Servicer under the servicing agreement, including the obligation to make
advances (the Master Servicer will not be obligated to pay Month End Interest).
See "THE MORTGAGE LOAN POOL -- Advances and Month End Interest" in this
Prospectus Supplement. If the Master Servicer is unable to appoint a successor
servicer, the Trustee will appoint or petition a court of competent jurisdiction
for the appointment of a suitable mortgage loan servicing institution to act as
successor servicer. Pending such appointment, the Master Servicer will be
obligated to service the Mortgage Loans. Any successor servicer will be entitled
to compensation arrangements similar to (but no greater than) those provided to
the predecessor Servicer. See "SERVICING OF THE MORTGAGE LOANS -- General" in
the Prospectus.
Governing Law
The Agreement and each Certificate will be construed in accordance with
and governed by the laws of the State of New York applicable to agreements made
and to be performed therein.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion of certain of the material anticipated federal
income tax consequences of the purchase, ownership and disposition of the
Offered Certificates is to be considered only in connection with "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES" in the Prospectus. The discussion herein and in
the Prospectus is based upon laws, regulations, rulings and decisions now in
effect, all of which are subject to change. The discussion below and in the
Prospectus does not purport to deal with all federal tax consequences applicable
to all categories of investors, some of which may be subject to special rules.
Investors should consult their own tax advisors in determining the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of the Offered Certificates.
REMIC Elections
The Trustee will cause elections to be made to treat certain assets of
the Trust as REMICs for federal income tax purposes. The assets of the Pooling
REMIC will consist of the Mortgage Loans and substantially all other property in
the Trust; the Pooling REMIC will issue uncertificated interests (the "Pooling
REMIC Regular Interests"), which will be designated as the regular interests in
the Pooling REMIC, and the Class R Certificates, which will be designated as the
residual interest in the Pooling REMIC. The assets of the Issuing REMIC will
consist of the Pooling REMIC Regular Interests; the Issuing REMIC will issue the
Offered Certificates and the Class C Certificates, which will be designated as
the regular interests in the Issuing REMIC, and the Class R Certificates, which
will be designated as the residual interest in the Issuing REMIC.
In the opinion of Arter & Hadden, counsel to the Depositor, for federal
income tax purposes, assuming (i) the REMIC elections are made, (ii) the
Agreement is fully executed, delivered and enforceable against the parties
thereto in accordance with its terms, (iii) the transactions described herein
are completed on substantially the terms and conditions set forth herein and
(iv) compliance with the Agreement, each REMIC will be treated as a REMIC and
each Class of Offered Certificates will be treated as "regular interests" in the
Issuing REMIC and generally will be treated as debt instruments issued by the
Issuing REMIC. Holders of Offered Certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to such Offered Certificates under an accrual method.
<PAGE>
As a result of the qualification of the Pooling REMIC and the Issuing
REMIC as REMICs, the Trust will not be subject to federal income tax except with
respect to (i) income from prohibited transactions, (ii) "net income from
foreclosure property" and (iii) certain contributions to the Trust after the
Closing Date. The total income of the Trust (exclusive of any income that is
taxed at the REMIC level) will be taxable to the beneficial owners of the
Certificates.
Under the laws of New York State and New York City, an entity that is
treated for federal income tax purposes as a REMIC generally is exempt from
entity level taxes imposed by those jurisdictions. This exemption does not
apply, however, to the income on the Offered Certificates.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain requirements on those employee benefit plans and
individual retirement arrangements (and entities whose underlying assets include
plan assets by reason of such a plan's or arrangement's investment in such
entities) to which it applies ("Plan") and on those persons who are fiduciaries
with respect to such Plans. Any Plan fiduciary which proposes to cause a Plan to
acquire any of the Class A Certificates should consult with counsel with respect
to the consequences under ERISA and the Code of the Plan's acquisition and
ownership of such Certificates. See "ERISA CONSIDERATIONS -- Plan Asset
Regulations," "-- Prohibited Transaction Class Exemption," "-- Tax Exempt
Investors" and "-- Consultation with Counsel" in the Prospectus.
Section 406 of ERISA prohibits Plans from engaging in certain
transactions involving the assets of such Plans with Parties in Interest with
respect to such Plans, unless a statutory or administrative exemption is
applicable to the transaction. Excise taxes under Section 4975 of the Code,
penalties under Section 502 of ERISA and other penalties may be imposed on Plan
fiduciaries and Parties in Interest (or "disqualified persons" under the Code)
that engage in "prohibited transactions" involving assets of a Plan. Individual
retirement arrangements and other plans that are not subject to ERISA, but are
subject to Section 4975 of the Code, and disqualified persons with respect to
such arrangements and plans, also may be subject to excise taxes and other
penalties if they engage in prohibited transactions. Furthermore, based on the
reasoning of the United States Supreme Court in John Hancock Life Ins. Co. v.
Harris Trust and Sav. Bank, 510 U.S. 86 (1993) an insurance company may be
subject to excise taxes and other penalties if such insurance company's general
account is deemed to include assets of the Plans investing in the general
account (e.g., through the purchase of an annuity contract).
The Department of Labor (the "DOL") has issued a regulation (the "Plan
Asset Regulation") describing what constitutes the assets of a Plan when the
Plan acquires an equity interest in another entity. The Plan Asset Regulation
states that, unless an exemption described in the regulation is applicable, the
underlying assets of an entity are considered, for purposes of ERISA, to be the
assets of the investing Plan. Pursuant to the Plan Asset Regulation, if the
assets of the Trust were deemed to be plan assets by reason of a Plan's
investment in any Class A Certificates, such plan assets would include an
undivided interest in the Mortgage Loans and any other assets held by the Trust.
In such an event, persons providing services with respect to assets of the
Trust, may be Parties in Interest, subject to the fiduciary responsibility of
including the prohibited transaction provisions of Section 406 of ERISA and
Section 4975 of the Code with respect to transactions involving such assets
unless such transactions are subject to a statutory or administrative exception.
The DOL has issued to Prudential Securities Incorporated, an individual
prohibited transaction exemption, Prohibited Transaction Exemption 90-32 (the
"Exemption"), which generally exempts from the application of the prohibited
transaction provision of Section 406(a), Section 406(b)(1) and Section 406(b)(2)
of ERISA and the excise taxes imposed pursuant to Sections 4975(a) and (b) of
the Code, relating to the initial purchase, the holding and the subsequent
resale by Plans of certificates in pass-through trusts that consist of certain
receivables, loans and other obligations with respect to which Prudential
Securities Incorporated or any of its affiliates is the sole underwriter or the
manager or co-manager of the underwriting syndicate; provided that the
conditions and requirements of the Exemption are met. The loans covered by the
Exemption include mortgage loans such as the Mortgage Loans.
Among the conditions that must be satisfied for the Exemption to apply
to the Class A Certificates are the following:
(1) the acquisition of Class A Certificates by a Plan is on
terms (including the price therefor) that are at least as favorable to
the Plan as they would be in an arm's-length transaction with an
unrelated party;
(2) the rights and interests evidenced by Class A Certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the trust;
<PAGE>
(3) Class A Certificates acquired by the Plan have received a
rating at the time of such acquisition that is one of the three highest
generic rating categories from either Standard & Poor's Rating
Services, a Division of The McGraw-Hill Companies, Inc., Moody's, Duff
& Phelps Credit Rating Co. or Fitch;
(4) the Trustee must not be an affiliate of any other member
of the Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the
Underwriters in connection with the distribution of the Class A
Certificates represents not more than reasonable compensation for
underwriting the Class A Certificates; the sum of all payments made to
and retained by the Depositor pursuant to the assignment of the loans
to the Trust represents not more than the fair market value of such
loans; the sum of all payments made to and retained by any Servicer
represents not more than reasonable compensation for such person's
services under the servicing agreement and reimbursement of such
person's reasonable expenses in connection therewith; and
(6) the Plan investing in Class A Certificates is an
"accredited investor" as defined in Rule 501(a)(1) of Regulation D of
the Securities and Exchange Commission under the Securities Act of
1933.
The Trust must also meet the following requirements:
(i) the corpus of the Trust must consist solely of assets of
the type that have been included in other investment pools;
(ii) certificates in such other investment pools must have
been rated in one of the three highest rating categories of Standard &
Poor's, Moody's, Fitch or D&P for at least one year prior to the Plan's
acquisition of certificates; and
(iii) certificates evidencing interests in such other
investment pools must have been purchased by investors other than Plans
for at least one year prior to the Plan's acquisition of certificates.
Moreover, the Exemption provides relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when
the Plan fiduciary causes a Plan to acquire certificates in a trust in which the
fiduciary (or its affiliate) is an obligor on the receivables held in the trust;
provided that, among other requirements, (i) in the case of an acquisition in
connection with the initial issuance of certificates, at least fifty percent of
each class of certificates in which Plans have invested is acquired by persons
independent of the Restricted Group and at least fifty percent of the aggregate
interest in the trust is acquired by persons independent of the Restricted
Group; (ii) such fiduciary (or its affiliate) is an obligor with respect to five
percent or less of the fair market value of the obligations contained in the
trust; (iii) the Plan's investment in certificates of any class does not exceed
twenty-five percent of all the certificates of that class outstanding at the
time of the acquisition; and (iv) immediately after the acquisition, no more
than twenty-five percent of the assets of the Plan with respect to which such
person is a fiduciary are invested in certificates representing an interest in
one or more trusts containing assets sold or serviced by the same entity. The
Exemption does not apply to Plans sponsored by the Depositor, the Underwriters,
the Trustee, the Master Servicer, any obligor with respect to Mortgage Loans
included in the Trust constituting more than five percent of the aggregate
unamortized principal balance of the assets in the Trust, or any affiliate of
such parties (the "Restricted Group").
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of the Exemption,
and the potential consequences in their specific circumstances, prior to making
an investment in the Class A Certificates. Moreover, each Plan fiduciary should
determine whether under the general fiduciary standards of investment procedure
and diversification an investment in the Class A Certificates is appropriate for
the Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
The Exemption does not apply to the initial purchase, the holding or
the subsequent resale of the Subordinated Certificates because the Subordinated
Certificates are subordinate to certain other Classes of Certificates.
Accordingly, Plans may not purchase the Subordinated Certificates, except that
any insurance company may purchase Subordinated Certificates with assets of its
general account if the exemptive relief granted by the DOL for transactions
involving insurance company general accounts in Prohibited Transaction Exemption
95-60, 60 Fed. Reg. 35925 (July 12, 1995) is available with respect to such
investment. Any insurance company proposing to purchase the Subordinated
Certificates for its general account should consider whether such relief would
be available. Under the Agreement, Subordinated Certificates may not be
transferred to a transferee that acknowledges that it is a Plan investor unless
such transferee provides the Certificate Registrar with a Benefit Plan Opinion.
The transferee of a Subordinated Certificate that does not furnish a Benefit
<PAGE>
Plan Opinion is deemed, by virtue of its acquisition of a Subordinated
Certificate to have represented that it is not a Plan investor. A Benefit Plan
Opinion is to the effect that the proposed transfer will not (i) cause the
assets of the Trust to be regarded as plan assets for purposes of the Plan Asset
Regulations, (ii) give rise to any fiduciary duty under ERISA on the part of the
Seller, the Depositor, a Servicer, the Master Servicer or the Trustee or (iii)
result in, or be treated as, a prohibited transaction under Section 406 or 407
of ERISA or section 4975 of the Code (which opinion shall not be a cost or
expense of the Seller, the Master Servicer or the Trustee).
RATINGS
It is a condition of the issuance of the Offered Certificates that they
receive ratings set forth under Ratings in the Summary.
The ratings do not represent any assessment of the likelihood or rate
of principal prepayments, or the likelihood that any Group II Certificates
Carryover will be paid.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. The security rating assigned to the Offered
Certificates should be evaluated independently of similar security ratings
assigned to other kinds of securities.
Explanations of the significance of such ratings may be obtained from
Moody's, 99 Church Street, New York, New York, 10004, and Fitch, One State
Street Plaza, 33rd Floor, New York, New York 10004. Such ratings will be the
views only of such rating agencies. There is no assurance that any such ratings
will continue for any period of time or that such ratings will not be revised or
withdrawn. Any such revision or withdrawal of such ratings may have an adverse
effect on the market price of the Offered Certificates.
LEGAL INVESTMENT CONSIDERATIONS
The Class AV-1, Class AV-2 and Class MV-1 Certificates will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") for so long as they are rated in one of the
two highest rating categories by one or more nationally recognized statistical
rating organizations. As such, they will be legal investments for certain
entities to the extent provided in SMMEA, subject to state laws overriding
SMMEA. In addition, institutions whose investment activities are subject to
review by federal or state regulatory authorities may be or may become subject
to restrictions, which may be retroactively imposed by such regulatory
authorities, on the investment by such institutions in certain forms of mortgage
related securities. Furthermore, certain states have enacted legislation
overriding the legal investment provisions of SMMEA.
Although the Class A Group I Certificates and Class MF-1 Certificates
expected to be rated in one of the two highest rating categories by Moody's and
Fitch, such Certificates will not constitute "mortgage related securities" for
purposes of SMMEA because some of the Mortgage Loans in Group I are secured by
second liens. Accordingly, many institutions with legal authority to invest in
comparably rated securities may not be legally authorized to invest in those
Certificates.
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement for the sale of the Offered Certificates, the Depositor has agreed to
cause the Trust to sell and the Underwriters named below (the "Underwriters")
have severally agreed to purchase the principal amount of Offered Certificates
set forth below.
<TABLE>
<CAPTION>
Merrill Lynch,
Prudential Securities Pierce, Fenner & J.P. Morgan Morgan Stanley &
Class Incorporated Smith Incorporated Securities Inc. Co. Incorporated
<S> <C>
AF-1 $43,426,000 $31,019,000 $24,815,000 $24,815,000
AF-2 7,700,000 5,500,000 4,400,000 4,400,000
AF-3 3,500,000 2,500,000 2,000,000 2,000,000
AF-4 5,250,000 3,750,000 3,000,000 3,000,000
AF-5 5,746,000 4,104,000 3,282,000 3,282,000
AF-6 7,291,000 5,209,000 4,166,000 4,166,000
MF-1 3,687,000 2,633,000 2,107,000 2,106,000
MF-2 3,277,000 2,340,000 1,873,000 1,873,000
BF 2,049,000 1,463,000 1,170,000 1,170,000
AV-1 43,444,000 31,031,000 24,825,000 24,825,000
AV-2 62,628,000 44,734,000 35,788,000 35,788,000
MV-1 9,934,000 7,096,000 5,677,000 5,677,000
MV-2 7,691,000 5,494,000 4,395,000 4,394,000
BV 4,486,000 3,204,000 2,564,000 2,564,000
</TABLE>
The Underwriters have advised the Depositor that they propose to offer
the Offered Certificates for sale from time to time in one or more negotiated
transactions or otherwise, at market prices prevailing at the time of sale, at
prices related to such market prices or at negotiated prices. The Underwriters
may effect such transactions by selling Offered Certificates to or through
dealers, and such dealers may receive compensation in the form of underwriting
discounts, concessions or commissions from the Underwriters or purchasers of the
Offered Certificates for whom they may act as agent. Any dealers that
participate with the Underwriters in the distribution of the Certificates
purchased by the Underwriters may be deemed to be underwriters, and any
discounts or commissions received by them or the Underwriters and any profit on
the resale of Offered Certificates by them or the Underwriters may be deemed to
be underwriting discounts or commissions under the Securities Act.
Proceeds to the Depositor are expected to be approximately
$598,751,759, plus accrued interest, before deducting expenses payable by the
Depositor in connection with the Offered Certificates, estimated to be $460,000.
In connection with the purchase and sale of the Offered Certificates, the
Underwriters may be deemed to have received compensation from the Depositor in
the form of underwriting discounts.
The Depositor and the Seller have agreed to indemnify the Underwriters
against certain liabilities including liabilities under the Securities Act of
1933, as amended.
Certain of the Mortgage Loans may have been the subject of financing
provided by affiliates of the Underwriters.
CERTAIN LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Depositor and the Seller by Arter &
Hadden, Washington, D.C. Certain legal matters relating to insolvency issues and
certain federal income tax matters concerning the Certificates will also be
passed upon for the Depositor by Arter & Hadden, Washington, D.C. Certain legal
matters relating to the validity of the Certificates will be passed upon for the
Underwriters by Brown & Wood LLP, Washington, D.C.
<PAGE>
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
2/28/LIBOR Mortgage Loans...........................4
3/27/LIBOR Mortgage Loans...........................4
Accrual Period......................................2
Applied Realized Loss Amount.......................33
Asset Proceeds Account.............................28
Beneficial Owners...................................8
Book Entry Certificates............................33
Cede................................................8
CEDEL...............................................8
Certificate Principal Balance.......................1
Certificate Registrar...............................3
Class A Principal Distribution Amount..............30
Class AF-1..........................................1
Class AF-1 Available Funds Cap......................2
Class AF-2..........................................1
Class AF-3..........................................1
Class AF-4..........................................1
Class AF-5..........................................1
Class AF-6..........................................1
Class AF-6 Distribution Amount.....................31
Class AV-1..........................................1
Class B Principal Distribution Amount..............31
Class BF............................................1
Class BV............................................1
Class M-1 Principal Distribution Amount............31
Class M-2 Principal Distribution Amount............31
Class MF-1..........................................1
Class MF-2..........................................1
Class MV-1..........................................1
Class MV-2..........................................1
Closing Date........................................3
Code................................................9
constant prepayment rate...........................22
Credit Enhancement..................................5
Current Interest...................................29
Cut-Off Date........................................3
Denominations.......................................2
Depositor...........................................3
Distribution Account...............................28
Distribution Date...................................5
DOL................................................37
DTC.................................................8
Due Period..........................................7
ERISA...............................................9
Euroclear...........................................8
European Depositaries...............................9
Exemption..........................................37
Extra Principal Distribution.......................31
Fitch...............................................8
Fixed Rate Group....................................3
FNMA...............................................10
Group...............................................3
Group II Available Funds Cap........................2
Group II Certificates Carryover.....................2
Holder.............................................27
Interest Carry Forward Amount......................29
Interest Determination Date........................33
Interest Funds.....................................28
Last Scheduled Distribution Dates...................1
Master Servicer.....................................3
Master Servicer Remittance Date....................28
Master Servicing Fee................................7
Master Servicing Fee Rate...........................4
Meritech...........................................18
Modeling Assumptions...............................22
Month End Interest.................................19
Moody's.............................................8
Mortgage Interest Rates.............................1
Mortgage Loan Group.................................3
mortgage related securities.........................2
Mortgaged Premises..................................3
Mortgages...........................................3
One Month LIBOR.....................................2
One Year CMT........................................4
One Year CMT Mortgage Loans.........................4
Participants.......................................33
Paying Agent........................................3
Percentage Interest................................28
Permitted Investments..............................28
Plan...............................................37
Plan Asset Regulation..............................37
prepayment assumptions.............................20
Principal Distribution Amount......................30
Principal Funds....................................28
Realized Loss......................................33
Record Date.........................................5
REMIC...............................................9
Restricted Group...................................38
Servicer............................................3
Servicing Fee.......................................7
Servicing Fee Rate..................................7
Six Month LIBOR.....................................4
Six Month LIBOR Mortgage Loans......................4
SMMEA..............................................39
Stepdown Date......................................31
Subgroup A..........................................5
Subgroup B..........................................5
Substitution Shortfall.............................28
Trigger Event......................................31
Trust...............................................1
Trustee.............................................3
Two Step/LIBOR Mortgage Loans.......................4
Underwriter........................................40
Unpaid Realized Loss Amount........................33
Variable Rate Group.................................3
Weighted average life..............................21
<PAGE>
[SAXON LOGO]
SAXON ASSET SECURITIES COMPANY
(Depositor)
MORTGAGE LOAN ASSET BACKED CERTIFICATES
(Issuable in Series)
This Prospectus relates to Mortgage Loan Asset Backed Certificates (the
"Certificates") to be issued from time to time in one or more Series (each, a
"Series") on terms determined at the time of sale and described in this
Prospectus and the related Prospectus Supplement. Each Series of Certificates
will be issued by a separate trust (each, a "Trust") and will evidence
beneficial ownership interests in one or more segregated pools of
mortgage-related assets as described herein (the "Mortgage Assets") and certain
other assets.
Each Series of Certificates will be issued in one or more classes
(each, a "Class"). One or more Classes of Certificates of a Series may be
subordinated in right to receive distributions and be subject to allocation of
losses 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 be entitled to receive distributions at the intervals and on the dates
specified in the related Prospectus Supplement from the assets of the related
Trust. The Depositor or an affiliate of the Depositor may make or obtain for the
benefit of any Series of Certificates limited representations and warranties
with respect to the Mortgage Assets included in the related Trust. Neither the
Depositor nor any affiliate of the Depositor will have any other obligation with
respect to any Series of Certificates.
The yield on each Series of Certificates will be affected by, among
other things, the rate and timing of payments of principal (including
prepayments) of the Mortgage Assets included in the related Trust. Each Series
of Certificates will be subject to early termination under the circumstances
described herein and in the related Prospectus Supplement.
If specified in the Prospectus Supplement for a Series, one or more
elections may be made to treat the related Trust or specified portions thereof
as real estate mortgage investment conduits (each, a "REMIC") for federal income
tax purposes. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES" herein and 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.
See "RISK FACTORS" herein at page 85 and in the related Prospectus
Supplement. Prospective purchasers should carefully review the information in
the related Prospectus Supplement concerning the risks associated with different
types and Classes of Certificates.
See "ERISA CONSIDERATIONS" herein and in the related Prospectus
Supplement for a discussion of restrictions on the acquisition of Certificates
by "plan fiduciaries."
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 DEPOSITOR, ANY 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 DEPOSITOR, ANY SELLER, ANY SERVICER, ANY
MASTER SERVICER, ANY TRUSTEE OR ANY OF THEIR AFFILIATES, EXCEPT AS SET FORTH IN
THE RELATED PROSPECTUS SUPPLEMENT.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON
OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY
IS UNLAWFUL.
--------------------
Offers of the Certificates may be made through one or more different
methods, including offerings through underwriters, as more fully described
herein and in the related Prospectus Supplement. See "PLAN OF DISTRIBUTION"
herein. There can be no assurance that a secondary market will develop for the
Certificates of any Series or, if such a market does develop, that it will
provide the holders of such Certificates with liquidity of investment or that it
will continue for the life of such Certificates. This Prospectus may not be used
to consummate sales of Certificates unless accompanied by a Prospectus
Supplement.
--------------------
The date of this Prospectus is February 19, 1997
<PAGE>
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY............................................1
RISK FACTORS..................................................5
DESCRIPTION OF THE CERTIFICATES...............................8
General..................................................8
Classes of Certificates..................................8
Book-Entry Procedures....................................9
Global Clearance, Settlement and Tax
Documentation Procedures..............................12
Allocation of Distributions.............................14
Allocation of Losses and Shortfalls.....................15
Mortgage Assets.........................................16
Optional Termination....................................16
MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS................16
THE TRUSTS...................................................18
Assignment of Mortgage Assets...........................18
The Mortgage Loans--General.............................19
Single Family Loans.....................................20
Cooperative Loans.......................................21
Multi-Family Loans......................................21
Junior Mortgage Loans...................................21
Home Improvement Loans..................................22
Home Equity Lines of Credit.............................22
Repurchase of Converted Mortgage Loans..................22
Repurchase of Delinquent Mortgage Loans.................23
Substitution of Mortgage Loans..........................23
Mortgage-Backed Securities..............................23
Pre-Funding Account.....................................24
Asset Proceeds Account..................................24
CREDIT ENHANCEMENT...........................................25
General.................................................25
Subordination...........................................25
Certificate Guaranty Insurance Policies.................26
Overcollateralization...................................26
Cross Support...........................................26
Mortgage Pool Insurance Policies........................27
Special Hazard Insurance Policies.......................27
Bankruptcy Bonds........................................28
Reserve Funds...........................................29
Other Credit Enhancement................................29
ORIGINATION OF MORTGAGE LOANS................................29
General.................................................29
Representations and Warranties..........................30
SERVICING OF MORTGAGE LOANS..................................31
General.................................................31
Payments on Mortgage Loans..............................32
Advances................................................32
Collection and Other Servicing Procedures...............33
Primary Mortgage Insurance Policies.....................33
Standard Hazard Insurance Policies......................34
Maintenance of Insurance Policies; Claims
Thereunder and Other Realization Upon
Defaulted Mortgage Loans..............................35
Modification of Mortgage Loans..........................35
Evidence as to Servicing Compliance.....................36
Events of Default and Remedies..........................36
Master Servicer Duties..................................36
Special Servicing Agreement.............................37
THE AGREEMENT................................................37
The Trustee.............................................37
Administration of Accounts..............................38
Reports to Certificateholders...........................38
Events of Default and Remedies..........................38
Amendment...............................................39
Termination.............................................40
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS......................40
General.................................................40
The Mortgage Loans......................................40
Foreclosure.............................................41
Junior Mortgage Loans; Rights of Senior
Mortgagees............................................43
Right of Redemption.....................................44
Anti-Deficiency Legislation and Other
Limitations on Lenders................................45
Soldiers' and Sailors' Civil Relief Act of 1940.........45
Environmental Considerations............................46
"Due-on-Sale" Clauses...................................47
Enforceability of Certain Provisions....................47
THE DEPOSITOR................................................47
USE OF PROCEEDS..............................................48
CERTAIN FEDERAL INCOME TAX CONSEQUENCES......................48
REMIC Certificates......................................48
Securities Classified as Partnership Interests..........69
State and Local Taxation................................69
STATE TAX CONSIDERATIONS.....................................69
ERISA CONSIDERATIONS.........................................69
LEGAL INVESTMENT MATTERS.....................................71
PLAN OF DISTRIBUTION.........................................72
AVAILABLE INFORMATION........................................73
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE..................................................73
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS.................74
REPORTS TO CERTIFICATEHOLDERS
The Depositor 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."
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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.
Depositor: Saxon Asset Securities Company (the
"Depositor"), a wholly owned, limited-purpose
financing subsidiary of Dominion Mortgage
Services, Inc., a Virginia corporation
("Dominion Mortgage"). Neither Dominion
Resources nor the Depositor has guaranteed, or
is otherwise obligated with respect to, the
Certificates of any Series. The principal
executive offices of the Depositor are located
at 4880 Cox Road, Glen Allen, Virginia 23060,
and the telephone number of the Depositor is
(804) 967-7400. See "THE DEPOSITOR."
Sellers: Saxon Mortgage, Inc. ("SMI"), a wholly
owned subsidiary of Dominion Mortgage and an
affiliate of the Depositor, and one or more
other mortgage originators named in the
related Prospectus Supplement (each a
"Seller").
Certificates Offered: Mortgage Loan 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 be issued by a separate trust (each, a
"Trust") and will evidence beneficial
ownership interests in one or more segregated
pools of Mortgage Assets and certain other
assets. 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 and be subject to
allocation of losses in favor of one or
more other Classes of Certificates of such
Series, (iv) may be entitled to receive
distributions only after the occurrence of
specified events, (v) may be entitled to
receive distributions 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 Depositor, any Seller, any Servicer, any
Master Servicer, any Trustee or any of their
affiliates, except as set forth in the
related Prospectus Supplement. The Depositor,
a Seller or one of their affiliates 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") with the Depositor and the
trustee (the "Trustee") identified in the
related Prospectus Supplement. Pursuant to an
Agreement, the Depositor will assign and
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transfer the Mortgage Assets and other assets
to be included in the related Trust to the
Trustee in exchange for a Series of
Certificates. See "THE TRUSTS Assignment of
Mortgage Assets."
Distributions: The Prospectus Supplement for each Series of
Certificates will specify (i) whether
distributions with respect to such
Certificates will be made monthly, quarterly,
semi-annually or at other intervals, (ii) the
date for each such distribution (each, a
"Distribution Date"), and (iii) the amount of
each such distribution allocable to principal
and interest. The amount available to be
distributed on each Distribution Date with
respect to each Series of Certificates 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."
The Scheduled Principal Balance of the
Mortgage Assets and the amount of any other
assets included in the Trust for each Series
of Certificates (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. 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:
A. Mortgage Loans: "Mortgage Loans" may include: (i) one- to
four-family mortgage loans secured by first,
second or more junior liens on residential
and mixed use properties (or participation
interests in such loans) ("Single Family
Loans"), (ii) loans secured by security
interests in or similar liens on shares in
private, non-profit cooperative housing
corporations ("Cooperatives") and on the
related proprietary leases or occupancy
agreements granting exclusive rights to
occupy specific dwelling units in the
buildings owned by the Cooperatives (or
participation interests in such loans)
("Cooperative Loans"), (iii) multi-family
mortgage loans secured by first, second or
more junior liens on residential and mixed
use properties, including buildings owned by
Cooperatives (or participation interests in
such loans) ("Multi-Family Loans"), (iv) home
improvement mortgage loans secured by first,
second or more junior liens on various types
of properties (or participation interests in
such loans) ("Home Improvement Loans"), and
(v) home equity lines of credit ("HELOCs").
B. Mortgage-Backed
Securities "Mortgage-Backed Securities" may include (i)
private (that is not guaranteed or insured by
the United States or any agency or
instrumentality thereof) mortgage
participation or pass- through certificates
or other mortgage-backed securities
(representing either debt or equity) or (ii)
securities insured or guaranteed by Federal
National Mortgage Association ("FNMA"),
Federal Home Loan Mortgage Corporation
("FHLMC") or Government National Mortgage
Association ("GNMA"). See "THE TRUSTS --
Mortgage-Backed Securities."
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 Depositor under which the Depositor
transfers additional Mortgage Assets to such
Trust following the date on which such Trust
is established and the related Certificates
are issued. If a Pre-Funding Agreement is
used, the related Trustee will be required to
deposit in a segregated account (each, a
"Pre-Funding Account") a portion of the
proceeds received by the Trustee in connection
with the sale of Certificates of the related
Series. Additional Mortgage Assets will
thereafter be transferred to the related
Trust in exchange for money released to the
Depositor from the related Pre-Funding
Account. If all moneys originally deposited
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in such Pre-Funding Account are not applied to
the acquisition of additional Mortgage Assets
by the end of the period specified in the
Pre-Funding Agreement (which may not exceed
three months), 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. See "THE
TRUSTS -- Pre-Funding Account."
Servicer: One or more servicers (each, a "Servicer"),
which may include an affiliate of the
Depositor, will perform certain customary
servicing functions with respect to the
Mortgage Loans included in the Trust for any
Series of Certificates. See "SERVICING OF
MORTGAGE LOANS."
Master Servicer: If specified in the Prospectus Supplement for
a Series, a master servicer (the "Master
Servicer"), which may include an affiliate of
the Depositor, 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: If so specified in the Prospectus Supplement
for a Series, the Servicers of the Mortgage
Loans included in the related Trust and, to
the limited extent described herein, the
Master Servicer are, obligated to advance
funds to such Trust to cover (i) delinquent
payments 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 specified Classes of Certificates of the
related Series, to specified periods of time,
to certain dollar amounts or to any
combination of the foregoing, in each case
as specified in the related Prospectus
Supplement. Any such Advance will be
recoverable as specified in the related
Prospectus Supplement. See "SERVICING OF
MORTGAGE LOANS -- General" and " -- Advances."
Credit Enhancement: If so specified in the Prospectus Supplement
for a Series, the related Trust may include,
or the related Certificates may be entitled
to the benefits of, certain ancillary or
incidental assets intended to provide credit
enhancement for the ultimate or timely
distribution of proceeds from the Mortgage
Assets to the holders of such Certificates,
including reserve accounts, insurance
policies, guaranties, surety bonds, letters
of credit, guaranteed investment contracts,
swap agreements and option agreements. In
addition, if so specified in the Prospectus
Supplement for a Series, one or more Classes
of Certificates of such Series may be entitled
to the benefits of other credit enhancement
arrangements, including subordination,
overcollateralization or cross support.
The protection against losses or delays
afforded by any such assets or credit
enhancement arrangements may be limited.
See "CREDIT ENHANCEMENT."
Optional Termination: To the extent and under the circumstances
specified in the Prospectus Supplement for a
Series, the early retirement of the
Certificates of such Series may be effected.
See "DESCRIPTION OF THE CERTIFICATES --
Optional Termination."
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
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Trust or specified portions thereof as "real
estate mortgage investment conduits" (each, a
"REMIC") under the provisions of the Internal
Revenue Code of 1986, as amended (the "Code")
or, if no REMIC election is made, whether the
Certificates are considered to be
Pass-Through Certificates or Strip
Certificates. The Prospectus Supplement for
each series of Certificates will specify
whether a REMIC election will be made.
Investors are urged to consult their tax
advisors concerning the application of
federal income tax laws to their particular
situations. See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES" herein and in the related
Prospectus Supplement.
Legal Investment
Matters: If so specified in the related Prospectus
Supplement, the Certificates of the related
Series will constitute "mortgage-related
securities" under the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA") and,
as such, will be "legal investments" for
certain types of institutional investors to
the extent provided in SMMEA, subject, in each
case, to state laws overriding SMMEA and to
any 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" herein and in the related
Prospectus Supplement.
ERISA Considerations: Fiduciaries of employee benefit plans or
other retirement plans or arrangements,
including individual retirement accounts,
certain Keogh plans, and collective investment
funds, separate accounts and insurance company
general accounts in which such plans,
accounts or arrangements are invested, that
are subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"),
or the Code, should carefully review with
their legal advisors whether an investment in
Certificates will cause the assets of the
related Trust to be considered plan assets
under the Department of Labor ("DOL")
regulations set forth in 29 C.F.R. Section
2510.3-101 (the "Plan Asset Regulations"),
thereby subjecting the Trustee and the Master
Servicer to the fiduciary responsibility
standards of ERISA, and whether the purchase,
holding or transfer of Certificates gives
rise to a transaction that is prohibited
under ERISA or subject to the excise tax
provisions of Section 4975 of the Code.
Certain Classes of Certificates may not be
offered for sale or transferable to Plans
(as defined herein). See "ERISA
CONSIDERATIONS" herein and in the related
Prospectus Supplement.
Ratings: Each Class of Certificates offered hereby
and by the related Prospectus Supplement
will be rated in one of the four highest
rating categories by one or more nationally
recognized statistical rating organizations
(each, a "Rating Agency").
Risk Factors: An investment in the Certificates will be
subject to one or more risk factors, including
declines in the value of Mortgaged Premises,
prepayment of Mortgage Loans, limitations on
credit enhancement, consumer credit laws
affecting the Mortgage Assets, the risk of
higher losses with respect to particular
types of Mortgage Loans and various other
factors. See "RISK FACTORS" herein and in
the related Prospectus Supplement.
4
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RISK FACTORS
Prospective investors should consider, among other things, the
following risk factors and the risk factors identified in the related
Prospectus Supplement in connection with a purchase of the Certificates of any
Series. See "Risk Factors" in the related Prospectus Supplement.
Limited Obligations. The Certificates will not represent an interest
in or obligation of the Depositor, any Seller, any Servicer, any Master
Servicer or any Trustee or any of their affiliates and will not be insured by
any government agency or instrumentality. Each Trust is expected to have no
significant assets other than the Mortgage Assets and any other assets assigned
to the Trust by the Depositor. Prospective purchasers of the Certificates
of a Series must rely primarily upon payments on the related Mortgage
Assets, the security therefor and the sources of credit enhancement, if any,
identified in the related Prospectus Supplement. The related Mortgage Assets
will not be guaranteed or insured by any governmental agency or instrumentality
or by the Depositor, any Servicer, any Master Servicer, any Trustee or any of
their affiliates, except as set forth in the related Prospectus Supplement.
Limitations on Credit Enhancement. The credit enhancement, if any,
for any Series of Certificates may be limited in amount and may 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."
Declining Real Estate Market. If the residential real estate market
in general or a regional or local area where the Mortgage Assets for a Trust
are concentrated should experience an overall decline in property values or a
significant downturn in economic conditions, rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced
in the mortgage lending industry. To the extent such losses are not
covered by credit enhancement, holders of the Certificates of the related
Series will have to look primarily to the value of the Mortgaged Premises
for recovery of the outstanding principal and unpaid interest of the defaulted
Mortgage Loans.
Bankruptcy. The Sellers and the Depositor intend that the transfers
of the Mortgage Assets to the Depositor and, in turn, to the related Trust
constitute sales rather than pledges to secure indebtedness for insolvency
purposes. If a Seller were to become a debtor under the federal Bankruptcy
Code, however, a creditor, trustee-in-bankruptcy or receiver of that Seller
might argue that such transfers were pledges rather than sales. This position,
if argued or accepted by a court, could result in a delay in or reduction of
distributions on the Certificates of the related Series.
Regulatory Risks. 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 May Delay or Reduce Certificate
Payments. With respect to a Mortgage Loan on which a material default has
occurred or a payment default is imminent, the related Servicer, 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 payments on the Mortgage Loan and, consequently, the amount and timing of
payments on one or more Classes of the related Series of Certificates. For
example, a modification agreement that results in a lower Mortgage Interest
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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."
Payment Considerations. The prepayment experience on the
Mortgage Assets underlying a particular Series of Certificates will affect
(i) the average life of each Class of such Certificates and (ii) for
Certificates purchased at a price other than par, the effective yield on such
Certificates. The timing and amount of prepayments on mortgage loans are
influenced by a variety of economic, geographic, legal, social and other
factors, including changes in interest rate levels. In general, if mortgage
interest rates fall, the rate of prepayment would be expected to increase.
Conversely, if mortgage interest rates rise, the rate of prepayment would be
expected to decrease. Prepayments may also result from foreclosure,
condemnation and other dispositions of the Mortgaged Premises (including
amounts paid by insurers under applicable insurance policies), from the
repurchase of any Mortgage Loan as to which there has been a material breach
of warranty or defect in documentation (or from the deposit of certain
amounts in respect of the delivery of a substitute Mortgage Loan), from the
repurchase of Mortgage Loans modified in lieu of refinancing, from the
repurchase of any liquidated Mortgage Loan or delinquent Mortgage Loan, if
applicable, or from the repurchase by the Depositor of all the Certificates of
a Series or all the Mortgage Loans or Mortgage Certificates in certain
circumstances. The yields realized by the holders of certain Certificates
of a Series with disproportionate allocations of principal or interest will be
extremely sensitive to levels of prepayments on the Mortgage Assets of the
related Trust. No assurance can be given as to the prepayment experience of
the mortgage loans underlying any Series of Certificates. Each prospective
investor must make its own decision as to the appropriate prepayment
assumption. 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 Certificates. If so specified in the related Prospectus
Supplement, certain Certificates of a Series may initially be registered in
book-entry form ("Book-Entry Certificates"). Issuance of the Certificates in
book-entry form may reduce the liquidity of such Certificates in the secondary
market because investors may be unwilling to purchase Certificates for which
they cannot obtain physical certificates. In addition, since transfers of
Book-Entry Certificates will, in most cases, be able to be effected only
through persons or entities that participate in the book-entry system, the
ability of a Certificateholder to pledge a Book-Entry Certificate to persons or
entities that do not participate in the book-entry system, or otherwise to
take actions with respect to a Book-Entry Certificate, may be impaired
since physical certificates representing the Certificates will generally not
be available. Certificateholders may experience some delay in their receipt
of distributions of interest on and principal of the Book-Entry Certificates
because distributions may be required to be forwarded by the Trustee through
book-entry system participants which thereafter will be required to credit
them to the accounts of the applicable Certificates, whether directly or
indirectly through financial intermediaries. See "DESCRIPTION OF THE
CERTIFICATES -- Book-Entry Procedures."
Limited Nature of 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 provider of such external credit
enhancement. Any lowering of the rating assigned to the claims-paying ability
of any such provider 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 Depositor will not be
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
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Certificate issued with original issue discount will be required to include
original issue discount in ordinary gross income for federal income tax
purposes as it accrues, in advance of receipt of the cash attributable to such
income. Accrued but unpaid interest on such Certificates generally will be
treated as original issue discount for this purpose. See "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES."
Balloon Loans. A portion of the Mortgage Assets may include
"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 its term
results in a remaining principal balance at maturity that is substantially
larger than the regular scheduled payments. The Depositor 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. The ability of a borrower to repay a
Balloon Loan at maturity frequently will depend upon such borrower's ability
to refinance such loan. Neither the Depositor nor the Trustee is obligated
to obtain refinancing. Any loss on a Balloon Loan resulting from a
borrower's inability to obtain refinancing will be borne by Certificateholders
if not covered by credit enhancement.
Junior Loans. A portion of the Mortgage Assets may include
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 senior lienholders, 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 lienholders. In the event of a default by the
related borrower, liquidation or other proceeds may be insufficient to
satisfy a second or more junior lien after satisfaction of the senior lien
and the payment of any liquidation expenses. See "THE TRUSTS -- Junior
Mortgage Loans."
Non-Owner Occupied Mortgage Premises. A portion of the Mortgage
Assets may be secured by liens on Mortgaged Premises which are not owner
occupied. It is possible that the rate of delinquencies, foreclosures and
losses on such Mortgage Loans could be higher than on Mortgage Loans secured by
liens on Mortgaged Premises which are the primary residences of the owner.
Non-Conforming Credits. All or a portion of the Mortgage Assets
may consist of mortgage loans underwritten in accordance with the
underwriting standards for "non-conforming credits." A mortgage loan made to
a "non-conforming credit" means a mortgage loan that is ineligible for
purchase by FNMA or FHLMC due to borrower credit characteristics, 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. As
a consequence, delinquencies and foreclosures can be expected to be more
prevalent with respect to such Mortgage Loans than with respect to mortgage
loans originated in accordance with FNMA or FHLMC underwriting guidelines and
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. Each prospective
investor must make its own decision as to the effect of non-conforming
credits upon the delinquency, foreclosure, and prepayment experience of the
Mortgage Loans. See "ORIGINATION OF MORTGAGE LOANS."
Delinquent Mortgage Loans. All or a portion of the Mortgage Loans may
be delinquent upon the issuance of the related Certificates. Credit
enhancement provided with respect to a particular Series of Certificates
may not cover all losses related thereto. Prospective investors should
consider the risk that the inclusion of 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."
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DESCRIPTION OF THE CERTIFICATES
General
The Mortgage Loan 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 provisions of each
Agreement will vary depending upon the nature of the Certificates to be issued
thereunder and the nature of the related Trust. The following summaries
describe the material provisions common to each Series of Certificates. The
summaries do not purport to be complete and are subject to the Prospectus
Supplement and the Agreement with respect to a particular Series. The
material terms of the Agreement with respect to a Series of Certificates
will be further described in the related Prospectus Supplement and a copy
thereof will be filed with the Commission on Form 8-K
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 Depositor, any 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 Depositor, any 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 applicable Servicer or any other entity or paid from any
applicable credit enhancement, such delinquencies may result in delays in the
distribution of payments to the holders of one or more Classes of Certificates
and such losses may be allocated to the holders of one or more Classes of
Certificates.
The Certificates of each Series will be issued as fully registered
certificates in certificated or book-entry form in the authorized denominations
for each Class specified in the related Prospectus Supplement. The
Certificates of each Series in certificated form may be transferred (subject
to the limitations on transfer, if any, specified in the related Agreement) or
exchanged at the corporate trust office of the Trustee without the payment
of any service charge, other than any tax or other governmental charge
payable in connection therewith. If so specified in the Prospectus
Supplement for a Series, distributions of principal and interest on each
Certificate in certificated form will be made on each Distribution Date by or
on behalf of the Trustee (i) by check mailed to each holder of such a
Certificate at the address of such holder appearing on the books and records of
the Trust or (ii) by wire transfer of immediately available funds upon timely
request to the Trustee in writing by any holder of such a Certificate having an
initial principal amount of at least $1,000,000 or such other amount as may
be specified in the related Prospectus Supplement; provided, however, that the
final distribution in retirement of a Certificate of a Series in certificated
form will be made only upon presentation and surrender of such Certificates
at the corporate trust office of the Trustee. Distributions of principal and of
interest on each Class of Certificates in book-entry form will be made as set
forth below.
Classes of Certificates
Each Series of Certificates will be issued in one or more classes
(each, a "Class") as specified in the related Prospectus Supplement. The
Certificates of any Class of any Series (i) may be entitled to receive
distributions allocable only to principal, only to interest or to any
combination of principal and interest, (ii) may be entitled to receive
distributions allocable to prepayments of principal throughout the life of such
Certificates or only during specified periods, (iii) may be subordinated in
right to receive distributions and may be subject to allocation of losses in
favor of one or more other Classes of Certificates of such Series, (iv) may
be entitled to receive distributions only after the occurrence of specified
events, (v) may be entitled to receive distributions 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.
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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 Depositor, 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. Except as described below, no
person acquiring a Book-Entry Certificate (each, a "Beneficial Owner") will
be entitled to receive a physical certificate representing such Certificate,
the only "Holder" of the Book-Entry Certificates will be the nominee of the
Depository and Beneficial Owners will not be "Holders" as that term is used in
the Agreement. In general, beneficial ownership of Book-Entry Certificates
will be subject to the rules, regulations and procedures governing the
Depository and participants in the Depository ("Depository Participants"), as
in effect from time to time.
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 Depository Participant
which acts as agent for the Financial Intermediary and 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 participant in DTC in the
Book-Entry Certificates, whether held for its own account or as a nominee for
another person. If DTC is the Depository (except under the circumstances
described below), under the rules, regulations and procedures creating and
affecting DTC and its operations (the "Rules"), DTC is required to make
book-entry transfers among its participants on whose behalf it acts with
respect to such Certificates and is required to receive and transmit
distributions of principal of, and interest on, such Certificates. DTC
participants and indirect participants with whom Beneficial Owners have
accounts with respect to Book-Entry Certificates are similarly required to
make book-entry transfers and receive and transmit such distributions on
behalf of their respective Beneficial Owners. Accordingly, although Beneficial
Owners will not possess Certificates, the Rules provide a mechanism by which
Beneficial Owners will receive distributions and will be able to transfer
their interests.
Because transactions in Book-Entry Certificates may 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 Prospectus Supplement for a Series may also specify that
CEDEL Bank, S.A. ("CEDEL") and Euroclear System ("Euroclear") will hold
omnibus positions on behalf of their participants through customers
securities accounts in CEDEL's and Euroclear's names on the books of their
respective depositaries which in turn will hold such positions in customers
securities accounts in the depositaries names on the books of the Depository.
Citibank, N.A., acts as depositary for CEDEL and Chase Manhattan Bank acts as
depositary for Euroclear (in such capacities, individually the "Relevant
Depositary" and collectively the "European Depositaries").
CEDEL. CEDEL is incorporated under the laws of Luxembourg as a
professional depository. CEDEL holds securities for its participant
organizations ("CEDEL Participants") and facilitates the clearance and
settlement of securities transactions between CEDEL Participants through
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electronic book-entry changes in accounts of CEDEL Participants, thereby
eliminating the need for physical movement of certificates. Transactions may
be settled in CEDEL in any of 28 currencies, including United States dollars.
CEDEL provides to CEDEL Participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally
traded securities and securities lending and borrowing. CEDEL interfaces
with domestic markets in several countries. As a professional depository,
CEDEL is subject to regulation by the Luxembourg Monetary Institute. CEDEL
Participants are recognized financial institutions around the world,
including underwriters, securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations. Indirect
access to CEDEL is also available to others, such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship
with a CEDEL Participant, either directly or indirectly.
Euroclear. Euroclear was created in 1968 to hold securities for
participants of Euroclear ("Euroclear Participants") and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of certificates and any risk from lack of simultaneous transfers of
securities and cash. Transactions may now be settled in any of 32 currencies,
including United States dollars. Euroclear includes various other services,
including securities lending and borrowing and interfaces with domestic markets
in several countries generally similar to the arrangements for cross-market
transfers with DTC described above. Euroclear is operated by Morgan
Guaranty Trust Company of New York, Brussels Office (the "Euroclear
Operator"), under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation (the "Cooperative"). All operations are conducted by
the Euroclear Operator, and all Euroclear Securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative establishes policy for Euroclear on behalf
of Euroclear Participants. Euroclear Participants include banks (including
central banks), securities brokers and dealers and other professional
financial intermediaries. Indirect access to Euroclear is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear Participant, either directly or indirectly.
The Euroclear Operator is an office of a New York trust company which
is a member bank of the Federal Reserve System. As such, it is regulated and
examined by the Board of Governors of the Federal Reserve System and the New
York State Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of the Euroclear System and
applicable Belgian law (collectively, the "Terms and Conditions"). The
Terms and Conditions govern transfers of securities and cash within
Euroclear, withdrawals of securities and cash from Euroclear, and receipts
of payments with respect to securities in Euroclear. All securities in
Euroclear are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts. The Euroclear
Operator acts under the Terms and Conditions only on behalf of Euroclear
Participants, and has no record of or relationship with persons holding through
Euroclear Participants.
Because of time zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a Depository Participant
will be made during subsequent securities settlement processing and dated
the business day following the settlement date for the Depository. Such
credits or any transactions in such securities settled during such processing
will be reported to the relevant Euroclear or CEDEL participants on such
business day. Cash received in CEDEL or Euroclear as a result of sales of
securities by or through a CEDEL Participant (as defined below) or Euroclear
Participant (as defined below) to a Depository Participant will be received
with value on the settlement date for the Depository but will be available in
the relevant CEDEL or Euroclear cash account only as of the business day
following settlements in the Depository. For information with respect to tax
documentation procedures relating to the Certificates, see "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES -- Backup Withholding" and "-- Global Clearance,
Settlement and Tax Documentation Procedures Certain U.S. Federal Income Tax
Documentation Requirements".
Transfers between Depository Participants will occur in accordance
with the rules of the Depository. Transfers between CEDEL Participants and
Euroclear Participants will occur in accordance with their respective rules
and operating procedures.
Cross-market transfers between persons holding directly or
indirectly through the Depository, on the one hand, and directly or indirectly
through CEDEL Participants or Euroclear Participants, on the other, will be
effected in the Depository in accordance with its rules on behalf of the
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relevant European international clearing system by the Relevant Depositary;
however, such cross market transactions will require delivery of instructions
to the relevant European international clearing system by the counterparty in
such system in accordance with its rules and procedures and within its
established deadlines (European time). The relevant European international
clearing system will, if the transaction meets its settlement
requirements, deliver instructions to the Relevant Depositary to take action
to effect final settlement on its behalf by delivering or receiving securities
in the Depository, and making or receiving payment in accordance with normal
procedures for same day funds settlement applicable to DTC. CEDEL
Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
Beneficial Owners of the Book-Entry Certificates may experience some
delay in their receipt of payments, since such payments will be forwarded by
the Paying Agent to the Depository. Distributions with respect to
Certificates held through CEDEL or Euroclear will be credited to the cash
accounts of CEDEL Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by the
Relevant Depositary. Such distributions will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. Because the
Depository can only act on behalf of Financial Intermediaries, the ability of
a Beneficial Owner to pledge Book-Entry Certificates to persons or entities
that do not participate in the Depository system, or otherwise take
actions in respect of such Book-Entry Certificates, may be limited due to
the lack of physical certificates for such Book-Entry Certificates. In
addition, issuance of the Book-Entry Certificates in book-entry form may reduce
the liquidity of such Certificates in the secondary market since certain
potential investors may be unwilling to purchase Certificates for which they
cannot obtain physical certificates.
Monthly and annual reports on the Trust provided by the Master
Servicer to the Depository, may be made available by the Depository to
Beneficial Owners upon request, in accordance with the rules, regulations
and procedures creating and affecting the Depository, and to the Depository
Participants to whose accounts the Book-Entry Certificates of such Beneficial
Owners are credited.
So long as the Certificates are held as Book-Entry Certificates by the
Depository, it is expected that the Depository will take any action permitted
to be taken by the Holders of the Certificates under the Agreement only at the
direction of one or more Depository Participants to whose accounts the
Book-Entry Certificates are credited. CEDEL or the Euroclear Operator, as the
case may be, will take any action permitted to be taken by a Holder under
the Agreement on behalf of a CEDEL Participant or Euroclear Participant only
in accordance with its relevant rules and procedures and subject to the ability
of the Relevant Depositary to effect such actions on its behalf through the
Depository. The Depository may take actions, at the direction of the
Depository Participants, with respect to some Certificates which conflict with
actions taken with respect to other Certificates.
None of the Sellers, the Depositor, the Servicers, the Master
Servicer, any Certificate Insurer or the Trustee will have any responsibility
for any aspect of the records relating to or payments made on account of
beneficial ownership interests of the Book-Entry Certificates or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
Definitive Certificates will be issued to Beneficial Owners of the
Book-Entry Certificates, or their nominees, rather than to the Depository,
only if (a) the Depository or the Depositor advises in writing that the
Depository is no longer willing, qualified or able to discharge properly its
responsibilities as a nominee and depository with respect to the Book- Entry
Certificates and the Depositor or the Trustee is unable to locate a qualified
successor, (b) the Depositor, at its sole option, elects to terminate a
book-entry system through the Depository or (c) the Depository, at the
direction of the Depository Participants to whose accounts are credited a
majority of the outstanding Book-Entry Certificates, advises the Trustee in
writing that the continuation of a book-entry system through DTC (or a
successor thereto) is no longer in the best interests of Beneficial Owners.
Upon the occurrence of any of the events described in the
immediately preceding paragraph, the Trustee will be required to notify all
Beneficial Owners of the occurrence of such event and the availability
through the Depository of Definitive Certificates. Upon surrender by the
Depository of the global certificate or certificates representing the Book-
Entry Certificates and instructions for re-registration, the Certificate
Registrar will issue Definitive Certificates, and thereafter the Certificate
Registrar will recognize the holders of such Definitive Certificates as
Holders under the Agreement.
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Global Clearance, Settlement and Tax Documentation Procedures
The Prospectus Supplement for a Series may specify that Certificates
of a Series will be tradeable as home market instruments in both the European
and U.S. domestic markets. Initial settlement and all secondary trades will
settle in same-day funds.
Secondary market trading between investors through CEDEL and
Euroclear will be conducted in the ordinary way in accordance with the
normal rules and operating procedures of CEDEL and Euroclear and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through the Depository
will be conducted according to its rules and procedures applicable to U.S.
corporate debt obligations.
Secondary cross-market trading between CEDEL or Euroclear and
Depository Participants will be effected on a delivery-against-payment basis
through the Relevant Depositaries (in such capacity) and as Depository
Participants.
Non-U.S. holders (as described below) will be subject to U.S.
withholding taxes unless they meet certain requirements and deliver appropriate
U.S. tax documents to the securities clearing organizations or their
participants.
Initial Settlement. All Certificates will be held in book-entry form
by the Depository. Investors interests in the Certificates will be represented
through financial institutions acting on their behalf as direct and indirect
participants in the Depository. As a result, CEDEL and Euroclear will hold
positions on behalf of their participants through their Relevant Depositary
which in turn will hold such positions in its account as a Depository
Participant.
Investors electing to hold through the Depository will follow its
settlement practices. Investor securities custody accounts will be credited
with their holdings against payment in same-day funds on the settlement date.
Investors electing to hold through CEDEL or Euroclear accounts will
follow the settlement procedures applicable to conventional eurobonds, except
that there will be no temporary global security and no "lock-up" or
restricted period. Certificates will be credited to the securities custody
accounts on the settlement date against payment in same-day funds.
Secondary Market Trading. Because the purchaser determines the place
of delivery, it is important to establish at the time of the trade where both
the purchaser's and seller's accounts are located to ensure that settlement
can be made on the desired value date.
Trading between Depository Participants. Secondary market trading
between Depository Participants will be settled using the procedures
applicable to prior asset-backed certificates issues in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between Depository Participant as Seller and CEDEL or
Euroclear Participant as Purchaser. When Certificates are to be transferred
from the account of a Depository Participant to the account of a CEDEL
Participant or a Euroclear Participant, the purchaser will send instructions
to CEDEL or Euroclear through a CEDEL Participant or Euroclear Participant at
least one business day prior to settlement. CEDEL or Euroclear will instruct
the Relevant Depositary, as the case may be, to receive the Global Securities
against payment. Payment will include interest accrued on the Certificates from
and including the last distribution date to and excluding the settlement
date, on the basis of the actual number of days in such accrual period and a
year assumed to consist of 360 days or a 360-day year of twelve 30-day months
as applicable to the related class of Certificates. For transactions settling
on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by
the Relevant Depositary to the account of the Depository Participant against
delivery of the Certificates. After settlement has been completed, the
Certificates will be credited to the respective clearing system and by the
clearing system, in accordance with its usual procedures, to the CEDEL
Participant's or Euroclear Participant's account. The securities credit will
appear the next day (European time) and the cash debt will be back-valued to,
and the interest on the Certificates will accrue from, the value date (which
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will be the preceding day when settlement occurred in New York). If
settlement is not completed on the intended value date (i.e., the trade
fails), the CEDEL or Euroclear cash debt will be valued instead as of the actual
settlement date.
CEDEL Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to
preposition funds for settlement, either from cash on hand or existing lines
of credit, as they would for any settlement occurring within CEDEL or
Euroclear. Under this approach, they may take on credit exposure to CEDEL or
Euroclear until the Certificates are credited to their account one day later.
As an alternative, if CEDEL or Euroclear has extended a line of
credit to them, CEDEL Participants or Euroclear Participants may elect not
to preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, CEDEL Participants or Euroclear
Participants purchasing Certificates would incur overdraft charges for one
day, assuming they cleared the overdraft when the Certificates were credited
to their accounts. Nevertheless, interest on the Certificates would accrue
from the value date. Therefore, in many cases the interest accruing on the
Certificates during that one-day period may substantially reduce or offset
the amount of such overdraft charges, although the result will depend on each
CEDEL Participant's or Euroclear Participant's particular cost of funds.
Because the settlement is taking place during New York business hours,
Depository Participants may employ their usual procedures for crediting
Certificates to the respective European Depositary for the benefit of CEDEL
Participants or Euroclear Participants. The sale proceeds will be available to
the seller on the settlement date. Thus, to the Depository Participants a
cross-Depository market transaction will settle no differently than a trade
between two Depository Participants.
Trading between CEDEL or Euroclear Participant as Seller and
Participant as Purchaser. Due to time zone differences in their favor, CEDEL
Participants and Euroclear Participants may employ their customary procedures
for transactions in which Certificates are to be transferred by the
respective clearing system, through the respective Depository, to a
Depository Participant. The seller will send instructions to CEDEL or
Euroclear through a CEDEL Participant or Euroclear Participant at least one
business day prior to settlement. In these cases CEDEL or Euroclear will
instruct the respective Depositary, as appropriate, to credit the Certificates
to the Depository Participant's account against payment. Payment will
include interest accrued on the Certificates from and including the last
distribution to and excluding the settlement date on the basis of the actual
number of days in such accrual period or a year assumed to consist of 360 days
or a 360-day year of twelve 30-day months as applicable to the related class of
Certificates. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
The payment will then be reflected in the account of CEDEL Participant or
Euroclear Participant the following day, and receipt of the cash proceeds
in the CEDEL Participant's or Euroclear Participant's account will be
back-valued to the value date (which will be the preceding day, when settlement
occurred in New York). Should the CEDEL Participant or Euroclear
Participant have a line of credit with its respective clearing system and
elect to be in debt in anticipation of receipt of the sale proceeds in its
account, the back- valuation will extinguish any overdraft incurred over that
one-day period. If settlement is not completed on the intended value date
(i.e., the trade fails), receipt of the cash proceeds in the CEDEL Participant's
or Euroclear Participant's account will instead be valued as of the actual
settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase
Certificates from Depository Participants for delivery to CEDEL Participants
or Euroclear Participants should note that these trades would automatically
fail on the sale side unless affirmative action is taken. At least three
techniques should be readily available to eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the
purchase side of the trade is reflected in their CEDEL or Euroclear accounts)
in accordance with the clearing system's customary procedures;
(b) borrowing the Certificates in the U.S. from a Depository
Participant no later than one day prior to settlement, which would give
the Certificates sufficient time to be reflected in their CEDEL or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the Depository Participant
is at least one day prior to the value date for the sale to the CEDEL
Participant or Euroclear Participant.
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Certain U.S. Federal Income Tax Documentation Requirements. A
Beneficial Owner of Certificates holding through CEDEL or Euroclear (or
through the Depository Participant if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies
to payments of interest (including original issue discount) on registered
debt issued by U.S. Persons (as defined below), unless (i) each clearing
system, bank or other financial institution that holds customers securities
in the ordinary course of its trade or business in the chain of intermediaries
between such Beneficial Owner and the U.S. entity required to withhold tax
complies with applicable certification requirements and (ii) such
Beneficial Owner takes one of the following steps to obtain an exemption or
reduced tax rate:
Exemption for Non-U.S. Persons (Form W-8). Beneficial Owners of
Certificates that are Non-U.S. Persons (as defined below) can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate of
Foreign Status). If the information shown on Form W-8 changes, a new Form W-8
must be filed within 30 days of such change.
Exemption for Non-U.S. Persons with effectively connected income (Form
4224). A Non-U.S. Person (as defined below), including a non-U.S.
corporation or bank with a U.S. branch, for which the interest income is
effectively connected with its conduct of a trade or business in the United
States, can obtain an exemption from the withholding tax by filing Form 4224
(Exemption from Withholding of Tax on Income Effectively Connected with the
Conduct of a Trade or Business in the United States).
Exemption or reduced rate for Non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons residing in a country that has a tax
treaty with the United States can obtain an exemption or reduced tax rate
(depending on the treaty terms) by filing Form 1001 (Holdership, Exemption or
Reduced Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by the Holder of a Certificate or
their agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's
Request for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Holder of a
Certificate or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
the security (the clearing agency, in the case of persons holding directly on
the books of the clearing agency). Form W-8 and Form 1001 are effective for
three calendar years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity organized in or under
the laws of the United States or any political subdivision thereof, (iii) an
estate or trust that is subject to U.S. federal income tax regardless of the
source of its income or (iv) a trust for which (a) a Court within the United
States is able to exercise primary supervision over the administration of the
trust and (b) one or more United States trustees have the authority to control
all substantial decisions of the trust. The term "Non-U.S. Person" means any
person who is not a U.S. Person. This summary does not deal with all aspects
of U.S. Federal income tax withholding that may be relevant to foreign holders
of the Certificates. Investors are advised to consult their own tax advisors
for specific tax advice concerning their holding and disposing of the
Certificates.
Allocation of Distributions
The Prospectus Supplement for each Series of Certificates will specify
(i) whether distributions 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") and (iii) the amount of each such
distribution allocable to principal and interest. 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 will be determined as set forth in the
related Agreement and will be described in the related Prospectus Supplement
and in general, 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,
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amounts required to reimburse any unreimbursed Advances and any other amounts
specified in the related Prospectus Supplement. The amount distributed
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. If so specified in the related Prospectus
Supplement, amounts received in respect of the Mortgage Assets representing
excess interest may be applied in reduction of the principal balance of one or
more specified Classes.
"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 or periods specified in the servicing agreement for each
Servicer 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. 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 amount available
therefor on such Distribution Dates, or may be entitled to payments of
principal from the amount by which the available amount exceeds specified
amounts. One or more Classes of Certificates may be subordinated in right
to receive distributions and may be subject to allocation of losses 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 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 a 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 the Servicer, Master Servicer or
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
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shortfalls may result in a reallocation to the Senior Certificates of a
Series of amounts otherwise distributable to the Subordinated Certificates of
such Series.
Mortgage Assets
The Scheduled Principal Balance of the Mortgage Assets and the amount
of any other assets included in the Trust for each Series of Certificates
(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.
"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.
Optional Termination
To the extent and under the circumstances specified in the
Prospectus Supplement for a Series, the Certificates of such Series may be
terminated at the option of the Depositor or such other party as may be
specified in the related Prospectus Supplement for a purchase price calculated
as specified in such Prospectus Supplement. Upon termination of the
Certificates, at the option of the terminating party, (i) the related Trust
may be terminated, thereby causing the sale of the remaining Mortgage Assets,
or (ii) such Certificates may be held or resold by the redeeming party. If
so specified in the Prospectus Supplement for a Series, the right to redeem
the Certificates of such Series will be conditioned upon the passage of a
certain date specified in such Prospectus Supplement and/or 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 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. Notice 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 and (ii)
for Certificates purchased at a price other than par, the effective yield on
such Certificates.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model, such as the Single Monthly Mortality ("SMM")
prepayment model, the Constant Prepayment Rate ("CPR") model or the
prepayment speed assumption ("PSA") model. The Prospectus Supplement for a
Series may contain a table setting forth percentages of the original principal
amount of each Class of Certificates of such Series to be outstanding after
each of the dates shown in the table based on the prepayment assumption model.
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 prepayments, including 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
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premises and, if the mortgage loans are secured by investment properties,
tax-related considerations and the availability of other investments. The
prepayment rate may also be subject to seasonal variations.
The 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 a pool of
mortgage loans, the mortgage loans in that pool would be expected to prepay
at higher rates than if prevailing interest rates were to remain at or above
the interest rates on those mortgage loans. Conversely, if interest rates were
to rise above the interest rates on a pool of the mortgage loans, the mortgage
loans in that pool would be expected to prepay at lower rates than if
prevailing interest rates were to remain at or below interest rates on the
mortgage loans. In general, junior mortgage loans have smaller average
principal balances than senior or first mortgage loans and are not viewed by
borrowers as permanent financing. Accordingly, junior mortgage loans may
experience a higher rate of prepayment than senior or first mortgage loans. In
addition, any future limitations on the right of borrowers to deduct interest
payments on mortgage loans for federal income tax purposes may affect in the
rate of prepayment of mortgage loans.
Distributions on the Certificates of a Series on any Distribution Date
generally will include interest accrued through a date specified in the
related Prospectus Supplement that may precede such Distribution Date.
Because interest generally will not be distributed to the Certificateholders
of such Series until the Distribution 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 of interest and, in the case of certificates purchased at a price other
than par, timing of payments of principal on the Mortgage Loans. If the
purchaser of a Certificate offered at a discount calculates the anticipated
yield to maturity of such Certificate based on an assumed rate of payment of
principal that is faster than that actually received on the Mortgage Loans
(or on the mortgage loans underlying Mortgage Backed Securities), 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 Mortgage Backed Securities), the actual
yield to maturity will be lower than that so calculated.
If so specified in a related Prospectus Supplement, amounts received
in respect of the Mortgage Assets representing excess interest may be applied
in reduction of the principal balance of one or more specified Classes. The
amount of excess interest required so to be applied may effect the weighted
average life of the related Series of Certificates.
The timing of changes in the rate of prepayments on the Mortgage
Loans (or on the mortgage loans underlying Mortgage Backed Securities) may
significantly affect an investor's actual yield to maturity, even if the
average rate of principal payments experienced over time is consistent with
such investor's expectation. In general, the earlier a prepayment of
principal on the Mortgage Loans (or on the mortgage loans underlying
Mortgage Backed Securities), the greater will be the effect on the investor s
yield to maturity. As a result, the effect on an investor's yield of principal
payments occurring at a rate higher (or lower) than the rate anticipated by the
investor during the period immediately following the issuance of the
Certificates would not be fully offset by a subsequent like reduction (or
increase) in the rate of principal payments. Because the rate of principal
payments (including prepayments) on the Mortgage Loans (or on the mortgage
loans underlying Mortgage Backed Securities) will significantly affect the
weighted average life and other characteristics of any Class of
Certificates, prospective investors are urged to consider their own estimates
as to the anticipated rate of future prepayments 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 effect 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
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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 at any time or
over the lives of the Certificates.
THE TRUSTS
Assignment of Mortgage Assets
Pursuant to the applicable Agreement, the Depositor 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 or dates specified in the related
Prospectus Supplement. The Trustee will deliver to the order of the
Depositor, in exchange for the Mortgage Assets so transferred, Certificates of
the related Series in authorized denominations registered in such names as the
Depositor may request representing the beneficial ownership interest in the
related Trust. Each Mortgage Loan or Mortgage Backed Security 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 Backed Securities as of
the specified date and its interest rate, its original principal balance and
certain other information.
In addition, the Depositor will take such steps as are necessary to
have the Trustee become the registered owner of each Mortgage Loan or Mortgage
Backed Security which is included in a Trust and to provide for all payments
thereon after the specified date or dates to be made directly to the Trustee.
As to each Mortgage Loan, the Depositor will 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 related Servicer, the Trustee or a custodian acting
on its behalf as assignee and certain other original documents evidencing or
relating to such Mortgage Loan. Unless otherwise specified in the related
Prospectus Supplement, within one year following the date of initial delivery
for a Series (the "Closing Date"), the Depositor 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 Depositor may deliver or cause to be
delivered to the Trustee an opinion of counsel to the effect that such
recording is not required to protect the right, title and interest of the
Trustee in such Mortgage Loans. The original mortgage documents are to be
held by the Trustee or a custodian acting on its behalf except to the
extent released to the Servicer or the Master Servicer from time to time in
connection with servicing the Mortgage Loans.
The Depositor will make certain customary representations and
warranties in each Agreement with respect to each related Mortgage Asset. In
addition, SMI or other Sellers of Mortgage Assets may make customary
representations and warranties with respect to the Mortgage Assets in the
sales agreement pursuant to which the Mortgage Assets are assigned and
transferred to the Depositor. See "ORIGINATION OF MORTGAGE LOANS
Representations and Warranties." The right of the Depositor to enforce
such representations and warranties will be assigned to the Trustee
under the related Agreement. If any representation or warranty is
breached, and such breach adversely affects the interest of the
Certificateholders, the Depositor or the Seller thereof will be required,
subject to the terms imposed under the related Agreement or sales agreement,
(i) to cure such breach, (ii) to substitute other Mortgage Assets for the
affected Mortgage Assets or (iii) to repurchase the affected Mortgage Assets at
a price generally equal to the unpaid principal balance of such Mortgage
Assets, together with accrued and unpaid interest thereon at the related
Mortgage Interest Rate. Neither the Depositor nor the Master Servicer will be
obligated to substitute Mortgage Assets or to repurchase Mortgage Assets, and
no assurance can be given that any Seller will perform its 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.
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.
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The Mortgage Loans -- General
The Mortgage Loans will be evidenced by promissory notes (each, a
"Mortgage Note") and will be secured by first, second or more junior liens on
(i) the related real property or leasehold interest, together with
improvements thereon, or (ii) with respect to Cooperative Loans, the shares
issued by the related Cooperative (the "Mortgaged Premises").
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 rate, a minimum rate 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 amortize
fully 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 may be fixed for the life of the Mortgage Loan, may
increase over a specified period of time or may change from
period to period. Mortgage Loans may include limits on
periodic increases or decreases in the amount of monthly
payments and may include maximum or minimum amounts of monthly
payments.
(d) Prepayments of principal may be subject to a prepayment fee,
which may be fixed for the life of the Mortgage Loan or may
adjust or decline over time, and may be prohibited for the
life of the Mortgage Loan or for certain periods ("Lockout
Periods"). Certain Mortgage Loans may permit prepayments
after expiration of the applicable Lockout Period and may
require the payment of a prepayment fee in connection
with any such subsequent prepayment. Other Mortgage Loans
may permit prepayments without payment of a prepayment fee
unless the prepayment occurs during specified time periods.
The Mortgage Loans may include due-on-sale clauses which
permit the mortgagee to demand payment of the entire Mortgage
Loan in connection with the sale or certain other transfers
of the related Mortgaged Premises. Other Mortgage Loans
may be assumable by persons meeting the then applicable
underwriting standards of the Originator.
The Mortgaged Premises (and, with respect to Cooperative Loans, the
buildings owned by Cooperatives) may be located in any state, territory or
possession of the United States (including the District of Columbia or Puerto
Rico). The Mortgaged Premises generally will be covered by Standard Hazard
Insurance Policies insuring against losses due to fire and various other causes.
The Mortgage Loans may be covered by 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.
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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. Such information may include: (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 expected aggregate outstanding Principal Balance of
Mortgage Loans having loan-to-value ratios at origination exceeding 80%,
(vii) the expected Mortgage Interest Rates and the range of Mortgage Interest
Rates, (viii) in the case of ARM Loans, the expected weighted average of the
Adjustable Rates, (ix) the expected aggregate outstanding Scheduled Principal
Balance, if any, of Buy-Down Loans as of the date set forth in the Prospectus
Supplement, (x) the expected aggregate outstanding principal balance, if any,
of GPM Loans as of the date set forth in the Prospectus Supplement, (xi)
the amount of any Mortgage Pool Insurance Policy, Special Hazard Insurance
Policy or Bankruptcy Bond to be maintained with respect to the related Trust,
(xii) 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, (xiii) the amount, if any, and terms of any other
credit enhancement to be provided with respect to all or a material portion of
the Mortgage Loans and (xv) the expected geographic location of the Mortgaged
Premises (or, in the case of a Cooperative Loan, the building owned by the
related Cooperative). If specific information respecting the Mortgage Loans is
not known to the Depositor at the time the related Certificates are initially
offered, more general information of the nature described above will be
provided in the Prospectus Supplement and specific information will be set
forth in the Detailed Description.
"ARM Loans" means Mortgage Loans providing for periodic adjustments to
the related Mortgage Interest Rate to equal the sum (which may be rounded) of a
Gross Margin and an Index.
Buy-Down Loans" means Mortgage Loans as to which funds have been
provided (and deposited into an escrow account) to reduce the monthly payments
of the borrowers during the early years of such Mortgage Loans.
"GPM Loans" means Mortgage Loans providing for monthly payments
during the early years of such Mortgage Loans which are or may be less than
the amount of interest due on such Mortgage Loans and as to which unpaid
interest is added to the principal balance of such Mortgage Loans (resulting
in negative amortization) and paid, together with interest thereon, in later
years.
No assurance can be given that values of the Mortgaged Premises have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the real estate market should experience an
overall decline in property values such that the outstanding principal
balances of the Mortgage Loans (plus any additional financing by other
lenders on the same Mortgaged Premises) in the related Trust become equal
to or greater than the value of such Mortgaged Premises, the actual rates of
delinquencies, foreclosures and losses could be higher than those now generally
experienced in the mortgage lending industry.
If specified in the Prospectus Supplement for a Series, the Mortgage
Assets in the related Trust may include Mortgage Loans that are delinquent
upon the issuance of the related Certificates. The inclusion of such Mortgage
Loans in the Trust for a Series may cause the rate of defaults and prepayments
on the Mortgage Loans to increase and, in turn, may cause losses to exceed the
available credit enhancement for such Series and affect the yield on the
Certificates of such Series.
Single Family Loans
Single Family Loans will consist of mortgage loans secured by liens
on one- to four-family residential and mixed use properties. The Mortgaged
Premises which secure Single Family Loans will consist of detached or
semi-detached one- to four-family dwelling units, townhouses, row houses,
individual condominium units in condominium buildings, individual units in
planned unit developments, and certain mixed use and other dwelling units.
Such Mortgaged Premises may include vacation and second homes or investment
properties. A portion of a dwelling unit may contain a commercial enterprise.
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Cooperative Loans
Cooperative Loans generally will be secured by security interests in or
similar liens on stock, shares or membership certificates issued by
Cooperatives and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific dwelling units in the buildings
owned by such Cooperatives. A Cooperative is owned by tenant-stockholders
who, through ownership of stock, shares or membership certificates in the
corporation, receive proprietary leases or occupancy agreements which confer
exclusive rights to occupy 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 management and, in most cases, payment of real estate taxes
and hazard and liability insurance. A Cooperative's ability to meet debt
service obligations on a mortgage loan on the building owned by the
Cooperative, as well as all other operating expenses, will be dependent in
large part on the receipt of maintenance payments from the 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.
Multi-Family Loans
Multi-Family Loans will consist of mortgage loans secured by liens on
rental apartment buildings, mixed-use properties or projects containing five or
more residential units including high-rise, mid-rise and garden apartments and
projects owned by Cooperatives.
Junior Mortgage Loans
If specified in the Prospectus Supplement for a Series, the Mortgage
Loans assigned and transferred to the related Trust may include Mortgage
Loans secured by second or more junior liens on residential properties
("Junior Mortgage Loans"). Because the rights of a holder of a junior lien
are subordinate to the rights of senior lienholders, 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 lienholders. In the event of a default by
the related borrower, liquidation or other proceeds would be applied first
to the payment of court costs and fees in connection with the
foreclosure, second to unpaid real estate taxes, and third in
satisfaction of all principal, interest, prepayment or acceleration
penalties, if any, and any other sums due and owing to the senior
lienholders. The claims of the senior lienholders 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. If
the proceeds from a foreclosure or similar sale of Mortgaged Premises on
which the Trust holds a junior lien are insufficient to satisfy the senior
lienholders in the aggregate, the Trust, as the holder of the junior lien, and
the holders of the Certificates of the related Series bear (i) the risk of
delay in distributions while a deficiency judgment, if any, against the
borrower is obtained and (ii) the risk of loss if the deficiency judgment,
if any, is not realized upon. In addition, deficiency judgments may not
be available in certain jurisdictions.
Even if the Mortgaged Premises provide adequate security for the
related Junior Mortgage Loan, substantial delays could be encountered in
connection with the liquidation of such Junior Mortgage Loan, and corresponding
delays in the receipt of related proceeds by the holders of the Certificates of
the related Series could occur. An action to foreclose on 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 the related Mortgaged Premises. In
the event of a default by a borrower, these restrictions, among other
things, may impede the ability of the Servicer 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.
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Home Improvement Loans
The Home Improvement Loans will consist of secured loans, the proceeds
of which generally will be used to improve or protect the basic livability or
utility of the property. To the extent set forth in the related Prospectus
Supplement, Home Improvement Loans will be fully amortizing and will bear
interest at a fixed or variable rate. To the extent a material portion of
the Mortgage Assets included in a Trust consists of Home Improvement Loans, the
related Prospectus Supplement will describe the material provisions of such
Mortgage Loans and the programs under which they were originated.
Home Equity Lines of Credit
HELOCs will consist of home equity lines of credit or certain
balances thereof secured by mortgages on one- to four-family residential
properties, including condominium units and cooperative dwellings, or
mixed-use properties. The HELOCs may be subordinated to other mortgages on
such properties.
As more fully described in the related Prospectus Supplement,
interest on each HELOC, excluding introductory rates offered from time to
time during promotional periods, may be computed and payable monthly on the
average daily outstanding principal balance of such loan. Principal amounts
on the HELOCs may be drawn down (up to a maximum amount as set forth in the
related Prospectus Supplement) or repaid under each HELOC from time to
time. If specified in the related Prospectus Supplement, new draws by
borrowers under HELOCs automatically will become part of the Trust for a
Series. As a result, the aggregate balance of the HELOCs will fluctuate from
day to day as new draws by borrowers are added to the Trust and principal
payments are applied to such balances, and such amounts usually will differ
each day, as more specifically described in the Prospectus Supplement. Under
certain circumstances more fully described in the related Prospectus
Supplement, a borrower under a HELOC may choose an interest only payment
option and is obligated to pay only the amount of interest which accrues on
such loan during the billing cycle. An interest only payment option may be
available for a specified period before the borrower may begin paying at
least the minimum monthly payment or a specified percentage of the average
outstanding balance of the loan.
The Mortgaged Premises relating to HELOCs will include one- to
four-family residential properties, including condominium units and
Cooperative dwellings, and mixed-use properties. Mixed-use properties will
consist of one- to four-family residential dwelling units and space used
for retail, professional or other commercial uses. The Mortgaged Premises may
consist of detached individual dwellings, individual condominiums, townhouses,
duplexes, row houses, individual units in planned unit developments and other
attached dwelling units. Each one- to four-family dwelling unit will be
located on land owned in fee simple by the borrower or, if so specified in the
related Prospectus Supplement, on land leased by the borrower for a term of at
least ten years greater than the term of the related HELOC. Attached
dwellings may include owner-occupied structures where each borrower owns the
land upon which the unit is built, with the remaining adjacent land owned in
common, or dwelling units subject to a proprietary lease or occupancy agreement
in a cooperatively-owned apartment building.
The aggregate principal balance of HELOCs secured by Mortgaged
Premises that are owner-occupied will be disclosed in the related Prospectus
Supplement. If so specified in the related Prospectus Supplement, the sole
basis for a representation that a given percentage of the HELOCs are secured by
one- to four-family dwelling units that are owner-occupied will be either (i)
the making of a representation by the borrower at origination of the HELOC
either that the underlying Mortgaged Premises will be used by the borrower for
a period of at least six months every year or that the borrower intends to use
the Mortgaged Premises as a primary residence or (ii) a finding that the
address of the underlying Mortgaged Premises is the borrower's mailing
address as reflected in the Master Servicer's records. If so specified in
the related Prospectus Supplement, the Mortgaged Premises may include non-owner
occupied investment properties and vacation and second homes.
Repurchase of Converted Mortgage Loans
Unless otherwise specified in the Prospectus Supplement for a Series,
the Trust for such Series may include Mortgage Loans with respect to which the
related Mortgage Interest Rate is convertible from an Adjustable Rate to a
Fixed Rate at the option of the borrower upon the fulfillment of certain
conditions. If so specified in such Prospectus Supplement, the applicable
Servicer (or other party specified in such Prospectus Supplement) may be
obligated to repurchase from the Trust any Mortgage Loan with respect to which
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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 may be obligated to purchase
such Converted Mortgage Loans to the extent provided in such Prospectus
Supplement. Any such purchase price will be treated as a prepayment of the
related Mortgage Loan.
Repurchase of Delinquent Mortgage Loans
If so specified in the Prospectus Supplement for a Series, the
Depositor may, but will not be obligated to, repurchase from the Trust any
Mortgage Loan as to which the borrower is delinquent in payments by 90 days or
more (a "Delinquent Mortgage Loan") at a purchase price equal to the greater of
the unpaid principal balance of such Delinquent Mortgage Loan plus interest
thereon at the applicable Mortgage Interest Rate from the date on which
interest was last paid to the last day of the month in which such purchase price
occurs or the fair market value of the Delinquent Mortgage Loan at the time
of its purchase. Any such purchase price will be treated as a prepayment of
the related Mortgage Loan.
Substitution of Mortgage Loans
If so specified in the Prospectus Supplement for a Series, the
Depositor may, within three months of the Closing Date for such Series,
deliver to the Trustee other Mortgage Loans in substitution for any one or
more Mortgage Loans initially included in the Trust for such Series. In
general, any substitute Mortgage Loan must, on the date of such substitution,
(i) have an unpaid principal balance not greater than the unpaid principal
balance of any 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 not
less than the Net Rate of the deleted Mortgage Loan, (iv) have a remaining
term to maturity not greater than (and not more than one year less than)
that of the deleted Mortgage Loans, (v) 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 Loans as of such date (in
each case, using the value at origination and after taking into account the
payment due on such date), and (vi) comply with each applicable representation
and warranty relating to the Mortgage Loans. In general, no ARM Loan may be
substituted unless the deleted Mortgage Loan is an ARM Loan, in which case the
substituted Mortgage Loan must also (i) have a minimum lifetime Mortgage
Interest Rate that is not less than the minimum lifetime Mortgage Interest
Rate on the deleted Mortgage Loan, (ii) have a maximum lifetime Mortgage
Interest Rate that is not less than the maximum lifetime Mortgage Interest Rate
on the deleted Mortgage Loans, (iii) provide for a lowest possible Net Rate
that is not lower than the lowest possible Net Rate for the deleted Mortgage
Loans and a highest possible Net Rate that is not lower than the highest
possible Net Rate for the deleted Mortgage Loans, (iv) have a Gross Margin that
is not less than the Gross Margin of the deleted Mortgage Loans, (v) have a
Periodic Rate Cap equal to the Periodic Rate Cap on the deleted Mortgage
Loans, (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 Loans 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. If 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.
Mortgage-Backed Securities
The Mortgage-Backed Securities may include (i) private (that is not
guaranteed or insured by the United States or any agency or instrumentality
thereof) mortgage participation or pass-through certificates or other
mortgage-backed securities or (representing either debt or equity) (ii)
Certificates insured or guaranteed by FNMA, FHLMC or GNMA. Private
Mortgage-Backed Securities will not include participations in previously
issued mortgage-backed securities unless such securities (i) have been
previously registered under the Securities Act of 1933, as amended, or held
for the required holding period under Rule 144(k) thereunder or (ii) were
acquired in a bona fide secondary market transaction from someone other than
an affiliate of the Depositor. Private Mortgage-Backed Securities will have
been issued pursuant to a PMBS Agreement (the "PMBS Agreement").
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The related Prospectus Supplement for a series of Certificates that
evidence interests in Mortgage-Backed Securities will specify (i) the
approximate aggregate principal amount and type of any Mortgage-Backed
Securities to be included in the Trust, (ii) to the extent known to the
Depositor, certain characteristics of the mortgage loans underlying the
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 Mortgage-Backed
Securities, (iv) the weighted average term-to-stated maturity of the
Mortgage-Backed Securities, (v) the pass-through or certificate rate of the
Mortgage-Backed Securities, (vi) the weighted average pass-through or
certificate rate of the Mortgage-Backed Securities, (vii) the issuer,
servicer and trustee of the Mortgage- Backed Securities, (viii) certain
characteristics of credit support, if any, such as reserve funds, insurance
policies, surety bonds, letters of credit or guaranties, relating to the
mortgage loans underlying the Mortgage-Backed Securities or to MBSthe
Mortgage-Backed Securities themselves, (ix) the terms on which the underlying
mortgage loans may, or are required to, be repurchased prior to their
stated maturity or the stated maturity of the Mortgage-Backed Securities and
(x) the terms on which other mortgage loans may be substituted for those
originally underlying the Mortgage-Backed Securities.
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 Depositor
under which the Depositor will transfer additional Mortgage Assets to such
Trust following the Closing Date. Any Pre-Funding Agreement will require
that any Mortgage Loans so transferred conform to the requirements specified
in such Pre-Funding Agreement. If a Pre-Funding Agreement is used, the
related Trustee will be required to deposit in a segregated account (each, a
"Pre-Funding Account") upon receipt a portion of the proceeds received by
the Trustee in connection with the sale 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 Depositor from the related
Pre-Funding Account. Each Pre-Funding Agreement will specify a period during
which any such transfer must occur. If all moneys originally deposited in
such Pre- Funding Account are not used by the end of such specified period,
then any remaining moneys will be applied as a mandatory prepayment of one or
more Classes of Certificates as specified in the related Prospectus Supplement.
The specified period for the acquisition by a Trust of additional Mortgage
Loans will not exceed three months from the date such Trust is established and
the maximum deposit of Mortgage Loans to the Pre-Funding Account will not
exceed thirty-five percent of the aggregate proceeds received from the sale of
all Classes of Certificates of the related Series.
Asset Proceeds Account
All payments and collections received or advanced on the Mortgage
Assets assigned or transferred to the Trust for the Certificates of a Series
will be remitted to one or more accounts (collectively, the "Asset Proceeds
Account") established and maintained in trust on behalf of the holders of such
Certificates. In general, reinvestment income, if any, on amounts in the
Asset Proceeds Account will not accrue for the benefit of the holders of the
Certificates of such Series.
If so specified in the Prospectus Supplement for a Series, payments
on the Mortgage Loans included in the related Trust will be remitted to the
Servicer Custodial Account or the Master Servicer Custodial Account and
then to the Asset Proceeds Account for such Series, net of amounts required to
pay servicing fees and any amounts that are to be included in any Reserve Fund
or other fund or account for such Series. All payments received on
Mortgage-Backed Securities 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, certain and
any other fees to be paid directly by the Trustee and to make distributions
with respect to Certificates of such Series in accordance with the
respective allocations set forth in the related Prospectus Supplement.
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CREDIT ENHANCEMENT
General
If so specified in the Prospectus Supplement for a Series, the related
Trust may include, or the related Certificates may be entitled to the benefits
of, certain ancillary or incidental assets intended to provide credit
enhancement for the ultimate or timely distribution of proceeds from the
Mortgage Assets to the holders of such Certificates, including reserve
accounts, insurance policies, guaranties, surety bonds, letters of credit,
guaranteed investment contracts, swap agreements and option agreements. In
addition, if so specified in the Prospectus Supplement for a Series, one or
more Classes of Certificates of such Series may be entitled to the benefits of
other credit enhancement arrangements, including subordination,
overcollateralization or cross support. The protection against losses or
delays afforded by any such assets or credit enhancement arrangements may be
limited.
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 exceed the amount covered by
credit enhancement or are not covered by credit enhancement, holders of one or
more Classes of Certificates will bear their allocable share of any resulting
losses. If a form of credit enhancement applies to several Classes of
Certificates, and if distributions with respect to principal equal to the
aggregate principal balances of certain Classes of Certificates are
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. In certain cases, credit enhancement may be canceled or reduced
if such cancellation or reduction would not adversely affect the rating of the
related Certificates.
Subordination
If so specified in the related Prospectus Supplement, a Series may
include one or more Classes of Certificates (the "Subordinated Certificates")
that are subordinated in right to receive distributions or subject to the
allocation of losses in favor of one or more other Classes of Certificates
of such Series (the "Senior Certificates"). If so specified in the
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 may instead be payable to one or more Classes of Senior Certificates
of such Series under the circumstances and to the extent specified in such
Prospectus Supplement. If so specified in the Prospectus Supplement, delays
in receipt of scheduled payments on the Mortgage Assets and losses with
respect thereto 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 Assets over the lives of the Certificates or at any time, the
aggregate losses 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 Assets or aggregate losses 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 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. If so specified in
the Prospectus Supplement, amounts on deposit in any such reserve account may
be released to the Depositor or a Seller or the holders of any Class of
Certificates at the times and under the circumstances specified in the
Prospectus Supplement.
If so specified in the related Prospectus Supplement, one or more
Classes of Certificates may bear the risk of losses not covered by credit
enhancement prior to other Classes of Certificates. Such subordination might
be effected by reducing the principal balance of the Subordinated Certificates
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on account of such losses, thereby decreasing the proportionate share of
distributions allocable to such Certificates, or by another means specified in
the Prospectus Supplement.
If so specified in the related Prospectus Supplement, various
Classes of Senior Certificates and Subordinated Certificates may themselves
be subordinate in their right to receive certain distributions to other
Classes of Senior Certificates and Subordinated Certificates, respectively,
through a cross-support mechanism or otherwise. If so specified in the
Prospectus Supplement, the same Class of Certificates may constitute Senior
Certificates with respect to certain types of payments or losses and
Subordinated Certificates with respect to other types of payments or losses.
Distributions may be allocated among Classes of Senior Certificates
and Classes of Subordinated Certificates (i) in the order of their scheduled
final distribution dates, (ii) in accordance with a schedule or formula, (iii)
in relation to the occurrence of events or (iv) otherwise, in each case as
specified in the Prospectus Supplement. As between Classes of Subordinated
Certificates, payments to holders of Senior Certificates on account of
delinquencies or losses and payments to any reserve account will be allocated
as specified in the Prospectus Supplement.
Certificate Guaranty Insurance Policies
If so specified in the related Prospectus Supplement, one or more
certificate guaranty insurance policies (each, a "Certificate Guaranty
Insurance Policy") will be obtained and maintained for one or more Classes
or Series of Certificates. The issuer of any such Certificate Guaranty
Insurance Policy (the "Certificate 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 Insurer to guarantee any
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 Insurer may be subrogated
to the rights of the holders of the related Certificates to receive
distributions 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 Insurer under the related Certificate Guaranty
Insurance Policy.
Overcollateralization
If so specified in the related Prospectus Supplement, the aggregate
principal balance of the Mortgage Assets included in a Trust may exceed the
original principal balance of the related Certificates. In addition, if so
specified in the related Prospectus Supplement, certain Classes of
Certificates may be entitled to receive distributions, creating a
limited acceleration of the payment of the principal of such Certificates
relative to the amortization of the related Mortgage Assets by applying excess
interest collected on the Mortgage Assets to distributions of principal on
such Classes of Certificates. Such 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.
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
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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.
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. 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 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 the
Seller or Servicer and, in such event, subject to certain limitations, might
give rise to an obligation on the part of the Seller or Servicer to purchase
the defaulted Mortgage Loan if the breach cannot be cured. See "ORIGINATION OF
MORTGAGE LOANS -- Representations and Warranties", 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 Mortgage Loan was made. If aggregate
net claims paid under a Mortgage Pool Insurance Policy reach the original
policy limit, 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 Depositor, a rating for the Certificates of
such Series confirms that such reduction will not result in a lowering or
withdrawal of such rating.
If so specified in the related Prospectus Supplement, a Mortgage Pool
Insurance Policy may insure against losses on mortgage loans that secure
other mortgage-backed securities or collateralized mortgage obligations;
provided, however, that any subsequent extension of coverage (and the
corresponding assignment of the Mortgage Pool Insurance Policy) to 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 Depositor, 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
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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
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 Depositor, 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,
a deposit may be made of cash, an irrevocable letter of credit or any other
instrument acceptable to each Rating Agency that provides, at the
request of the Depositor, a rating for the Certificates of such Series in
the related Trust to provide protection in lieu of or in addition to that
provided by a Special Hazard Insurance Policy.
If so specified in the related Prospectus Supplement, a Special
Hazard Insurance Policy may insure against losses on mortgage loans that
secure other mortgage-backed securities or collateralized mortgage
obligations; provided, however, that any subsequent 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 Depositor, 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, a deposit may be made of cash, an
irrevocable letter of credit or any other instrument acceptable to each Rating
Agency that provides, at the request of the Depositor, 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."
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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 Depositor 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 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. 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
Depositor, a rating for the Certificates of such Series. Additional
information with respect to such instruments deposited in the Reserve Funds
may be set forth in the related Prospectus Supplement.
Other Credit Enhancement
If so specified in the Prospectus Supplement for a Series, the related
Trust may include, or the related Certificates may be entitled to the benefits
of, certain other assets including reserve accounts, insurance policies,
guaranties, surety bonds, letters of credit, guaranteed investment contracts
or similar arrangements (i) for the purpose of maintaining timely payments or
providing additional protection against losses on the assets included in
such Trust, (ii) for the purpose of paying administrative expenses, (iii) for
the purpose of establishing a minimum reinvestment rate on the payments
made in respect of such assets or principal payment rates on such assets, (iv)
for the purpose of guaranteeing timely distributions with respect to 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 Depositor, a rating for the Certificates of the related
Series.
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. 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) credit, appraisal and underwriting
standards and guidelines approved by the Depositor. The underwriting
guidelines with respect to loan programs approved by the Depositor may be less
stringent than those of FNMA or FHLMC, primarily in that they generally may
permit the borrower to have a higher debt- to-income ratio and a larger number
of derogatory credit items than do the guidelines of FNMA or FHLMC. These
underwriting guidelines are intended to provide for the origination of single
family mortgage loans for non-conforming credits. A mortgage loan made to a
"non-conforming credit" means a mortgage loan that is ineligible for purchase
by FNMA or FHLMC due to borrower credit characteristics that do not meet FNMA
or FHLMC underwriting guidelines, including a loan made to a borrower whose
creditworthiness and repayment ability do not satisfy such FNMA or FHLMC
underwriting guidelines or a borrower who may have a record of major derogatory
credit items such as default on a prior mortgage loan, credit write-offs,
outstanding judgments and prior bankruptcies. Accordingly, Mortgage Loans
underwritten pursuant to these guidelines are likely to experience rates of
delinquency and foreclosure that are higher, and may be substantially
higher, than mortgage loans originated in accordance with FNMA or FHLMC
underwriting guidelines.
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The underwriting standards are applied in a manner intended to
comply with applicable federal and state laws and regulations. The purpose
of applying these standards is to evaluate each prospective borrower's credit
standing and repayment ability and the value and adequacy of the related
Mortgaged Premises as collateral.
In general, a prospective borrower is required to complete a detailed
application designed to provide pertinent credit information. The prospective
borrower generally is required to provide a current list of assets as well as
an authorization for a credit report which summarizes the borrower's credit
history with merchants and lenders as well as any suits, judgments or
bankruptcies that are of public record. The borrower may also be
required to authorize verification of deposits at financial institutions
where the borrower has demand or savings accounts.
In determining the adequacy of the Mortgaged Premises as collateral,
an appraisal is made of each property considered for financing by a qualified
independent appraiser. The appraiser is required to inspect the property and
verify that it is in good repair and that construction, if new, has been
completed. The appraisal is based on the market value of comparable homes
and, if considered applicable by the appraiser, the estimated rental income of
the property and a replacement cost and analysis based on the current cost of
constructing a similar home. All appraisals generally are expected to conform
to FNMA or FHLMC appraisal standards then in effect.
Once all applicable employment, credit and property information is
received, a determination generally is made as to whether the prospective
borrower has sufficient monthly income available (i) to meet the borrower s
monthly obligations on the proposed mortgage loan (generally determined on the
basis of the monthly payments due in the year of origination) and other
expenses related to the Mortgaged Premises (such as property taxes and
insurance premiums) and (ii) to meet 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 Depositor generally will acquire the Mortgage Loans from SMI. SMI
will make certain customary representations and warranties with respect to the
Mortgage Loans in the sales agreement by which SMI transfers its interest in
the Mortgage Loans to the Depositor. SMI 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 issued by the related mortgage insurer, (iii) that
each note and Security Instrument has been executed and delivered by the
borrower and the Security Instrument has been duly recorded where the Mortgage
Premises are located in order to make effective lien on the related
Mortgaged Premises and (iv) that upon foreclosure on the Mortgage Premises, the
holders of the Mortgage Loan will be able to deliver good and merchantable
title to such Mortgaged Premises. If so specified in the Prospectus
Supplement for a Series, SMI 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, SMI is
required to deliver a final title insurance policy or satisfactory evidence of
the existence of such a policy.
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If SMI 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 such breach or defect cannot be cured within the number of days
specified in the Agreement, the Trustee may require SMI 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 SMI of a
representation or warranty with respect to a Mortgage Loan or the delivery
by SMI to the Trustee of a materially defective document with respect to a
Mortgage Loan, SMI 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. SMI s
obligation to purchase a Mortgage Loan will not be guaranteed by the Depositor
or any other party.
SERVICING OF MORTGAGE LOANS
General
For each Trust that includes Mortgage Loans, one or more Servicers,
which may include an affiliate of the Depositor, 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 Depositor, 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 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 Depositor 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
Depositor 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 Depositor 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 Depositor 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 Depositor 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. Certain servicing obligations of a Servicer may be delegated to an
approved sub-servicer; provided, however, that the Servicer remains fully
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responsible and liable for all its obligations under the Servicing
Agreement. The rights of the Depositor under each Servicing Agreement with
respect to a Series will be assigned to the Trust for such Series.
Payments on Mortgage Loans
Each Servicing Agreement with respect to a Series will require the
related Servicer to establish and maintain one or more separate, insured (to
the available limits) custodial accounts (collectively, the "Custodial
Account") into which the Servicer will be required to deposit on a daily
basis payments of principal and interest received with respect to Mortgage
Loans serviced by such Servicer included in the Trust for such Series. To the
extent deposits in each Custodial Account are required to be insured by the
FDIC, if at any time the sums in any Custodial Account exceed the limits of
insurance on such account, the Servicer will be required within one business
day to withdraw such excess funds from such account and remit such amounts (i)
to a custodial account maintained by the Trustee or at a separate institution
(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 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 Prepayment Period specified in such Servicing Agreement,
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 available for
distribution on 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 advanced by the Servicer.
Prior to each Distribution Date for a Series, the Master Servicer
will furnish to the Trustee a statement setting forth certain information with
respect to the Mortgage Loans included in the Trust for such Series.
Advances
If so specified in the Prospectus Supplement for a Series, each
Servicing Agreement with respect to such Series will provide that the related
Servicer will be obligated to advance funds (each, an "Advance") to cover, to
the extent that such amounts are deemed to be recoverable from any subsequent
payments on the Mortgage Loans, (i) delinquent payments of principal or interest
on such Mortgage Loans, (ii) delinquent payments of taxes, insurance premiums
or other escrowed items and (iii) foreclosure costs, including reasonable
attorney's fees. The failure of a Servicer to make any required Advance
under the related Servicing Agreement constitutes a default under such
Servicing Agreement for which the Servicer may be terminated. Upon a default
by the Servicer, the Master Servicer or the Trustee may, if so provided in
the Agreement, be required to make Advances to the extent necessary to make
required distributions on certain Certificates, provided that such party deems
such amounts to be recoverable.
As specified in the related Prospectus Supplement, the advance
obligation of the Master Servicer may be further limited to an amount
specified in the Agreement that has been approved by each Rating Agency that
provides, at the request of the Depositor, 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
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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 on the Certificates of such Series. Neither the Servicer or
the Master 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 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
Mortgage Loan may 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. If 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 may 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
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 (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.
If so specified in the Prospectus Supplement for a Series, the amount
of a claim for benefits under a Primary Mortgage Insurance Policy covering a
Mortgage Loan included in the related Trust (the "Mortgage Insurance Loss")
will consist of the insured portion of the unpaid principal balance of the
covered Mortgage Loan plus accrued and unpaid interest on such unpaid principal
balance and reimbursement of certain expenses, less (i) all rents or other
payments collected or received by the insured (other than the proceeds of
hazard insurance) that are derived from or are in any way related to the
related Mortgaged Premises, (ii) hazard insurance proceeds in excess of the
amount required to restore such Mortgaged Premises and which have not been
applied to the payment of such Mortgage Loan, (iii) amounts expended but not
approved by the mortgage insurer, (iv) claim payments previously made by the
mortgage insurer and (v) unpaid premiums. If so specified in the Prospectus
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Supplement for a Series, the mortgage insurer will be required to pay to the
insured either (i) the Mortgage Insurance Loss or (ii) at its option under
certain of the Primary Mortgage Insurance Policies, the sum of the delinquent
scheduled payments plus any advances made by the insured, both to the date of
the claim payment, and, thereafter, scheduled payments in the amount that
would have become due under the Mortgage Loan if it had not been discharged
plus any advances made by the insured until the earlier of (A) the date the
Mortgage Loan would have been discharged in full if the default had not
occurred and (B) the date of an approved sale. Any rents or other payments
collected or received by the insured which are derived from or are in any way
related to the Mortgaged Premises securing such Mortgage Loan will be deducted
from any claim payment.
Standard Hazard Insurance Policies
Each Servicing Agreement with respect to a Series will require the
related Servicer to cause to be maintained a Standard Hazard Insurance
Policy covering each Mortgaged Premises securing each Mortgage Loan covered
by such Servicing Agreement. Each Standard Hazard Insurance Policy is
required to 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 Depositor 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
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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 or Trustee 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. The terms of any such policy or bond and any requirements in
connection therewith applicable to any Servicer or Master Servicer will be
described in the related Prospectus Supplement. If 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 or Trustee 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 each
Rating Agency that provides, at the request of the Depositor, a rating for
the Certificates of such Series confirms 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. If, however, 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 such replacement
policy or other credit enhancement may be secured 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 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 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
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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 Servicer and, if
required, the Master Servicer, are required to determine, in their 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 either
the Master Servicer or the Trustee.
Evidence as to Servicing Compliance
Within 120 days after the end of each of its fiscal years, each
Servicer must provide the Master Servicer or the Trustee 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 or the Trustee will review, on an annual basis, the
performance of each Servicer under the related Servicing Agreement and the
status of any fidelity bond and errors and omissions policy required to be
maintained by such Servicer under such Servicing Agreement.
Events of Default and Remedies
If so specified in the Prospectus Supplement for a Series, events of
default under the Servicing Agreement in respect of such Series will consist of
(i) any failure by the Servicer to remit to the Master Servicer Custodial
Account any payment required to be made by a Servicer under the terms of the
Servicing Agreement that is not remedied within at least one business day; (ii)
any failure on the part of a Servicer to observe or perform in any 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 or the Trustee 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 or the Trustee) (subject to written confirmation
by each Rating Agency that provides, at the request of the Depositor, a
rating for the Certificates of the related Series that such appointment will
not adversely effect the ratings then in effect on the Certificates). Any
successor servicer, including the Master Servicer or the Trustee, will be
entitled to compensation arrangements similar to those provided to the
Servicer.
Master Servicer Duties
If so specified in the Prospectus Supplement for a Series, the Master
Servicer will (i) administer and supervise the performance by each Servicer
of its duties and responsibilities under the related Servicing Agreement,
(ii) maintain any insurance policies (other than property specific insurance
policies) providing coverage for losses on the Mortgage Loans for such Series,
(iii) calculate amounts payable to Certificateholders on each Distribution
Date, (iv) prepare periodic reports to the Trustee or the Certificateholders
with respect to the foregoing matters, (v) prepare federal and state tax and
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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 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.
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 Depositor may appoint a stand-by Master Servicer,
which will assume the obligations of the Master Servicer upon a default by the
Master Servicer.
Special Servicing Agreement
The Master Servicer may appoint a Special Servicer to undertake
certain responsibilities of the Servicer with respect to certain defaulted
Mortgage Loans securing a Series. The Special Servicer may engage various
independent contractors to perform certain of its responsibilities; provided,
however, that the Special Servicer must remain fully responsible and liable for
all its responsibilities under the special servicing agreement (the "Special
Servicing Agreement"). As may be further specified in the related Prospectus
Supplement, the Special Servicer, if any, may be entitled to various fees,
including, but not limited to, (i) a monthly engagement fee applicable to each
Mortgage Loan or related REO Properties as of the first day of the immediately
preceding Due Period, (ii) a special servicing fee expressed as a fixed
percentage of the remaining Scheduled Principal Balance of each specially
serviced Mortgage Loan or related REO Properties, or (iii) a performance fee
applicable to each liquidated Mortgage Loan based upon the related liquidation
proceeds.
THE AGREEMENT
The following summaries describe the material provisions common to
each Series of Certificates. The summaries do not purport to be complete and
are subject to the related Prospectus Supplement and the Agreement with
respect to such Series. The material provisions of a specific Agreement will
be further described in the related Prospectus Supplement. When
particular provisions or terms used in the Agreement are referred to, the
actual provisions (including definitions of terms) are incorporated by
reference as part of such summaries.
The Trustee
The Trustee under each Agreement will be named in the related
Prospectus Supplement. The Trustee must be a corporation or a national
banking association organized under the laws of the United States or any
state thereof and authorized under the laws of the jurisdiction in which it
is organized to have corporate trust powers. The Trustee must also have
combined capital and surplus of at least $50,000,000 and be subject to
regulation and examination by state or federal regulatory authorities. Although
the Trustee may not be an affiliate of the Depositor or the Master
Servicer, either the Depositor or the Master Servicer may maintain normal
banking relations with the Trustee if the Trustee is a depository
institution.
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The Trustee may resign at any time, in which event the Depositor
will be obligated to appoint a successor Trustee. The Depositor 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% (or such other percentage as may be
specified in the related Prospectus Supplement) of the voting rights of such
Series. Certificate Insurers may obtain the right to exercise all voting
rights of holders of Certificates. 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 Depositor, 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 Depositor, a rating for the Certificates of such Series
at the time of issuance of such Series and (vii) certain repurchase agreements
with respect to 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. In general, reinvestment income
from Permitted Investments will not accrue for the benefit of the
Certificateholders of such Series. If a reinvestment agreement is obtained
with respect to a Series, the related Agreement will require the Trustee to
invest funds deposited in the Asset Proceeds Account and any Reserve Fund or
other fund or account for such Series pursuant to the terms of the reinvestment
agreement.
Reports to Certificateholders
Concurrently with each distribution on the Certificates of any
Series, there will be mailed to the holders of such Certificates a statement
generally setting forth, to the extent applicable to such Series, among
other things: (i) the aggregate amount of such distribution allocable to
principal, separately identifying the amount allocable to each Class of
Certificates; (ii) the aggregate amount of such distribution allocable
to interest, separately identifying the amount allocable to each Class of
Certificates; (iii) the aggregate principal balance of each Class of
Certificates after giving effect to distributions on the related Distribution
Date; (iv) if applicable, the amount otherwise distributable to any Class of
Certificates that was distributed to any other Class of Certificates; (v) if
any Class of Certificates has priority in the right to receive principal
prepayments, the amount of principal prepayments in respect of the related
Mortgage Assets; and information regarding the levels of delinquencies and
losses on the Mortgage Loans. Customary information deemed necessary for
Certificateholders to prepare their tax returns will be furnished annually.
Events of Default and Remedies
If so specified in the Prospectus Supplement for a Series, events of
default under the related Agreement will consist of (i) any default in the
performance or breach of any covenant or warranty of the Master Servicer under
such Agreement which continues unremedied for a specified period after the
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giving of written notice of such failure to the Master Servicer by the Trustee
or by the holders of Certificates entitled to at least 25% of the aggregate
voting rights, (ii) any failure by the Master Servicer to make required
Advances with respect to delinquent Mortgage Loans in the related Trust, (iii)
certain events of insolvency, readjustment of debt, marshaling of assets and
liabilities or similar proceedings regarding the Master Servicer, if any,
and (iv) certain actions by or on behalf of the Master Servicer indicating
its insolvency or inability to pay its obligations.
So long as an event of default by the Master Servicer under an
Agreement remains unremedied, the Trustee may, and, at the direction of the
holders of outstanding Certificates of a Series entitled to at least 51% of
the voting rights, the Trustee will, terminate all the rights and
obligations of the Master Servicer under the related Agreement, except that
the holders of Certificates may not direct the Trustee to terminate the Master
Servicer for its failure to make Advances. Upon termination, the Trustee will
succeed to all the responsibilities, duties and liabilities of the Master
Servicer under such Agreement (except that if the Trustee is prohibited by
law from obligating itself to make Advances regarding delinquent Mortgage
Loans, then the Trustee will not be so obligated) and will be entitled to
similar compensation arrangements. If the Trustee is unwilling or unable to
act as successor Master Servicer, the Trustee may appoint or, if the holders of
Certificates of a Series entitled to at least 51% of the voting rights of
such Series (or a Certificate Insurer entitled to exercise the voting rights
of the holders of Certificates) so request in writing, the Trustee shall
appoint, or petition a court of competent jurisdiction for the appointment
of, an established mortgage loan servicing institution acceptable to the
Rating Agencies and having a net worth of at least $15,000,000 to act as
successor to the Master Servicer under the Agreement. The Trustee and such
successor may agree upon the servicing compensation to be paid, which in no
event may be greater than the compensation to the Master Servicer under the
Agreement.
The Trustee will be under no obligation to exercise any of the trusts
or powers vested in it by the Agreement or to make any investigation of
matters arising thereunder or to institute, conduct or defend any
litigation thereunder or in relation thereto at the request, order or
direction of any of the holders of the Certificates of the related Series
unless such Certificateholders have offered to the Trustee reasonable
security or indemnity against the costs, expenses and liabilities which may
be incurred therein or thereby.
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.
Nevertheless, no amendment shall (i) reduce in any manner the amount of, or
delay the timing of, payments received on the Mortgage Assets that are
required to be distributed on any Certificate without the consent of the Holder
of such Certificate, (ii) adversely affect in any material respect the
interests of the Holders of any Class of Certificates in a manner other than
as described in (i) without the consent of the Holders of Certificates of such
Class evidencing 66% of the voting rights of such class, or (iii) reduce the
aforesaid percentage of Certificateholders required to consent to any such
amendment unless each holder of a Certificate consents. A Certificate
Insurer may obtain the right to exercise all voting rights of the
holders of Certificates. The Agreement may also be amended by the parties
thereto without the consent of Certificateholders for the purpose of, among
other things, (i) curing any ambiguity, (ii) correcting or supplementing any
provisions thereof which may be inconsistent with any other provision
thereof, (iii) modifying, eliminating or adding to any of the provisions
of the Agreement to such extent as shall be necessary or appropriate to
maintain the qualification of the Trust (or certain assets thereof) either as
a REMIC or as a grantor trust under the Code at all times that any
Certificates are outstanding or (iv) making any other provision with respect to
matters or questions arising under the Agreement or matters arising with respect
to the Trust which are not covered by the Agreement and which shall not be
inconsistent with the provisions of the Agreement, provided in each case
that such action shall not adversely affect in any material respect
the interests of any Certificateholder. Any such amendment or supplement
shall be deemed not to adversely affect in any material respect any
Certificateholder if there is delivered to the Trustee written notification
from each Rating Agency that provides, at the request of the Depositor, 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.
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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 Termination." In no event, however, will any Trust continue beyond the
expiration of 21 years from the death of the survivor of certain persons
described in the related Agreement. Written notice of termination of the
Agreement will be given to each Certificateholder, and the final
distribution will be made only upon surrender and cancellation of the
Certificates of the related Series at the corporate trust office of the
Trustee or its agent.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
General
The following discussion contains summaries of certain legal aspects
of mortgage loans which are general in nature. Because such legal aspects are
governed by applicable state law (which laws may differ substantially), the
summaries do not purport to be complete nor to reflect the laws of any
particular state, nor to encompass the laws of all states in which the security
for the Mortgage Loans is situated.
The Mortgage Loans
Single Family Loans, Multi-Family Loans, Conventional Home
Improvement Loans, Title I Loans and HELOCs. The Single Family Loans,
Multi-Family Loans, Conventional Home Improvement Loans, Title I Loans and
HELOCs generally will be secured by mortgages, deeds of trust, security deeds
or deeds to secure debt, depending upon the prevailing practice in the state
in which the related Mortgaged Premises is located. A mortgage creates a lien
upon the real property encumbered by the mortgage, which lien is generally not
prior to liens for real estate taxes and assessments. Priority between
mortgages depends on their terms and generally on any order of recording with
a state or county office. There are two parties to a mortgage, the
mortgagor, who is the borrower and owner of the mortgaged premises, and the
mortgagee, who is the lender. The mortgagor delivers to the mortgagee a note
or bond and the mortgage. Although a deed of trust is similar to a mortgage,
a deed of trust has three parties: the trustor, who is the borrower and
homeowner (similar to the mortgagor); the beneficiary, who is the lender
(similar to a mortgagee); and the trustee, who is a third-party grantee.
Under a deed of trust, the borrower grants the property, irrevocably until
the debt is paid, in trust, generally with a power of sale, to the trustee to
secure payment of the obligation. A security deed and a deed to secure debt
are special types of deeds which indicate on their face that they are granted
to secure an underlying debt. By executing a security deed or deed to secure
debt, the grantor conveys title to, as opposed to merely creating a lien upon,
the subject property to the grantee until such time as the underlying debt is
repaid. The mortgagee's authority under a mortgage, the trustee's authority
under a deed of trust and the grantee's authority under a security deed or deed
to secure debt are governed by law and, with respect to some deeds of trust,
the directions of the beneficiary.
Condominiums. Certain of the Mortgage Loans may be loans secured by
condominium units. The condominium building may include one or more multi-unit
buildings, or a group of buildings whether or not attached to each other,
located on property subject to condominium ownership. Condominium ownership
is a form of ownership of real property wherein each owner is entitled to
the exclusive ownership and possession of his or her individual condominium
unit and also owns a proportionate undivided interest in all parts of the
condominium building (other than the individual condominium units) and all
areas or facilities, if any, for the common use of the condominium units. The
condominium unit owners appoint or elect the condominium association to govern
the affairs of the condominium.
Cooperative Loans. Certain of the Mortgage Loans may be Cooperative
Loans. The Cooperative (i) owns all the real property that comprises the
project, including the land and the apartment building comprised of separate
dwelling units and common areas or (ii) leases the land generally by a
long-term ground lease and owns the apartment building. The Cooperative is
directly responsible for project management and, in most cases, payment of
real estate taxes and hazard and liability insurance. If there is a
blanket mortgage on the Cooperative and/or underlying land, as is
generally the case, the Cooperative, as project mortgagor, is also
responsible for meeting these mortgage obligations. A blanket mortgage
is ordinarily incurred by the Cooperative in connection with the
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construction or purchase of the Cooperative's apartment building. The
interest of the occupants under proprietary leases or occupancy agreements to
which the Cooperative is a party are generally subordinate to the interest of
the holder of the blanket mortgage in that building. If the Cooperative is
unable to meet the payment obligations arising under its blanket mortgage,
the mortgagee holding the blanket mortgage could foreclose on that mortgage
and terminate all subordinate proprietary leases and occupancy agreements.
In addition, the blanket mortgage on a Cooperative may provide financing in
the form of a mortgage that does not fully amortize with a significant
portion of principal being due in one lump sum at final maturity. The
inability of the Cooperative to refinance this mortgage or make such final
payment could lead to foreclosure by the mortgagee providing the financing.
A foreclosure in either event by the holder of the blanket mortgage could
eliminate or significantly diminish the value of, in the case of a Trust
including Cooperative Loans, the collateral securing the Cooperative Loans.
A Cooperative is owned by tenant-stockholders who, through ownership
of stock, shares or membership certificates in the corporation, receive
proprietary leases or occupancy agreements which confer exclusive rights
to occupy specific apartments or units. In general, a tenant-stockholder
of a Cooperative must make a monthly payment to the Cooperative
representing such tenant-stockholder's pro rata share of the Cooperative's
payments for its mortgage loans, real property taxes, maintenance expenses
and other capital or ordinary expenses. An ownership interest in a
Cooperative and accompanying rights is financed through a Cooperative share
loan evidenced by a promissory note and secured by a security interest in the
occupancy agreement or proprietary lease and in the related Cooperative
shares. The lender takes possession of the share certificate and a
counterpart of the proprietary lease or occupancy agreement, and a
financing statement covering the proprietary lease or occupancy agreement and
the Cooperative shares is filed in the appropriate state and local offices
to perfect the lender's interest in its collateral. Subject to the
limitations discussed below, upon default of the tenant- stockholder, the
lender may sue for judgment on the promissory note, dispose of the collateral
at a public or private sale or otherwise proceed against the collateral or
tenant-stockholder as an individual as provided in the security agreement
covering the assignment of the proprietary lease or occupancy agreement and the
pledge of the Cooperative shares.
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
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and costs, including attorney's fees, which may be recovered by a lender.
After the reinstatement period has expired without the default having been
cured, the borrower or junior lienholder no longer has the right to reinstate
the loan and must pay the loan in full to prevent the scheduled foreclosure
sale. If the mortgage or deed of trust is not reinstated, a notice of sale
must be posted in a public place and, in most states, published for a
specific period of time in one or more newspapers. In addition, some state
laws require that a copy of the notice of sale be posted on the property and
sent to all parties having an interest in the real property. See " Junior
Mortgage Loans; Rights of Senior Mortgagees."
A sale conducted in accordance with the terms of the power of sale
contained in a mortgage or deed of trust is generally presumed to be
conducted regularly and fairly, and a conveyance of the real property by the
referee confers absolute legal title to the real property to the purchaser,
free of all junior mortgages and free of all other liens and claims
subordinate to the mortgage or deed of trust under which the sale is made
(with the exception of certain governmental liens and any redemption rights
that may be granted to borrowers pursuant to applicable state law). The
purchaser's title is, however, subject to all senior liens, encumbrances and
mortgages. Thus, if the mortgage or deed of trust being foreclosed is a junior
mortgage or deed of trust, the referee or trustee will convey title to the
property to the purchaser, subject to the underlying first mortgage or deed of
trust and any other prior liens or claims. A foreclosure under a junior
mortgage or deed of trust generally will have no effect on any senior mortgage
or deed of trust, except that it may trigger the right of a senior mortgagee
or beneficiary to accelerate its indebtedness under a "due-on-sale" clause or
"due on further encumbrance" clause contained in the senior mortgage.
In case of foreclosure under either a mortgage or a deed of trust,
the sale by the receiver or other designated officer or by the trustee is a
public sale. Nevertheless, 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
applicable to REMICs. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES."
Foreclosure of a deed of trust is generally accomplished by a non-judicial
sale under a specific provision in the deed of trust which authorizes the
trustee to sell the property at public auction upon any default by the
borrower under the terms of the note or deed of trust. In some states, the
trustee must record a notice of default and send a copy to the
borrower-trustor, to any person who has recorded a request for a copy of any
notice of default and notice of sale, to any successor in interest to the
borrower-trustor, to the beneficiary of any junior deed of trust and to
certain other persons. In some states, a notice of sale must be posted in a
public place and published during a specific period of time in one or more
newspapers, posted on the property and sent to parties having an interest of
record in the property before such non- judicial sale takes place.
Courts have imposed general equitable principles upon foreclosure,
which are generally designed to mitigate the legal consequences to the
borrower of the borrower's defaults under the loan documents. Some courts have
been faced with the issue of whether federal or state constitutional provisions
reflecting due process concerns for fair notice require that borrowers under
deeds of trust receive notice longer than that prescribed by statute. For
the most part, these cases have upheld the notice provisions as being
reasonable or have found that the sale by a trustee under a deed of trust
does not involve sufficient state action to afford constitutional protection to
the borrower.
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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 Mortgage Loans; Rights of Senior Mortgagees
Some of the Mortgage Loans included in a Trust may be secured by
mortgages or deeds of trust that are junior to other mortgages or deeds of
trust. 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
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default is required to be given to a junior mortgagee or junior beneficiary,
and junior mortgagees or junior beneficiaries are seldom given notice of
defaults on senior mortgages. In order for a foreclosure action in some
states to be effective against a junior mortgagee or junior beneficiary, the
junior mortgagee or junior beneficiary must be named in any foreclosure
action, thus giving notice to junior lienors.
The standard form of the mortgage or deed of trust used by most
institutional lenders confers on the mortgagee or beneficiary the right under
some circumstances both to receive all proceeds collected under any
Standard Hazard Insurance Policy and all awards made in connection with any
condemnation proceedings, and to apply such proceeds and awards to any
indebtedness secured by the mortgage or deed of trust in such order as the
mortgagee or beneficiary may determine. Thus, in the event improvements on
the property are damaged or destroyed by fire or other casualty, or in the
event the property is taken by condemnation, the mortgagee or beneficiary
under any underlying senior mortgage may have the 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 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.
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Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory prohibitions which limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a
mortgage. In some states, statutes limit the right of the beneficiary or
mortgagee to obtain a deficiency judgment against the borrower following
foreclosure or sale under a deed of trust. A deficiency judgment would be a
personal judgment against the former borrower equal in most cases to the
difference between the amount due to the lender and the fair market value of
the real property sold at the foreclosure sale. As a result of these
prohibitions, it is anticipated that in many instances Servicers will not seek
deficiency judgments against defaulting borrowers.
In addition to anti-deficiency and related legislation, numerous
other federal and state statutory provisions, including the federal
bankruptcy laws and state laws affording relief to debtors, may interfere with
or affect the ability of the secured mortgage lender to realize upon collateral
and/or enforce a deficiency judgment. For example, if a mortgagor is in a
proceeding under the federal Bankruptcy Code, a lender may not foreclose on
the mortgaged premises without the permission of the bankruptcy court. The
rehabilitation plan proposed by the debtor may provide, if the court determines
that the value of the mortgaged premises is less than the principal
balance of the mortgage loan, for the reduction of the secured
indebtedness to the value of the mortgaged premises as of the date of the
commencement of the bankruptcy, rendering the lender a general unsecured
creditor for the difference, and also may reduce the monthly payments due
under such mortgage loan, change the rate of interest and alter the mortgage
loan repayment schedule. The effect of any such proceedings under the
federal Bankruptcy Code, including, but not limited to, any automatic stay,
could result in delays in receiving payments on the Mortgage Loans
underlying a Series of Certificates and possible reductions in the aggregate
amount of such payments. Some states also have homestead exemption laws which
would protect a principal residence from a liquidation in bankruptcy.
Federal and local real estate tax laws provide priority to certain
tax liens over the lien of a mortgage or secured party. Numerous federal
and state consumer protection laws impose substantive requirements upon
mortgage lenders in connection with the origination, servicing and
enforcement of Single Family Loans and Cooperative Loans. These laws include
the federal Truth-in-Lending Act, Real Estate Settlement Procedures Act,
Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting
Act and related states and regulations. These federal and state laws impose
specific statutory liabilities upon lenders who fail to comply with the
provisions of the law. In some cases, this liability may affect assignees
of mortgage loans.
Generally, Article 9 of the UCC governs foreclosure on Cooperative
shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted section 9-504 of the UCC to prohibit a deficiency award unless
the creditor establishes that the sale of the collateral (which, in the case
of a Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
Soldiers and Sailors Civil Relief Act of 1940
Under the Soldiers and Sailors Civil Relief Act of 1940, members
of all branches of the military on active duty, including draftees and
reservists in military service, (i) are entitled to have interest rates
reduced and capped at 6% per annum on obligations (including mortgage loans)
incurred prior to the commencement of military service for the duration of
military service, (ii) may be entitled to a stay of proceedings on any kind of
foreclosure or repossession action in the case of defaults on such obligations
incurred prior to the commencement of military service and (iii) may have the
maturity of such obligations incurred prior to the commencement of military
service extended, the payments lowered and the payment schedule readjusted
for a period of time after the completion of military service. The
benefits of (i), (ii), or (iii) above are subject to challenge by creditors,
however, and if, in the opinion of the court, the ability of a person to
comply with such obligations is not materially impaired by military service,
the court may apply equitable principles accordingly. If a borrower's
obligation to repay amounts otherwise due on a Mortgage Loan included in
the Trust for a Series is relieved pursuant to the Soldiers and Sailors
Civil Relief Act of 1940, neither the Servicer, the Master Servicer nor the
Trustee will be required to advance such amounts and any loss in respect
thereof may reduce the amounts available to be paid to the holders of the
Certificates of such Series. If so specified in the Prospectus Supplement
for a Series, any shortfalls in interest collections on Mortgage Loans
included in the Trust for such Series resulting from application of the
Soldiers and Sailors Civil Relief Act of 1940 will be allocated to each
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Class of Certificates of such Series that is entitled to receive interest in
respect of such Mortgage Loans in proportion to the interest that each such
Class of Certificates would have otherwise been entitled to receive in respect
of such Mortgage Loans had such interest shortfall not occurred.
Environmental Considerations
Environmental conditions may diminish the value of the Mortgage Assets
and give rise to liability of various parties, including federal, state and
local environmental laws, regulations and ordinances concerning hazardous
waste, hazardous substances, petroleum, underground and aboveground storage
tanks, solid waste, lead and copper in drinking water, asbestos, lead-based
paint and other materials ("Adverse Environmental Conditions") under the
federal Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA"). A secured party which participates in management
of a facility, participates in the management of the owner of a facility,
takes a deed in lieu of foreclosure or purchases a mortgaged premises at a
foreclosure sale may become liable in certain circumstances for the costs
of a remedial action ("Cleanup Costs") if hazardous substances have been
released or disposed of on the property. Such Cleanup Costs may be
substantial. The U.S. Environmental Protection Agency (the "EPA") has
established a Policy Towards Owners of Residential Property at Superfund
Sites (July 3, 1991) which provides that EPA will not proceed against owners
of residential property contaminated with hazardous substances under certain
circumstances. Similarly, EPA and the Department of Justice have adopted a
policy not to proceed against lenders which are acting primarily to protect a
security interest at the inception of loan, during a workout, in foreclosure
or after foreclosure or the taking of a deed in lieu of foreclosure. Policy
on CERCLA Enforcement Against lenders and Government Entities that Acquire
Property Involuntarily (September 22, 1995). These policies are not binding on
the EPA, a state or third parties who may have a cause of action under CERCLA,
however, and are subject to certain limitations and conditions. Many state or
local laws, regulations or ordinances may also require owners or operators of
property (which may include a lender in certain circumstances) to incur
Cleanup Costs if hazardous substances, hazardous wastes, petroleum or solid
waste are released or otherwise exist on the property. 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.
It is possible that no environmental assessment or a very limited
environmental assessment of the Mortgaged Premises was conducted and no
representations or warranties are made by the Depositor or the Seller
to the Trustee or Certificateholders as to the absence or effect of Adverse
Environmental Conditions on any of the Mortgaged Premises. In addition, the
Servicers have not made any representations or warranties or assumed any
liability with respect to the absence or effect of Adverse Environmental
Conditions on any Mortgaged Premises or any casualty resulting from the
presence or effect of Adverse Environmental Conditions, and any loss or
liability resulting from the presence or effect of such Adverse
Environmental Conditions will reduce the amounts otherwise available to pay to
the holders of the Certificates.
If so specified in the Prospectus Supplement for a Series, the
Servicers are not permitted to foreclose on any Mortgaged Premises without
the approval of the Master Servicer or the Trustee. The Master Servicer or
the Trustee 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 or the Trustee 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.
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"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. The Garn-St. Germain Depository
Institutions Act of 1982 (the "Act") preempts 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. 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. Late charges and
prepayment fees (to the extent permitted by law and not waived by the
Servicers) will generally 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 DEPOSITOR
Saxon Asset Securities Company was incorporated in Virginia on May
6, 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"). Dominion Capital is a wholly owned
subsidiary of Dominion Resources, Inc., a Virginia corporation ("Dominion
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Resources"). None of Dominion Resources, Dominion Capital, Dominion Mortgage
or the Depositor has guaranteed, or is otherwise obligated with respect
to, the Certificates of any Series. The principal executive offices of the
Depositor are located at 4880 Cox Road, Glen Allen, Virginia 23060, and the
telephone number of the Depositor is (804) 967-7400. The Depositor 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
Depositor's Articles of Incorporation limit the Depositor's business to the
foregoing and place certain other restrictions on the Depositor s
activities.
USE OF PROCEEDS
Substantially all the net proceeds from the sale of the Certificates
of each Series will be applied by the Depositor to purchase the Mortgage
Assets assigned to the Trust underlying such Series and to fund any Pre-Funding
Account.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the anticipated material
federal income tax consequences of the purchase, ownership and disposition of
two general types of Certificates: (i) Certificates ("REMIC Certificates")
representing interests in all or a portion of a Trust ("REMIC Mortgage Pool")
for which an election is made to treat it as a real estate mortgage investment
conduit ("REMIC") under Code Sections 860A through 860G (the "REMIC
Provisions") and (ii) Certificates ("Trust Certificates") representing
certain interests in a Trust Fund for which such an election is not made. The
discussion is based upon the advice of Arter & Hadden, special counsel to the
Depositor. Arter & Hadden has delivered to the Depositor their opinion,
which addresses issues identified below as being covered thereby and states that
the discussion of federal income tax issues in this section accurately sets
forth their views on those issues. The discussion reflects the applicable
provisions of: the Internal Revenue Code of 1986, as amended (the "Code");
the final regulations on REMICs (the "REMIC Regulations") promulgated on
December 23, 1992; the final regulations under Sections 1271 through 1273
and 1275 of the Code (the "OID Regulations") concerning debt instruments
promulgated on January 21, 1994; the final regulations concerning debt
instruments providing for contingent payments (the "1996 Contingent Payment
Regulations") promulgated on June 11, 1996; the final mark-to- market
regulations under Section 475 (the "Mark-To-Market regulations")
promulgated December 31, 1996; the proposed regulations concerning
withholding for foreign persons (the "Proposed Withholding Regulations")
published on April 15, 1996; and the proposed regulations concerning
amortization of premium (the "Proposed Premium Regulations") published on
June 27, 1996. The discussion does not, however, purport to cover all
federal income tax consequences applicable to particular investors, some of
which may be subject to special rules. In addition, the authorities on which
the discussion is based are subject to change or differing interpretation, and
any change or differing interpretation could be applied retroactively. In some
instances where the Treasury Department has not adopted regulations
implementing provisions of the Code, the discussion cites the views expressed
in the Conference Committee Report (the "Committee Report") to the Tax
Reform Act of 1986 which enacted the Code. The discussion does not address
the state or local tax consequences of the purchase, ownership and
disposition of Certificates. Investors should consult their own tax advisers
in determining the federal, state, local, or other tax consequences to them of
the purchase, ownership and disposition of the Certificates.
REMIC Certificates
With respect to each series of REMIC Certificates relating to a REMIC
Mortgage Pool, Arter & Hadden, special counsel for the Depositor, will deliver
their opinion generally to the effect that, assuming that (i) a REMIC election
is timely made in the required form, (ii) there is ongoing compliance with
all provisions of the related Agreement and (iii) certain representations
set forth in the Agreement are true, such REMIC Mortgage Pool will qualify
as a REMIC and the classes of interests offered will be considered to be
"regular interests" or "residual interests" in that REMIC Mortgage Pool within
the meaning of the REMIC Provisions. REMICs may issue one or more classes of
"regular" interests and must issue one and only one class of "residual"
interest. A REMIC Certificate representing a regular interest in a REMIC
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Mortgage Pool will be referred to as a "REMIC Regular Certificate" and a REMIC
Certificate representing a residual interest in a REMIC Mortgage Pool will be
referred to as a "REMIC Residual Certificate."
If an entity elects to be treated as a REMIC but fails to comply with
one or more of the ongoing requirements of the Code for REMIC status during
any taxable year, the entity will not qualify as a REMIC for such year and
thereafter. In such event, the entity may be subject to taxation as a
separate corporation, and the Certificates issued by the entity may not be
accorded the status described below under the heading "Status of REMIC
Certificates". In the case of an inadvertent termination of REMIC status,
the Treasury Department has authority to issue regulations providing relief;
however, sanctions, such as the imposition of a corporate tax on all or a
portion of the entity's income for the period during which the requirements
for REMIC status are not satisfied, may accompany any such relief.
Among the ongoing requirements to qualify for REMIC treatment is
that substantially all the assets of the REMIC Mortgage Pool (as of the
close of the third calendar month beginning after the creation of the
REMIC and continually thereafter) must consist of only "qualified mortgages"
and "permitted investments". A "Qualified Mortgage" means: (a) any
obligation (including any participation or certificate of beneficial
ownership therein) which is principally secured by an interest in real
property (including for this purpose any obligation secured by stock held by a
person as a tenant stockholder in a cooperative housing corporation) and
which is transferred to the REMIC on the Closing Date in exchange for
REMIC Certificates or is purchased within three months of the Closing Date, (b)
any qualified replacement mortgage, (c) any regular interest in another REMIC
transferred to the REMIC on the Closing Date in exchange for REMIC
Certificates, or (d) beginning on September 1, 1997, certain regular interests
in a financial asset securitization investment trust. The REMIC
Regulations treat an obligation secured by a manufactured home that has a
minimum of 400 square feet of living space and a minimum width in excess of
102 inches and that is of a kind customarily used at a fixed location as an
obligation secured by real property without regard to the treatment of the
obligation or the property under state law.
Taxation of REMIC Regular Certificates. Except as otherwise stated in
this discussion, the REMIC Regular Certificates will be treated for federal
income tax purposes as debt instruments issued by the REMIC Mortgage Pool and
not as ownership interests in the REMIC Mortgage Pool or its assets. In
general, interest, original issue discount and market discount paid or accrued
on a REMIC Regular Certificate will be treated as ordinary income to the
holder of such REMIC Regular Certificate. Distributions in reduction of the
stated redemption price at maturity of the REMIC Regular Certificate will be
treated as a return of capital to the extent of such holder's basis in
such REMIC Regular Certificate. Holders of REMIC Regular Certificates that
otherwise report income under a cash method of accounting will be required to
report income with respect to REMIC Regular Certificates under an accrual
method.
Original Issue Discount. Certain REMIC Regular Certificates may be
issued with "original issue discount" within the meaning of Code Section
1273(a). Holders of REMIC Regular Certificates issued with original issue
discount generally will be required to include original issue discount in
income as it accrues, in accordance with a constant yield method that takes
into account the compounding of interest, in advance of the receipt of the
cash attributable to such income. The Master Servicer Certificateholders
will receive reports annually (or more frequently if required) to the
contracting Internal Revenue Service ("IRS") and to Certificateholders such
information with respect to the original issue discount accruing on the REMIC
Regular Certificates as may be required under Code Section 6049 and the
regulations thereunder. See "Reporting and Other Administrative Matters of
REMICs".
Rules governing original issue discount are set forth in Code
Sections 1271 through 1273 and 1275 and in the OID Regulations. Code Section
1272(a)(6) provides special original issue discount rules applicable to REMIC
Regular Certificates. The OID Regulations do not apply to debt instruments
subject to Code Section 1272(a)(6).
Code Section 1272(a)(6) requires that a mortgage prepayment assumption
("Prepayment Assumption") be used in computing the accrual of original issue
discount on REMIC Regular Certificates and for certain other federal income
tax purposes. The Prepayment Assumption is to be determined in the manner
prescribed in Treasury regulations. To date, no such regulations have been
promulgated. The Committee Report indicates that the regulations should
provide that the Prepayment Assumption, if any, used with respect to a
particular transaction must be the same as that used by the parties in
pricing the transaction. In reporting original issue discount a Prepayment
Assumption consistent with this standard will be used. Nevertheless, the
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Depositor does not make any representation that prepayment will in fact be
made at the rate reflected in the Prepayment Assumption or at any other
rate. Each investor must make its own decision as to the appropriate
prepayment assumption to be used in deciding to purchase any of the REMIC
Regular Certificates. The Prospectus Supplement with respect to a Series of
REMIC Certificates will disclose the Prepayment Assumption to be used in
reporting original issue discount, if any, and for certain other federal income
tax purposes.
The total amount of original issue discount on a REMIC Regular
Certificate is the excess of the "stated redemption price at maturity" of the
REMIC Regular Certificate over its "issue price". Except as discussed in
the following two paragraphs, in general, the issue price of a particular
class of REMIC Regular Certificates will be the price at which a substantial
amount thereof are first sold to the public (excluding bond houses and
brokers). The stated redemption price at maturity of a REMIC Regular
Certificate is equal to the total of all payments to be made on such
Certificate other than "qualified stated interest."
If a REMIC Regular Certificate is sold with accrued interest that
relates to a period prior to the issue date of such REMIC Regular Certificate,
the amount paid for the accrued interest will be treated instead as increasing
the issue price of the REMIC Regular Certificate. In addition, that portion of
the first interest payment in excess of interest accrued from the Closing Date
to the first Distribution Date will be treated for federal income tax
reporting purposes as includible in the stated redemption price at maturity
of the REMIC Regular Certificates, and as excludable from income when
received as a payment of interest on the first Distribution Date (except to
the extent of any accrued market discount as of that date). The OID
Regulations suggest, however, that some of or all this pre-issuance accrued
interest may be treated as a separate asset (and hence is not includible in a
REMIC Regular Certificate's issue price or stated redemption price at
maturity), whose cost is recovered entirely out of interest paid on the first
Distribution Date.
Under the OID Regulations, "qualified stated interest" is interest
that is unconditionally payable at least annually during the entire term of the
Certificate at either (i) a single fixed rate that appropriately takes into
account the length of the interval between payments or (ii) a current value of
a single "qualified floating rate" or "objective rate" (each, a "Single
Variable Rate"). A "current value" is the value of a variable rate on any day
that is no earlier than three months prior to the first day on which that
value is in effect and no later than one year following that day. A "qualified
floating rate" is a rate whose variations can reasonably be expected to
measure contemporaneous variations in the cost of newly borrowed funds in the
currency in which the debt instrument is denominated. Such a rate remains
qualified even though it is multiplied by (i) a fixed, positive multiple
greater than 0.65 but not exceeding 1.35, (ii) increased or decreased by a
fixed rate, or (iii) both (i) and (ii). Certain combinations of rates
constitute a single qualified floating rate, including (i) interest stated at
a fixed rate for an initial period of less than one year followed by a
qualified floating rate if the value of the floating rate at the Closing Date
is intended to approximate the fixed rate and (ii) two or more qualified
floating rates that can reasonably be expected to have approximately the same
values throughout the term of the debt instrument. A combination of such
rates is conclusively presumed to be a single floating rate if the values of
all rates on the Closing Date are within 0.25 percentage points of one
another. A variable rate that is subject to an interest rate cap, floor,
governor or similar restriction on rate adjustment may be a qualified floating
rate only if such restriction is fixed throughout the term of the instrument,
or is not reasonably expected as of the Closing Date to cause the yield on
the debt instrument to differ significantly from the expected yield absent the
restriction. An "objective rate" is a rate determined using a single fixed
formula and based on objective financial information or economic information
(excluding a rate based on information that is in the control of the issuer or
that is unique to the circumstances of a related party). A combination of
interest stated at a fixed rate for an initial period of less than one year
followed by an objective rate is treated as a single objective rate if the
value of the objective rate at the Closing Date is intended to approximate the
fixed rate, such a combination of rates is conclusively presumed to be a
single objective rate if the objective rate on the Closing Date does not
differ from the fixed rate by more than 0.25 percentage points. Under the
foregoing rules, some of the payments of interest on a REMIC Regular
Certificate bearing a fixed rate of interest for an initial period followed
by a qualified floating rate of interest in subsequent periods could be
treated as included in the stated redemption price at maturity if the initial
fixed rate were to differ sufficiently from the rate that would have been set
using the formula applicable to subsequent periods. REMIC Regular Certificates
other than such Certificates providing for variable rates of interest are not
anticipated to have stated interest other than "qualified stated interest,"
but, if any such REMIC Regular Certificates are so offered, appropriate
disclosures will be made in the Prospectus Supplement. Some of or all the
payments on REMIC Regular Certificates providing for the accretion of
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interest will be included in the stated redemption price at maturity of such
Certificates. Interest payments are unconditionally payable only if a late
payment or nonpayment is expected to be penalized or reasonable remedies
exist to compell payments. Certain debt securities may provide for default
remedies in the event of late payment or nonpayment of interest. The
interest on such securities will be unconditionally payable and constitute
qualified stated interest, not original issue discount. Nevertheless, absent
clarification of the OID Regulations, where debt securirites do not provide
for default remedies, the interest payments will be included in their stated
redemption prices at maturity and taxed as original issue discount. Any stated
interest in excess of qualified stated interest is included in the stated
redemption price at maturity.
Under a de minimis rule in the Code, as interpreted in the OID
Regulations, original issue discount on a REMIC Regular Certificate will be
considered to be zero if it is less than 0.25% of the stated redemption price
at maturity of the REMIC Regular Certificate multiplied by the number of
complete years to its weighted average maturity. For this purpose, the
weighted average maturity is computed as the sum of the products of each
payment (other than a payment of qualified stated interest) multiplied by a
fraction the numerator of which is the number of complete years from the
issue date until such payment is made and the denominator of which is the
stated redemption price at maturity. The IRS may take the position that this
rule should be applied taking into account the Prepayment Assumption and the
effect of any anticipated investment income. Under the OID Regulations, REMIC
Regular Certificates bearing only qualified stated interest except for any
"teaser" rate, interest holiday or similar provision are treated as subject to
the de minimis rule if the greater of the foregone interest or any excess of
stated principal balance over the issue price is less than such de minimis
amount.
The OID Regulations generally treat de minimis original issue
discount as includible in income as each principal payment is made, based
on the product of the total amount of such de minimis original issue
discount and a fraction, the numerator of which is the amount of such
principal payment and the denominator of which is the outstanding principal
balance of the REMIC Regular Certificate. The OID Regulations also permit a
Certificateholder to elect to accrue de minimis original issue discount
(together with stated interest, market discount and original issue discount)
into income currently based on a constant yield method. See "Taxation of Owners
of REMIC Regular Certificates Market Discount and Premium."
Each holder of a REMIC Regular Certificate must include in gross
income the sum of the "daily portions" of original issue discount on its
REMIC Regular Certificate for each day during its taxable year on which it
held such REMIC Regular Certificate. For this purpose, in the case of an
original holder of a REMIC Regular Certificate, a calculation will first be
made of the portion of the original issue discount that accrued during each
accrual period, generally each period that ends on a date that corresponds to
a Distribution Date on the REMIC Regular Certificate and begins on the first
day following the immediately preceding accrual period (or in the case of the
first such period, begins on the Closing Date). For any accrual period such
portion will equal the excess, if any, of (i) the sum of (A) the present value
of all the distributions remaining to be made on the REMIC Regular
Certificate, if any, as of the end of the accrual period that are included
in the stated redemption price at maturity and (B) distributions made on such
REMIC Regular Certificate during the accrual period of amounts included in the
stated redemption price at maturity over (ii) the adjusted issue price of
such REMIC Regular Certificate at the beginning of the accrual period. The
present value of the remaining distributions referred to in clause (i)(A)
of the preceding sentence will be calculated based on (i) the yield to
maturity of the REMIC Regular Certificate, calculated as of the Closing Date,
giving effect to the Prepayment Assumption, (ii) events (including actual
prepayments) that have occurred prior to the end of the accrual period and
(iii) the Prepayment Assumption. The adjusted issue price of a REMIC Regular
Certificate at the beginning of any accrual period will equal the issue price
of such Certificate, increased by the aggregate amount of original issue
discount with respect to such REMIC Regular Certificate that accrued in prior
accrual periods and reduced by the amount of any distributions made on such
REMIC Regular Certificate in prior accrual periods of amounts included in the
stated redemption price at maturity. The original issue discount accruing
during any accrual period will then be allocated ratably to each day during
the period to determine the daily portion of original issue discount for each
day. With respect to an accrual period between the Closing Date and the
first Distribution Date that is shorter than a full accrual period, the OID
Regulations permit the daily portions of original issue discount to be
determined according to any reasonable method.
A subsequent purchaser of a REMIC Regular Certificate that purchases
such REMIC Regular Certificate at a cost (not including payment for accrued
qualified stated interest) less than its remaining stated redemption price at
maturity will also be required to include in gross income, for each day on
which it holds such REMIC Regular Certificate, the daily portions of original
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issue discount with respect to such REMIC Regular Certificate, but reduced, if
such cost exceeds the "adjusted issue price", by an amount equal to the product
of (i) such daily portions and (ii) a constant fraction, the numerator of which
is such excess and the denominator of which is the sum of the daily portions
of original issue discount on such REMIC Regular Certificate for all days on
or after the day of purchase. The adjusted issue price of a REMIC Regular
Certificate on any given day is equal to the sum of the adjusted issue price
(or, in the case of the first accrual period, the issue price) of the REMIC
Regular Certificate at the beginning of the accrual period during which such
day occurs and the daily portions of original issue discount for all days
during such accrual period prior to such day, reduced by the aggregate
amount of distributions made during such accrual period prior to such day other
than distributions of qualified stated interest.
The qualified stated interest payable with respect to REMIC Regular
Certificates which are certain variable rate debt instruments not bearing
interest at a Single Variable Rate generally is determined under the OID
Regulations by converting them into fixed rate debt instruments. REMIC
Regular Certificates required to be so treated generally include those providing
for stated interest at (i) more than one qualified floating rate or (ii) a
single fixed rate and (a) one or more qualified floating rates or (b) a
single "qualified inverse floating rate" (each, a "Multiple Variable Rate").
A qualified inverse floating rate is an objective rate equal to a fixed rate
reduced by a qualified floating rate, the variations in which can reasonably
be expected to inversely reflect contemporaneous variations in the
qualified floating rate (disregarding permissible rate caps, floors,
governors and similar restrictions described above).
There is uncertainty concerning the application of Code Section
1272(a)(6) and the OID Regulations to REMIC Regular Certificates bearing
interest at one or more variable rates. In the absence of other authority,
the provisions of the OID Regulations governing variable rate debt instruments
will be used as a guide in adapting the provisions of Code Section
1272(a)(6) to such Certificates for the purpose of preparing reports
furnished to Certificateholders. REMIC Regular Certificates bearing
interest at a Single Variable Rate will take into account for each accrual
period an amount corresponding to the sum of (i) the qualified stated interest
accruing on the outstanding principal balance of the REMIC Regular Certificate
(as the stated interest rate for that Certificate varies from time to time)
and (ii) the amount of original issue discount that would have been
attributable to that period on the basis of a constant yield to maturity for a
bond issued at the same time and issue price as the REMIC Regular Certificate,
having the same principal balance and schedule of payments of principal as such
Certificate, subject to the same Prepayment Assumption, and bearing interest
at a fixed rate equal to the applicable qualified floating rate or qualified
inverse floating rate in the case of a REMIC Regular Certificate providing
for either such rate, or equal to the fixed rate that reflects the reasonably
expected yield on the Certificate in the case of a REMIC Regular Certificate
providing for an objective rate other than a qualified inverse floating rate,
in each case as of the issue date. Holders of REMIC Regular Certificates
bearing interest at a Multiple Variable Rate generally will take into
account interest and original issue discount under a similar methodology,
except that the amounts of qualified stated interest and original issue
discount attributable to such a Certificate first will be determined for
an "equivalent" debt instrument bearing fixed rates, the assumed fixed rates
for which are (a) for a qualified floating rate or qualified inverse floating
rate, such rate as of the Closing Date (with appropriate adjustment for
any differences in intervals between interest adjustment dates), and (b) for
any other objective rate, the fixed rate that reflects the yield that is
reasonably expected for the REMIC Regular Certificate. If the interest paid
or accrued with respect to a Multiple Variable Rate Certificate during an
accrual period differs from the assumed fixed interest rate, such difference
will be an adjustment (to interest or original issue discount, as applicable)
to the Certificateholder's taxable income for the taxable period or periods to
which such difference relates.
In the case of a REMIC Regular Certificate that provides for stated
interest at a fixed rate in one or more accrual periods and either one or
more qualified floating rates or a qualified inverse floating rate in other
accrual periods, the fixed rate is first converted into an assumed variable
rate. The assumed variable rate will be a qualified floating rate or a
qualified inverse floating rate according to the type of actual variable rate
provided by the Certificate and must be such that the fair market value of the
REMIC Regular Certificate as of issuance is approximately the same as the fair
market value of an otherwise identical debt instrument that provides for
the assumed variable rate in lieu of the fixed rate. The Certificate is
then subject to the determination of the amount and accrual of original issue
discount as described above, by reference to the hypothetical variable rate
instrument.
The provisions of the OID Regulations applicable to variable rate debt
instruments may not apply to some REMIC Regular Certificates having variable
rates. If such a Certificate is not governed by the provisions of the OID
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Regulations applicable to variable rate debt instruments, it may be subject to
the 1996 Contingent Debt Regulations. The application of the 1996 Contingent
Payment Regulations to instruments such as variable rate REMIC Regular
Certificates is subject to differing interpretations. If Certificates with
variable rates are subject to the 1996 Contingent Payment Regulations, the
related Prospectus Supplement will include additional information about their
application.
Market Discount. The purchaser of a REMIC Regular Certificate at a
market discount, that is at a purchase price less than the stated redemption
price at maturity (or, in the case of a REMIC Regular Certificate issued
with original issue discount, the REMIC Regular Certificate's adjusted
issue price (as defined under "Taxation of REMIC Regular
Certificates -- Original Issue Discount")), will recognize market discount
upon receipt of each payment of principal. In particular, such a holder
will generally be required to allocate each payment of principal on a REMIC
Regular Certificate first to accrued market discount and to recognize ordinary
income to the extent such principal payment does not exceed the aggregate
amount of accrued market discount on such REMIC Regular Certificate not
previously included in income. Such market discount must be included in income
in addition to any original issue discount includible in income.
A Certificateholder may elect to include market discount in income
currently as it accrues rather than including it on a deferred basis in
accordance with the foregoing. Such election, if made, will apply to all
market discount bonds acquired by such Certificateholder on or after the first
day of the first taxable year to which such election applies. In addition, the
OID Regulations permit a Certificateholder to elect to accrue all interest
and discount, including de minimis market or original issue discount,
reduced by any premium, in income as interest, based on a constant yield
method. If such an election is made, the Certificateholder is deemed to have
made an election to include on a current basis market discount in income with
respect to all other debt instruments having market discount that such
Certificateholder acquires during the year of the election or thereafter.
Similarly, a Certificateholder that makes this election for a Certificate
that is acquired at a premium is deemed to have made an election to amortize
bond premium, as described below, with respect to all debt instruments having
amortizable bond premium that such Certificateholder owns or acquires. A
taxpayer may not revoke an election to accrue interest, discount and premium on
a constant yield method without the consent of the IRS.
Under a statutory de minimis exception, market discount with respect
to a REMIC Regular Certificate will be considered to be zero for purposes of
Code Sections 1276 through 1278 if it is less than 0.25% of the stated
redemption price at maturity of such REMIC Regular Certificate multiplied by
the number of complete years to maturity remaining after the date of its
purchase. In interpreting the de minimis rule with respect to original
issue discount, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same principle will be applied in
determining whether market discount is de minimis. It appears that de minimis
market discount on a REMIC Regular Certificate would be treated in a manner
similar to de minimis original issue discount. See "Taxation of REMIC Regular
Certificates -- Original Issue Discount." Such treatment would result in de
minimis market discount being included in income at a slower rate than market
discount would be required to be included using the method described in the
preceding paragraph.
The Treasury Department is authorized to issue regulations providing
for the method for accruing market discount of more than a de minimis
amount on debt instruments the principal of which is payable in more
than one installment. Nevertheless, no such regulations have been issued.
Until regulations are issued, certain rules described in the Committee Report
might apply. Under those rules, the holder of a bond purchased with more than
de minimis market discount may elect to accrue such market discount either on
the basis of a constant yield method or on the basis of the appropriate
proportionate method described below. Under the proportionate method for
obligations issued with original issue discount, the amount of market
discount that accrues during a period is equal to the product of (i) the total
remaining market discount multiplied by (ii) a fraction the numerator of which
is the original issue discount accruing during the period and the denominator
of which is the total remaining original issue discount at the beginning of
the period. The Prepayment Assumption, if any, used in calculating the
accrual of original issue discount should be used in calculating the accrual
of market discount. Under the proportionate method for obligations issued
without original issue discount, the amount of market discount that accrues
during a period is equal to the product of (i) the total remaining market
discount multiplied by (ii) a fraction the numerator of which is the amount
of stated interest paid during the accrual period and the denominator of
which is the total amount of stated interest remaining to be paid at the
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beginning of the period. Because regulations have not been issued, it is not
possible to predict what effect such regulations might have on the tax
treatment of a REMIC Regular Certificate purchased at a discount in the
secondary market.
A Certificateholder generally will be required to treat a portion of
any gain on sale or exchange of a REMIC Regular Certificate as ordinary
income to the extent of the market discount accrued to the date of
disposition under one of the foregoing methods less market discount
previously reported as ordinary income as distributions in reduction of the
stated redemption price at maturity were received. See further "Sales of
REMIC Certificates" below. A Certificateholder may be required to defer a
portion of its interest deductions for the taxable year attributable to any
indebtedness incurred or continued to purchase or carry such REMIC Regular
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 such holder elects to include market discount in income
currently as it accrues on all market discount instruments acquired by such
holder in that taxable year or thereafter, the interest expense deferral rule
described above will not apply.
Premium. A REMIC Regular Certificate purchased at a cost (not
including payment for accrued qualified stated interest) greater than its
remaining stated redemption price at maturity will be considered to be
purchased at a premium. The holder of such a REMIC Regular Certificate may
elect to amortize such premium under the constant yield method. The OID
Regulations also permit Certificateholders to elect to include all
interest, discount and premium in income based on a constant yield method,
further treating the Certificateholder as having made the election to
amortize premium generally, as described above. The Committee Report indicates
a Congressional intent that the same rules that apply to accrual of market
discount on installment obligations also apply in amortizing premium under Code
Section 171 on installment obligations such as the REMIC Regular Certificates.
The Proposed Premium Regulations describe the constant yield method
under which premium is amortized and provide that the resulting offset to
interest income may be taken into account only as a Certificateholder takes the
corresponding interest income into account under such holder's regular
accounting method. In the case of instruments that may be called or repaid
prior to maturity, the Proposed Premium Regulations provide that the premium
is calculated by assuming that the issuer will exercise its redemption rights
in the manner that maximizes the Certificateholder's yield and the
Certificateholder will exercise its option in a manner that maximizes the
Certificateholder's yield. The Proposed Premium Regulations are proposed to be
effective for debt instruments acquired on or after the date 60 days after
publication of final regulations. The Proposed Premium Regulations do not apply
to debt instruments subject to Code Section 1272(a)(b). Nevertheless, if a
Certificateholder elects to amortize premium for the taxable year containing
such effective date, the Proposed Premium Regulations will apply to all the
Certificateholder's debt instruments held on or after the first day of that
taxable year. It cannot be predicted at this time whether the Proposed Premium
Regulations will become effective or what, if any, modifications will be made
to them prior to their becoming effective.
Treatment of Subordinated Certificates. REMIC Regular Certificates
may include one or more Classes of Subordinated Certificates. Holders of
Subordinated Certificates will be required to report income with respect to
such Certificates on the accrual method without giving effect to delays and
reductions in distributions attributable to defaults or delinquencies on any
Mortgage Loans, except possibly, in the case of income that constitutes
qualified stated interest, to the extent that it can be established that such
amounts are uncollectible. As a result, the amount of income reported by a
Certificateholder of a Subordinated Certificate in any period could exceed the
amount of cash distributed to such Certificateholder in that period.
Although not entirely clear, it appears that: (a) a holder who holds
a Subordinated Regular REMIC Certificate in the course of a trade or business
or a corporate holder generally should be allowed to deduct as an ordinary
loss any loss sustained on account of its partial or complete worthlessness
and (b) a noncorporate holder who does not hold a Subordinated Regular REMIC
Certificate in the course of a trade or business generally should be allowed
to deduct as a short-term capital loss any loss sustained on account of
its complete worthlessness. Special rules are applicable to banks and
thrift institutions. Holders of Subordinated Certificates should consult their
own tax advisers regarding the appropriate timing, character and amount of any
loss sustained with respect to Subordinated Certificates.
Status of REMIC Certificates. REMIC Certificates held by a domestic
building and loan association will constitute a "regular or residual . . .
interest in a REMIC" within the meaning of Code Section 7701(a)(19)(C)(xi) in
the same proportion that the assets of the REMIC Mortgage Pool underlying such
Certificates would be treated as "loans secured by an interest in real
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property" within the meaning of Code Section 7701(a)( 19)(C)(v) or as
other assets described in Code Section 7701 (a)(19)(C)(i) through (x).
REMIC Certificates held by a real estate investment trust will constitute
"real estate assets" within the meaning of Code Section 856(c)(5)(A), and any
amount includible in gross income with respect to the REMIC Certificates will
be considered "interest on obligations secured by mortgages on real
property or on interests in real property" within the meaning of Code
Section 856(c)(3)(B) in the same proportion that, for both purposes, the
assets and income of the REMIC would be treated as "interests in real property"
as defined in Code Section 856(c)(6)(C) or, as provided in the Committee
Report, as "real estate assets" as defined in Code Section 856(c)(6)(B)) and
as "interest on obligations secured by mortgages on real property or on
interests in real property", respectively. See, in this regard,
"Characterization of Investments in Trust Certificates -- Buydown Mortgage
Loans," below. Moreover, if 95% or more of the assets qualify for any of the
foregoing treatments, the REMIC Certificates (and income thereon) will
qualify for the corresponding status in their entirety. The investment of
amounts in any reserve fund in non-qualifying assets would, and, holding
property acquired by foreclosure pending sale might, reduce the amount of the
REMIC Certificates that would qualify for the foregoing treatment. The REMIC
Regulations provide that payments on Qualified Mortgages held pending
distribution are considered part of the Qualified Mortgages for purposes of
Code Section 856(c)(5)(A); it is unclear whether such collected payments
would be so treated for purposes of Code Section 7701(a)(19)(C)(v), but there
appears to be no reason why analogous treatment should be denied. The
determination as to the percentage of the REMIC's assets (or income) that
will constitute assets (or income) described in the foregoing sections of
the Code will be made with respect to each calendar quarter based on the
average adjusted basis (or average amount of income) of each category of the
assets held (or income accrued) by the REMIC during such calendar quarter. The
REMIC will report those determinations to Certificateholders in the manner and
at the times required by applicable Treasury regulations. The Prospectus
Supplement or the related Current Report on Form 8-K for each Series of REMIC
Certificates will describe the assets as of the Cut-off Date. REMIC
Certificates held by certain financial institutions will constitute an
"evidence of indebtedness" within the meaning of Code Section 582(c)(1).
For purposes of characterizing an investment in REMIC
Certificates, a contract secured by a Manufactured Home qualifying as a
"single family residence" under Code Section 25(e)(10) will constitute (i) a
"real estate asset" within the meaning of Code Section 856 and (ii) an asset
described in Code Section 7701(a)(19)(C).
Tiered REMIC Structures. For certain series of Certificates, two or
more separate elections may be made to treat designated portions of the
related Trust Fund as REMICs ("Tiered REMICs") for federal income tax purposes.
Upon the issuance of any such series of Certificates, Arter & Hadden, special
counsel to the Depositor, will deliver its opinion generally to the effect
that, assuming compliance with all provisions of the related Agreement, the
Tiered REMICs will each qualify as a REMIC and the REMIC Certificates issued
by the Tiered REMICs will be considered to evidence ownership of REMIC
Regular Certificates or REMIC Residual Certificates in the related REMIC
within the meaning of the REMIC Provisions. Solely for purposes of
determining whether the REMIC Certificates will be "real estate assets"
within the meaning of Code Section 856(c)(5)(A), and assets described in Code
Section 7701(a)(19)(C), and whether the income on such Certificates is
"interest" described in Code Section 856(c)(3)(B), the Tiered REMICs will be
treated as one REMIC.
Taxation of REMlC Residual Certificates. An owner of a REMIC
Residual Certificate ("Residual Owner") generally will be required to report
its daily portion of the taxable income or, subject to the limitation
described below in "Basis Rules and Distributions", the net loss of the REMIC
Mortgage Pool for each day during a calendar quarter that the Residual Owner
owned such REMIC Residual Certificate. For this purpose, the daily portion will
be determined by allocating to each day in the calendar quarter, using a 30
days per month/90 days per quarter/360 days per year counting convention, its
ratable portion of the taxable income or net loss of the REMIC Mortgage Pool
for such quarter, and by allocating the daily portions among the Residual
Owners (on such day) in accordance with their percentage of ownership
interests on such day. Any amount included in the gross income of, or allowed
as a loss to, any Residual Owner by virtue of the rule referred to in this
paragraph will be treated as ordinary income or loss. Taxable income from
Residual Certificates may exceed cash distributions with respect thereto in
any taxable year. For example, if Qualified Mortgages are acquired by a
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REMIC at a discount, then the Residual Owner may recognize original issue
discount as income without corresponding cash distributions. This result
could occur because a payment produces recognition by the REMIC of discount
on the Qualified Mortgages while all or a portion of such payment could be
used in whole or in part to make principal payments on REMIC Regular
Certificates issued without substantial discount.
The tax treatment of any payments received by a Residual Owner in
connection with the acquisition of such Certificate is unclear. Such payments
may be taken into account in determining the income of such holder.
Alternatively, a holder may take another position. Because of the uncertainty
concerning the treatment of such payments, Residual Owners should consult their
tax advisers concerning the treatment of such payments for income tax purposes.
Taxable Income or Net Loss of the REMIC Trust Fund. The taxable
income or net loss of the REMIC Mortgage Pool reflects a netting of income
from the Qualified Mortgages, any cancellation of indebtedness income due to
the allocation of realized losses to REMIC Regular Certificates and the
deductions and losses allowed to the REMIC Mortgage Pool. Such taxable income
or net loss for a given calendar quarter is determined in the same manner as
for an individual having the calendar year as his taxable year and using the
accrual method of accounting, with certain modifications. First, a deduction is
allowed for accruals of interest (including original issue discount) on the
REMIC Regular Certificates. Second, market discount equal to the excess of
any Qualified Mortgage's adjusted issue price (as determined under
"Taxation of REMIC Regular Certificates -- Market Discount and Premium")
over its fair market value at the time of its transfer to the REMIC Mortgage
Pool generally will be included in income as it accrues, based on a constant
yield method and on the Prepayment Assumption. For this purpose, the fair
market value of the Mortgage Loans will be treated as being equal to the
aggregate issue prices of the REMIC Regular Certificates and REMIC Residual
Certificates; if one or more classes of REMIC Regular Certificates or REMIC
Residual Certificates are retained by the Depositor, the value of such
retained interests will be estimated in order to determine the fair market
value of the Qualified Mortgages for this purpose. Third, no item of income,
gain, loss or deduction allocable to a prohibited transaction (see "Prohibited
Transactions and Other Possible REMIC Taxes") is taken into account. Fourth,
the REMIC Mortgage Pool generally may deduct only items that would be allowed
in calculating the taxable income of a partnership by virtue of Code Section
703(a)(2). Fifth, the limitation on miscellaneous itemized deductions
imposed on individuals by Code Section 67 does not apply at the REMIC
Mortgage Pool level to investment expenses such as trustee fees or the
servicing fees paid to the Master Servicer or sub-servicers, if any. See,
however, "Pass-Through of Servicing Fees". If the deductions allowed to the
REMIC Mortgage Pool exceed its gross income for a calendar quarter, such excess
will be the net loss for the REMIC Mortgage Pool for that calendar quarter.
Basis Rules and Distributions. A Residual Owner will not include any
distribution by a REMIC Mortgage Pool in gross income to the extent it is less
than the adjusted basis of such Residual Owner's interest in a REMIC Residual
Certificate. Such distribution will reduce the adjusted basis of such
interest, but not below zero. To the extent a distribution exceeds the
adjusted basis of the REMIC Residual Certificate, it will be treated as
gain from the sale of the REMIC Residual Certificate. See "Sales of REMIC
Certificates". The adjusted basis of a REMIC Residual Certificate is equal to
the amount paid for such REMIC Residual Certificate, increased by amounts
included in the income of the Residual Owner and decreased by distributions
and by net losses taken into account with respect to such interest. See
"Taxation of REMIC Residual Certificates -- Daily Portions".
A Residual Owner is not allowed to take into account any net loss for
any calendar quarter to the extent such net loss exceeds such Residual Owner's
adjusted basis in its REMIC Residual Certificate as of the close of such
calendar quarter (determined without regard to such net loss). Any loss
disallowed by reason of this limitation may be carried forward indefinitely
to future calendar quarters and, subject to the same limitation, may be used
to offset income from the REMIC Residual Certificate.
The effect of these basis and distribution rules is that a Residual
Owner may not amortize its basis in a REMIC Residual Certificate but may
only recover its basis through distributions, through the deduction of any
net losses of the REMIC Mortgage Pool or upon the sale of its REMIC Residual
Certificate. See "Sales of REMIC Certificates". The Residual Owner does,
however, receive reduced taxable income over the life of the REMIC because the
REMIC's basis in the underlying REMIC Mortgage Pool used to determine taxable
income or net loss includes the fair market value of the REMIC Regular
Certificates and REMIC Residual Certificates at the Closing Date, not the unpaid
principal balances of the REMIC Mortgage Pool.
Excess Inclusions. "Excess inclusions" with respect to a REMIC
Residual Certificate are subject to special tax rules. With respect to a
Residual Owner, the excess inclusion for any calendar quarter is defined as the
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excess, if any, of the daily portions of taxable income over the sum of the
"daily accruals" for each day during such quarter that the Residual Owner held
such REMIC Residual Certificate. The daily accruals are determined by
allocating to each day during a calendar quarter its ratable portion of the
product of the "adjusted issue price" of the REMIC Residual Certificate at
the beginning of the calendar quarter and 120 percent of the long-term
"applicable federal rate" (generally, an average of current yields on
Treasury securities of comparable maturity, and hereafter the "AFR") in effect
at the time of issuance of the REMIC Residual Certificate. For this purpose,
the adjusted issue price of a REMIC Residual Certificate as of the beginning
of any calendar quarter is the issue price of the REMIC Residual Certificate,
increased by the amount of daily accruals for all prior quarters and decreased
by any distributions made with respect to such REMIC Residual Certificate
before the beginning of such quarter. The issue price of a REMIC Residual
Certificate (a) if it is publicly offered is the initial offering price to
the public (excluding bond houses and brokers) at which a substantial amount of
the REMIC Residual Certificates were sold, or (b) if it is not public offered,
is its fair market value on the pricing date when the prices of the REMIC
Regular Certificates are fixed.
For Residual Owners, an excess inclusion may not be offset by
deductions, losses or loss carryovers from other activities. For Residual
Owners that are subject to tax on unrelated business taxable income (as
defined in Code Section 511), an excess inclusion is treated as unrelated
business taxable income. For Residual Owners that are nonresident alien
individuals or foreign corporations generally subject to United States
withholding tax, even if interest paid to such Residual Owners is generally
eligible for exemptions from such tax, an excess inclusion will be subject to
such tax and no tax treaty rate reduction or exemption may be claimed with
respect thereto. See "Foreign Investors in REMIC Certificates."
Alternative minimum taxable income for a Residual Owner is determined
without regard to the special rule that taxable income may not be less than
excess inclusions and may not be less than the excess inclusions for the year.
The amount of any alternative minimum tax net operating loss deductions must be
computed without regard to any excess inclusions.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Code Section
857(b)(2), excluding any net capital gain), will be allocated among the
shareholders of such trust in proportion to the dividends received by such
shareholders from such trust, and any amount so allocated will be treated as
an excess inclusion with respect to a REMIC Residual Certificate as if held
directly by such shareholder.
Noneconomic REMIC Residual Certificates. Under the REMIC
Regulations, transfers of "noneconomic" REMIC Residual Certificates are
disregarded for all federal income tax purposes if "a significant purpose of
the transfer was to enable the transferor to impede the assessment or
collection of tax". If such transfer is disregarded, the purported
transferor will continue to remain liable for any taxes due with respect to
the income on such "noneconomic" REMIC Residual Certificate. The REMIC
Regulations provide that a REMIC Residual Certificate is noneconomic unless,
at the time of its transfer and based on the Prepayment Assumption and any
required or permitted clean up calls or required liquidation provided for in
the REMIC's organizational documents: (1) the present value of the expected
future distributions (discounted using the AFR) on the REMIC Residual
Certificate equals at least the product of the present value of the anticipated
excess inclusions and the highest tax rate applicable to corporations for the
year of the transfer and (2) the transferor reasonably expects that the
transferee will receive distributions with respect to the REMIC Residual
Certificate at or after the time the taxes accrue on the anticipated excess
inclusions in an amount sufficient to satisfy the accrued taxes.
Accordingly, all transfers of REMIC Residual Certificates will be subject to
certain restrictions under the terms of the related. Agreement that are
intended to reduce the possibility of any such transfer being disregarded.
Such restrictions will require each party to a transfer to provide an
affidavit that no purpose of such transfer is to impede the assessment or
collection of tax, including certain representations as to the financial
condition of the prospective transferee. Prior to purchasing a REMIC Residual
Certificate, prospective purchasers should consider the possibility that a
purported transfer of such REMIC Residual Certificate by such a purchaser to
another purchaser at some future date may be disregarded in accordance with
the above-described rules, which would result in the retention of tax
liability by such purchaser. The applicable Prospectus Supplement will
disclose whether offered REMIC Residual Certificates may be considered
"noneconomic" residual interests under the REMIC Regulations; provided,
however, that any disclosure that a REMIC Residual Certificate will or will
not be considered "noneconomic" will be based upon certain assumptions, and the
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Depositor will make no representation that a REMIC Residual Certificate will
not be considered "noneconomic" for purposes of the above-described rules or
that a Residual Owner will receive distributions calculated pursuant to
such assumptions. See "Foreign Investors in REMIC Certificates" below for
additional restrictions applicable to transfers of certain REMIC Residual
Certificates to foreign persons.
Tax-Exempt Investors. Tax-exempt organizations (including employee
benefit plans) that are subject to tax on unrelated business taxable income
(as defined in Code Section 511) will be subject to tax on any excess
inclusions attributed to them as owners of Residual Certificates. Excess
inclusion income associated with a Residual Certificate may significantly
exceed cash distributions with respect thereto. See "Excess Inclusions".
Generally, tax-exempt organizations that are not subject to federal
income taxation on "unrelated business taxable income" pursuant to Code
Section 511 are treated as "disqualified organizations". Under provisions of
the Agreement, such organizations generally are prohibited from owning Residual
Certificates. See "Sales of REMIC Certificates".
Real Estate Investment Trusts. If the applicable Prospectus
Supplement so provides, a REMIC Mortgage Pool may hold Qualified Mortgages
bearing interest based wholly or partially on mortgagor profits, mortgaged
property appreciation, or similar contingencies. Such interest, if earned
directly by a real estate investment trust ("REIT"), would be subject to the
limitations of Code Sections 856(f) and 856(j). Treasury Regulations treat a
REIT holding a REMIC Residual Certificate for a principal purpose of avoiding
such Code provisions as receiving directly the income of the REMIC
Mortgage Pool, hence potentially jeopardizing its qualification for taxation
as a REIT and exposing such income to taxation as a prohibited
transaction at a 100 percent rate.
Mark-to-Market Rules. Code Section 475 generally requires that
securities dealers include securities in inventory at their fair market value,
recognizing gain or loss as if the securities were sold at the end of each
tax year. The Mark-to-Market Regulations provide that a REMIC Residual
Certificate is not treated as a security and thus may not be marked to
market.
Sales of REMIC Certificates. If a REMIC Certificate is sold, the
seller will recognize gain or loss equal to the difference between the amount
realized on the sale and its adjusted basis in the REMIC Certificate. The
adjusted basis of a REMIC Regular Certificate generally will equal the cost
of such REMIC Regular Certificate to the seller, increased by any original
issue discount or market discount included in the seller's gross income
with respect to such REMIC Regular Certificate and reduced by premium
amortization deductions and distributions previously received by the seller
of amounts included in the stated redemption price at maturity of such REMIC
Regular Certificate. The adjusted basis of a REMIC Residual Certificate will
be determined as described under "Taxation of REMIC Residual Certificates --
Basis Rules and Distributions." Gain from the disposition of a REMIC Regular
Certificate that might otherwise be treated as a capital gain will be treated
as ordinary income to the extent that such gain does not exceed the excess,
if any, of (i) the amount that would have been includible in such holder's
income had income accrued at a rate equal to 110% of the AFR as of the date of
purchase over (ii) the amount actually includible in such holder's income.
Except as otherwise provided under "Taxation of REMIC Regular Certificates
- -- Market Discount and Premium" and under Code Section 582(c), any
additional gain or any loss on the sale or exchange of a REMIC Certificate
will be capital gain or loss, provided such REMIC Certificate is held as a
capital asset (generally, property held for investment) within the meaning of
Code Section 1221. The Code currently provides for a top marginal tax rate
of 39.6% for individuals while maintaining a maximum marginal rate for the
long-term capital gains of individuals at 28%. There is no such rate
differential for corporations. In addition, the distinction between a capital
gain or loss and ordinary income or loss remains relevant for other purposes,
including limitations on the use of capital losses to offset ordinary income.
All or a portion of any gain from the sale of a REMIC Certificate that
might otherwise be capital gain may be treated as ordinary income (i) if such
Certificate is held as part of a "conversion transaction" as defined in Code
Section 1258(c), up to the amount of interest that would have accrued on the
holder's net investment in the conversion transaction at 120% of the
appropriate AFR in effect at the time the taxpayer entered into the transaction
reduced by any amount treated as ordinary income with respect to any prior
disposition or other termination of a position that was held as part of such
transaction or (ii) in the case of a noncorporate taxpayer that has made an
election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates.
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If a Residual Owner sells a REMIC Residual Certificate at a loss,
the loss will not be recognized if, within six months before or after the sale
of the REMIC Residual Certificate, such Residual Owner purchases another
residual interest in any REMIC or any interest in a taxable mortgage pool (as
defined in Code Section 7701 (i)) comparable to a residual interest in a
REMIC. Such disallowed loss will be allowed upon the sale of the other
residual interest (or comparable interest) if the rule referred to in the
preceding sentence does not apply to that sale. While the Committee Report
states that this rule may be modified by Treasury regulations, the REMIC
Regulations do not address this issue and it is not clear whether any such
modification will in fact be implemented or, if implemented, what its precise
nature or effective date would be.
Transfers of a REMIC Residual Certificate to certain "disqualified
organizations" are subject to an additional tax on the transferor in an amount
equal to the maximum corporate tax rate applied to the present value (using a
discount rate equal to the AFR) of the total anticipated excess inclusions
with respect to such residual interest for the periods after the transfer.
For this purpose, "disqualified organizations" includes the United States, any
state or political subdivision of a state, any foreign government or
international organization or any agency or instrumentality of any of the
foregoing; any tax- exempt entity (other than a Code Section 521 cooperative)
which is not subject to the tax on unrelated business income; and any rural
electrical or telephone cooperative. The anticipated excess inclusions must be
determined as of the date that the REMIC Residual Certificate is transferred
and must be based on events that have occurred up to the time of such
transfer, the Prepayment Assumption, and any required or permitted clean up
calls or required liquidation provided for in the REMIC's organizational
documents. The tax generally is imposed on the transferor of the REMIC
Residual Certificate, except that it is imposed on an agent for a disqualified
organization if the transfer occurs through such agent. The Agreement
requires, as a prerequisite to any transfer of a Residual Certificate, the
delivery to the Trustee of an affidavit of the transferee to the effect that
it is not a disqualified organization and contains other provisions designed
to render any attempted transfer of a Residual Certificate to a disqualified
organization void.
In addition, if a "pass-through entity" includes in income excess
inclusions with respect to a REMIC Residual Certificate, and a disqualified
organization is the record holder of an interest in such entity at any time
during any taxable year of such entity, then a tax will be imposed on such
entity equal to the product of (i) the amount of excess inclusions on the
REMIC Residual Certificate for such taxable year that are allocable to the
interest in the pass-through entity held by such disqualified organization and
(ii) the highest marginal federal income tax rate imposed on corporations. A
pass-through entity will not be subject to this tax for any period, however, if
the record holder of an interest in such entity furnishes to such entity (i)
such holder's social security number and a statement under penalties of
perjury that such social security number is that of the record holder or
(ii) a statement under penalties of perjury that such record holder is
not a disqualified organization. For these purposes, a "pass-through entity"
means any regulated investment company, real estate investment trust, trust,
partnership or certain other entities described in Code Section 860E(e)(6).
In addition, a person holding an interest in a pass-through entity as a
nominee for another person shall, with respect to such interest, be treated as a
pass-through entity.
Pass-Through of Servicing Fees. In general, Residual Owners take
into account taxable income or net loss of the related REMIC Mortgage Pool.
Consequently, expenses of the REMIC Mortgage Pool to serice providers,
such as servicing compensation of the Master Servicer and the subservicers
(if any), will be allocated to the holders of the REMIC Residual
Certificates, and therefore will not affect the income or deductions of
holders of REMIC Regular Certificates. In the case of a "single-class REMIC"
(as described below), however, such expenses and an equivalent amount of
additional gross income will be allocated among all holders of REMIC Regular
Certificates and REMIC Residual Certificates for purposes of the limitations
on the deductibility of certain miscellaneous itemized deductions by
individuals contained in Code Sections 56(b)(1) and 67. Generally, any holder
of a REMIC Residual Certificate and any holder of a REMIC Regular Certificate
issued by a "single-class REMIC" who is an individual, estate or trust
(including such a person that holds an interest in a pass-through entity
holding such a REMIC Certificate) are permitted to deduct such expenses in
determining regular taxable income only to the extent that such expenses
together with certain other miscellaneous itemized deductions of such
individual, estate or trust exceed 2% of adjusted gross income; such a holder
may not deduct such expenses to any extent in determining liability for
alternative minimum tax. Accordingly, REMIC Residual Certificates, and REMIC
Regular Certificates receiving an allocation of servicing compensation, may
not be appropriate investments for individuals, estates or trusts.
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A "single-class REMIC" is a REMIC that either (i) would be treated
as an investment trust under the provisions of Treasury Regulation Section
301.7701-4(c) in the absence of a REMIC election or (ii) is substantially
similar to such an investment trust and is structured with the principal
purpose of avoiding the allocation of investment expenses to holders of REMIC
Regular Certificates. The Master Servicer intends (subject to certain
exceptions which, if applicable, will be stated in the applicable Prospectus
Supplement) to treat each REMIC Mortgage Pool as other than a "single-class
REMIC," consequently allocating servicing compensation expenses and related
income amounts entirely to REMIC Residual Certificates.
Prohibited Transactions and Other Possible REMIC Taxes. The Code
imposes a tax on REMIC Mortgage Pools equal to 100% of the net income derived
from "prohibited transactions." In general, a prohibited transaction means
the disposition of a Qualified Mortgage other than pursuant to certain
specified exceptions, the receipt of income from a source other than a
Qualified Mortgage or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset
purchased with the payments on the Qualified Mortgages for temporary
investment pending distribution on the REMIC Certificates. The Code also
imposes a 100% tax on the value of any contribution of assets to the REMIC
after the Closing Date other than pursuant to specified exceptions, and
subjects "net income from foreclosure property" to tax at the highest
corporate rate. It is not anticipated that a REMIC Mortgage Pool will engage
in any such transactions or receive any such income.
Termination of a REMIC Mortgage Pool. In general, no special tax
consequences will apply to a holder of a REMIC Regular Certificate upon the
termination of the REMIC Mortgage Pool by virtue of the final payment or
liquidation of the last Mortgage Loan remaining in the REMIC Mortgage Pool. If
a Residual Owner's adjusted basis in its REMIC Residual Certificate at the time
such termination occurs exceeds the amount of cash distributed to such
Residual Owner in liquidation of its interest, then, although the matter is not
entirely free from doubt, it appears that the Residual Owner would be
entitled to a loss (which could be a capital loss) equal to the amount of such
excess.
Reporting and Other Administrative Matters of REMIC. Reporting of
interest income, including any original issue discount, with respect to REMIC
Regular Certificates is required annually, and may be required more frequently
under Treasury regulations. Certain holders of REMIC Regular Certificates
which are generally exempt from information reporting on debt instruments,
such as corporations, banks, registered securities or commodities brokers,
real estate investment trusts, registered investment companies, common
trust funds, charitable remainder annuity trusts and unitrusts, will be
provided interest and original issue discount income information and the
information set forth in the following paragraph upon request in accordance
with the requirements of the Treasury regulations. The information must be
provided by the later of 30 days after the end of the quarter for which the
information was requested, or two weeks after the receipt of the request. The
REMIC Mortgage Pool must also comply with rules requiring the face of a REMIC
Certificate issued at more than a de minimis discount to disclose the amount
of original issue discount and the issue date and requiring such information
to be reported to the Treasury Department.
The REMIC Regular Certificate information reports must include a
statement of the "adjusted issue price" of the REMIC Regular Certificate at the
beginning of each accrual period. In addition, the reports must include
information necessary to compute the accrual of any market discount that may
arise upon secondary trading of REMIC Regular Certificates. Because exact
computation of the accrual of market discount on a constant yield method
would require information relating to the holder's purchase price which the
REMIC Mortgage Pool may not have, it appears that this provision will only
require information pertaining to the appropriate proportionate method of
accruing market discount.
For purposes of the administrative provisions of the Code, REMIC
Mortgage Pools are treated as partnerships and the holders of Residual
Certificates are treated as partners. On of the Holders of the Residual
Interest will be the "tax matters person" with respect to the REMIC Mortgage
Pool in all respects, and will file federal income tax information returns
on behalf of the related REMIC Mortgage Pool.
As the tax matters person will, subject to certain notice
requirements and various restrictions and limitations, generally have the
authority to act on behalf of the REMIC Mortgage Pool and the Residual
Owners in connection with the administrative and judicial review of items of
income, deduction, gain or loss of the REMIC Mortgage Pool, as well as the
REMIC Mortgage Pool's classification. Residual Owners will generally be
required to report such REMIC Mortgage Pool items consistently with their
treatment on the REMIC Mortgage Pool's federal income tax information
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return and may in some circumstances be bound by a settlement agreement
between the person serving as the tax matters person, and the IRS concerning
any such REMIC Mortgage Pool item. Adjustments made to the REMIC Mortgage Pool
tax return may require a Residual Owner to make corresponding adjustments on
its return, and an audit of the REMIC Mortgage Pool's tax return, or the
adjustments resulting from such an audit, could result in an audit of a Residual
Owner's return.
Backup Withholding with Respect to REMIC Certificates.
Distribution of interest and principal on REMIC Regular Certificates, as
well as payment of proceeds from the sale of REMIC Certificates, may be
subject to the "backup withholding tax" under Code Section 3406 at a rate of
31 percent if recipients fail to furnish certain information, including
their taxpayer identification numbers, or otherwise fail to establish an
exemption from such tax. Any amounts deducted and withheld from a recipient
would be allowed as a credit against such recipient's federal income tax.
Furthermore, certain penalties may be imposed by the IRS on a recipient that is
required to supply information but that does not do so in the manner required.
Foreign Investors in REMIC Certificates. Except as qualified below,
payments made on a REMIC Regular Certificate to a REMIC Regular
Certificateholder that is not a U.S. Person, as hereinafter defined (a
"Non-U.S. Person"), or to a person acting on behalf of such a
Certificateholder, generally will be exempt from U.S. federal income and
withholding taxes, provided that (a) the holder of the Certificate is not
subject to U.S. tax as a result of a connection to the United States other
than ownership of such Certificate, (b) the holder of such Certificate signs a
statement under penalties of perjury that certifies that such holder is a
Non-U.S. Person, and provides the name and address of such holder, and (c) the
last U.S. Person in the chain of payment to the holder receives such statement
from such holder or a financial institution holding on its behalf and does not
have actual knowledge that such statement is false. If the holder does not
qualify for exemption, distributions of interest, including distributions in
respect of accrued original issue discount, to such holder may be
subject to a withholding tax rate of 30 percent, subject to reduction under an
applicable tax treaty.
"U.S. Person" means a citizen or resident of the United States, a
corporation, partnership or other entity treated as a corporation or
partnership for United States federal income tax purposes, created or
organized in or under the laws of the United States or any political
subdivision thereof, an estate that is subject to U.S. federal income tax
regardless of the source of its income or a trust if (i) a court within the
United States is able to exercise primary supervision over the administration
of the trust and (ii) one or more United States trustees have authority to
control all substantial decisions of the trust.
Holders of REMIC Regular Certificates should be aware that the IRS
may take the position that exemption from U.S. withholding taxes does not
apply to such a holder that also directly or indirectly owns 10 percent or
more of the REMIC Residual Certificates. Further, the foregoing rules will not
apply to exempt a "United States shareholder" (as such term is defined in Code
Section 951) of a controlled foreign corporation from taxation on such United
States shareholder's allocable portion of the interest or original issue
discount income earned by such controlled foreign corporation.
Amounts paid to a Residual Owner that is a Non-U.S. Person
generally will be treated as interest for purposes of applying the withholding
tax on Non-U.S. Persons with respect to income on its REMIC Residual
Certificate. It is unclear, however, whether distributions on REMIC Residual
Certificates will be eligible for the general exemption from withholding tax
that applies to REMIC Regular Certificates as described above. Treasury
Regulations provide that, for purposes of the portfolio interest exception,
payments to the foreign owner of a REMIC Residual Certificate are to be
considered paid on the obligations held by the REMIC Mortgage Pool, rather than
on the Certificate itself. Such payments will thus only qualify for the
portfolio interest exception if the underlying obligations held by the
REMIC Mortgage Pool would so qualify. Such withholding tax generally is
imposed at a rate of 30 percent but is subject to reduction under any tax
treaty applicable to the Residual Owner. Nevertheless, there is no exemption
from withholding tax nor may the rate of such tax be reduced, under a tax
treaty or otherwise, with respect to any distribution of income that is an
excess inclusion. Although no regulations have been proposed or adopted
addressing withholding on residual interests held by Non-U.S. Persons, the
provisions of the REMIC Regulations, relating to the transfer of residual
interests to Non-U.S. Persons may be read to imply that withholding with
respect to excess inclusion income is to be determined by reference to the
amount of the excess inclusion income rather than to the amount of cash
distributions. If the IRS were successfully to assert such a position, cash
distributions on Residual Certificates held by Non-U.S. Persons could be
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subject to withholding at rates as high as 100%, depending on the relationship
of accrued excess inclusion income to cash distributions with respect to such
Residual Certificates. See "Taxation of REMIC Residual Certificates -- Excess
Inclusions."
Certain restrictions relating to transfers of REMIC Residual
Certificates to and by investors who are Non U.S. Persons are also imposed by
the REMIC Regulations. First, transfers of REMIC Residual Certificates to a
Non-U.S. Person that have "tax avoidance potential" are disregarded for all
federal income tax purposes. If such transfer is disregarded, the purported
transferor of such a REMIC Residual Certificate to a Non-U.S. Person continues
to remain liable for any taxes due with respect to the income on such REMIC
Residual Certificate. A transfer of a REMIC Residual Certificate has tax
avoidance potential unless, at the time of the transfer, the transferor
reasonably expects (1) that the REMIC will distribute to the transferee
Residual Certificateholder amounts that will equal at least 30 percent of each
excess inclusion and (2) that such amounts will be distributed at or after the
time at which the excess inclusion accrues and not later than the close of
the calendar year following the calendar year of accrual. This rule does
not apply to transfers if the income from the REMIC Residual Certificate
is taxed in the hands of the transferee as income effectively connected
with the conduct of a U.S. trade or business. Second, if a Non-U.S. Person
transfers a REMIC Residual Certificate to a U.S. Person (or to a Non-U.S.
Person in whose hands income from the REMIC Residual Certificate would be
effectively connected) and the transfer has the effect of allowing the
transferor to avoid tax on accrued excess inclusions, that transfer is
disregarded for all federal income tax purposes and the purported Non-U.S.
Person transferor continues to be treated as the owner of the REMIC Residual
Certificate. Thus, the REMIC's liability to withhold 30 percent of the excess
inclusions is not terminated even though the REMIC Residual Certificate is no
longer held by a Non-U.S. Person.
The Proposed Withholding Regulations, if adopted in final form,
could affect the United States taxation of foreign investors in REMIC
Certificates. The Proposed Withholding Regulations are generally proposed to
be effective for payments after December 31, 1997, regardless of the issue
date of the REMIC Certificate with respect to which such payments are made,
subject to certain transition rules. The Proposed Withholding Regulations
would provide certain presumptions with respect to withholding for holders not
providing the required certifications to qualify for the withholding exemption
described above and would replace a number of current tax certification forms
with a single, restated form and standardize the period of time for which
withholding agents could rely on such certifications. The Proposed Withholding
Regulations would also provide rules to determine whether, for purposes of
United States federal withholding tax, interest paid to a Non-U.S. Person that
is an entity should be treated as paid to the entity or those holding an
interest in that entity.
Non-REMlC Trust Funds
Classification of Trust Funds. With respect to each series of Trust
Certificates for which no REMIC election is made and are not subject to
partnership treatment, Arter & Hadden, special counsel to the Depositor, will
deliver their opinion generally to the effect that the arrangements pursuant
to which such Trust Fund will be administered and such Trust Certificates
will be issued will not be classified as an association taxable as a
corporation and that each such Trust Fund will be classified as a trust whose
taxation will be governed by the provisions of subpart E, Part I, of
subchapter J of the Code.
A Trust Certificate representing an undivided equitable ownership
interest in the principal of the Mortgage Loans constituting the related
Trust Fund, together with interest thereon at a remittance rate (which may
be less than, greater than, or equal to the net rate on the related Mortgage
Assets) is referred to as a "Trust Fractional Certificate" and a Trust
Certificate representing an equitable ownership of all or a portion of the
interest paid on each Mortgage Loan constituting the related Trust Fund (net of
normal servicing fees) is referred to as a "Trust Interest Certificate."
Characterization of Investments in Trust Certificates.
Trust Fractional Certificates. In the case of Trust Fractional
Certificates, Arter & Hadden, special counsel to the Depositor, will deliver
their opinion that, in general (and subject to the discussion below under
"Buydown Mortgage Loans"), (i) Trust Fractional Certificates held by a thrift
institution taxed as a "domestic building and loan association" will
represent "loans . . . secured by an interest in real property" within the
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meaning of Code Section 7701(a)(19)(C)(v); (ii) Trust Fractional Certificates
held by a real estate investment trust will represent "real estate assets"
within the meaning of Code Section 856(c)(5)(A) and interest on Trust Fractional
Certificates will be considered "interest on obligations secured by mortgages
on real property or on interests in real property" within the meaning of Code
Section 856(c)(5)(B); and (iii) Trust Fractional Certificates acquired by a
REMIC in accordance with the requirements of Code Section 860G (a)(3)(A)(i) and
(ii) or Section 860G(a)(4)(B) will be treated as "qualified mortgages" within
the meaning of Code Section 860D(a)(4).
Trust Interest Certificates. Although there appears to be no
policy reason not to accord to Trust Interest Certificates the treatment
described above for Trust Fractional Certificates to Trust Interest
Certificates, there is no authority addressing such characterization for
instruments similar to Trust Interest Certificates. Consequently, it is unclear
to what extent, if any, (1) a Trust Interest Certificate owned by a
"domestic building and loan association" within the meaning of Code Section
7701 (a) (19) will be considered to represent "loans . . . secured by an
interest in real property" within the meaning of Code Section
7701(a)(19)(C)(v); and (2) a real estate investment trust which owns a
Trust Interest Certificate will be considered to own "real estate assets"
within the meaning of Code Section 856(c)(5)(A), and interest income thereon
will be considered "interest on obligations secured by mortgages on real
property" within the meaning of Code Section 856(c)(3)(B). . Prospective
purchasers to which such characterization of an investment in Trust Interest
Certificates is material should consult their own tax advisers regarding
whether the Trust Interest Certificates, and the income therefrom, will be so
characterized.
Buydown Mortgage Loans. It is contemplated that the assets of certain
Trust Funds may include Buydown Mortgage Loans. The characterization of an
investment in Buydown Mortgage Loans will depend upon the precise terms of
the related Buydown Agreement. There are no directly applicable precedents
with respect to the federal income tax treatment or the
characterization of investments in Buydown Mortgage Loans. Accordingly,
holders of Trust Certificates should consult their own tax advisers with respect
to characterization of investments in Trust Funds that include Buydown Mortgage
Loans.
Although the matter is not entirely free from doubt, the portion of a
Trust Certificate representing an interest in Buydown Mortgage Loans may be
considered to represent an investment in "loans . . . secured by an interest
in real property" within the meaning of Code Section 7701(a)(19)(C)(v) to the
extent the outstanding principal balance of the Buydown Mortgage Loans exceeds
the amount held from time to time in the Buydown Fund. It is also possible that
the entire interest in Buydown Mortgage Loans may be so considered, because the
fair market value of the real property securing each Buydown Mortgage Loan
will exceed the amount of such loan at the time it is made. Section
1.593-11(d)(2) of the Treasury Regulations suggests that this latter treatment
may be available, and Revenue Ruling 81-203, 1981-2 C.B. 137 may be read to
imply that apportionment is generally required whenever more than a minimal
amount of assets other than real property may be available to satisfy
purchasers' claims.
For similar reasons, the portion of such Trust Certificate
representing an interest in Buydown Mortgage Loans may be considered to
represent "real estate assets" within the meaning of Code Section 856(c)(5)(A).
Section 1.856-5 (c)(1)(i) of the Treasury Regulations specifies that, if a
mortgage loan is secured by both real property and by other property and the
value of the real property alone equals or exceeds the amount of the loan, then
all interest income will be treated as "interest on obligations secured by
mortgages on real property" within the meaning of Code Section 856(c)(3)(B).
Taxation of Trust Fractional Certificates. Each holder of a Trust
Fractional Certificate (a "Trust Fractional Certificateholder") will be
treated as the owner of an undivided percentage interest in the principal
of, and possibly a different undivided percentage interest in the interest
portion of, each of the assets in a Trust. Accordingly, each Trust
Fractional Certificateholder must report on its federal income tax return its
allocable share of income from its interests, as described below, at the same
time and in the same manner as if it had held directly interests in the
Mortgage Assets and received directly its share of the payments on such
Mortgage Assets. Because those interests may represent interests in
"stripped bonds" or "stripped coupons" within the meaning of Code Section 1286,
such interests would be considered to be newly issued debt instruments, and
thus to have no market discount or premium, and the amount of original issue
discount may differ from the amount of original issue discount on the Mortgage
Assets and the amount includible in income on account of a Trust Fractional
Certificate may differ significantly from the amount payable thereon from
payments of interest on the Mortgage Assets. Each Trust Fractional
Certificateholder may report and deduct its allocable share of the servicing
and related fees and expenses at the same time, to the same extent, and in the
same manner as such items would have been reported and deducted had it held
directly interests in the Mortgage Assets and paid directly its share of
the servicing and related fees and expenses. A holder of a Trust Fractional
Certificate who is an individual, estate or trust will be allowed a deduction
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for servicing fees in determining its regular tax liability only to the extent
that the aggregate of such holder's miscellaneous itemized deductions exceeds
2 percent of such holder's adjusted gross income and will be allowed no
deduction for such fees in determining its liability for alternative minimum
tax. Amounts received by Trust Fractional Certificateholders in lieu of
amounts due with respect to any Mortgage Assets but not received from the
mortgagor will be treated for federal income tax purposes as having the same
character as the payments which they replace.
Purchasers of Trust Fractional Certificates identified in the
applicable Prospectus Supplement as representing interests in Stripped
Mortgage Assets should read the material under the headings "Application
of Stripped Bond Rules," "Market Discount and Premium" and "Allocation of
Purchase Price" for a discussion of particular rules applicable to their
Certificates. A "Stripped Mortgage Asset" means a Mortgage Asset having a
Retained Yield (as that term is defined below) or a Mortgage Asset included in
a Trust having either Trust Interest Certificates or more than one class of
Trust Fractional Certificates or identified in the Prospectus Supplement as
related to a Class of Trust Certificates identified as representing interests
in Stripped Mortgage Assets.
Purchasers of Trust Fractional Certificates identified in the
applicable Prospectus Supplement as representing interests in Unstripped
Mortgage Assets should read the material under the headings "Treatment of
Unstripped Certificates", "Market Discount and Premium", and "Allocation of
Purchase Price" for a discussion of particular rules applicable to their
Certificates. Nevertheless, the IRS has indicated that under some
circumstances it will view a portion of servicing and related fees and
expenses paid to or retained by the Master Servicer or sub-servicers as an
interest in the Mortgage Assets, essentially equivalent to that portion of
interest payable with respect to each Mortgage Asset that is retained
("Retained Yield"). If such a view were sustained with respect to a
particular Trust, such purchasers would be subject to the rules set forth under
"Application of Stripped Bond Rules" rather than those under "Treatment of
Unstripped Certificates". The Depositor does not expect any Servicing Fee or
Master Servicing Fee to constitute a retained interest in the Mortgage
Assets; nevertheless, prospective purchasers are advised to consult their own
tax advisers with respect to the existence of a retained interest and any
effects on investment in Trust Fractional Certificates.
Application of Stripped Bond Rules. Each Trust will consist of an
interest in each of the Mortgage Assets relating thereto, exclusive of the
Retained Yield, if any. With respect to each Series of Certificates Arter &
Hadden, special counsel to the Depositor, will deliver their opinion that any
Retained Yield will be treated for federal income tax purposes as an ownership
interest retained by the owner thereof in a portion of each interest payment
on the underlying Mortgage Assets. The sale of the Trust Certificates
associated with any Trust for which there is a class of Trust Interest
Certificates or two or more Classes of Trust Fractional Certificates bearing
different interest rates or of Trust Certificates identified in the
Prospectus Supplement as representing interests in Stripped Mortgage
Loans (subject to certain exceptions which, if applicable, will be stated
in the applicable Prospectus Supplement) will be treated for federal income
tax purposes as having effected a separation in ownership between the
principal of each Mortgage Asset and some or all of the interest payable
thereon. As a consequence, each Stripped Mortgage Asset will become subject
to the "stripped bond" rules of the Code (the "Stripped Bond Rules"). The
effect of applying those rules will generally be to require each
Trust Fractional Certificateholder to accrue and report income attributable to
its share of the principal and interest on each of the Stripped Mortgage
Assets as original issue discount on the basis of the yield to maturity
of such Stripped Mortgage Assets, as determined in accordance with the
provisions of the Code dealing with original issue discount. For a
description of the general method of calculating original issue discount,
see "REMIC Trust Funds -- Taxation of Owners of REMIC Regular
Certificates -- Original Issue Discount". The yield to maturity of a Trust
Fractional Certificateholder's interest in the Stripped Mortgage Loans will be
calculated taking account of the price at which the holder purchased the
Certificate and the holder's share of the payments of principal and interest
to be made thereon. Although the provisions of the Code and the OID
Regulations do not directly address the treatment of instruments similar to
Trust Fractional Certificates, in reporting to Trust Fractional
Certificateholders such Certificates will be treated as a single obligation
with payments corresponding to the aggregate of the payments allocable thereto
from each of the Mortgage Assets and the amount of original issue discount on
such Certificates will be determined accordingly. See "Aggregate Reporting".
Under Treasury regulations, original issue discount determined with
respect to a particular Stripped Mortgage Loan may be considered to be zero
under the de minimis rule described above, in which case it is treated as
market discount. See "REMIC Trust Funds -- Taxation of REMIC Regular
Certificates Original -- Issue Discount". Those regulations also provide that
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original issue discount so determined with respect to a particular Stripped
Mortgage Asset will be treated as market discount if the rate of interest on
the Stripped Mortgage Asset, including a reasonable servicing fee, is no more
than one percentage point less than the unstripped rate of interest. See
"Market Discount and Premium". The foregoing de minimis and market discount
rules will be applied on an aggregate poolwide basis, although it is possible
that investors may be required to apply them on a loan-by-loan basis. The
loan-by-loan information required for such application of those rules may
not be available. See "Aggregate Reporting".
Subsequent purchasers of the Certificates may be required to include
"original issue discount" in an amount computed using the price at which such
subsequent purchaser purchased the Certificates. Further, such purchasers may
be required to determine if the above described de minimis and market
discount rules apply at the time a Trust Fractional Certificate is acquired,
based on the characteristics of the Mortgage Assets at that time.
Variable Rate Certificates. There is considerable uncertainty
concerning the application of the OID Regulations to Mortgage Assets bearing a
variable rate of interest. Although such regulations are subject to a
different interpretation, as discussed below, in the absence of other contrary
authority in preparing reports furnished to Certificateholders Stripped
Mortgage Assets bearing a variable rate of interest (other than those
treated as having market discount pursuant to the regulations described
above) will be treated as subject to the provisions of the OID Regulation
governing variable rate debt instruments. The effect of the application of
such provisions generally will be to cause Certificateholders holding Trust
Fractional Certificates bearing interest at a Single Variable Rate or at a
Multiple Variable Rate (as defined above under "REMIC Trust Funds -- Taxation
of REMIC Regular -- Certificates -- Original Issue Discount") to accrue
original issue discount and interest as though the value of each variable rate
were a fixed rate, which is (a) for each qualified floating rate, such rate as
of the Closing Date (with appropriate adjustment for any differences in
intervals between interest adjustment dates), (b) for a qualified inverse
floating rate, such rate as of Closing Date, and (c) for any other objective
rate, the fixed rate that reflects the yield that is reasonably expected for
the Trust Fractional Certificate. If the interest paid or accrued with
respect to a variable rate Trust Fractional Certificate during an accrual period
differs from the assumed fixed interest rate, such difference will be an
adjustment (to interest or original issue discount, as applicable) to the
Certificateholder's taxable income for the taxable period or periods to which
such difference relates.
The provisions in the OID Regulations applicable to variable rate debt
instruments may not apply to certain adjustable and variable rate mortgage
loans, possibly including the Mortgage Assets, or to Stripped Certificates
representing interests in such Mortgage Assets. If variable rate Trust
Fractional Certificates are not governed by the provisions of the OID
Regulations applicable to variable rate debt instruments, such Certificates may
be subject to the provisions of the Contingent Debt Regulations. The
application of those provisions to instruments such as the Trust Fractional
Certificates is subject to differing interpretations. Prospective purchasers of
variable rate Trust Fractional Certificates are advised to consult their tax
advisers concerning the tax treatment of such Certificates.
Aggregate Reporting. The Trustee intends in reporting
information relating to original issue discount to Certificateholders to
provide such information on an aggregate poolwide basis. Applicable law is
unclear, however, and it is possible that investors may be required to
compute original issue discount on a loan-by-loan basis (or on the basis of
the rights to individual payments) taking account of an allocation of the
investor's basis in the Certificates among the interests in the various
Mortgage Assets represented by such Certificates according to their respective
fair market values. Investors should be aware that it may not be possible to
reconstruct after the fact sufficient loan-by-loan information should the IRS
require a computation on that basis.
Because the treatment of the Certificates under the OID
Regulations is both complicated and uncertain, Certificateholders should
consult their tax advisers to determine the proper method of reporting
amounts received or accrued on Certificates.
Treatment of Unstripped Certificates. Mortgage Assets in a Fund for
which there is neither any Class of Trust Interest Certificates, nor more than
one Class of Trust Fractional Certificates, nor any Retained Yield otherwise
identified in the Prospectus Supplement as being unstripped mortgage assets
("Unstripped Mortgage Assets") will be treated as wholly owned by the Trust
Fractional Certificateholders of the stated Trust. Trust Fractional
Certificateholders using the cash method of accounting must take into account
their pro rata shares of original issue discount as it accrues and qualified
stated interest (as described in "REMIC Trust Funds -- Taxation of REMIC
Regular Certificates -- Original Issue Discount") from Unstripped Mortgage
Assets as and
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when collected by the Trustee. Trust Fractional Certificateholders using an
accrual method of accounting must take into account their pro rata shares of
qualified stated interest from Unstripped Mortgage Assets as it accrues or
is received by the Trustee, whichever is earlier.
Code Sections 1272 through 1275 provide generally for the inclusion of
original issue discount in income on the basis of a constant yield to
maturity. Nevertheless, the application of the OID Regulations to mortgage
loans is unclear in certain respects. The OID Regulations provide a de
minimis rule for determining whether certain self-amortizing installment
obligations are to be treated as having original issue discount. Such
obligations have original issue discount if the points charged at origination
(or other loan discount) exceed the greater of one-sixth of one percent times
the number of full years to final maturity or one-fourth of one percent times
weighted average maturity. The OID Regulations treat certain variable rate
mortgage loans as having original issue discount because of an initial rate of
interest that differs from that determined by the mechanism for setting the
interest rate during the remainder of the term of the mortgage loan, or because
of the use of an index that does not vary in a manner approved in the OID
Regulations. For a description of the general method of calculating the
amount of original issue discount see "REMIC Trust Funds -- Taxation of REMIC
Regular Certificates -- Original Issue Discount" and "Application of Stripped
Bond Rules -- Variable Rate Certificates."
A subsequent purchaser of a Trust Fractional Certificate that
purchases such Certificate at a cost (not including payment for accrued
qualified stated interest) less than its allocable portion of the
aggregate of the remaining stated redemption prices at maturity of the
Unstripped Mortgage Assets will also be required to include in gross income,
for each day on which it holds such Trust Fractional Certificate, its allocable
share of the daily portion of original issue discount with respect to each
Unstripped Mortgage Asset. That allocable share is reduced, if the cost
of such subsequent purchaser's interest in such Unstripped Mortgage Asset
exceeds its "adjusted issue price," by an amount equal to the product of (i)
the daily portion and (ii) a constant fraction, the numerator of which is such
excess and the denominator of which is the sum of the daily portions of
original issue discount allocable to such subsequent purchaser's interest for
all days on or after the day of purchase. The adjusted issue price of an
Unstripped Mortgage Asset on any given day is equal to the sum of the adjusted
issue price (or, in the case of the first accrual period, the issue price) of
such Unstripped Mortgage Asset at the beginning of the accrual period during
which such day occurs and the daily portions of original issue discount for
all days during such accrual period prior to such day reduced by the
aggregate amount of payments made (other than payments of qualified stated
interest) during such accrual period prior to such day.
Market Discount and Premium. In general, if the Stripped Bond Rules do
not apply to a Trust Fractional Certificate, a purchaser of a Trust Fractional
Certificate will be treated as acquiring market discount bonds to the extent
that the share of such purchaser's purchase price allocable to any Unstripped
Mortgage Asset is less than its allocable share of the "adjusted issue price"
of such Mortgage Asset. See "Treatment of Unstripped Certificates" and
"Application of Stripped Bond Rules". Thus, with respect to such Mortgage
Assets, a holder will be required, under Code Section 1276, to include as
ordinary income the previously unrecognized accrued market discount in an
amount not exceeding each principal payment on any such Mortgage Assets at
the time each principal payment is received or due, in accordance with the
purchaser's method of accounting, or upon a sale or other disposition of the
Certificate. In general, the amount of market discount that has accrued is
determined on a ratable basis. A Trust Fractional Certificateholder may,
however, elect to determine the amount of accrued market discount on a constant
yield to maturity basis. This election is made on a loan-by-loan basis and
is irrevocable. In addition, the description of the market discount rules in
"Taxation of REMIC Regular -- Certificates -- Market Discount and Premium" with
respect to (i) conversion to ordinary income of a portion of any gain
recognized on sale or exchange of a market discount bond, (ii) deferral of
interest expense deductions, (iii) the de minimis exception from the market
discount rules and (iv) the elections to include in income either market
discount or all interest, discount and premium as they accrue, is also
generally applicable to Trust Fractional Certificates. Treasury regulations
implementing the market discount rules have not yet been issued and
investors therefore should consult their own tax advisers regarding the
application of these rules.
If a Trust Fractional Certificate is purchased at a premium, under
existing law such premium must be allocated to each of the Mortgage Assets (on
the basis of its relative fair market value). In general, the portion of any
premium allocated to Unstripped Mortgage Assets can be amortized and
deducted under the provisions of the Code relating to amortizable bond
premium.
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The application of the Stripped Bond Rules to Stripped Mortgage Assets
will generally cause any premium allocable to Stripped Mortgage Assets to be
amortized automatically by adjusting the rate of accrual of interest and
discount to take account of the allocable portion of the actual purchase price
of the Certificate. In that event, no additional deduction for the
amortization of premium would be allowed. See "REMIC Certificates -- Taxation
of REMIC Regular Certificates -- Market Discount and Premium" for a discussion
of the application of the Proposed Premium Regulations.
Allocation of Purchase Price. As noted above, a purchaser of a
Trust Fractional Certificate relating to Unstripped Mortgage Assets will be
required to allocate the purchase price therefore to the undivided interest it
acquires in each of the Mortgage Assets, in proportion to the respective fair
market values of the portions of such Mortgage Assets included in the Trust
Fund at the time the Certificate is purchased. The Depositor believes that it
may be reasonable to make such allocation in proportion to the respective
principal balances of the Mortgage Assets, where the interests in the
Mortgage Assets represented by a Trust Fractional Certificate have a common
remittance rate and other common characteristics, and otherwise so as to
produce a common yield for each interest in a Mortgage Asset, provided the
Mortgage Assets are not so diverse as to evoke differing prepayment
expectations. Nevertheless, if there is any significant variation in
interest rates among the Mortgage Assets, a disproportionate allocation of
the purchase price taking account of prepayment expectations may be
required.
Taxation of Trust Interest Certificates. With respect to each Series
of Certificates Arter & Hadden, special counsel to the Depositor, will
deliver their opinion that each holder of a Trust Interest Certificate
(a "Trust Interest Certificateholder") will be treated as the owner of an
undivided interest in the interest portion ("Interest Portion") of each of
the Mortgage Assets in the related Trust. Accordingly, and subject to the
discussion below, each Trust Interest Certificateholder is treated as owning
its allocable share of the Interest Portion from the Mortgage Assets, will
report income as described below, and may deduct its allocable share of the
servicing and related fees and expenses paid to or retained by the related
Trust at the same time and in the same manner as such items would have been
reported under the Trust Interest Certificateholder's tax accounting method had
it held directly an interest in the Interest Portion from the Mortgage Assets,
received directly its share of the amounts received with respect to the
Mortgage Assets and paid directly its share of the servicing and related fees
and expenses. An individual, estate or trust holder of a Trust Interest
Certificate will be allowed a deduction for servicing fees in determining its
regular tax liability only to the extent that the aggregate of such holder's
miscellaneous itemized deductions exceeds 2 percent of such holder's adjusted
gross income, and will be allowed no deduction for such fees in determining
its liability for alternative minimum tax. Amounts, if any, received by Trust
Interest Certificateholders in lieu of amounts due with respect to any
Mortgage Asset but not received from the mortgagor will be treated for
federal income tax purposes as having the same character as the payment which
they replace.
A Trust Interest Certificate will consist of an undivided interest
in the Interest Portion of each of the Mortgage Assets in the related Trust.
With respect to each Series of Certificates, a Trust Interest Certificate
will be treated for federal income tax purposes as comprised of an ownership
interest in a portion of the Interest Portion of each of the Mortgage Assets (a
"Stripped Interest") separated by the Depositor from the right to receive
principal payments and the remainder, if any, of each interest payment on the
underlying Mortgage Asset. As a consequence, the Trust Interest Certificates
will become subject to the Stripped Bond Rules. Each Trust Interest
Certificateholder will be required to apply the Stripped Bond Rules to its
interest in the Interest Portion under the method prescribed by the Code,
taking account of the price at which the holder purchased the Trust Interest
Certificate. The Stripped Bond Rules generally require a holder of stripped
bonds or coupon portions to accrue and report income therefrom daily on the
basis of the yield to maturity of such stripped bonds or coupons, as
determined in accordance with the provisions of the Code dealing with
original issue discount. For a discussion of the general method of
calculating original issue discount, see "REMIC Trust Funds -- Taxation of
REMIC Regular Certificates -- Original Issue Discount." The provisions of the
Code and the OID Regulations do not directly address the treatment of
instruments similar to Trust Interest Certificates. In reporting to Trust
Interest Certificateholders such Certificates will be treated as a single
obligation with payment corresponding to the aggregate of the payment
allocable thereto from each of the Mortgage Assets.
Alternatively, IRS may require Trust Interest Certificateholders to
treat each scheduled payment on each Stripped Interest (or their interests
in all scheduled payments from each of the Stripped Interests) as a
separate obligation for purposes of allocating purchase price and computing
original issue discount.
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The tax treatment of the Trust Interest Certificates with respect to
the application of the original issue discount provisions of the Code is
currently unclear. Each Trust Interest Certificate will be treated as a
single debt instrument issued on the day it is purchased for purposes of
calculating any original issue discount. Original issue discount with respect
to a Trust Interest Certificate must be included in ordinary gross income
for federal income tax purposes as it accrues in accordance with a constant
yield method that takes into account the compounding of interest and such
accrual of income may be in advance of the receipt of any cash attributable to
such income. In general, the rules for accruing original issue discount set
forth above in "REMIC Trust Funds -- Taxation of REMIC Regular Certificates --
Original Issue Discount" apply; however, there is no authority permitting
Trust Interest Certificateholders to take into account the Prepayment
Assumption in computing original issue discount accruals. See "Prepayments"
below. For purposes of applying the original issue discount provisions of
the Code, the issue price used in reporting original issue discount with
respect to a Trust Interest Certificate will be the purchase price paid by
each holder thereof and the stated redemption price at maturity may include the
aggregate amount of all payments to be made with respect to the Trust Interest
Certificate whether or not denominated as interest. The amount of original
issue discount with respect to a Trust Interest Certificate may be treated as
zero under the original issue discount de minimis rules described above.
The Trustee intends in reporting information relating to original
issue discount to Certificateholders to provide such information on an aggregate
poolwide basis. Applicable law is however, unclear, and it is possible that
Certificateholders may be required to compute original issue discount either on
a loan-by-loan basis or on a payment-by-payment basis taking account of an
allocation of their basis in the Certificates among the interests in the
various mortgage loans represented by such Certificates according to their
respective fair market values. The effect of an aggregate computation for the
inclusion of original issue discount in income may be to defer the recognition
of losses due to early prepayments relative to a computation on a loan-by-loan
basis. It may not be possible to reconstruct after the fact sufficient
loan-by-loan information should the IRS require a computation on that basis.
Because the treatment of the Trust Interest Certificates under
current law and the potential application of the 1996 Contingent Debt
Regulations are both complicated and uncertain, Trust Interest
Certificateholders should consult their tax advisers to determine the proper
method of reporting amounts received or accrued on Trust Interest Certificates.
Prepayments. The proper treatment of interests, such as the Trust
Fractional Certificates and the Trust Interest Certificates, in debt
instruments that are subject to prepayment is unclear. The rules of Section
1272(a)(6) described above require original issue discount to be taken into
account on the basis of a constant yield to assumed maturity and actual
prepayments to any pool of debt instruments the payments on which may be
accelerated by reason of prepayments. The manner of determining the prepayment
assumption is to be determined under Treasury regulations, but no
regulations have been issued. Trust Fractional Certificateholders and Trust
Interest Certificateholders should consult their tax advisers as to the proper
reporting of income from Trust Fractional Certificates and Trust Interest
Certificates, as the case may be, in the light of the possibility of
prepayment and, with respect to the Trust Interest Certificates, as to the
possible application of the 1996 Contingent Debt Regulations.
Sales of Trust Certificates. If a Certificate is sold, gain or loss
will be recognized by the holder thereof in an amount equal to the difference
between the amount realized on the sale and the Certificateholder's adjusted
tax basis in the Certificate. Such tax basis will equal the
Certificateholder's cost for the Certificate, increased by any original issue
or market discount previously included in income and decreased by any deduction
previously allowed for premium and by the amount of payments, other than
payments of qualified stated interest, previously received with respect to
such Certificate. The portion of any such gain attributable to accrued market
discount not previously included in income will be ordinary income, as will
gain attributable to a Certificate which is part of a "conversion
transaction" or which the holder elects to treat as ordinary. See "REMIC
Trust Funds -- Sales of REMIC Certificates" above. Any remaining gain or any
loss will be capital gain or loss if the Certificate was held as a capital
asset except to the extent that Code Section 582(c) applies to such gain or
loss.
Trust Reporting. Each holder of a Trust Fractional Certificate will
be furnished with each distribution a statement setting forth the allocation of
such distribution to principal and interest. In addition, within a reasonable
time after the end of each calendar year, each holder of a Trust Certificate
who was such a holder at any time during such year, will be furnished with
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information regarding the amount of servicing compensation and such other
customary factual information necessary or desirable to enable holders of Trust
Certificates to prepare their tax returns.
Back-up Withholding. In general, the rules described in "REMIC Trust
Funds -- Back-up Withholding" will also apply to Trust Certificates.
Foreign Certificateholders. Payments in respect of interest or original
issue discount (including amounts attributable to servicing fees) to a
Certificateholder who is not a citizen or resident of the United States, a
corporation or other entity organized in or under the laws of the United States
or of any State thereof, or a United States estate or trust, will not
generally be subject to United States withholding tax, provided that such
Certificateholder (i) does not own, directly or indirectly, 10% or more of,
and is not a controlled foreign corporation (within the meaning of Code Section
957) related to, each of the issuers of the Mortgages and (ii) provides
required certification as to its non-United States status under penalty of
perjury. Any withholding tax that does apply may be reduced or eliminated by
an applicable tax treaty. Notwithstanding the foregoing, if any such payments
are effectively connected with a United States trade or business
conducted by the Certificateholder, they will be subject to regular United
States income tax and, in the case of a corporation, to a possible branch
profits tax, but will ordinarily be exempt from United States withholding tax
provided that applicable documentation requirements are met.
See further the discussion of the Proposed Withholding Regulations,
under "REMIC Trust Funds -- Foreign Investors in REMIC Certificates".
Securities Classified as Partnership Interests
Certain Trust Funds may be treated as partnerships for federal income
tax purposes. In such event, the Trust Funds may issue Certificates
characterized as "Partnership Interests" as discussed in the related
Prospectus Supplement. With respect to such series of Partnership Interests,
Arter & Hadden, special counsel to the Depositor, will deliver their opinion
(unless otherwise limited in the related Prospectus Supplement) that the Trust
Fund will be characterized as a partnership and not as an association taxable as
a corporation for federal income tax purposes.
State and Local Taxation
In addition to the federal income tax consequences described herein,
potential investors should consider the state and local income tax consequences
of the acquisition, ownership, and disposition of the Certificates. State and
local 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 or locality.
For example, a REMIC Mortgage Pool or Non -- REMIC Trust Fund may be
characterized as a corporation, a partnership, or some other entity for
purposes of state income tax law. Such characterization could result in entity
level income or franchise taxation of the REMIC Mortgage Pool or Trust Fund
formed in, owning mortgages or property in, or having servicing activity
performed in a state. Further, REMIC Regular Certificateholders resident in
non-conforming states may have their ownership of REMIC Regular Certificates
characterized as an interest other than debt of the REMIC such as stock or a
partnership interest. Therefore, potential investors should consult their
own tax advisers with respect to the various state and local tax
consequences of an investment in 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
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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 Depositor, the Credit Enhancer, the
Underwriters and the Trustee, and certain of their affiliates, might be
considered parties in interest or disqualified persons with respect to a Plan.
If so, the acquisition or holding or transfer of Certificates by or on behalf
of such Plan could be considered to give rise to a prohibited transaction
within the meaning of ERISA and the Code unless an exemption is available.
The United States Department of Labor ("DOL") has issued a regulation (29
C.F.R. Section 2510.3-101) concerning the definition of what constitutes the
assets of a Plan (the "Plan Asset Regulations"). Under the Plan Asset
Regulations, the underlying assets and properties of corporations,
partnerships, trusts and certain other entities in which a Plan makes an
"equity interest" investment could be deemed for purposes of ERISA to be
assets of the investing Plan unless certain exceptions apply. If an
investing Plan's assets were deemed to include an interest in the Mortgage
Assets and any other assets of a Trust and not merely an interest in the
Certificates, the assets of the Trust would become subject to the fiduciary
responsibility standards of ERISA, and transactions occurring between the
Depositor, 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 Depositor
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 Depositor; and (iii) the payments made to and retained by the Depositor
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 Depositor, 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
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<PAGE>
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 Depositor, 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 Depositor 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
Depositor, 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. Nevertheless, even if the conditions
specified in PTCE 83-1 or one or more of these other exemptions are met, the
scope of the relief provided might not cover all acts which might be
construed as prohibited transactions.
Certain Classes of Certificates may not be offered for sale or be
transferable to Plans. The Prospectus Supplement for each Series will indicate
which Classes of Certificates are subject to restrictions on transfer to Plans.
Any Plan fiduciary considering the purchase of a Certificate should
consult with its counsel with respect to the potential applicability of
ERISA and the Code to such investment. Moreover, each Plan fiduciary should
determine whether, under the general fiduciary standards of investment
prudence and diversification, an investment in the Certificates is
appropriate for the Plan, taking into account the overall investment policy
of the Plan and the composition of the Plan s investment portfolio.
LEGAL INVESTMENT MATTERS
If so specified in the Prospectus Supplement for a Series, the
Certificates of such Series will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"), so
long as they are rated in one of the two highest rating categories by one or
more nationally recognized statistical rating organizations, and, as such,
will be legal investments for persons, trusts, corporations, partnerships,
associations, business trusts and business entities (including, but not limited
to, state-chartered savings banks, commercial banks, savings and loan
associations and insurance companies, as well as trustees and state government
employee retirement systems) created pursuant to 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,
71
<PAGE>
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. Institutions whose
investment activities are subject to legal investment laws and
regulations or to review by certain regulatory authorities may be subject
to restrictions on investment in certain Classes of the Certificates of a
Series.
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. (section) ss. 24
(Seventh), subject in each case to such regulations as the applicable federal
regulatory authority may prescribe. Federal credit unions should review
National Credit Union Administration (the "NCUA") Letter to Credit Unions
No. 96, as modified by Letter to Credit Unions No. 108, which includes
guidelines to assist federal credit unions in making investment decisions for
mortgage related securities. The NCUA has adopted rules, effective December 2,
1991, which prohibit federal credit unions from investing in certain mortgage
related securities, possibly including certain series or classes of
Certificates, except under limited circumstances.
If specified in the Prospectus Supplement for a Series, one or more
Classes of Certificates of such Series will not constitute "mortgage related
securities" for purposes of SMMEA. In such event, persons whose investments are
subject to state or federal regulation may not be legally authorized to invest
in such Classes of Certificates.
All depository institutions considering an investment in the
Certificates should review the "Supervisory Policy Statement on Securities
Activities" dated January 28, 1992 (the "Policy Statement") of the Federal
Financial Institution Examination Council. The Policy Statement, which has
been adopted by the Board of Governors of the Federal Reserve System, the
FDIC, the Comptroller of the Currency and the Office of Thrift Supervision,
effective February 10, 1992, and by the NCUA (with certain modifications)
effective June 26, 1992, which, among other things, 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. In addition, depository institutions
and other financial institutions should consult their regulators concerning
the risk-based capital treatment of any Certificates. Any financial
institution that is subject to the jurisdiction of the Comptroller of the
Currency, the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the Office of Thrift Supervision, the
National Credit Union Administration or other federal or state agencies with
similar authority should review any applicable rules, guidelines and regulations
prior to purchasing the Certificates of a Series.
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 Depositor 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
72
<PAGE>
Series and of each Class of such Series, including the name or names of the
Underwriters, the proceeds to and their use by the Depositor 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 Depositor 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.
AVAILABLE INFORMATION
The Depositor has filed a registration statement with the Securities
and Exchange Commission (the "Commission") with respect to the Certificates.
The registration statement and amendments thereto and the exhibits thereto as
were as reports filed with the Commission on behalf of each Trust may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
certain of its Regional Offices located as follows: Chicago Regional Office,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and New
York Regional Office, 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of such materials can also be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates and electronically through the Electronic
Data Gathering, Analysis and Retrieval ("EDGAR") system at the Commission's
web site (http:\\www.sec.gov). The Commission maintains computer terminals
providing access to the EDGAR system at each of the offices referred to above.
This Prospectus does not contain all the information set forth in the
Registration Statement of which this Prospectus is a part, or in the exhibits
relating thereto, which the Depositor has filed with the Commission in
Washington, D.C. Copies of the information and the exhibits are on file at
the offices of the Commission and may be obtained upon payment of the fee
prescribed by the Commission or may be examined without charge at the offices
of the Commission. Copies of the Agreement (as defined herein) for a Series
will be provided to each person to whom a Prospectus is delivered upon
written or oral request, provided that such request is made to Saxon Asset
Securities Company, 4880 Cox Road, Glen Allen, Virginia 23060 ((804) 967-
7400).
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed with respect to each Trust pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended, after the date of this Prospectus and prior to the termination of
the offering of the Certificates of such Trust hereunder shall be deemed to be
incorporated into and made a part of this Prospectus from the date of filing
of such documents. Any statement contained in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or
is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Depositor 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).
73
<PAGE>
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
Page
----
1996 Contingent Payment Regulations....................................49
Adjustable Rate........................................................20
adjusted issue price...................................................53
Advance................................................................33
Advances................................................................3
AFR....................................................................58
Agreement...............................................................9
applicable federal rate................................................58
ARM Loans..............................................................21
backup withholding tax.................................................62
Balloon Loans...........................................................8
Bankruptcy Bond........................................................29
Beneficial Owner.......................................................10
Book-Entry Certificates................................................10
Buy-Down Loans.........................................................21
Certificate Guaranty Insurance Policy..................................27
Certificate Insurer....................................................27
Certificateholder......................................................15
Certificates.........................................................1, 9
Class................................................................1, 9
Closing Date...........................................................19
Code................................................................4, 49
Committee Report.......................................................49
Compound Interest Certificates.........................................16
Converted Mortgage Loan................................................23
Cooperative Loans.......................................................2
Cooperatives............................................................2
current value..........................................................51
Custodial Account......................................................33
daily accruals.........................................................58
daily portions.........................................................52
Delinquent Mortgage Loan...............................................24
Depositor...............................................................1
Depository.............................................................10
disqualified organizations.............................................60
disqualified persons...................................................71
Distribution Date...................................................2, 15
DOL.....................................................................4
DTC....................................................................10
equity interest........................................................71
ERISA...................................................................4
Excess inclusions......................................................58
FHLMC...................................................................2
Financial Intermediary.................................................10
Fixed Rate.............................................................20
FNMA....................................................................2
GNMA....................................................................2
GPM Loans..............................................................21
Gross Margin...........................................................20
HELOCs..................................................................2
Home Improvement Loans..................................................2
Index..................................................................20
Interest Adjustment Date...............................................20
Interest Portion.......................................................68
issue price............................................................51
Junior Mortgage Loans..................................................22
Lockout Periods........................................................20
market discount........................................................54
Mark-To-Market Regulations.............................................49
Master Servicer.....................................................3, 32
Master Servicer Custodial Account......................................33
Mortgage Assets.........................................................2
Mortgage Interest Rate.................................................20
Mortgage Loans..........................................................2
Mortgage Note..........................................................20
mortgage pool..........................................................71
Mortgage Pool Insurance Policy.........................................28
Mortgaged Premises.....................................................20
mortgage-related securities.............................................4
Multi-Family Loans......................................................2
Multiple Variable Rate.................................................53
non-conforming credit...................................................8
Non-U.S. Person........................................................62
objective rate.........................................................51
OID Regulations........................................................49
original issue discount................................................51
parties in interest....................................................71
pass-through entity....................................................60
Pass-Through Rate....................................................1, 9
Periodic Rate Cap......................................................20
Permitted Investments..................................................39
Plan...................................................................71
Plan Asset Regulations..................................................4
Pool Insurer...........................................................28
Pre-Funding Account.....................................................2
Pre-Funding Agreement...................................................2
Prepayment Assumption..................................................50
Primary Mortgage Insurance Policies....................................20
prohibited transactions................................................61
Proposed Premium Regulations...........................................49
Proposed Withholding Regulations.......................................49
PTCE 83-1..............................................................71
qualified floating rate................................................51
qualified mortgages....................................................50
qualified stated interest..............................................51
Rating Agency...........................................................4
Realized Loss..........................................................16
regular interests......................................................50
REMIC...................................................................4
REMIC Certificates.....................................................49
REMIC Mortgage Pool....................................................49
REMIC Provisions.......................................................49
REMIC Regular Certificate..............................................50
REMIC Regulations......................................................49
REMIC Residual Certificate.............................................50
Remittance Date........................................................33
REO Properties..........................................................3
Reserve Fund...........................................................30
residual interests.....................................................50
Residual Owner.........................................................56
Retained Yield.........................................................65
Security Instrument....................................................19
Seller..................................................................1
Series..................................................................1
Servicer................................................................3
Servicer Custodial Account.............................................33
Servicing Agreement....................................................32
Servicing of Mortgage Loans.............................................3
Single Family Loans.....................................................2
Single Variable Rate...................................................51
single-class REMIC.....................................................61
SMI.....................................................................1
SMMEA...................................................................4
Special Hazard Insurance Policy........................................28
Special Hazard Insurer.................................................28
Special Servicer....................................................3, 32
Standard Hazard Insurance Policies.....................................35
stated redemption price at maturity....................................51
Stripped Interest......................................................68
Stripped Mortgage Asset................................................65
tax matters person.....................................................62
Tiered REMICs..........................................................56
Trust...................................................................1
Trust Certificates.....................................................49
Trust Fractional Certificate...........................................63
Trust Fractional Certificateholder.....................................64
Trust Interest Certificate.............................................64
Trust Interest Certificateholder.......................................68
Trustee.................................................................2
U.S. Person............................................................62
United States shareholder..............................................62
Unstripped Mortgage Assets.............................................67
<PAGE>
No dealer, salesman or any other person has been authorized to give any
information or to make any representations not contained in this Prospectus
Supplement and the Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the
Depositor or by the Underwriters. This Prospectus Supplement and the Prospectus
do not constitute an offer to sell, or a solicitation of an offer to buy, the
Certificates offered hereby to anyone in any jurisdiction in which the person
making such offer or solicitation is not qualified to do so or to anyone to whom
it is unlawful to make any such offer or solicitation. Neither the delivery of
this Prospectus Supplement nor any sale made hereunder shall, under any
circumstances, create an implication that information herein or therein is
correct as of any time since the date of this Prospectus Supplement or the
Prospectus.
--------------------
TABLE OF CONTENTS
Prospectus Supplement
Summary...................................................S- 1
Risk Factors..............................................S-10
The Mortgage Loan Pool....................................S-13
Use of Proceeds...........................................S-20
Prepayment and Yield Considerations.......................S-20
Description of the Offered Certificates...................S-27
The Agreement.............................................S-34
Certain Federal Income Tax Consequences...................S-36
ERISA Considerations......................................S-37
Ratings...................................................S-39
Legal Investment Considerations...........................S-39
Underwriting..............................................S-40
Certain Legal Matters.....................................S-40
Index to Location of Principal Defined Terms...............A-1
Prospectus
Prospectus Summary...........................................1
Risk Factors.................................................5
Description of the Certificates..............................8
Maturity, Prepayment and Yield Considerations...............16
The Trusts..................................................18
Credit Enhancement..........................................25
Origination of Mortgage Loans...............................29
Servicing of Mortgage Loans.................................31
The Agreement...............................................37
Certain Legal Aspects of Mortgage Loans.....................40
The Depositor...............................................47
Use of Proceeds.............................................48
Certain Federal Income Tax Consequences.....................48
State Tax Considerations....................................69
ERISA Considerations........................................69
Legal Investment Matters....................................71
Plan of Distribution........................................72
Available Information.......................................73
Incorporation of Certain Terms by Reference.................73
Index to Location of Principal Defined Terms................74
Until 90 days after the date of this Prospectus Supplement,
all dealers effecting transactions in the related Certificates, whether or
not participating in the distribution thereof, may be required to deliver this
Prospectus Supplement and the related Prospectus. This delivery requirement
is in addition to the obligation of dealers to deliver a Prospectus Supplement
and Prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
[LOGO]
$600,308,000
Saxon Asset Securities Trust 1997-3
Saxon Asset Securities Company,
as Depositor
$124,075,000 Class AF-1 Certificates
$22,000,000 Class AF-2 Certificates
$10,000,000 Class AF-3 Certificates
$15,000,000 Class AF-4 Certificates
$16,414,000 Class AF-5 Certificates
$20,832,000 Class AF-6 Certificates
$10,533,000 Class MF-1 Certificates
$9,363,000 Class MF-2 Certificates
$5,852,000 Class BF Certificates
$124,125,000 Class AV-1 Certificates
$178,938,000 Class AV-2 Certificates
$28,384,000 Class MV-1 Certificates
$21,974,000 Class MV-2 Certificates
$12,818,000 Class BV Certificates
Mortgage Loan Asset Backed Certificates
Series 1997-3
Prudential Securities Incorporated
Merrill Lynch & Co.
J.P. Morgan & Co.
Morgan Stanley Dean Witter
---------------------
PROSPECTUS SUPPLEMENT
---------------------
November 6, 1997
