REGISTRATION NO. 333-59479
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 1
to
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SAXON ASSET SECURITIES COMPANY
(DEPOSITOR)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
VIRGINIA 52-1865887
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION
ORGANIZATION) NUMBER)
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4880 COX ROAD
GLEN ALLEN, VIRGINIA 23060
(804) 967-7400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
FRANCIS R. SNODGRASS, ESQ.
ARTER & HADDEN LLP
1801 K STREET, N.W., SUITE 400-K
WASHINGTON, D.C. 20006-1301
(202) 775-7153
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
CHARLES COUDRIET THOMAS F. FARRELL, II, ESQUIRE
SAXON ASSET SECURITIES COMPANY DOMINION RESOURCES, INC.
4880 COX ROAD RIVERFRONT PLAZA, WEST TOWER
GLEN ALLEN, VIRGINIA 901 EAST BYRD STREET, 17TH FLOOR
(804) 967-7400 RICHMOND, VIRGINIA 23219
(804) 775-5807
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable on or after the effective date of this registration statement.
If the only securities registered on this Form are to be offered pursuant
to dividend or interest reinvestment plans, please check the following box. |_|
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.|_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.|_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.|_|
Pursuant to Rule 429 under the Securities Act of 1933, the Prospectus filed
as part of this Registration Statement may be used in connection with the
securities covered by Registration Statement No. 333-20025.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
Prospectus Supplement dated September 21, 1998
(To Prospectus Dated September 21, 1998)
$---,---,---
[SAXON MORTGAGE, INC.]
Mortgage Loan Asset Backed Certificates, Series 1998-__
Saxon Asset Securities Trust 1998-__
Saxon Mortgage, Inc. Saxon Asset Securities Company
Seller and Master Servicer
Depositor
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Consider carefully the risk factors beginning on page S-6 of this prospectus
supplement and on page 5 of the prospectus.
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The Offered Certificates represent interests in the Trust only and will not
represent interests in or obligations of any other entity.
This prospectus supplement may be used to offer and sell the Offered
Certificates only if accompanied by the prospectus.
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The Trust will issue and offer the following Offered Certificates:
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Initial Annual Pass Last Scheduled
Class Certificate Through Rates Distribution Date
Principal Balance
<S> <C>
Group I and Class AV-2
Class AF-1 $__,___,000 _.__% ______ __, 20__
Class AF-2 $__,___,000 _.__ ______ __, 20__
Class AF-3 $__,___,000 _.__ ______ __, 20__
Class AF-4 $__,___,000 _.__ ______ __, 20__
Class AF-5 $__,___,000 _.__(1) ______ __, 20__
Class AF-6 $__,___,000 _.__ ______ __, 20__
Class MF-1 $__,___,000 _.__(1) ______ __, 20__
Class MF-2 $__,___,000 _.__(1) ______ __, 20__
Class BF-1 $__,___,000 _.__(1) ______ __, 20__
Class AV-2 $__,___,000 _.__(1) ______ __, 20__
Initial Spread over
One Month LIBOR
Group II (other than Class AV-2)
Class AV-1 $___,000,000 _.__%(1) ______ __, 20__
Class MV-1 $__,000,000 _.__ (1) ______ __, 20__
Class MV-2 $_,___,000 _.__ (1) ______ __, 20__
Class BV-1 $_,___,000 _.__ (1) ______ __, 20__
</TABLE>
(1) Subject to "caps" described on page S-1.
o Distributions will be made monthly, commencing _____ 25, 1998.
o The Certificates represent undivided ownership interests in two groups
of mortgage loans.
o The Trust will make one or more REMIC elections.
Neither the Securities and Exchange Commission nor any state securities
commission has approved the Offered Certificates or determined that this
prospectus supplement or the prospectus is accurate or complete. 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 underwriters listed below will offer the Offered Certificates from time to
time in negotiated transactions or otherwise, at varying prices to be determined
at the time of sale. See "UNDERWRITING" herein.
The Depositor expects to deliver the Offered Certificates to the Underwriters on
or about _____ __, 19__, in book entry form through The Depository Trust
Company, CEDEL, S.A., and the Euroclear System.
1st Underwriter
2nd Underwriter
3rd Underwriter
4th Underwriter
<PAGE>
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TABLE OF CONTENTS
Page
SUMMARY...........................................S-1
RISK FACTORS......................................S-6
THE MORTGAGE LOAN POOL............................S-8
General......................................S-8
Underwriting Standards.......................S-8
Characteristics of the Mortgage Loans........S-11
Additional Information.......................S-15
Servicing of the Mortgage Loans..............S-15
Servicing and Other Compensation and
Payment of Expenses; Repurchase...........S-16
Advances and Month End Interest..............S-16
Interest Payments on the Mortgage Loans......S-17
The Master Servicer..........................S-17
USE OF PROCEEDS...................................S-18
PREPAYMENT AND YIELD CONSIDERATIONS...............S-18
General......................................S-18
Prepayments and Yields for Offered
Certificates............................S-19
Payment Delay Feature of Group I
Certificates............................S-25
DESCRIPTION OF THE OFFERED CERTIFICATES...........S-25
General......................................S-25
Distributions................................S-27
Crosscollateralization Provisions............S-31
Calculation of One Month LIBOR...............S-32
Book Entry Registration of the
Offered Certificates.........................S-32
THE AGREEMENT.....................................S-33
Formation of the Trust.......................S-33
Reports to Certificateholders................S-33
Delivery and Substitution of Mortgage Loans..S-34
The Trustee..................................S-34
Voting Rights................................S-34
Termination..................................S-34
Sale of Mortgage Loans.......................S-34
Events of Default............................S-35
Governing Law................................S-35
CERTAIN FEDERAL INCOME TAX CONSEQUENCES...........S-35
REMIC Elections..............................S-35
ERISA CONSIDERATIONS..............................S-36
RATINGS...........................................S-38
UNDERWRITING......................................S-38
LEGAL INVESTMENT CONSIDERATIONS...................S-39
CERTAIN LEGAL MATTERS.............................S-39
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS.....A-1
SUMMARY
The trust. Saxon Asset Securities Company is forming a trust to own a group of
fixed rate and a group of variable rate mortgage loans.
o An affiliate, Saxon Mortgage, Inc., originated or acquired those
mortgages under its non-conforming credit program and will act as master
servicer.
o Another affiliate, Meritech Mortgage, Inc., will act as servicer.
o Chase Bank of Texas, National Association, will act as trustee of the
trust.
The certificates. Ownership of the trust consists of two groups of
"certificates" that correspond to the mortgage loan groups and, within each
group, separate classes of certificates.
Principal distributions. The trust will distribute principal monthly under
formulas that generally favor distribution first to the most senior certificates
of each group, which are the Class A Certificates, then to the Class M-1
Certificates, then to the Class M-2 Certificates, then to the Class B
Certificates and finally to classes of certificates that are not offered by this
prospectus supplement. Distributions of principal among the various classes of
Class A Certificates is also subject to formulas.
Interest distributions. The trust will distribute interest monthly, in order of
seniority. Pass-through rates on certain classes are subject to caps based on
the mortgage loan interest rates.
Possible losses. The trust may lose money because of a mortgagor default if the
trust is unable to dispose of the mortgaged premises for an amount equal to the
mortgage loan obligation. Any ultimate loss will be borne by the certificates in
reverse order of seniority, beginning with classes of certificates that are not
offered by this prospectus supplement.
No obligor or guarantor. The certificates do not represent the obligation of any
entity nor has any other entity guaranteed distributions.
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----------------------------------
The Securities and Exchange Commission mandates the inclusion of a summary to
provide a very broad overview of the certificates; this summary does not,
however, contain any of the specific information you will need to consider in
making a decision whether to invest in the certificates.
If you are considering an investment in the certificates, you should next review
the section "Terms of the Certificates and the Mortgage Loans." Before making a
final investment decision, you should review:
o this prospectus supplement -- for more detailed information on the
certificates
o the prospectus -- for general information some of which may not
apply to the certificates
<PAGE>
TERMS OF THE CERTIFICATES AND THE MORTGAGE LOANS
The Trust prepared this term sheet to provide an initial overview of the Offered
Certificates and the Mortgage Loans. It does not contain all the information
that you need to consider in making your investment decision. To understand all
the terms of the Offered Certificates, read carefully the entire Prospectus
Supplement and the accompanying Prospectus.
OFFERED CERTIFICATES
The Offered Certificates represent undivided ownership interests in the assets
of the Trust and are not the obligation of any other entity.
The assets of the Trust are divided into two groups, each containing Mortgage
Loans secured by single family residential properties:
o Group I consists of fixed-rate, first or second lien, Mortgage Loans.
o Group II consists of adjustable rate first lien, Mortgage Loans.
The Offered Certificates are also divided into two groups that match the
Mortgage Loan Groups. In general, the Trust will distribute collections on the
Group I Mortgage Loans to the Group I Certificates and collections on the Group
II Mortgage Loans to the Group II Certificates.
The Trust will make distributions on the 25th day of each month, or if that day
is not a business day, the next business day (each, a "Distribution Date").
Pass Through Rates
Pass through rates on the Group I Certificates and Class AV-2 Certificates are
fixed and are shown on the cover page except that on any Distribution Date:
o the pass through rates for [Class AF-5, Class MF-1, Class MF-2 and Class
BF-1] Certificates will be capped at the net weighted average of the
Group I mortgage interest rates, which may be less than the fixed rates
shown on the cover page;
o the pass through rate for Class AV-1 Certificates will be capped as
described below, which may be less than the fixed rate shown on the cover
page; and
o the pass through rate for the Class AF-5 Certificates increases by
_.__% after the Initial Optional Termination Date. See "Optional
Termination" in this Summary.
The interest distributable on the Group I Certificates and the Class AV-2
Certificates on each Distribution Date is the interest accrued during the month
immediately preceding the month in which such Distribution Date occurs. All
calculations are made on the basis of a 360-day year consisting of twelve 30 day
months.
Pass through rates on the Group II Certificates (other than Class AV-2)
Certificates adjust on each Distribution Date, generally to One Month LIBOR plus
the "Applicable Spread" as follows:
Before the After the
Initial Initial
Optional Optional
Termination Date Termination Date
---------------- ----------------
Class AV-1
Class MV-1
Class MV-2
Class BV-1
o Group II pass through rates on any Distribution Date will, however, be
capped at the lesser of:
1. the net weighted average of the maximum lifetime mortgage interest
rates on the Group II Mortgage Loans and
2. the "Group II Available Funds Cap", which is, in effect,
that rate which results in the interest then distributable on the
Group II Certificates equaling the net scheduled interest on the
Group II Mortgage Loans.
Either or both of the cap rates may be less than One Month LIBOR plus the
Applicable Spread.
o Whenever a Group II pass through-rate (other than in respect of
Class AV-2 Certificates), is capped by the Group II Available Funds Cap,
the excess of:
1. the interest distributable had the pass-through rate
not been based on the Group II Available Funds Cap over
2. the interest actually distributed on that Class based on the Group II
Available Funds Cap
3. plus interest thereon.
will be treated as "Group II Certificates Carryover Amount)":
o The Trust will keep track of the Group II Certificates Carryover Amount for
each Class of the Group II Certificates (other than the Class AV-2
Certificates). If funds are available for the purpose before the last
Distribution Date for a Class, the Trust will distribute an amount equal
the Group II Certificates Carryover Amount for that Class.
o One Month LIBOR is the rate for one-month U.S. dollar deposits which
appears on Telerate Page 3750, as of 11:00 a.m. London time, on the second
business day prior to the immediately preceding Distribution Date.
S-1
<PAGE>
For the Group II Certificates (other than the Class AV-2 Certificates) interest
accrues on each Distribution Date from and including the prior Distribution Date
(or from _____ __, 19__, the Closing Date, in the case of the first Distribution
Date) to and excluding such Distribution Date). All calculations are made on the
basis of an actual number of days and a year of 360 days.
Interest Distributions
On each Distribution Date, the Trust will apply interest collected from a
Mortgage Loan Group to make distributions in the following order:
o all interest due to the related Class A Certificates, pro rata if funds
are not sufficient to distribute all interest due, at the applicable pass
through rates;
o in order of seniority, interest due to the other related Classes at the
applicable pass-through rates; and
o any remaining interest as described under "Crosscollateralization" in this
Summary.
Principal Distributions
Until _______ 2001, the Trust will distribute all principal collected from a
Mortgage Loan Group to the most senior related Class of Certificates.
As a result, over time, such Certificates will be overcollateralized by an
increasing percentage of the outstanding principal balance of the related Group.
For example, the scheduled principal balances of Group I initially exceed, or
overcollateralize, the certificate principal balance of the Group I Class A
Certificates by __%. When, however, the Trust has collected and distributed __%
of the scheduled principal balances of the Group I to the Group I Class A
Certificates, the scheduled principal balances of the Group I will exceed or
overcollateralize the certificate principal balance of the Group I Class A
Certificates by __%.
When, after _______ 2001, the overcollateralization of the Class A Certificates
of a Group equals or exceeds the applicable percentage set forth below, the
Trust will only distribute to such Class A Certificates that portion of the
principal that is needed to maintain that level of overcollateralization and the
balance of the principal will be distributed to the related Class M-1, Class M-2
and Class B-1 Classes subject to meeting similar overcollateralization tests
based, in each case, on the certificate principal balance of such Class and of
any related Classes senior to such Class).
Class Overcollateralization Level
- ---------------- -----------------------------
Group I Group II
------------- -----------
Class A % %
Class M-1 % %
Class M-2 % %
Class B-1 % %
While, however, a Trigger Event (as defined) with respect to a Mortgage Loan
Group exists, principal will be distributed exclusively to the most senior
outstanding Class of a Group.
Crosscollateralization
On each Distribution Date, the Trust will apply any excess interest in the
following order:
o to reduce the outstanding principal balance of the related Certificates,
in accordance with the priorities for distributions of principal, by the
amount of any unreimbursed "Realized Loss" with respect to that Mortgage
Loan Group,
o to distribute, in order of seniority, unpaid interest for prior
Distribution Dates (excluding Group II Certificates Carryover) on the
related Certificates,
o to make similar distributions to the other Group of Certificates,
o in the case of Group II, in order of seniority, to distribute Group II
Certificates Carryover, and
o to distribute any final balance as described
in this Prospectus Supplement.
See "DESCRIPTION OF THE OFFERED CERTIFICATES" in this Prospectus Supplement.
Realized Losses
If the Trust disposes of a Mortgage Loan for less than its scheduled principal
balance, the Trust will incur a "Realized Loss".
If, on any Distribution Date, there is not sufficient excess interest to offset
Realized Losses fully as described above under "Crosscollateralization", the
Trust will reduce the certificate principal balances of the Certificates,
excluding the Class A Certificates, of the related Group by the remaining
amount of Realized Losses in reverse order of seniority, beginning with the
Private Certificates. Thereafter, the holders of any such Certificates will
generally only be entitled to distributions of both principal and interest on
the reduced certificate principal balance of their Certificates. If, however,
excess interest is subsequently available to reimburse Realized Losses, then any
previous reduction made because of a Realized Loss will be eliminated in order
of seniority.
S-2
<PAGE>
Private Certificates
The Trust will simultaneously issue the Private Certificates, which are not
offered by this prospectus supplement and the accompanying prospectus. The
Private Certificates represent the most junior ownership interests in the assets
of the Trust. See " DESCRIPTION OF THE OFFERED CERTIFICATES--General" in this
Prospectus Supplement.
Denominations
The Trust will issue the Offered Certificates in book-entry form in minimum
denominations of $1,000 in original principal amount and integral multiples.
Trustee
Chase Bank of Texas, National Association.
MORTGAGE LOANS
Seller and Master Servicer
Saxon Mortgage, Inc., an affiliate of the Depositor, is the seller. The Seller
originated or acquired all the Mortgage Loans in accordance with its program for
non-conforming credits and will act as Master Servicer.
See "RISK FACTORS--Mortgage Underwriting Standards" in this Prospectus
Supplement.
Servicer
The Servicer of the Mortgage Loans, Meritech Mortgage Services, Inc., an
affiliate of the Depositor, will be obligated:
o to make recoverable advances of delinquent payments on the Mortgage Loans
(up to the amount of its monthly Servicing Fee and
o to deposit Month End Interest (as defined) with respect to Mortgage Loans
that are prepaid.
If the Servicer fails to make required advances or to deposit Month End
Interest, the Master Servicer will be obligated to do so.
Optional Termination
The Master Servicer has the right to purchase all the Mortgage Loans on any
Distribution Date when their aggregate scheduled principal balances have
declined to less than 10% of their aggregate scheduled principal balances as of
__________, 19__. The first such Distribution Date is referred to as the
"Initial Optional Terminiation Date". Any such repurchase will result in the
early retirement of your Certificates.
See "The Agreement--Termination" in this Prospectus Supplement.
Mortgage Loan Data
At ________ __, 19__, there were _,___ Mortgage Loans
secured by 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.
Group I Mortgage Loans
Aggregate Scheduled Principal Balances $
Average Scheduled Principal Balance $
Range of Scheduled Principal Balances $
Range of Mortgage Interest Rates %
Weighted Average Mortgage Interest Rate %
Weighted Average Loan-to-Value Ratio %
Weighted Average Combined Loan-to-Value Ratio %
Weighted Average Remaining Amortization Term Months
Range of Remaining Amortization Terms Months
Second Liens %
Balloon Mortgage loans %
Mortgaged Premises
Single-family detached dwellings %
Single-family attached dwellings %
Planned unit developments %
Condominiums %
Weighted Average Servicing Fee Rate %
Master Servicing Fee Rate
Group II Mortgage Loans
Aggregate Scheduled Principal Balances $
Average Scheduled Principal Balance $
Range of Scheduled Principal Balances $
Mortgage Interest Rates
Weighted Average By Type of Index:
Six Month LIBOR %
3/27 and 2/28 /LIBOR %
One Year CMT %
Gross Margin Range:
Six Month LIBOR %
5/25, 3/27 and 2/28/LIBOR %
One Year CMT %
Two Step LIBOR %
Current Weighted Average Mortgage Interest Rate%
Range of Current Mortgage Interest Rates %
Weighted Average Maximum Lifetime Mortgage
Interest Rate %
Range of Minimum Lifetime Mortgage Interest Rates%
Weighted Average Lifetime Minimum Mortgage
Interest Rate %
Range of Minimum Lifetime Mortgage Interest Rates%
Weighted Average Loan-to-Value Ratio %
Weighted Average Remaining Amortization Term Months
Range of Remaining Amortization Term Months
Second Lien Mortgage Loans None
Mortgage Premises
Single-family detached dwelling %
Single-family attached dwelling %
Planned unit developments %
Condominiums %
Weighted Average Servicing Fee Rate %
Master Servicing Fee Rate %
See "THE MORTGAGE LOAN POOL -- Characteristics of the Mortgage Loans" in this
Prospectus Supplement.
<PAGE>
BOOK-ENTRY REGISTRATION OF THE OFFERED
CERTIFICATES
The Trust will initially issue the Offered Certificates in book-entry form. You
may elect to hold your interest in the Offered Certificates through The
Depository Trust Company in the United States, or CEDEL Bank, S.A. or the
Euroclear System ("Euroclear"), in Europe, or indirectly through participants in
such systems.
You will not be entitled to receive a definitive certificate representing your
interest unless Definitive Certificates (as defined in the Prospectus) are
issued.
See "DESCRIPTION OF THE OFFERED CERTIFICATES -- Book-Entry Registration of the
Offered Certificates" in this Prospectus Supplement and "DESCRIPTION OF THE
CERTIFICATES -- Global Clearance, Settlement and Tax Documentation Procedures"
in the Prospectus.
RATINGS AND RATING AGENGIES
The Trust expects that the Offered Certificates will
receive ratings by _______________ and ___________ as follows:
Offered
Certificates
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 AA AA
Class MF-2 A A
Class BF-1 BBB BBB
Class AV-1 AAA AAA
Class AV-2 AAA AAA
Class MV-1 AA AA
Class MV-2 A A
Class BV-1 BBB 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 rating agency. 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.
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 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.
See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES" 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.
Although the Group I Class A Certificates in and the Class MF-1 Certificates are
expected to be rated in one of the two highest rating categories by _____ and
_____, 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.
See "LEGAL INVESTMENT CONSIDERATIONS" in this Prospectus Supplement and "LEGAL
INVESTMENT MATTERS" in the Prospectus.
ERISA CONSIDERATIONS
Fiduciaries of employee benefit plans subject to the Employee Retirement Income
Security Act of 1974, 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. Except for the Class A
Certificates, the Offered Certificates may not be purchased by such plans except
as described herein.
See "ERISA CONSIDERATIONS" in this Prospectus Supplement and in the Prospectus.
S-4
<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.
<TABLE>
<S> <C>
Group II Generally, the Group II pass-through rates (other than the
mortgage Class AV-2 Certificates) adjust monthly based upon the value
interest rates of an index (One Month LIBOR). The Group II Mortgage Interest
may limit Rates adjust semi-annually based upon another index (Six Month
Group II pass- LIBOR), annually based upon still another index (One Year CMT)
through rates or semi-annually based upon Six Month LIBOR beginning from two
to five years after origination.
In a rising interest rate environment, the Group II pass through
rates (other than the Class AV-2 Certificates) may rise before
the Group II mortgage interest rates. One Month LIBOR may
respond to different economic and market factors than the
indices applicable to the Group II Mortgage Loans.
One Month LIBOR could rise while the other indices are stable or
are falling. Even if they move in the same direction, One Month
LIBOR may rise more rapidly than the other indices in a rising
interest environment or fall less rapidly in a declining
interest rate environment. In a falling interest rate
environment, the Group II Available Funds Cap may be lower than
the otherwise applicable fixed pass-through rate for the Class
AV-2 Certificates. In any of those interest rate environments,
because of the caps on the Group II pass through rates, the
Trust may distribute interest on the Group II Certificate at a
pass-through rates less than LIBOR plus the Applicable Spread
(or the fixed pass-through rate on the Class AV-1 Certificates).
If, on any Distribution Date, the pass-through rates on one or
more classes of Group II Certificates (other than the Class AV-2
Certificates) are limited by application of the Group II
Available Funds Cap, a Group II Certificates Carryover will
result. On subsequent Distribution Dates, to the extent of
available funds (but only on or before the last Distribution
Date with respect to a Class), the Trust will distribute any
Group II Certificates Carryover, in accordance with the priority
of payment provisions described herein, to the Group II
Certificates (other than the Class AV-2 Certificates). The
ratings on the Group II Certificates do not represent an
assessment of the likelihood of the distribution of any Group II
Certificates Carryover.
Mechanics of Under the cash flow mechanics of the Trust:
the Trust Class M-1 Certificates receive distributions only after required
place risk distributions to the related Class A Certificates
of loss Class M-2 Certificates receive distributions only after required
principally on distributions to the related Class A and the Class M-1
the Subordinate Certificates
Certificates Class B-1 Certificates receive distributions only after required
distributions to the related Class A, Class M-1 and Class M-2
Certificates.
If the Trust does not have sufficient funds to distribute
interest to all Classes of Certificates, the shortfall will be
borne by the Certificates in reverse order of seniority.
If the Trust disposes of a Mortgage Loan at a loss, the
aggregate Certificate Principal Balances of the related
Certificates may exceed the Scheduled Principal Balances of the
Group. In that event, the Trust will reduce the Certificate
Principal Balances of the related Certificates (other than the
Class A Certificates) in reverse order of seniority by the
excess. See "DESCRIPTION OF THE OFFERED CERTIFICATES --
Crosscollateralization" in the Prospectus Supplement.
You should fully consider the subordination risks associated
with an investment in the Class M-1, Class M-2 or Class B-1
Certificates, including the possibility that you may not fully
recover your initial investment as a result of losses on the
Mortgage Loans. See "DESCRIPTION OF THE OFFERED CERTIFICATES --
Crosscollateralization Provisions" in this Prospectus
Supplement.
The following characteristics
of the Mortgage Loans may
increase risk of loss:
Non- The Seller originated or purchased all the Mortgage Loans in
Conforming accordance with its mortgage loan program for non-conforming
Mortgage Loan credits. A non-conforming credit means a mortgage loan which
Underwriting is ineligible for purchase by Fannie Mae due to credit
Standards characteristics that do notmeet Fannie Mae guidelines.
S-5
<PAGE>
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 Fannie Mae guidelines.
At the Cut Off Date less than _% of the Mortgage Loans were
delinquent. ___% of Group I Mortgage Loans and ____% of Group II
Mortgage had a first monthly payment due on or before
________ __, 19__. Because only those Mortgage Loans could
have a monthly payment that was delinquent 30 days or more on
the Cut Off Date, current information about delinquencies on
the Mortgage Loans may not be representative of future
experience.
Concentration The Mortgaged Premises for ____% of Group I Mortgage Loans and
____% of Group II Mortgage are located in _____. An overall
decline in the residential real estate market, or the occurrence
of a natural disaster such an earthquake, in ______, could
adversely affect the values of the Mortgaged Premises securing
such Mortgage Loans. That could cause the Scheduled Principal
Balances of such Mortgage Loans to equal or exceed the value of
such Mortgaged Premises and increase the risk of Realized Losses
on Mortgage Loans and result in losses to Certificateholders.
Second Liens ___% of the aggregate Scheduled Principal Balance of the
Group I Mortgage Loans are secured by second liens
subordinate to the rights of the mortgagee under the related
first mortgage. The Trust will have no source of funds to
satisfy the first mortgage or make payments due to the first
mortgagee and, accordingly, its ability to realize on its
second lien may be limited. See "THE TRUSTS -- Junior
Mortgage Liens" in the Prospectus.
Balloon __% of the aggregate Scheduled Principal Balances of the
Loans Mortgage Loans are "balloon loans" that provide for the
payment of the unamortized principal balance in a single
payment at maturity. See "RISK FACTORS -- Balloon Loans" in
the Prospectus.
High Balance Certain of the Mortgage Loans are expected to have high principal
Mortgage Loans balances (in one case, $________________ as of the Cut Off Date).
The payment experience on such Mortgage Loans may
have a disproportionate effect on the related Certificates.
Texas Home ___% of the aggregate Scheduled Principal Balance of the Mortgage
Equity Loans Loans are "home equity loans" subject to Section 50(a)(6) of
Article XVI of the Constitution of Texas (the "Texas
Home Equity Laws"), which took effect January 1, 1998. Legal
uncertainties with respect to home equity loans under the
Texas Home Equity Loans are described under "RISK FACTORS" in
the Prospectus.
The Federal Government has made emergency aid available to
Storm Damage property owners in several areas of _________ and _______ as a
may result in result of _________. The Seller has not made a physical
repurchases of inspection of mortgaged premises in those states or in any other
Mortgage Loans states, and, as a result, there can be no assurance that
material damage to any mortgage premises in the affected areas
has not occurred.
The Seller represents and warrants that each of the mortgaged
premises is free of casualty damage (except as set
__________forth in the related appraisal) as of the date of
issuance of the Certificates. If an uncured breach of such
representation and warranty materially and adversely affects the
interests of Certificateholders, the Seller will be required to
repurchase any affected Mortgage Loan or substitute another
mortgage loan. If any damage occurs after the issuance of the
Certificates, the Seller will have no such obligation.
Other Legal Federal and state laws, public policy and general principles of
Considerations equity relating to the protection of consumers, unfair
and deceptive practices and debt collection practices:
o regulate interest rates and other charges on mortgage loans,
o require certain disclosures to borrowers
o require licensing of the Seller and the other originators
o regulate generally the origination, servicing and collection
process for the mortgage loans.
Depending on the specific facts and circumstances involved,
violations may limit the ability of the Trust to collect on
the Mortgage Loans, may entitle the borrower to a refund of
amounts previously paid and could result in liability for
damages and administrative enforcement against the originator
or the Servicer.
S-6
<PAGE>
The Seller has represented that all applicable federal and
state laws were complied with in connection with the
origination of the Mortgage Loans. If there is a material and
adverse breach of such representation, the Seller will be
obligated to repurchase any affected Mortgage Loan or to
substitute a new mortgage loan. See "CERTAIN LEGAL ASPECTS OF
MORTGAGE LOANS -- Anti-Deficiency Legislation and Other
Limitations on Lenders" in the Prospectus.
Limitations on The standard hazard insurance policy required to be maintained
Hazard under the terms of each Mortgage Loan does not insure against
Insurance 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
excess interest on the Mortgage Loans is insufficient to
cover such losses, you could experience a loss on your
investment.
Insolvency of The Seller believes that the transfer of the Mortgage Loans by
Seller could the Seller to the Depositor and by the Depositor to the Trust
cause payment constitute sales by the Seller to the Depositor and by the
delays 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, 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 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.
The Trustee, the Depositor and the Rating Agencies will receive
an opinion of Arter & Hadden LLP, 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.
</TABLE>
THE MORTGAGE LOAN POOL
General
The Seller originated or acquired all the Mortgage Loans 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, 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
Fannie Mae due to credit characteristics that do not meet Fannie Mae 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 Fannie Mae
guidelines.
All statistical data with respect to the Mortgage Loans are approximate and are
based on the scheduled principal balances of the Mortgage Loans at
_____________, 19__, except where otherwise noted.
Underwriting Standards
The Seller customarily employs underwriting guidelines to aid in assessing:
o the borrower's ability and willingness to repay a loan
according to its terms and
o whether the value of the property securing the loan will
allow the lender to recover its investment if a loan default
occurs.
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. The
Seller generally offers loan applicants with less favorable credit ratings loans
with higher interest rates and lower loan-to-value ratios than applicants with
more favorable credit ratings.
S-7
<PAGE>
The Seller's general guidelines are set forth below:
<TABLE>
<CAPTION>
A+ A A- B C D
Mortgage History
<S> <C>
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 credit installment credit payments on one 60-day late
installment payments on
credit (isolated installment
60-day late credit (isolated
payments 90-day late
acceptable) payments
acceptable)
Bankruptcy Filings
Chapters 7 & 13 - Chapter 7 - Chapter 7 - Chapter 7 - Chapter 7 - Chapter 7 & 13 -
Discharged 3 Discharged 2 years Discharged 2 years Discharged 2 years Discharged 1 year 1 day from
years Chapter 13 - Chapter 13 -1 Chapter 13 -1 Chapter 13 -1 day discharge
(re-established Discharged 1 year year from date of year from date of after discharge
credit since the (re-established filing with proof filing with proof with proof paid
discharge) credit since paid as agreed paid as agreed as agreed
discharge) (must be (must be
discharged) discharged)
Debt-To-Income Ratio
28%/38% If LTV is less than 50% 50% 55% 60%
or equal to 80%, 45%
If LTV is greater
than 80%, 33%/38%
Maximum Combined Loan-To-Value
95% to $400,000 95% to $400,000 100% (Second 100% (Second 100% (Second 100% (Second
90% to $1 million 90% to $1 million homes and homes and homes and homes and
Investor Investor Investor Investor
Properties-reduce Properties-reduce Properties-reduce Properties-reduce
by 5%) by 5%) by 5%) by 5%)
</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 underwrites each loan 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'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 Fannie Mae standards. Each appraisal includes a market data
analysis 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 may be no more than 180 days old on the day the loan is originated. In
most instances, the Seller requires a second drive-by appraisal for properties
that have a value of $300,000 to $500,000 and a second full appraisal for
properties that have a value over $500,000.
The Seller has four loan documentation programs:
Full Documentation -- 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);
Limited Documentation -- is only available for self-employed borrowers;
six months of personal and/or business bank statements are
acceptable documentation of the borrower's stated cash flow;
Stated Income -- only available for self-employed borrowers; 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; and
No Ratio -- was specifically created for borrowers that want to be
qualified based primarily on their equity positions in their homes
and their individual credit profiles.
S-8
<PAGE>
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 Current Current Number of Number of Current Current
Grade Loans of Loans(%) Balance Balance(%) Loans Loans(%) Balance Balance(%)
<S> <C>
A+
A
A-
B
C
D
Totals
</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 (each, a "Mortgage") 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 ____% with respect to Group I; and at least ___%
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.
All the Mortgage Loans in Group II are 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"); 5/25/LIBOR Mortgage Loans, 3/27/LIBOR Mortgage
Loans and 2/28/LIBOR Mortgage Loans bear interest initially at a rate fixed at
origination for five, 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 a origination for six months, then at the
initial rate plus 1.5% for two years and thereafter at a rate that adjusts
semiannually based on Six Month LIBOR; 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").
Characteristics of the Mortgage Loans
The information in the following tables (including the textual information
beneath each table) is approximate and is based solely on the Mortgage Loans as
of the Cut Off Date. Totals may not sum to 100% due to rounding. All the
calculations are a percent of the given group.
S-9
<PAGE>
1) Current Scheduled Principal Balance
Group I Group II
No. of Scheduled No. of Scheduled
Current Scheduled Mortgage Principal Mortgage Principal
Principal Balance Loans(%) Balance(%) Loans(%) Balance(%)
$49,999 and below
50,000 - 99,999
100,000 -149,999
150,000 -199,999
200,000 -249,999
250,000 -299,999
300,000 -349,999
350,000 -399,999
400,000 -449,999
450,000 -499,999
500,000 -549,999
550,000 -599,999
600,000 -649,999
650,000 -699,999
700,000 -749,999
750,000 -799,999
800,000 -849,999
850,000 -899,999
900,000 -949,999
950,000 -999,999
over 1,000,000
Totals: 100 100 100 100
=== === === ===
The average Scheduled Principal Balance is (a) $______ for the Mortgage Loans,
(b) $______ for Group I and (c) $______ for Group. The minimum and maximum
Scheduled Principal Balances of the Mortgage Loans are $_____ and $_______,
respectively.
2) Current Mortgage Interest Rates
Group I Group II
Current No. of Scheduled No. of Scheduled
Mortgage Interest Mortgage Principal Mortgage Principal
Rate(%) Loans(%) Balance(%) Loans(%) Balance(%)
5.50 - 5.99
6.00 - 6.49
6.50 - 6.99
7.00 - 7.49
7.50 - 7.99
8.00 - 8.49
8.50 - 8.99
9.00 - 9.49
9.50 - 9.99
10.00 - 10.49
10.50 - 10.99
11.00 - 11.49
11.50 - 11.99
12.00 - 12.49
12.50 - 12.99
13.00 - 13.49
13.50 - 13.99
14.00 - 14.49
14.50 - 14.99
15.00 - 15.49
15.50 - 15.99
16.00 - 16.49
16.50 - 16.99
Totals: 100 100 100 100
=== === === ===
The weighted average current Mortgage Interest Rate is (a) ___% per annum for
the Mortgage Loans, (b) ____% per annum for Group I and (c) ___% per annum for
Group II.
3) Maximum Lifetime Mortgage Interest Rates on
Group II
Maximum Lifetime No. of Scheduled
Mortgage Interest Mortgage Principal
Rates(%) Loans(%) Balance(%)
11.50 - 11.99
12.00 - 12.49
12.50 - 12.99
13.00 - 13.49
13.50 - 13.99
14.00 - 14.49
14.50 - 14.99
15.00 - 15.49
15.50 - 15.99
16.00 - 16.49
16.50 - 16.99
17.00 - 17.49
17.50 - 17.99
18.00 - 18.49
18.50 - 18.99
19.00 - 19.49
19.50 - 19.99
20.00 - 20.49
Totals: 100 100
=== ===
The weighted average maximum lifetime Mortgage Interest Rate is ____%.
4) Minimum Lifetime Mortgage Interest Rates on Group II
Minimum Lifetime No. of Scheduled
Mortgage Interest Mortgage Principal
Rates(%) Loans(%) Balance(%)
4.50 - 4.99
5.00 - 5.49
5.50 - 5.99
6.00 - 6.49
6.50 - 6.99
7.00 - 7.49
7.50 - 7.99
8.00 - 8.49
8.50 - 8.99
9.00 - 9.49
9.50 - 9.99
10.00 - 10.49
10.50 - 10.99
11.00 - 11.49
11.50 - 11.99
12.00 - 12.49
12.50 - 12.99
13.00 - 13.49
13.50 - 13.99
Totals: 100 100
=== ===
The weighted average minimum lifetime Mortgage Interest Rate for Group II is
____% per annum. Substantially all the Group II Mortgage Loans have a minimum
lifetime Mortgage Interest Rate greater than the applicable Gross Margin.
S-10
<PAGE>
5) Next Interest Adjustment Date (Group II)
Interest No. of Scheduled
Adjustment Date Mortgage Loans(%) Principal Balance(%)
March 1, 1998
April 1, 1998
May 1, 1998
June 1, 1998
July 1, 1998
August 1, 1998
September 1, 1998
October 1, 1998
November 1, 1998
December 1, 1998
January 1, 1999
February 1, 1999
March 1, 1999
April 1, 1999
May 1, 1999
June 1, 1999
July 1, 1999
August 1, 1999
September 1, 1999
October 1, 1999
November 1, 1999
December 1, 1999
January 1, 2000
February 1, 2000
June 1, 2000
August 1, 2000
September 1, 2000
November 1, 2000
December 1, 2000
January 1, 2001
February 1, 2001
Totals: 100 100
=== ===
The weighted average next Interest Adjustment Date for Group II is ______, 19__.
6) Gross Margins on Group II
No. of Scheduled
Gross Margin (%) Mortgage Loans(%) Principal Balance(%)
1.50 - 1.99
2.00 - 2.49
2.50 - 2.99
3.00 - 3.49
3.50 - 3.99
4.00 - 4.49
4.50 - 4.99
5.00 - 5.49
5.50 - 5.99
6.00 - 6.49
6.50 - 6.99
7.00 - 7.49
7.50 - 7.99
8.00 - 8.49
8.50 - 8.99
9.00 - 9.50
Totals: 100 100
=== ===
The weighted average Gross Margin for Group II is ___%.
7) Original Loan-to-Value Ratios(1)
Group I Group II
No. of Scheduled No. of Scheduled
Original Loan-to- Mortgage Principal Mortgage Principal
Value Ratio(%) Loans(%) Balance(%) Loans(%) Balance(%)
50.00 and below
50.01 - 55.00
55.01 - 60.00
60.01 - 65.00
65.01 - 70.00
70.01 - 75.00
75.01 - 80.00
80.01 - 85.00
85.01 - 90.00
90.01 - 95.00
95.00+
Totals: 100 100 100 100
=== === === ===
(1)The Loan-to-Value Ratio of a Mortgage Loan (including a second Mortgage Loan)
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 __% for Group I and __% for Group II.
8) Occupancy Type of Mortgaged Premises
Group I Group II
No. of Scheduled No. of Scheduled
Mortgage Principal Mortgage Principal
Occupancy Type(1) Loans(%) Balance(%) Loans(%) Balance(%)
Primary Home
Second Home
Investor
Totals: 100 100 100 100
(1)As represented by the borrowers on their Mortgage Loan applications.
9) Origination Program
Group I Group II
No. of Scheduled No. of Scheduled
Mortgage Principal Mortgage Principal
Origination Program Loans(%) Balance(%) Loans(%) Balance(%)
Full Documentation
Limited
Documentation(1)
Stated Income(2)
No Ratio
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 I Group II
No. of Scheduled No. of Scheduled
Mortgage Principal Mortgage Principal
Loan Purpose Loans(%) Balance(%) Loans(%) Balance(%)
Purchase
Refinance
(Cash-Out)
Refinance (No
Cash-Out)
Totals: 100 100 100 100
=== === === ===
S-11
<PAGE>
11) Remaining Amortization Term
Group I Group II
No. of Scheduled No. of Scheduled
Remaining Mortgage Principal Mortgage Principal
Term (Months) Loans(%) Balance(%) Loans(%) Balance(%)
360
359
358
357
356
355
354
238-353
178-237
1-177
Totals: 100 100 100 100
=== === === ===
The weighted average remaining amortization term is ___ months for Group I and
___ months for Group II.
12) Property Types of Mortgage Premises
Group I Group II
No. of Scheduled No. of Scheduled
Mortgage Principal Mortgage Principal
Property Type Loans(%) Balance(%) Loans(%) Balance(%)
Single Family
Detached
Single Family
Attached
De Minimis PUD
PUD
Condominium Low Rise
Manufactured Housing
Condominium High Rise
Townhouse
2-4 Family
Totals: 100 100 100 100
=== === === ===
<PAGE>
13) State Distribution of Mortgage Premises
<TABLE>
<CAPTION>
Group I Group II
State No. of Mortgage Scheduled Principal No. of Mortgage Scheduled Principal
Loans(%) Balance(%) Loans(%) Balance(%)
<S> <C>
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
District of Columbia
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
Totals: 100 100 100 100
=== === === ===
</TABLE>
S-12
<PAGE>
Additional Information
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. The Depositor may remove Mortgage
Loans prior to closing as a result of incomplete documentation or non-compliance
with representations and warranties 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. Neither the
deletion of Mortgage Loans nor the addition of Mortgage Loans are expected to
cause material variances from the information set forth herein.
The Depositor will file a current report on Form 8-K with the Commission,
together with the Agreement, within fifteen days after the initial issuance of
the Offered Certificates. The Depositor will note the effect of any changes in
the pool the current report on Form 8-K as a result of adding or removing any
Mortgage Loans, as set forth in the preceding paragraph. The Depositor also
intends to file additional yield tables and other computational materials with
the Commission in a current report on Form 8-K. The Underwriters prepared such
tables and materials at the request of 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.
The Trust has included "forward looking statements" in this Prospectus
Supplement. Section 27a of the Securities Act of 1933 defines "forward-looking
statements" to include statements containing projections of various financial
items. You should understand that forward looking statements are qualified by
the important factors discussed in connection therewith that could cause actual
results to differ materially from those in the forward-looking statements.
Servicing of the Mortgage Loans
General. Meritech Mortgage Services, Inc., an affiliate of the Depositor (the
"Servicer"), will service the Mortgage Loans. The Servicer is (a) a HUD-approved
originator and (b) approved by and in good standing with Fannie Mae and FHLMC.
The Servicer will provide customary servicing functions with respect to the
Mortgage Loans. Among other things, the 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. The Servicer must obtain approval of the Master
Servicer with respect to certain servicing activities. See "SERVICING OF THE
MORTGAGE LOANS" in the Prospectus.
The Servicer 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 ________, 1998, the Servicer serviced a portfolio of approximately ______
one- to- four family conventional residential mortgage loans totaling
approximately $_____ million. The following table sets forth certain unaudited
information concerning the delinquency experience (including loans in
foreclosure) and mortgage loans foreclosed with respect to the Servicer'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
---------------------------------------------------------------------------------------------
, 1998 December 31, 1997 December 31, 1996 December 31, 1995
---------------------- --------------------- --------------------- ----------------------
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 5.82% 6.25% 3.72% 3.10% 3.56% 3.25%
61 to 90 days 1.61 1.49 1.02 1.03 0.65 0.71
91 days or more 1.37 1.20 1.33 1.48 1.57 2.30
Percentage of Total
Portfolio
Delinquent 8.81 8.95 6.08 5.62 5.79 6.27
Foreclosed 2.07 1.47 0.91 1.31 0.73 0.99
</TABLE>
(1) Totals may not sum due to rounding.
The foregoing statistics represent the recent experience of the Servicer. 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 the Servicer's
S-13
<PAGE>
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 the Servicer's servicing portfolio
constitute non-conforming credits. Accordingly, there can be no assurance that
the delinquency and foreclosure experience of the Mortgage Loans in the future
will correspond to the future delinquency and foreclosure experience of the
Servicer'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.
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 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. 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 will be paid
to or retained by each Servicer as additional servicing compensation. The
Servicer must pay certain insurance premiums and certain ongoing expenses. The
Servicer may transfer its servicing to successor servicers that meet the
criteria for servicers approved by the Rating Agencies.
The 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, the Servicer (and any successor servicer) must
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 the Servicer to make any such required advance will
constitute an event of default under the servicing agreement. If the 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, the Servicer must deposit in its Custodial Account on or before
each remittance date (the 21st day of each month or the preceding business day
if such 21st day is not a business day) an amount equal to Month End Interest
with respect to the preceding prepayment period (the period from and including
the 18th day of a month to and including the 17th day of the following month)
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 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).
If the Servicer fails to deposit Month End Interest as required, the Master
Servicer will be obligated to do so.
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. 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, however, one or more payments are made more than one month
after the respective preceding payment date, the outstanding principal balance
S-14
<PAGE>
would not 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 that 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. 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
Saxon Mortgage, Inc., 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 its 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 represent (together with the Private Certificates certain of
which may be retained by the Depositor or its affiliates) 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 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. 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. 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
S-15
<PAGE>
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).
The Class AF-6 and Class AV-2 Certificates will not be entitled to distributions
of principal (either scheduled or unscheduled) until _______ 2001 and _______,
respectively (except as otherwise described herein). Thereafter, the relative
entitlement of the Class AF-6 Certificates and Class AV-2 Certificates to
payments in respect of principal is subject to increase in accordance with the
calculation of the Class AF-6 Distribution Amount and the Class AV-s Principal
Distribution Amount. See "DESCRIPTION OF THE OFFERED CERTIFICATES --
Distributions -Distributions of Principal" in the Prospectus Supplement.
Prepayments and Yields for Offered Certificates
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 Rates applicable to the Class [___________] 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 ____% to ____% 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 _____% per annum.
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 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. 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 distributed in reduction of the Certificate Principal Balances
thereof and (ii) the Master Servicer 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
S-16
<PAGE>
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. ___% HEP (Scenario IV for Group I) assumes prepayment rates
of ___% 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 ___% 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, ___% HEP assumes a constant prepayment rate of 22%
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. ___% CPR (Scenario IV for Group II) assumes
a constant prepayment rate of ___% 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 ______ 1998,
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 ________ 1, 1998, 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 _____ 1998, and include 30 days'
interest thereon;
(v) the level of Six-Month LIBOR remains constant at _____%;
(vi) the level of One Year CMT remains constant at _____%;
(vii) the Pass-Through Rates for the Group II Certificates remain
constant (based on One-Month LIBOR of _______%);
(viii) the Closing Date for the Certificates is _____ __, 19__;
(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) the Offered Certificates are redeemed on the Initial
Optional Termination Date;
(xi) credit enhancement percentages for each Group were derived
from the Certificate Principal Balances of the Certificates
set forth herein;
(xii) none of the Mortgage Loans are assumed to be Two/Step LIBOR
Mortgage Loans and all the Mortgage Loans are assumed to be
Actuarial Loans; and
(xiii) each Mortgage Loan Group consists of Mortgage Loans having the
approximate characteristics in the following tables.
S-17
<PAGE>
FIXED RATE GROUP
<TABLE>
<CAPTION>
Original Remaining Original Remaining
Amortization Current Net Amortization Amortization Term to Term to
Methodology Balance WAC Servicing WAC Term Term Balloon Balloon
<S> <C>
Level
Level
Level
Level
Level
Level
Balloon
</TABLE>
VARIABLE RATE GROUP
<TABLE>
<CAPTION>
Initial
Current Original Remaining Gross Periodic Periodic Reset Next
Balance WAC Servicing Net WAC Term Term Margin Cap Cap Life Cap Floor Frequency Reset
<S> <C>
Subgroup A
Six Month LIBOR Loans
CMT Loans
Subgroup B
Six Month LIBOR Loans
CMT Loans
</TABLE>
PREPAYMENT SCENARIOS
<TABLE>
<CAPTION>
Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI Scenario VII
<S> <C>
Group I (HEP): 0%
Group II (CPR): 0%
</TABLE>
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%.
S-18
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
Class AF-1 Scenario
------------------------------------------
I II III IV V VI VII
- -- --- -- - -- ---
Initial 100 100 100 100 100 100 100
Percent
06/25/99
06/25/00 0 0 0 0
06/25/01 0 0 0 0 0
06/25/02 0 0 0 0 0 0
06/25/03 0 0 0 0 0 0
06/25/04 0 0 0 0 0 0
06/25/05 0 0 0 0 0 0
06/25/06 0 0 0 0 0 0
06/25/07 0 0 0 0 0 0
06/25/08 0 0 0 0 0 0
06/25/09 0 0 0 0 0 0
06/25/10 0 0 0 0 0 0
06/25/11 0 0 0 0 0 0
06/25/12 0 0 0 0 0 0
06/25/13 0 0 0 0 0 0
06/25/14 0 0 0 0 0 0 0
06/25/15 0 0 0 0 0 0 0
06/25/16 0 0 0 0 0 0 0
06/25/17 0 0 0 0 0 0 0
06/25/18 0 0 0 0 0 0 0
06/25/19 0 0 0 0 0 0 0
06/25/20 0 0 0 0 0 0 0
06/25/21 0 0 0 0 0 0 0
06/25/22 0 0 0 0 0 0 0
06/25/23 0 0 0 0 0 0 0
06/25/24 0 0 0 0 0 0 0
06/25/25 0 0 0 0 0 0 0
06/25/26 0 0 0 0 0 0 0
Weighted
Average Life
Years(1)
Class AF-2 Scenario
--------------------------------------- --
I II III IV V VI VII
- -- --- -- - -- ---
Initial 100 100 100 100 100 100 100
Percent
06/25/99 100 100 100 100 100 100 100
06/25/00 100 100 100 0 0 0
06/25/01 100 100 0 0 0 0 0
06/25/02 100 0 0 0 0 0
06/25/03 100 0 0 0 0 0 0
06/25/04 100 0 0 0 0 0 0
06/25/05 100 0 0 0 0 0 0
06/25/06 100 0 0 0 0 0 0
06/25/07 100 0 0 0 0 0 0
06/25/08 100 0 0 0 0 0 0
06/25/09 100 0 0 0 0 0 0
06/25/10 100 0 0 0 0 0 0
06/25/11 100 0 0 0 0 0 0
06/25/12 100 0 0 0 0 0 0
06/25/13 100 0 0 0 0 0 0
06/25/14 0 0 0 0 0 0
06/25/15 0 0 0 0 0 0
06/25/16 0 0 0 0 0 0 0
06/25/17 0 0 0 0 0 0 0
06/25/18 0 0 0 0 0 0 0
06/25/19 0 0 0 0 0 0 0
06/25/20 0 0 0 0 0 0 0
06/25/21 0 0 0 0 0 0 0
06/25/22 0 0 0 0 0 0 0
06/25/23 0 0 0 0 0 0 0
06/25/24 0 0 0 0 0 0 0
06/25/25 0 0 0 0 0 0 0
06/25/26 0 0 0 0 0 0 0
Weighted
Average Life
Years(1)
<PAGE>
Class AF-3 Scenario
-------------------------------------------
I II III IV V VI VII
- -- --- -- - -- ---
Initial 100 100 100 100 100 100 100
Percent
06/25/99 100 100 100 100 100 100 100
06/25/00 100 100 100 100
06/25/01 100 100 0 0
06/25/02 100 100 0 0 0
06/25/03 100 0 0 0 0
06/25/04 100 0 0 0 0 0
06/25/05 100 0 0 0 0 0
06/25/06 100 0 0 0 0 0
06/25/07 100 0 0 0 0 0
06/25/08 100 0 0 0 0 0
06/25/09 100 0 0 0 0 0
06/25/10 100 0 0 0 0 0
06/25/11 100 0 0 0 0 0 0
06/25/12 100 0 0 0 0 0 0
06/25/13 100 0 0 0 0 0 0
06/25/14 100 0 0 0 0 0 0
06/25/15 100 0 0 0 0 0 0
06/25/16 0 0 0 0 0 0
06/25/17 0 0 0 0 0 0
06/25/18 0 0 0 0 0 0
06/25/19 0 0 0 0 0 0
06/25/20 0 0 0 0 0 0
06/25/21 0 0 0 0 0 0
06/25/22 0 0 0 0 0 0
06/25/23 0 0 0 0 0 0
06/25/24 0 0 0 0 0 0
06/25/25 0 0 0 0 0 0 0
06/25/26 0 0 0 0 0 0 0
Weighted
Average Life
Years(1)
Class AF-4 Scenario
--------------------------------------- ---
I II III IV V VI VII
- -- --- -- - -- ---
Initial 100 100 100 100 100 100 100
Percent
06/25/99 100 100 100 100 100 100 100
06/25/00 100 100 100 100 100 100 100
06/25/01 100 100 100 100 100 0
06/25/02 100 100 100 100 0 0
06/25/03 100 100 100 0 0 0
06/25/04 100 100 0 0 0 0
06/25/05 100 100 0 0 0 0
06/25/06 100 100 0 0 0 0
06/25/07 100 100 0 0 0 0 0
06/25/08 100 100 0 0 0 0 0
06/25/09 100 100 0 0 0 0 0
06/25/10 100 100 0 0 0 0 0
06/25/11 100 0 0 0 0 0
06/25/12 100 0 0 0 0 0
06/25/13 100 0 0 0 0 0 0
06/25/14 100 0 0 0 0 0 0
06/25/15 100 0 0 0 0 0 0
06/25/16 100 0 0 0 0 0 0
06/25/17 100 0 0 0 0 0 0
06/25/18 100 0 0 0 0 0 0
06/25/19 100 0 0 0 0 0 0
06/25/20 100 0 0 0 0 0 0
06/25/21 100 0 0 0 0 0 0
06/25/22 100 0 0 0 0 0 0
06/25/23 100 0 0 0 0 0 0
06/25/24 100 0 0 0 0 0 0
06/25/25 0 0 0 0 0 0
06/25/26 0 0 0 0 0 0 0
Weighted
Average Life
Years(1)
<PAGE>
- ---------------------------------------------------------
(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.
S-19
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
Class AF-5 Scenario
--------------------------------------- ---
I II III IV V VI VII
- -- --- -- - -- ---
Initial 100 100 100 100 100 100 100
Percent
06/25/99 100 100 100 100 100 100 100
06/25/00 100 100 100 100 100 100 100
06/25/01 100 100 100 100 100 100
06/25/02 100 100 100 100 100
06/25/03 100 100 100 100 8
06/25/04 100 100 100 0 0
06/25/05 100 100 100 0 0 0
06/25/06 100 100 100 0 0 0
06/25/07 100 100 0 0 0 0
06/25/08 100 100 0 0 0 0
06/25/09 100 100 0 0 0 0 0
06/25/10 100 100 0 0 0 0 0
06/25/11 100 100 0 0 0 0 0
06/25/12 100 100 0 0 0 0 0
06/25/13 100 0 0 0 0 0
06/25/14 100 0 0 0 0 0 0
06/25/15 100 0 0 0 0 0 0
06/25/16 100 0 0 0 0 0 0
06/25/17 100 0 0 0 0 0 0
06/25/18 100 0 0 0 0 0 0
06/25/19 100 0 0 0 0 0 0
06/25/20 100 0 0 0 0 0 0
06/25/21 100 0 0 0 0 0 0
06/25/22 100 0 0 0 0 0 0
06/25/23 100 0 0 0 0 0 0
06/25/24 100 0 0 0 0 0 0
06/25/25 100 0 0 0 0 0 0
06/25/26 0 0 0 0 0 0
06/25/27 0 0 0 0 0 0 0
Weighted
Average
Life Years(1)
Class AF-6 Scenario
------------------------------------------
I II III IV V VI VII
- -- --- -- - -- ---
Initial 100 100 100 100 100 100 100
Percent
06/25/99 100 100 100 100 100 100 100
06/25/00 100 100 100 100 100 100 100
06/25/01 100 100 100 100 100 100 100
06/25/02
06/25/03
06/25/04 0 0
06/25/05 0 0 0
06/25/06 0 0 0
06/25/07 0 0 0 0
06/25/08 0 0 0 0
06/25/09 0 0 0 0 0
06/25/10 0 0 0 0 0
06/25/11 0 0 0 0 0
06/25/12 0 0 0 0 0
06/25/13 0 0 0 0 0
06/25/14 0 0 0 0 0 0
06/25/15 0 0 0 0 0 0
06/25/16 0 0 0 0 0 0
06/25/17 0 0 0 0 0 0
06/25/18 0 0 0 0 0 0
06/25/19 0 0 0 0 0 0
06/25/20 0 0 0 0 0 0
06/25/21 0 0 0 0 0 0
06/25/22 0 0 0 0 0 0
06/25/23 0 0 0 0 0 0
06/25/24 0 0 0 0 0 0 0
06/25/25 0 0 0 0 0 0 0
06/25/26 0 0 0 0 0 0 0
06/25/27 0 0 0 0 0 0 0
Weighted
Average Life
Years(1)
<PAGE>
Class MF-1 Scenario
--------------------------------------- ---
I II III IV V VI VII
- -- --- -- - -- ---
Initial 100 100 100 100 100 100 100
Percent
06/25/99 100 100 100 100 100 100 100
06/25/00 100 100 100 100 100 100 100
06/25/01 100 100 100 100 100 100 100
06/25/02 100 100
06/25/03 100 100
06/25/04 100 100 0 0
06/25/05 100 0 0 0
06/25/06 100 0 0 0
06/25/07 100 0 0 0 0
06/25/08 100 0 0 0 0
06/25/09 100 0 0 0 0 0
06/25/10 100 0 0 0 0 0
06/25/11 100 0 0 0 0 0
06/25/12 100 0 0 0 0 0
06/25/13 100 0 0 0 0 0
06/25/14 100 0 0 0 0 0 0
06/25/15 100 0 0 0 0 0 0
06/25/16 100 0 0 0 0 0 0
06/25/17 0 0 0 0 0 0
06/25/18 0 0 0 0 0 0
06/25/19 0 0 0 0 0 0
06/25/20 0 0 0 0 0 0
06/25/21 0 0 0 0 0 0
06/25/22 0 0 0 0 0 0
06/25/23 0 0 0 0 0 0
06/25/24 0 0 0 0 0 0
06/25/25 0 0 0 0 0 0
06/25/26 0 0 0 0 0 0
06/25/27 0 0 0 0 0 0 0
Weighted
Average Life
Years(1)
Class MF-2 Scenario
--------------------------------------- ---
I II III IV V VI VII
- -- --- -- - -- ---
Initial 100 100 100 100 100 100 100
Percent
06/25/99 100 100 100 100 100 100 100
06/25/00 100 100 100 100 100 100 100
06/25/01 100 100 100 100 100 100 100
06/25/02 100 100
06/25/03 100 100
06/25/04 100 100 0 0
06/25/05 100 0 0 0
06/25/06 100 0 0 0
06/25/07 100 0 0 0 0
06/25/08 100 0 0 0 0
06/25/09 100 0 0 0 0 0
06/25/10 100 0 0 0 0 0
06/25/11 100 0 0 0 0 0
06/25/12 100 0 0 0 0 0
06/25/13 100 0 0 0 0 0
06/25/14 100 0 0 0 0 0 0
06/25/15 100 0 0 0 0 0 0
06/25/16 100 0 0 0 0 0 0
06/25/17 0 0 0 0 0 0
06/25/18 0 0 0 0 0 0
06/25/19 0 0 0 0 0 0
06/25/20 0 0 0 0 0 0
06/25/21 0 0 0 0 0 0
06/25/22 0 0 0 0 0 0
06/25/23 0 0 0 0 0 0
06/25/24 0 0 0 0 0 0
06/25/25 0 0 0 0 0 0
06/25/26 0 0 0 0 0 0
06/25/27 0 0 0 0 0 0 0
Weighted
Average Life
Years(1)
<PAGE>
- ----------------------------
(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.
S-20
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
Class BF-1 Scenario
------------------------------------------
I II III IV V VI VII
- -- --- -- - -- ---
Initial 100 100 100 100 100 100 100
Percent
06/25/99 100 100 100 100 100 100 100
06/25/00 100 100 100 100 100 100 100
06/25/01 100 100 100 100 100 100 100
06/25/02 100 100
06/25/03 100 100
06/25/04 100 100 0 0
06/25/05 100 0 0 0
06/25/06 100 0 0 0
06/25/07 100 0 0 0 0
06/25/08 100 0 0 0 0
06/25/09 100 0 0 0 0 0
06/25/10 100 0 0 0 0 0
06/25/11 100 0 0 0 0 0
06/25/12 100 0 0 0 0 0
06/25/13 100 0 0 0 0 0
06/25/14 100 0 0 0 0 0 0
06/25/15 100 0 0 0 0 0 0
06/25/16 100 0 0 0 0 0 0
06/25/17 0 0 0 0 0 0
06/25/18 0 0 0 0 0 0
06/25/19 0 0 0 0 0 0
06/25/20 0 0 0 0 0 0
06/25/21 0 0 0 0 0 0
06/25/22 0 0 0 0 0 0
06/25/23 0 0 0 0 0 0
06/25/24 0 0 0 0 0 0
06/25/25 0 0 0 0 0 0
06/25/26 0 0 0 0 0 0
06/25/27 0 0 0 0 0 0 0
Weighted
Average Life
Years(1)
Class AV-1 Scenario
--------------------------------------
I II III IV V VI VII
- -- --- -- - -- ---
Initial 100 100 100 100 100 100 100
Percent
06/25/99
06/25/00
06/25/01 0
06/25/02 0
06/25/03 0
06/25/04 0 0
06/25/05 0 0 0
06/25/06 0 0 0
06/25/07 0 0 0 0
06/25/08 0 0 0 0
06/25/09 0 0 0 0 0
06/25/10 0 0 0 0 0
06/25/11 0 0 0 0 0
06/25/12 0 0 0 0 0
06/25/13 0 0 0 0 0
06/25/14 0 0 0 0 0 0
06/25/15 0 0 0 0 0 0
06/25/16 0 0 0 0 0 0
06/25/17 0 0 0 0 0 0
06/25/18 0 0 0 0 0 0
06/25/19 0 0 0 0 0 0
06/25/20 0 0 0 0 0 0
06/25/21 0 0 0 0 0 0
06/25/22 0 0 0 0 0 0
06/25/23 0 0 0 0 0 0
06/25/24 0 0 0 0 0 0
06/25/25 0 0 0 0 0 0
06/25/26 0 0 0 0 0 0
06/25/27 0 0 0 0 0 0 0
Weighted
Average Life
Years(1)
<PAGE>
Class AV-2 Scenario
-----------------------------------------
I II III IV V VI VII
- -- --- -- - -- ---
Initial 100 100 100 100 100 100 100
Percent
06/25/99
06/25/00
06/25/01 0
06/25/02 0
06/25/03 0
06/25/04 0 0
06/25/05 0 0 0
06/25/06 0 0 0
06/25/07 0 0 0 0
06/25/08 0 0 0 0
06/25/09 0 0 0 0 0
06/25/10 0 0 0 0 0
06/25/11 0 0 0 0 0
06/25/12 0 0 0 0 0
06/25/13 0 0 0 0 0
06/25/14 0 0 0 0 0 0
06/25/15 0 0 0 0 0 0
06/25/16 0 0 0 0 0 0
06/25/17 0 0 0 0 0 0
06/25/18 0 0 0 0 0 0
06/25/19 0 0 0 0 0 0
06/25/20 0 0 0 0 0 0
06/25/21 0 0 0 0 0 0
06/25/22 0 0 0 0 0 0
06/25/23 0 0 0 0 0 0
06/25/24 0 0 0 0 0 0
06/25/25 0 0 0 0 0 0
06/25/26 0 0 0 0 0 0
06/25/27 0 0 0 0 0 0 0
Weighted
Average Life
Years(1)
Class MV-1 Scenario
--------------------------------------- ---
I II III IV V VI VII
- -- --- -- - -- ---
Initial 100 100 100 100 100 100 100
Percent
06/25/99 100 100 100 100 100 100 100
06/25/00 100 100 100 100 100 100 100
06/25/01 100 100 100 100 100 100
06/25/02 100 100 100
06/25/03 100
06/25/04 100 0 0
06/25/05 100 0 0 0
06/25/06 100 0 0 0
06/25/07 100 0 0 0 0
06/25/08 100 0 0 0 0
06/25/09 100 0 0 0 0 0
06/25/10 100 0 0 0 0 0
06/25/11 100 0 0 0 0 0
06/25/12 100 0 0 0 0 0
06/25/13 100 0 0 0 0 0
06/25/14 100 0 0 0 0 0 0
06/25/15 100 0 0 0 0 0 0
06/25/16 100 0 0 0 0 0 0
06/25/17 100 0 0 0 0 0 0
06/25/18 100 0 0 0 0 0 0
06/25/19 100 0 0 0 0 0 0
06/25/20 100 0 0 0 0 0 0
06/25/21 100 0 0 0 0 0 0
06/25/22 0 0 0 0 0 0
06/25/23 0 0 0 0 0 0
06/25/24 0 0 0 0 0 0
06/25/25 0 0 0 0 0 0
06/25/26 0 0 0 0 0 0
06/25/27 0 0 0 0 0 0 0
Weighted
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.
S-21
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
Class MV-2 Scenario
---------------------------------------
I II III IV V VI VII
-- -- --- -- - -- ---
Initial 100 100 100 100 100 100 100
Percent
06/25/99 100 100 100 100 100 100 100
06/25/00 100 100 100 100 100 100 100
06/25/01 100 100 100 100 100 100 100
06/25/02 100 100
06/25/03 100
06/25/04 100 0 0
06/25/05 100 0 0 0
06/25/06 100 0 0 0
06/25/07 100 0 0 0 0
06/25/08 100 0 0 0 0
06/25/09 100 0 0 0 0 0
06/25/10 100 0 0 0 0 0
06/25/11 100 0 0 0 0 0
06/25/12 100 0 0 0 0 0
06/25/13 100 0 0 0 0 0
06/25/14 100 0 0 0 0 0 0
06/25/15 100 0 0 0 0 0 0
06/25/16 100 0 0 0 0 0 0
06/25/17 100 0 0 0 0 0 0
06/25/18 100 0 0 0 0 0 0
06/25/19 100 0 0 0 0 0 0
06/25/20 100 0 0 0 0 0 0
06/25/21 100 0 0 0 0 0 0
06/25/22 0 0 0 0 0 0
06/25/23 0 0 0 0 0 0
06/25/24 0 0 0 0 0 0
06/25/25 0 0 0 0 0 0
06/25/26 0 0 0 0 0 0
06/25/27 0 0 0 0 0 0 0
Weighted
Average Life
Years(1)
Class BV-1 Scenario
-------------------------------------------
I II III IV V VI VII
- -- --- -- - -- ---
Initial 100 100 100 100 100 100 100
Percent
06/25/99 100 100 100 100 100 100 100
06/25/00 100 100 100 100 100 100 100
06/25/01 100 100 100 100 100 100 100
06/25/02 100 100
06/25/03 100
06/25/04 100 0 0
06/25/05 100 0 0 0
06/25/06 100 0 0 0
06/25/07 100 0 0 0 0
06/25/08 100 0 0 0 0
06/25/09 100 0 0 0 0 0
06/25/10 100 0 0 0 0 0
06/25/11 100 0 0 0 0 0
06/25/12 100 0 0 0 0 0
06/25/13 100 0 0 0 0 0
06/25/14 100 0 0 0 0 0 0
06/25/15 100 0 0 0 0 0 0
06/25/16 100 0 0 0 0 0 0
06/25/17 100 0 0 0 0 0 0
06/25/18 100 0 0 0 0 0 0
06/25/19 100 0 0 0 0 0 0
06/25/20 100 0 0 0 0 0 0
06/25/21 100 0 0 0 0 0 0
06/25/22 0 0 0 0 0 0
06/25/23 0 0 0 0 0 0
06/25/24 0 0 0 0 0 0
06/25/25 0 0 0 0 0 0
06/25/26 0 0 0 0 0 0
06/25/27 0 0 0 0 0 0 0
Weighted
Average Life
Years(1)
<PAGE>
- --------------------------------------------------
(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 Group I Certificates
The effective yield to the Holders of the Group I 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 Mortgage Loan Asset Backed Certificates, Series 1998-1, will consist of:
(i) the following Group I Offered Certificates:
(a) Class AF-1, Class AF-2, Class AF-3, Class AF-4, Class AF-5 and
Class AF-6 Certificates,
(b) Class MF-1 and Class MF-2 Certificates and
(c) Class BF-1 Certificates;
(ii) the following Group II Offered Certificates:
(a) Class AV-1 and Class AV-2 Certificates,
(b) Class MV-1 and Class MV-2 Certificates and
(c) Class BV-1 Certificates; and
S-22
<PAGE>
(iii) Class BF-2 and Class BF-3 Certificates (together with the Group I
Offered Certificates, the "Group I Certificates"), Class BV-2 and Class
BV-3 Certificates (together with the Group II Offered Certificates,
the "Group II Certificates"), Class C and Class R Certificates
(together with the Class BF-2, Class BF-3, Class BV-2 and Class BV-3
Certificates, the "Private Certificates").
References to Class A, Class M-1, Class M-2, Class B-1, Subordinated
Certificates and Private Certificates are, as the context requires, references
to Certificates of either or both Groups of similar designations. The Class M-1,
Class M-2, Class B-1 and the Private Certificates are collectively referred to
as the "Subordinated Certificates".
The initial scheduled principal balances of each Mortgage Loan Group will equal
or exceed the initial certificate principal balances of the related
Certificates. The Private Certificates of a Group are subordinate to the related
Offered Certificates on the same basis that the Class B, Class M-2 and Class M-1
Certificates are subordinate to more senior Classes of Certificates of a Group.
The Private Certificates will have Pass Through Rates that do not exceed the net
weighted average mortgage interest rates of the related Mortgage Loan Group.
Only the Group I Offered Certificates and the Group II Offered Certificates
(collectively, the "Offered Certificates") are offered hereby. The Certificates
will be issued by Saxon Asset Securities Trust 1998-__, pursuant to the
Agreement. The Private Certificates may be offered privately or will be retained
initially by the Depositor or its affiliates and are not being offered hereby.
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 adjusted for all amounts to be applied on such
Distribution Date with respect to principal (including, reductions, or
increases, in the Certificate Principal Balance of the Subordinated Certificates
as a result of increases, or reductions, in Unpaid Realized Loss Amounts, as
described herein). See "Description of the Certificates --
Crosscollateralization Provisions" in this Prospectus Supplement.
Persons in whose names Certificates are registered in the Certificate Register
maintained by the Trustee 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 Owner will be entitled to receive a
definitive certificate representing such Beneficial Owner'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.
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 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 Servicer 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.
S-23
<PAGE>
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 Servicer during
the related Due Period or advanced on or before such
Master Servicer Remittance Date,
(ii) prepayments collected by the Servicer in the applicable
prepayment period, (iii) the Scheduled Principal Balance
of each Mortgage Loan that was repurchased by the
Depositor,
(iii) 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
(iv) 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 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") 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 and Class AV-2 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 and interest distributable with respect to the Group II
Certificates (other than the Class AV-2 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
Certificates.
All calculations of interest on the Group I 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 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:
(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-1 Certificates of such Group, the Current Interest for
such Class;
(v) to the Class B-2 Certificates of such Group, the Current Interest for
such Class;
(vi) to the Class B-3 Certificates of such Group, the Current Interest for
such Class; and
(vii) any remainder to be distributed as described below under
"--Crosscollateralization Provisions".
"Current Interest", with respect to each Class of the 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.
S-24
<PAGE>
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. 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
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.
"Interest Carry Forward Amount", with respect to each Class of the 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 % for Group I ( % 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 _______
2001, 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 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 __% for Group I ( __% 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 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 __% for Group I (__% 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-1 Certificates of the related Group 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-1 Certificate Principal Balances of the related Group is equal to or exceeds
__ % for Group I ( __% for Group II) of such Scheduled Principal Balances;
thereafter principal not required to be distributed to the Offered Certificates
will be distributed to the Private Certificates as described herein.
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-1 Certificates
of the related Group and, after the Certificate Principal Balance of the related
Class B-1 Certificates has been reduced to zero, exclusively to the Class B-2
Certificates of the related Group) and (ii) if the Certificate Principal Balance
of the Class A Certificates of a Group has been reduced to zero before _______
2001, principal will be distributed exclusively to the Class M-1 Certificates of
the related Group until _______ 2001 (or until the Certificate Principal Balance
thereof has been reduced to zero), if the Certificate Principal Balance of the
related Class M-1 Certificates has been reduced to zero before _______ 2001,
exclusively to the Class M-2 Certificates of the related Group until[Month] 2001
(or until the Certificate Principal Balance thereof has been reduced to zero),
S-25
<PAGE>
if the Certificate Principal Balance of the related Class M-2 Certificates has
been reduced to zero before [Month] 2001, exclusively to the Class B-1
Certificates of the related Group until March 2001 (or until the Certificate
Principal Balance thereof has been reduced to zero) and, if the Certificate
Principal Balance of the related Class B-1 Certificates has been reduced to zero
before _______ 2001, exclusively to the Class B-2 Certificates of the related
Group until _______ 2001 (or until the Certificate Principal Balance thereof has
been reduced to zero).
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; provided, however:
(a) 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 such
Class A Certificates with a lower numeral denomination shall have
been reduced to zero; provided, further, that, on any
Distribution Date on which the Certificate Principal Balances for
the Class A Certificates with respect to Group I 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
such Class A Certificates; and
(b) the Class A Principal Distribution Amount for Group II is
required to be distributed as follows: first the Class AV-2
Principal Distribution Amount to the Class AV-2 Certificates and
then the balance of such Class A Principal Distribution Amount
sequentially to the Class AV-1 and Class AV-2 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-1 Certificates of such Group, the Class B-1 Principal
Distribution Amount for such Class;
(v) to the Class B-2 Certificates of such Group, the Class B-2 Principal
Distribution Amount; and
(vi) to the Class B-3 Certificates of such Group, the Class B-3 Principal
Distribution Amount.
"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 (B) the lesser of (I) __% for Group I (__%
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 Balance of the
Mortgage Loans in such Group on the preceding Due Date less $_______ for Group I
($_______ for Group II).
"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
_____ 1998 - _______2001 0%
_______ 2001 - _____ 2003 45%
_____ 2003 - _____ 2004 80%
_____ 2004 - _____ 2005 100%
2005 and thereafter 300%
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"Class AV-2 Principal Distribution Amount" (i) for any Distribution Date on or
before ________, is the product of (a) a fraction, the numerator of which is the
Class AV-2 Certificate Principal Balance and the denominator of which is the
Class A Certificate Principal Balance for Group II, in each case immediately
prior to such Distribution Date, (b) the Class A Principal Distribution Amount
with respect to Group II for such Distribution Date and (c) the applicable
percentage for such Distribution Date set forth in the following table:
Distribution Date Percentage
%
%
and (ii) for any Distribution Date after ______ so long as the Class AV-2
Certificates are outstanding, is the Class A Principal Distribution Amount for
Group II.
"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) __% for
Group I (__% 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
Balance of the Mortgage Loans in such Group on the preceding Due Date less
$_______ for Group I ($_______ 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) 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 (ii) the lesser of (A) __% for Group I (__% 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 Balance of the Mortgage Loans
in such Group on the preceding Due Date less $_______ for Group I ($_______ for
Group II).
"Class B-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, (B) the related Class M-1 Certificate Principal Balance, (C)
the related Class M-2 Certificate Principal Balance and (D) the related Class
B-1 Certificate Principal Balance immediately prior to such Distribution Date
over (ii) the lesser of (A) __% for Group I (__% 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 Balance of the Mortgage Loans in such Group on
the preceding Due Date less $_______ for Group I ($_______ for Group II)..
"Class B-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) 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, (D) the related Class B-1
Certificate Principal Balance and (E) the related Class B-2 Certificate
Principal Balance immediately prior to such Distribution Date over (ii) the
lesser of (A) __% for Group I (__% 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 Balance of the Mortgage Loans in such Group on the
preceding Due Date less $_______ for Group I ($_______ for Group II).
"Class B-3 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 Principal Distribution Amount for such Group over (ii) the
sum for such Group of (A) the related Class A Principal Distribution Amount, (B)
the related Class M-1 Principal Distribution Amount, (C) the related Class M-2
Principal Distribution Amount, (D) the related Class B-1 Principal Distribution
Amount and (E) the related Class B-2 Principal Distribution Amount.
"Stepdown Date", with respect to each Group, is the earlier to occur of (i) the
later to occur of (A) the Distribution Date in _______ 2001 and (B) the first
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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) __% for Group I (__% 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) ____
times for Group I (____ 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 __% for Group I
(__% for Group II).
Crosscollateralization Provisions
On each Distribution Date, Interest Funds with respect to each Group not
otherwise required to be distributed 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-2 Certificates of such Group, the Class M-2
Interest Carry Forward Amount for such Class;
(iv) to the Class B-1 Certificates of such Group, the Class B-1
Interest Carry Forward Amount for such Class;
(v) to the Class B-2 Certificates of such Group, the Class B-2
Interest Carry Forward Amount for such Class;
(vi) to the Class B-3 Certificates of such Group, the Class B-3
Interest Carry Forward Amount for such Class;
(vii) for distribution to the other Group to the extent that any of
the amounts listed above (including any Extra Principal
Distribution Amount) 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;
(viii) 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; and
(ix) to the Class C and Class R Certificates, the remaining amount.
"Extra Principal Distribution Amount", for a Mortgage Loan Group and
with respect to any Distribution Date, to the extent of Interest Funds available
for the purpose, is an amount equal to the excess of (i) all Realized Losses
with respect to such Mortgage Loan Group over (ii) all Extra Principal
Distribution Amounts for such Group with respect to prior Distribution Dates.
If on any Distribution Date, after giving effect to any Extra Principal
Distribution Amount, the aggregate Certificate Principal Balances of the
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 by an amount equal to such excess,
which is an Applied Realized Loss Amount, in inverse order of seniority (first,
the Class B-3 Certificates, until the Certificate Principal Balance thereof has
been reduced to zero, second, the Class B-2 Certificates, until the Certificate
Principal Balance thereof has been reduced to zero, third, the Class B-1
Certificates, until the Certificate Principal Balance thereof has been reduced
to zero, fourth, the Class M-2 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero and fifth, the Class M-1 Certificates
until the Certificate Principal Balance thereof has 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.
As described above, however, Interest Funds with respect to each Group not
otherwise required to be distributed with respect to the Certificates will be
distributed as an Extra Principal Distribution Amount and, upon any such
distribution, the Certificate Principal Balance of any Class of Subordinated
Certificates that has been reduced by an Applied Realized Loss Amount will be
increased, in direct order of seniority, by the lesser of (i) such Extra
Principal Distribution Amount and (ii) the Unpaid Realized Loss Amount
applicable to such Class. After any such increase, such Class will thereafter be
entitled to distributions of principal and interest with respect to the
Certificate Principal Balance as so increased.
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"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.
"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
increases in the Certificate Principal Balance of such Class as the result of
the application of Extra Principal Distribution Amounts on all previous
Distribution Dates.
Calculation of One Month LIBOR
On the second business day preceding each Distribution Date (________,1998, for
the first Distribution Date) (each such date, an "Interest Determination Date"),
the Master Servicer 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 Master Servicer will request the principal London
office of each of the Reference Banks to provide a quotation of its rate. If at
least two such quotations are provided, the rate for that day will be the
arithmetic-mean of the quotations. If fewer than two quotations are provided as
requested, the rate for that day will be the arithmetic-mean of the rates quoted
by major banks in New York City, selected by the Master Servicer, at
approximately 11:00 a.m., New York City time, on that day for loans in United
States dollars to leading European banks for a period 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 Master Servicer and engaged in
transactions in Eurodollar deposits in the international Eurocurrency market.
Book Entry Registration of the Offered 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.
THE AGREEMENT
The Certificates will be issued pursuant to a trust agreement to be dated as of
________ __, 19__ (the "Agreement"), among the Depositor, the Master Servicer
and the Trustee. In addition to the provisions of the Agreement summarized
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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 Depositor will create and establish the Trust pursuant
to the Agreement and will sell without recourse the Mortgage Loans (excluding
any prepayment penalties payable with respect thereto) to the Trust, and the
Trust will issue the Certificates pursuant to the Agreement. The Prospectus
contains 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 will consist of:
(i) the Mortgage Loans (excluding any prepayment penalties payable with
respect thereto);
(ii) such assets as from time to time are identified as deposited in any
account held for the benefit of the Certificateholders;
(iii)any Mortgaged Premises acquired on behalf of the Certificateholders
by foreclosure or by deed in lieu of foreclosure;
(iv) 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;
(v) certain rights of the Depositor to the enforcement of representations
and warranties made by the Seller relating to the Mortgage Loans; and
(vi) 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
Servicer, 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 Group I Certificates (if based on the
Group I Net Rate) and the Group II Certificates for the current
Accrual Period.
Delivery and Substitution of Mortgage Loans
The Depositor must repurchase any such Mortgage Loan for which the required
documentation is not delivered on the Closing Date or reasonably promptly
thereafter. Under the limited circumstances specified in the Agreement, the
Depositor may substitute substantially similar mortgage loans for Mortgage Loans
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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
Chase Bank of Texas, National Association, a national banking association, will
act as Trustee of the Trust. The mailing address of its Corporate Trust Office
is 600 Travis, Houston, Texas 77002, and its telephone number is (713) 216-4756.
Voting Rights
The voting rights of the Trust will be allocated as follows: 1% to each of the
Class C and Class R Certificates and 98% to the Classes of Offered Certificates
and Private Certificates (excluding the Class C and Class R Certificates) in
proportion to their respective outstanding Certificate Principal Balances.
Termination
The Trust will terminate upon the payment to the Holders of all Certificates of
all amounts required to be paid to such Holders and 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 the Master Servicer. At its option, the Master Servicer may, on any
Distribution Date when the aggregate outstanding Scheduled Principal Balances of
the Mortgage Loans are less than 10% of the aggregate Schedule Principal
Balances of the Mortgage Loans as of the Closing Date (the first such
Distribution Date, the "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, the closing/settlement-escrow agent or
the 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
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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.
On the Closing Date, the Depositor will also assign to the Trustee all the
Depositor's right, title and interest in the Sales Agreement between the Seller
and the Depositor 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. 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 one or more 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 and 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 Private Certificates (other
than the residual interest in the Issuing REMIC), which will be designated as
the regular interests in the Issuing REMIC, and 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.
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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 1st Underwriter, an individual prohibited transaction
exemption, Prohibited Transaction Exemption 1st Underwriter Exemption Order (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 1st Underwriter
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;
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(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 Standard & Poor's, Moody's Investors
Service, Inc. ("Moody's"), Duff & Phelps Credit Rating Co. ("D&P") 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 Trustee with a Benefit Plan Opinion. The transferee
S-34
<PAGE>
of a Subordinated Certificate that does not furnish a Benefit 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 as 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
________________________________________, and ___________________________. 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.
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.
Class 1st Underwriter 2nd Underwriter 3rd Underwriter 4th Underwriter
AF-1
AF-2
AF-3
AF-4
AF-5
AF-6
MF-1
MF-2
BF-1
AV-1
AV-2
MV-1
MV-2
BV-1
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, subject to prior
sale withdrawal, cancelation or modification of the offer without notice, to
delivery and acceptance by the Underwriters and certain other conditions. 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.
S-35
<PAGE>
The Depositor expects to receive proceeds of approximately $___,___,___, plus
accrued interest, before deducting expenses payable by it in connection with the
Offered Certificates, estimated to be $___,___. 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. 1st Underwriter has been retained by the
Depositor to place certain Classes of the Private 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 Certificates with respect to Group I and the 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.
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 LLP, 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.
S-36
<PAGE>
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
Page
2/28/LIBOR Mortgage Loans........................S-10
3/27/LIBOR Mortgage Loans........................S-10
5/25/LIBOR Mortgage Loans........................S-10
Accrual Period...................................S-25
Actuarial Loans..................................S-16
Agreement........................................S-30
Applicable Spread.................................S-1
Applied Realized Loss Amount.....................S-30
Asset Proceeds Account...........................S-24
Beneficial Owner.................................S-30
Book-Entry Certificates..........................S-30
Cede & Co........................................S-30
CEDEL.............................................S-4
Certificate Principal Balance....................S-24
Class A..........................................S-24
Class A Principal Distribution Amount............S-27
Class AF-6 Distribution Amount...................S-27
Class AV-2 Principal Distribution Amount.........S-28
Class B-1........................................S-24
Class B-1 Principal Distribution Amount..........S-28
Class B-2 Principal Distribution Amount..........S-28
Class B-3 Principal Distribution Amount..........S-28
Class M-1........................................S-24
Class M-1 Principal Distribution Amount..........S-28
Class M-2........................................S-24
Class M-2 Principal Distribution Amount..........S-28
Closing Date......................................S-3
Code..............................................S-5
Constant Prepayment Rate.........................S-18
CPR..............................................S-18
Current Interest.................................S-25
Cut Off Date......................................S-3
Denominations.....................................S-3
Distribution Account.............................S-24
Distribution Date.................................S-1
DOL..............................................S-34
DTC...............................................S-4
ERISA............................................S-34
Euroclear.........................................S-4
Exemption........................................S-34
Extra Principal Distribution Amount..............S-29
Fannie Mae........................................S-6
FHLMC.............................................S-9
Group I...........................................S-1
Group I Certificates.............................S-24
Group I Offered Certificates.....................S-23
Group II..........................................S-1
Group II Available Funds Cap.....................S-25
Group II Certificates............................S-24
Group II Certificates Carryover..................S-26
Group II Offered Certificates....................S-23
HEP..............................................S-18
Holder...........................................S-24
Home Equity Prepayment...........................S-18
Interest Carry Forward Amount....................S-26
Interest Determination Date......................S-30
Interest Funds...................................S-24
Last Scheduled Distribution Date.................S-17
LIBOR............................................S-30
Master Servicer..................................S-16
Master Servicer Remittance Date..................S-24
Master Servicing Fee.............................S-16
Master Servicing Fee Rate.........................S-4
Modeling Assumptions.............................S-18
Month End Interest...............................S-15
Mortgage.........................................S-10
Mortgage Interest Rate...........................S-11
Mortgage Loan Group...............................S-1
mortgage related securities......................S-37
Mortgaged Premises...............................S-10
Offered Certificates.............................S-24
One Month LIBOR..................................S-30
One Year CMT.....................................S-10
One Year CMT Mortgage Loans......................S-10
Participants.....................................S-30
Pass Through Rates................................S-1
Percentage Interest..............................S-25
Permitted Investments............................S-24
Plan.............................................S-34
Plan Asset Regulation............................S-34
Principal Distribution Amount....................S-27
Principal Funds..................................S-24
Private Certificates.............................S-24
Realized Loss....................................S-30
Record Date......................................S-25
Reference Banks..................................S-30
REMIC............................................S-33
Restricted Group.................................S-35
Seller............................................S-3
Servicer.........................................S-14
Servicing Fee Rate...............................S-15
Simple Interest Loans............................S-15
Six Month LIBOR..................................S-10
Six Month LIBOR Mortgage Loans...................S-10
SMMEA............................................S-37
Stepdown Date....................................S-29
Subordinated Certificates........................S-24
Substitution Shortfall...........................S-25
Telerate Page 3750...............................S-30
Trigger Event....................................S-29
Trustee...........................................S-3
Two Step/LIBOR Mortgage Loans....................S-10
Underwriters.....................................S-36
Unpaid Realized Loss Amount......................S-30
voting rights....................................S-32
weighted average life............................S-17
S-37
<PAGE>
SAXON ASSET SECURITIES COMPANY
(Depositor)
[SAXON MORGAGE, INC. LOGO]
MORTGAGE LOAN ASSET BACKED CERTIFICATES
(Issuable in Series)
The Depositor will establish, from time to time, separate trusts to issue a
series of mortgage loan asset backed certificates. The certificates will
evidence beneficial ownership interests in one or more segregated pools of
mortgage assets and certain other assets described in this prospectus and the
related prospectus supplement. The Depositor will determine the terms of each
series of certificates at the time of sale.
This prospectus describes the general terms of certificates of each series. The
prospectus supplement for a particular series will describe the classes of
certificates included in that series and their terms.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE CERTIFICATES OR DETERMINED THAT THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS IS ACCURATE OR COMPLETE. 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.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 5 OF THIS PROSPECTUS AND
IN THE PROSPECTUS SUPPLEMENT.
THE CERTIFICATES WILL REPRESENT INTERESTS IN THE APPLICABLE TRUST ONLY AND WILL
NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF ANY OTHER ENTITY.
-----------------------
A secondary market may not develop for the certificates of any series or, if
such a market does develop, it may not provide the holders of such certificates
with liquidity of investment or it may not continue for the life of such
certificates.
This prospectus may not be used to offer and sell certificates only if
accompanied by a prospectus supplement.
- --------------------
The date of this prospectus is July __, 1998
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS
You will get information about each trust and the certificates in two separate
documents that progressively provide more detail:
o this prospectus -- which provides general information some of which may not
apply to the Certificates
o a separate prospectus supplement -- which will describe the specific terms
of the Certificates.
In addition, this prospectus starts with a summary to give you an initial
overview. The summary complies with the "plain English" requirements of the
Securities and Exchange Commission; it does not contain all the information that
you need to consider in making your investment decision.
IF THE DESCRIPTION OF ANY MATTER VARIES BETWEEN THE PROSPECTUS SUPPLEMENT AND
THIS PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN THE PROSPECTUS
SUPPLEMENT.
Cross-references in the prospectus supplement and in this prospectus will direct
you to captions where you can find further related information. The following
Table of Contents for the prospectus and the Table of Contents in the prospectus
supplement provide page references for the captions.
Generally a capitalized word not at the beginning of a sentence means that it
has a specially defined meaning. In the "Index to Location of Principal Defined
Terms" at the end of the prospectus and at the end of the prospectus supplement,
you can find a listing of the pages where the specially defined meaning of a
capitalized word is given.
<PAGE>
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY..........................................................1
RISK FACTORS................................................................5
DESCRIPTION OF THE CERTIFICATES............................................10
General...............................................................10
Classes of Certificates...............................................10
Book-Entry Procedures.................................................11
Global Clearance, Settlement and Tax Documentation
Procedures..........................................................14
Allocation of Distributions...........................................16
Allocation of Losses and Shortfalls...................................17
Mortgage Assets.......................................................18
Optional Termination..................................................18
MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS..............................18
THE TRUSTS.................................................................20
Assignment of Mortgage Assets.........................................20
The Mortgage Loans--General...........................................21
Canadian Mortgage Loans...............................................23
Single Family Loans...................................................23
Cooperative Loans.....................................................23
Multi-Family Loans....................................................24
Junior Mortgage Loans.................................................24
Home Improvement Loans................................................24
Home Equity Lines of Credit...........................................24
Repurchase of Converted Mortgage Loans................................25
Repurchase of Delinquent Mortgage Loans...............................25
Substitution of Mortgage Loans........................................26
Mortgage-Backed Securities............................................26
Pre-Funding Account...................................................27
Asset Proceeds Account................................................27
CREDIT ENHANCEMENT.........................................................28
General...............................................................28
Subordination.........................................................28
Certificate Guaranty Insurance Policies...............................29
Overcollateralization.................................................29
Cross Support.........................................................30
Mortgage Pool Insurance Policies......................................30
Special Hazard Insurance Policies.....................................31
Bankruptcy Bonds......................................................31
Reserve Funds.........................................................32
Other Credit Enhancement..............................................32
ORIGINATION OF MORTGAGE LOANS..............................................32
General...............................................................32
Representations and Warranties........................................34
SERVICING OF MORTGAGE LOANS................................................34
Payments on Mortgage Loans............................................35
Advances..............................................................35
Collection and Other Servicing Procedures.............................36
Primary Mortgage Insurance Policies...................................36
Standard Hazard Insurance Policies....................................37
Maintenance of Insurance Policies; Claims Thereunder
and Other Realization Upon Defaulted Mortgage
Loans...............................................................38
Modification of Mortgage Loans........................................39
Evidence as to Servicing Compliance...................................39
Events of Default and Remedies........................................39
Master Servicer Duties................................................40
Special Servicing Agreement...........................................40
THE AGREEMENT..............................................................40
The Trustee...........................................................41
Administration of Accounts............................................41
Reports to Certificateholders.........................................42
Events of Default and Remedies........................................42
Amendment.............................................................43
Termination...........................................................43
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS....................................43
General...............................................................43
The Mortgage Loans....................................................44
Foreclosure...........................................................45
Junior Mortgage Loans; Rights of Senior Mortgagees....................47
Right of Redemption...................................................48
Anti-Deficiency Legislation and Other Limitations on
Lenders.............................................................48
Soldiers' and Sailors' Civil Relief Act of 1940.......................49
Environmental Considerations..........................................49
"Due-on-Sale" Clauses.................................................50
Enforceability of Certain Provisions..................................51
Texas Home Equity Loans...............................................51
THE DEPOSITOR..............................................................52
USE OF PROCEEDS............................................................52
CERTAIN FEDERAL INCOME TAX CONSEQUENCES....................................52
REMIC Certificates....................................................53
FASIT Certificates....................................................67
Trust Certificates....................................................67
Certificates Classified as Partnership Interests......................74
Debt Certificates.....................................................74
Taxation of Certificates Classified as Partnership
Interests...........................................................76
STATE AND LOCAL TAX CONSIDERATIONS.........................................76
CANADIAN INCOME TAX CONSIDERATIONS.........................................76
ERISA CONSIDERATIONS.......................................................76
LEGAL INVESTMENT MATTERS...................................................78
PLAN OF DISTRIBUTION.......................................................79
AVAILABLE INFORMATION......................................................80
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................80
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS...............................81
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information from this prospectus to assist you
in getting in initial overview. The summary complies with the "plain English"
requirements of the Securities and Exchange Commission; it does not contain all
the information that you need to consider in making your investment decision. To
understand all the terms of a Series of Certificates, read carefully this entire
prospectus and the related prospectus supplement.
DEPOSITOR
Saxon Asset Securities Company, a wholly owned, limited-purpose financing
subsidiary of Dominion Mortgage Services, Inc.
See "THE DEPOSITOR".
SELLERS
Saxon Mortgage, Inc. , a wholly owned subsidiary of Dominion Mortgage Services,
Inc., and an affiliate of the Depositor, and one or more other mortgage
originators named in the related prospectus supplement.
CERTIFICATES OFFERED
The Depositor will establish separate trusts each of which will issue a series
of mortgage loan asset backed certificates.
The certificates of each series will evidence beneficial ownership interests in
one or more segregated pools of mortgage assets and certain other assets.
Each series may be divided into one or more classes. The related prospectus
supplement will describe the certificates in detail.
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 may be:
o subordinated in right to receive distributions and subject to allocation of
losses in favor of one or more other classes of certificates of such
series,
o entitled to receive distributions:
o allocable only to principal, only to interest or to any combination of
principal and interest,
o allocable to prepayments of principal throughout the life of such
certificates or only during specified periods,
o only after the occurrence of specified events,
o in accordance with a specified schedule or formula or on the basis of
distributions on specified portions of the mortgage assets,
o in the case of certificates entitled to receive distributions allocable to
interest entitled to receive:
o interest at a specified pass through rate, which may be fixed,
variable or adjustable and may differ from the pass through rate at
which other classes of certificates of such series are entitled to
receive interest and
o such distributions only after the occurrence of specified events with
interest accruing until such events occur, in each case as specified
in the related prospectus supplement.
No governmental agency or instrumentality and no other entity will guarantee or
insure the certificates or the underlying assets, 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 trust will issue a series of certificates pursuant to a trust agreement or
pooling and servicing agreement with the Depositor and the trustee identified in
the related prospectus supplement. The Depositor will assign and transfer the
assets to be included in the related trust to the trustee in exchange for the
related certificates.
See "THE TRUSTS -- Assignment of Mortgage Assets".
DISTRIBUTIONS
Each prospectus supplement will specify:
o whether distributions to the certificates will be made monthly, quarterly,
semi-annually or at other intervals,
o the distribution date for each such distribution
o the amount of each distribution allocable to principal and interest and
o how the amounts distributed will be determined.
See "DESCRIPTION OF THE CERTIFICATES -- Allocation of Distributions".
MORTGAGE ASSETS
The scheduled principal balance of the mortgage assets and the amount of any
other assets included in a trust, including amounts held in any pre-funding
account for such series, will equal or exceed the aggregate original certificate
principal balance of the certificates of such trust.
See "DESCRIPTION OF THE CERTIFICATES -- Valuation of Mortgage Assets".
The mortgage assets may consist of:
A. MORTGAGE LOANS":
o Single family loans -- one- to four-family mortgage loans secured by liens
on residential and mixed use properties or participation interests in such
loans;
o Cooperative loans -- loans secured by security interests in or similar
liens on shares in private, non-profit cooperative housing corporations 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;
o Multifamily loans -- multi-family mortgage loans secured by liens on
residential and mixed use properties, including buildings owned by
cooperatives or participation interests in such loans;
o Home improvement loans -- home improvement mortgage loans secured liens
on various types of properties or participation interests in such
loans; and
o HELOCs -- home equity lines of credit ").
All liens may be first, second or more junior liens.
The mortgaged premises may be located in any of the 50 States, the District of
Columbia, the Commonwealth of Puerto Rico or Canada.
B. MORTGAGE-BACKED SECURITIES
o 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
o securities insured or guaranteed by Fannie Mae, Federal Home Loan Mortgage
Corporation ("FHLMC") or Government National Mortgage Association ("GNMA").
See "THE TRUSTS -- Mortgage-Backed Securities".
PRE-FUNDING ACCOUNT
A trust may enter into a pre-funding agreement with the Depositor for the
transfer of additional mortgage assets to such trust following the issuance of
the related certificates. If a pre-funding agreement is used, the trustee will
be required to deposit in a segregated pre-funding account a portion of the
proceeds of sale of the related certificates. Thereafter the trustee will
acquire additional mortgage assets in exchange for money in the segregated
account pre-funding account.
The trust will apply proceeds remaining in the pre-funding account at the end of
a specified period (which may not exceed three months), as a mandatory
prepayment of certificates as specified in the related prospectus supplement.
See "THE TRUSTS -- Pre-Funding Account".
SERVICER
One or more servicers, which may include an affiliate of the Depositor, will
perform customary servicing functions for the mortgage loans included in each
trust.
See "SERVICING OF MORTGAGE LOANS".
MASTER SERVICER
A master servicer, which may include an affiliate of the Depositor, will
perform, directly or indirectly through one or more sub-servicers,
administrative and supervisory functions for each trust.
See "SERVICING OF MORTGAGE LOANS".
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.
ASSETS PROCEEDS ACCOUNT
The servicers and, to the limited extent described herein, the master servicer,
will be, obligated to advance funds to a trust to cover:
o delinquent mortgage loan payments,
o delinquent payments of taxes, insurance premiums or other escrowed items
and
o foreclosure costs, including reasonable attorney's fees.
<PAGE>
Any such advance obligation may be limited to:
o amounts the servicer or master servicer deems to be recoverable from late
payments or liquidation proceeds,
o amounts due holders of specified classes of certificates,
o specified periods of time,
o certain dollar amounts or
o 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
A 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 ultimate or timely distributions 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, one or more classes of certificates of a 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
The certificates may be subject to early retirement.
See "DESCRIPTION OF THE CERTIFICATES -- Optional Termination".
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The federal income tax consequences to the certificateholders will depend on,
among other factors, whether the related trust (or specified portions) elects to
be treated as "real estate mortgage investment conduits" (each, a "REMIC") or
"financial asset securitization investment trusts" (each, a "FASIT") under the
provisions of the Internal Revenue Code of 1986, as amended, or, if
the Trust does not elect to be treated as a REMIC or FASIT, whether the
Certificates are considered to be Trust Certificates, Partnership Interests or
Debt Certificates.
The prospectus supplement for each series of certificates will specify whether
the related trust will make a REMIC or FASIT election.
You should consult your tax advisors concerning the application of federal
income tax laws to your particular situation.
See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES" herein and in the related
prospectus supplement.
LEGAL INVESTMENT MATTERS
Some of, but not all, the certificates of a series may constitute
"mortgage-related securities" under the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA"). Mortgage-related securities 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.
Certificates that do not constitute "mortgage-related securities" 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 subject to the Employee Retirement Income
Security Act of 1974, as amended, or the Code, should carefully review whether
an investment in certificates could give rise to a transaction prohibited or not
otherwise permissible. Certain classes of certificates may not be offered for
sale or transferable to such plans.
See "ERISA CONSIDERATIONS" herein and in the related prospectus supplement.
RATINGS
Each class of certificates 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.
See "RISK FACTORS" herein and in the related prospectus supplement.
<PAGE>
RISK FACTORS
Prospective investors should consider the following factors (as well as the
factors identified under "Risk Factors" in the related prospectus supplement) in
connection with a purchase of the Certificates of any Series.
LIMITED OBLIGATIONS The Certificates will represent an ownership interest
in the related Trust and will not represent an
interest in or obligation of any other entity and
will not be insured by any government agency or
instrumentality. Each Trust is expected to have no
significant assets other than the assets assigned to
it by the Depositor.
You must rely primarily upon payments on the assets
assigned to the related Trust, any security for those
Certificates and the sources of credit enhancement,
if any, identified in the related prospectus
supplement for distributions on the Certificates.
None of any governmental agency or instrumentality,
the Depositor, any Servicer, any Master Servicer, any
Trustee or any of their affiliates will guarantee or
insured any assets assigned to a Trust, 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, you 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 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. That 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. Those 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. Those 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, the liability may affect assignees of the
mortgage loans.
<PAGE>
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 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:
o the average life of each Class of such
Certificates and
o 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:
o foreclosure, condemnation and other dispositions
of the Mortgaged Premises (including amounts
paid by insurers under applicable insurance
policies);
o 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);
o the repurchase of Mortgage Loans modified in
lieu of refinancing;
o the repurchase of any liquidated Mortgage Loan
or delinquent Mortgage Loan, if applicable; or
o the repurchase or redemption 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.
You must make your own decision as to the appropriate
prepayment assumption.
See "MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS."
<PAGE>
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
you 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,
a Trust may issue Certificates of a Series 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, because 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, your ability 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 because
physical certificates representing the Certificates
will generally not be available. You may experience
some delay in receipt of distributions of interest on
and principal of the Book-Entry Certificates because
the Trustee will forward distributions through
book-entry system participants which thereafter will
be required to credit such distributions to your
accounts as a beneficial owner of the Certificates,
whether directly or indirectly through financial
intermediaries.
See "DESCRIPTION OF THE CERTIFICATES-- Book-Entry
Procedures."
LIMITED NATURE
OF RATINGS Any rating of Certificates 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 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. 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 Certificate issued with original issue
discount must 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."
<PAGE>
BALLOON LOANS A portion of the Mortgage Assets included in a Trust
may be "balloon loans" that provide for the payment
of the unamortized principal balance of such Mortgage
Loans in a single payment at maturity ("Balloon
Loans"). Balloon Loans provide for equal monthly
payments, consisting of principal and interest,
generally based on a 30-year amortization schedule,
and a single payment of the remaining balance of the
Balloon Loan, generally five, seven, ten or 15 years
after origination. Amortization of a Balloon Loan
based on a scheduled period that is longer than 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 must make
substantial single payments at maturity, the default
risk associated with Balloon Loans may be 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 included in a Trust
may be 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 related
Certificates could be more adversely affected by a
reduction in the value of the Mortgaged Premises than
would the position of the senior lienholders. If a
borrower defaults, 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 included in a Trust
may be secured by liens on Mortgaged Premises which
are not owner occupied. 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 acordance 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 Fannie Mae or FHLMC due to borrower credit
characteristics, property characteristics, loan
documentation guidelines or other characteristics
that do not meet Fannie Mae or FHLMC underwriting
guidelines, including a loan made to:
o a borrower whose creditworthiness and repayment
ability do not satisfy such Fannie Mae or FHLMC
underwriting guidelines or
o a borrower with 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 Fannie Mae 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 Fannie
Mae or FHLMC underwriting guidelines.
You must make your 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."
<PAGE>
DELINQUENT MORTGAGE
LOANS All or a portion of the Mortgage Loans may be
delinquent upon the issuance of the related
Certificates. Inclusion of such Mortgage Loans may
cause the rate of defaults and prepayments to
increase and, in turn, may cause losses to exceed the
available credit enhancement and affect the yield on
the related Certificates.
See "THE TRUSTS -- The Mortgage Loans -- General."
TEXAS HOME
EQUITY LOANS The Texas Home Equity Laws, Section 50(a)(6) of
Article XVI of the Constitution of Texas apply to any
"cash-out" refinance or other non-purchase money
transaction (except rate/term refinances, home
improvement loans when the amount of the loan does
not exceed the cost of the improvement and certain
other narrow exceptions) secured by a Texas
resident's principal residence and provide for
certain disclosure requirements, caps on allowable
fees, required loan closing procedures, restrictions
on land parcel size, and other restrictions.
Failure, inadvertent or otherwise, to comply with any
requirement may create an opportunity for the
borrower to argue that the Mortgage Loan is
unenforceable and/or the lien on the Mortgaged
Premises is invalid. Because the Texas Home Equity
Laws, which first became effective on January 1,
1998, did not grant authority to any government
agency to promulgate interpretive regulations,
definitive authority for determining compliance is
not available to the same extent as for federal and
other state mortgage laws. Any Mortgage Loan subject
to the Texas Home Equity Laws can be foreclosed only
pursuant to court order, rather than non-judicial
foreclosure as is available for other types of
mortgage loans in Texas, which may result in delay
and increased losses in connection with foreclosures.
If a court were to find that any requirement of the
Texas Home Equity Laws was not complied with, the
court could refuse to allow foreclosure to proceed,
declare the lien on the Mortgaged Premises to be
invalid, and/or require the originating lender or the
holder of the note to forfeit some or all principal
and interest of the related Mortgage Loan. In
addition, the Texas Home Equity Laws may be voided in
their entirety, possibly affecting the validity of
any existing loans originated pursuant to the Texas
Home Equity Laws, if it is determined that federal
law preempts any portion of the Texas Home Equity
Laws. Pending litigation involving one or more
lenders unrelated to Seller asserts that the voter
referendum authorizing the Texas Home Equity Laws
failed to comply with certain aspects of Texas
election laws. Were the plaintiffs to prevail
substantially in such or similar litigation, the
legal effect upon the validity of loans originated
pursuant to the Texas Home Equity Laws is uncertain.
There can be no assurance that other litigants will
not assert other challenges to the validity of the
Texas Home Equity Laws based on similar or other
legal theories. Title insurance generally available
on such Mortgage Loans may exclude coverage for some
of the risks described in this paragraph.
CANADIAN MORTGAGE
LOANS Canadian Mortgage Loans may present risks generally
not associated with mortgage loans made to United
States borrowers, including the risk of adverse
economic and political developments in Canada. In
addition, the value of Mortgaged Premises located in
Canada may be subject to certain risks not associated
with mortgage loans secured by properties located in
the United States. For example, increases and
decreases in the relative market values of currencies
could cause the value of the payments received with
respect to Canadian Mortgage Loans to decline in
terms of United States currency. The value of
properties located in Canada may decline in relation
to the United States dollar as a result of adverse
political and economic developments in Canada.
Developments in Canada that could adversely affect
the value of Canadian Mortgage Loans may include
currency devaluation, high inflation, high
unemployment, social and political unrest,
expropriation of property and moratoriums on
enforceability of lenders' rights. Such factors
could also affect the ability of the Canadian
borrower to repay his loan.
For additional information regarding the Canadian
Mortgage Loans and the procedure for realizing on the
related collateral, see "THE TRUST-- The Mortgage
Loans-- General" and "CERTAIN LEGAL ASPECTS OF
MORTGAGE LOANS-- The Mortgage Loans".
<PAGE>
DESCRIPTION OF THE CERTIFICATES
GENERAL
The 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:
o may be entitled to receive distributions:
o allocable only to principal, only to interest or to any
combination of principal and interest,
o allocable to prepayments of principal throughout the life of
such Certificates or only during specified periods,
o only after the occurrence of specified events,
o in accordance with a specified schedule or formula or on the
basis of distributions on specified portions of the Mortgage
Assets,
o 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,
<PAGE>
o in the case of Certificates entitled to receive distributions allocable to
interest may be entitled to receive:
o interest at 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
o such distributions only after the occurrence of specified
events and may accrue interest until such events occur, in
each case as specified in the related Prospectus Supplement.
BOOK-ENTRY PROCEDURES
The Prospectus Supplement for a Series may specify that certain Classes of
Certificates will initially be issued in book-entry form ("Book-Entry
Certificates") in the authorized denominations specified therein. Each such
Class will be represented by a single certificate registered in the name of the
nominee of the depository, which is expected to be The Depository Trust Company
("DTC" and, together with any successor or other depository selected by the
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").
<PAGE>
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 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".
<PAGE>
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 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.
<PAGE>
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 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.
<PAGE>
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 Relevant Depositary 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:
o 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;
o 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
<PAGE>
o 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.
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 under "CERTAIN FEDERAL INCOME TAX CONSEQUENCES -- REMIC Certificates
- -- Foreign Investors in REMIC Certificates"), 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 (any person who is not a U.S. Person) 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.
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:
o whether distributions on such Certificates will be made monthly,
quarterly, semi-annually or at other intervals,
o the Distribution Date for each such distribution and
o 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, 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.
<PAGE>
"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:
o 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,
o 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,
o certain physical damage to the related Mortgaged Premises of a type not
covered by Standard Hazard Insurance Policies or
o 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.
<PAGE>
If so specified in the related Prospectus Supplement, the Senior Certificates of
a Series will not bear any Realized Losses on the related Mortgage Loans until
the Subordinated Certificates of such Series have borne realized losses up to a
specified amount or loss limit or until the principal amount of the Subordinated
Certificates has been reduced to zero, either through the allocation of Realized
Losses, the priority of distributions or both. If so specified in the related
Prospectus Supplement, interest shortfalls may result in a reallocation to the
Senior Certificates of a Series of amounts otherwise distributable to the
Subordinated Certificates of such Series.
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.
<PAGE>
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 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 the rate of prepayment of mortgage loans.
The Seller is not aware of any historical prepayment experience with respect to
Canadian Mortgage Loans and, accordingly, prepayments thereon may or may not
occur at the same rate or be affected by the same factors as United States
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 affect 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.
<PAGE>
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 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 (other than Canadian
Mortgage Loans) 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. Comparable arrangements with respect to Canadian
Mortgage Loans will be addressed in the related Prospectus Supplement. As to
each Mortgage Loan, the Depositor will deliver or cause to be delivered to the
Trustee the related Mortgage Note (other than Canadian Mortgage Loans, for which
generally there is no 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.
<PAGE>
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.
THE MORTGAGE LOANS--GENERAL
The Mortgage Loans will be evidenced by promissory notes (each, a "Mortgage
Note") (other than Canadian Mortgage Loans, for which generally there is no
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:
o 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.
o 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.
o 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.
o 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.
<PAGE>
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) or Canada.
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.
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:
o 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,
o the largest expected principal balance and the smallest expected
principal balance of any of the Mortgage Loans,
o the types of Mortgaged Premises and/or other assets securing the
Mortgage Loans,
o the original terms to maturity of the Mortgage Loans,
o 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,
o the expected aggregate outstanding Principal Balance of Mortgage
Loans having loan-to-value ratios at origination exceeding 80%,
o the expected Mortgage Interest Rates and the range of Mortgage
Interest Rates,
o in the case of ARM Loans, the expected weighted average of the
Adjustable Rates,
o the expected aggregate outstanding Scheduled Principal Balance,
if any, of Buy-Down Loans as of the date set forth in the
Prospectus Supplement,
o the expected aggregate outstanding principal balance, if any, of
GPM Loans as of the date set forth in the Prospectus Supplement,
o the amount of any Mortgage Pool Insurance Policy, Special Hazard
Insurance Policy or Bankruptcy Bond to be maintained with respect
to the related Trust,
o 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,
o 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
o 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.
<PAGE>
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.
CANADIAN MORTGAGE LOANS
Each Canadian Mortgage Loan will be made between the originator of the Canadian
Mortgage Loan and the borrower, pursuant to a mortgage, charge, or similar
instrument, which will provide that the rights and obligations of the borrower
and the lender thereunder will be governed under applicable Canadian law. Title
insurance is generally not provided in Canada and there will be no title
insurance with respect to Canadian Mortgage Loans unless otherwise specified in
the related Prospectus Supplement. The Canadian Mortgage Loans will generally
have terms of five years or less unless otherwise specified in the related
Prospectus Supplement.
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.
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 Cooperative.
<PAGE>
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.
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.
<PAGE>
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 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
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,
<PAGE>
(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 later than one
year prior to the "latest possible maturity date"
specified in the Agreement,
(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:
(a) provide for a lowest possible Net Rate that is not
lower than the lowest possible Net Rate for the deleted
Mortgage Loan and a highest possible Net Rate that is
not lower than the highest possible Net Rate for the
deleted Mortgage Loan,
(b) have a Gross Margin that is not less than the Gross
Margin of the deleted Mortgage Loan,
(c) have a Periodic Rate Cap equal to the Periodic Rate Cap
on the deleted Mortgage Loan,
(d) 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 or two months later than the next Interest
Adjustment Date for the deleted Mortgage Loan,
(e) does not have a permitted increase or decrease in the
Monthly Payment less than the permitted increase or
decrease applicable to the deleted Mortgage Loan,
(f) 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 and
(g) be secured by Mortgaged Premises located in the United
States, unless the deleted Mortgage Loan was a Canadian
Mortgage Loan, in which case the substitute Mortgage
Loan may be a Canadian Mortgage Loan.
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) and (ii) Certificates insured
or guaranteed by Fannie Mae, 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").
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,
<PAGE>
(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 the 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.
<PAGE>
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 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.
<PAGE>
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 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.
<PAGE>
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 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.
<PAGE>
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".
<PAGE>
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 :
a) its own credit approval process, to the extent that such process
conforms to underwriting standards generally acceptable to Fannie Mae
or FHLMC, or
b) 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 Fannie Mae 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
Fannie Mae 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 Fannie Mae or FHLMC due to borrower credit
characteristics that do not meet Fannie Mae or FHLMC underwriting guidelines,
including a loan made to a borrower whose creditworthiness and repayment ability
do not satisfy such Fannie Mae 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 Fannie Mae or FHLMC underwriting guidelines.
<PAGE>
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
Fannie Mae 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. In
general, SMI will 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, and, 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;
however, for second Mortgage Loans with a balance of less than $50,000 and
Canadian Mortgage Loans, SMI will generally not obtain a mortgage title
insurance policy.
<PAGE>
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
Each Servicer generally will be approved or will utilize a sub-servicer that is
approved by Fannie Mae 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 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.
<PAGE>
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 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.
<PAGE>
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 Fannie Mae.
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 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".
<PAGE>
Primary Mortgage Insurance on a Canadian Mortgage Loan may be issued by a
private corporation or a government-owned corporation.
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 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.
Hazard insurance on the properties securing Canadian Mortgage Loans will
generally be provided by insurers located in Canada. The Seller may not be able
to obtain as much information about the financial condition of the companies
issuing hazard insurance in Canada as it is able to obtain with respect to
companies based in the United States. The ability of such insurers to pay claims
also may be affected by, among other things, adverse political and economic
developments in the future.
<PAGE>
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. In certain Canadian provinces, it
is not possible to obtain a deficiency judgment. 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 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,
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.
<PAGE>
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 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") without the consent of the Master
Servicer.
EVIDENCE AS TO SERVICING COMPLIANCE
Within 120 days after the end of each of its fiscal years, each Servicer must
provide the Master Servicer 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 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, will be entitled to compensation arrangements similar to those
provided to the Servicer.
MASTER SERVICER DUTIES
If so specified in the Prospectus Supplement for a Series, the Master Servicer
will;
(i) administer and supervise the performance by each Servicer of its
duties and responsibilities under the related Servicing Agreement,
(ii) maintain any insurance policies (other than property specific
insurance policies) providing coverage for losses on the Mortgage
Loans for such Series,
(iii) calculate amounts payable to Certificateholders on each Distribution
Date,
(iv) prepare periodic reports to the Trustee or the Certificateholders with
respect to the foregoing matters,
(v) prepare federal and state tax and information returns and
(vi) prepare reports, if any, required under the Securities Exchange Act of
1934, as amended.
<PAGE>
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 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, 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.
<PAGE>
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.
<PAGE>
EVENTS OF DEFAULT AND REMEDIES
If so specified in the Prospectus Supplement for a Series, events of default
under the related Agreement will consist of:
(i) any default in the performance or breach of any covenant or warranty
of the Master Servicer under such Agreement which continues unremedied
for a specified period after the giving of written notice of such
failure to the Master Servicer by the Trustee or by the holders of
Certificates entitled to at least 25% of the aggregate voting rights,
(ii) any failure by the Master Servicer to make required Advances with
respect to delinquent Mortgage Loans in the related Trust,
(iii) certain events of insolvency, readjustment of debt, marshaling of
assets and liabilities or similar proceedings regarding the Master
Servicer, if any, and
(iv) certain actions by or on behalf of the Master Servicer indicating its
insolvency or inability to pay
its obligations.
So long as an event of default by the Master Servicer under an Agreement remains
unremedied, the Trustee may, and, at the direction of the holders of outstanding
Certificates of a Series entitled to at least 51% of the voting rights, the
Trustee will, terminate all the rights and obligations of the Master Servicer
under the related Agreement, except that the holders of Certificates may not
direct the Trustee to terminate the Master Servicer for its failure to make
Advances. Upon termination, the Trustee will succeed to all the
responsibilities, duties and liabilities of the Master Servicer under such
Agreement (except that if the Trustee is prohibited by law from obligating
itself to make Advances regarding delinquent Mortgage Loans, then the Trustee
will not be so obligated) and will be entitled to similar compensation
arrangements. 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.
<PAGE>
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.
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.
<PAGE>
CONDOMINIUMS. Certain of the Mortgage Loans may be loans secured by condominium
units. The condominium building may include one or more multi-unit buildings, or
a group of buildings whether or not attached to each other, located on property
subject to condominium ownership. Condominium ownership is a form of ownership
of real property wherein each owner is entitled to the exclusive ownership and
possession of his or her individual condominium unit and also owns a
proportionate undivided interest in all parts of the condominium building (other
than the individual condominium units) and all areas or facilities, if any, for
the common use of the condominium units. The condominium unit owners appoint or
elect the condominium association to govern the affairs of the condominium.
COOPERATIVE LOANS. Certain of the Mortgage Loans may be Cooperative Loans. The
Cooperative (i) owns all the real property that comprises the project, including
the land and the apartment building comprised of separate dwelling units and
common areas or (ii) leases the land generally by a long-term ground lease and
owns the apartment building. The Cooperative is directly responsible for project
management and, in most cases, payment of real estate taxes and hazard and
liability insurance. If there is a blanket mortgage on the Cooperative and/or
underlying land, as is generally the case, the Cooperative, as project
mortgagor, is also responsible for meeting these mortgage obligations. A blanket
mortgage is ordinarily incurred by the Cooperative in connection with the
construction or purchase of the Cooperative's apartment building. The interest
of the occupants under proprietary leases or occupancy agreements to which the
Cooperative is a party are generally subordinate to the interest of the holder
of the blanket mortgage in that building. If the Cooperative is unable to meet
the payment obligations arising under its blanket mortgage, the mortgagee
holding the blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements. In addition, the
blanket mortgage on a Cooperative may provide financing in the form of a
mortgage that does not fully amortize with a significant portion of principal
being due in one lump sum at final maturity. The inability of the Cooperative to
refinance this mortgage or make such final payment could lead to foreclosure by
the mortgagee providing the financing. A foreclosure in either event by the
holder of the blanket mortgage could eliminate or significantly diminish the
value of, in the case of a Trust including Cooperative Loans, the collateral
securing the Cooperative Loans.
A Cooperative is owned by tenant-stockholders who, through ownership of stock,
shares or membership certificates in the corporation, receive proprietary leases
or occupancy agreements which confer exclusive rights to occupy specific
apartments or units. In general, a tenant-stockholder of a Cooperative must make
a monthly payment to the Cooperative representing such tenant-stockholder's pro
rata share of the Cooperative's payments for its mortgage loans, real property
taxes, maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying rights is financed through a
Cooperative share loan evidenced by a promissory note and secured by a security
interest in the occupancy agreement or proprietary lease and in the related
Cooperative shares. The lender takes possession of the share certificate and a
counterpart of the proprietary lease or occupancy agreement, and a financing
statement covering the proprietary lease or occupancy agreement and the
Cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of the
Cooperative shares.
CANADIAN MORTGAGE LOANS. If specified in the related Prospectus
Supplement, the Mortgage Loans may include Canadian Mortgage Loans. See
"THE TRUSTS -- Canadian Mortgage Loans" for a description of the collateral for
the Canadian Mortgage Loans.
FORECLOSURE
SINGLE FAMILY LOANS, MULTI-FAMILY LOANS, CONVENTIONAL HOME IMPROVEMENT LOANS,
TITLE I LOANS AND HELOCS. Foreclosure of a mortgage is generally accomplished by
judicial action. A foreclosure action generally is initiated by the service of
legal pleadings upon the borrower and any party having a subordinate interest in
the real estate including any holder of a junior encumbrance on the real estate.
Delays in completion of the foreclosure occasionally may result from
difficulties in locating necessary parties defendant. When the mortgagee's right
to foreclosure is contested, the legal proceedings necessary to resolve the
issue can be time-consuming. After the completion of a judicial foreclosure
proceeding, the court may issue a judgment of foreclosure and appoint a receiver
or other officer to conduct the sale of the Mortgaged Premises. In some states,
mortgages may also be foreclosed by advertisement, pursuant to a power of sale
provided in the mortgage. Foreclosure of a mortgage by advertisement is
essentially similar to foreclosure of a deed of trust by non-judicial power of
sale.
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust that authorizes
the trustee to sell the Mortgaged Premises to a third party upon any default by
the borrower under the terms of the note or deed of trust. In certain states,
such foreclosure also may be accomplished by judicial action in the manner
provided for foreclosure of mortgages. In some states, the trustee must record a
notice of default and send a copy to the borrower and to any person who has
recorded a request for a copy of a notice of default and notice of sale. In
addition, the trustee must provide notice in some states to any other party
having a subordinate interest in the real estate, including any holder of a
junior encumbrance on the real estate. If the deed of trust is not reinstated
within any applicable cure period, a notice of sale must be posted in a public
place and, in most states, published for a specified period of time in one or
more newspapers. In addition, some state laws require that a copy of the notice
of sale be posted on the property and sent to all parties having an interest of
record in the property. When the beneficiary's right to foreclosure is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming.
In some states, the borrower, or any other person having a junior encumbrance on
the real estate, may, during a statutorily prescribed reinstatement period, cure
a monetary default by paying the entire amount in arrears plus other designated
costs and expenses incurred in enforcing the obligation. In general, state law
controls the amount of foreclosure expenses and costs, including attorney's
fees, which may be recovered by a lender. After the reinstatement period has
expired without the default having been cured, the borrower or junior lienholder
no longer has the right to reinstate the loan and must pay the loan in full to
prevent the scheduled foreclosure sale. If the mortgage or deed of trust is not
reinstated, a notice of sale must be posted in a public place and, in most
states, published for a specific period of time in one or more newspapers. In
addition, some state laws require that a copy of the notice of sale be posted on
the property and sent to all parties having an interest in the real property.
See " --Junior Mortgage Loans; Rights of Senior Mortgagees".
A sale conducted in accordance with the terms of the power of sale contained in
a mortgage or deed of trust is generally presumed to be conducted regularly and
fairly, and a conveyance of the real property by the referee confers absolute
legal title to the real property to the purchaser, free of all junior mortgages
and free of all other liens and claims subordinate to the mortgage or deed of
trust under which the sale is made (with the exception of certain governmental
liens and any redemption rights that may be granted to borrowers pursuant to
applicable state law). The purchaser's title is, however, subject to all senior
liens, encumbrances and mortgages. Thus, if the mortgage or deed of trust being
foreclosed is a junior mortgage or deed of trust, the referee or trustee will
convey title to the property to the purchaser, subject to the underlying first
mortgage or deed of trust and any other prior liens or claims. A foreclosure
under a junior mortgage or deed of trust generally will have no effect on any
senior mortgage or deed of trust, except that it may trigger the right of a
senior mortgagee or beneficiary to accelerate its indebtedness under a
"due-on-sale" clause or "due on further encumbrance" clause contained in the
senior mortgage.
In case of foreclosure under either a mortgage or a deed of trust, the sale by
the receiver or other designated officer or by the trustee is a public sale.
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.
<PAGE>
Courts have imposed general equitable principles upon foreclosure, which are
generally designed to mitigate the legal consequences to the borrower of the
borrower's defaults under the loan documents. Some courts have been faced with
the issue of whether federal or state constitutional provisions reflecting due
process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust does not involve sufficient state
action to afford constitutional protection to the borrower.
COOPERATIVE LOANS. The Cooperative shares owned by the tenant-stockholder and
pledged to the lender are, in almost all cases, subject to restrictions on
transfer as set forth in the Cooperative's charter documents, as well as the
proprietary lease or occupancy agreement, and may be canceled by the Cooperative
for failure by the tenant-stockholder to pay rent or other obligations or
charges owed by such tenant-stockholder, including mechanics' liens against the
cooperative apartment building incurred by such tenant-stockholder. The
proprietary lease or occupancy agreement generally permits the Cooperative to
terminate such lease or agreement in the event an obligor fails to make payments
or defaults in the performance of covenants required thereunder. Typically, the
lender and the Cooperative enter into a recognition agreement which establishes
the rights and obligations of both parties in the event of a default by the
tenant-stockholder on its obligations under the proprietary lease or occupancy
agreement. A default by the tenant-stockholder under the proprietary lease or
occupancy agreement will usually constitute a default under the security
agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that, in the event of a foreclosure on a
Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease.
In some states, foreclosure on the Cooperative shares is accomplished by a sale
in accordance with the provisions of Article 9 of the Uniform Commercial Code
(the "UCC") and the security agreement relating to those shares. Article 9 of
the UCC requires that a sale be conducted in a "commercially reasonable" manner.
Whether a foreclosure sale has been conducted in a "commercially reasonable"
manner will depend on the facts in each case. In determining commercial
reasonableness, a court will look to the notice given the debtor and the method,
manner, time, place and terms of the foreclosure. Generally, a sale conducted
according to the usual practice of banks selling similar collateral will be
considered reasonably conducted.
<PAGE>
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".
FORECLOSURE ON CANADIAN MORTGAGE LOANS. In certain Canadian provinces, lenders
are not required to sell the Mortgaged Premises securing Canadian Mortgage Loans
by means of a judicial proceeding but rather may exercise self-help remedies
with respect to the related Mortgaged Premises, provided that the applicable
prior notice has been given to the borrower. The judicial proceedings and
self-help remedies available to lenders in connection with the enforcement of
Canadian Mortgage Loans will be described in the related Prospectus Supplement.
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 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.
<PAGE>
Other provisions sometimes included in the form of the mortgage or deed of trust
used by institutional lenders obligate the mortgagor or trustor to pay, before
delinquency, all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee or beneficiary under the
mortgage or deed of trust. Upon a failure of the mortgagor or trustor to perform
any of these obligations, the mortgagee or beneficiary is given the right under
certain mortgages or deeds of trust to perform the obligation itself, at its
election, with the mortgagor or trustor agreeing to reimburse the mortgagee or
beneficiary for any sums expended by the mortgagee or beneficiary on behalf of
the mortgagor or trustor. All sums so expended by the mortgagee or beneficiary
become part of the indebtedness secured by the mortgage or deed of trust.
RIGHT OF REDEMPTION
In some states, after foreclosure of a mortgage or sale pursuant to a deed of
trust, the borrower and certain foreclosed junior lienholders are given a
statutory period in which to redeem the Mortgaged Premises from the foreclosure
sale. Depending upon state law, the right of redemption may apply to sale
following judicial foreclosure or to sale pursuant to a non-judicial power of
sale. In some states, statutory redemption may occur only upon payment of the
foreclosure purchase price, accrued interest and taxes and certain of the costs
and expenses incurred in enforcing the obligation. In some states, the right to
redeem is a statutory right and in others it is a contractual right. The effect
of a right of redemption is to diminish the ability of the lender to sell the
foreclosed Mortgaged Premises while such right of redemption is outstanding. The
exercise of a right of redemption would defeat the title of any purchaser at a
foreclosure sale or of any purchaser from the lender subsequent to judicial
foreclosure or sale under a deed of trust. The practical effect of the
redemption right is to force the lender to maintain the property and pay the
expenses of ownership until the redemption period has run.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions which limit the remedies of a
beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment would be a personal judgment against the
former borrower equal in most cases to the difference between the amount due to
the lender and the fair market value of the real property sold at the
foreclosure sale. As a result of these prohibitions, it is anticipated that in
many instances Servicers will not seek deficiency judgments against defaulting
borrowers.
In addition to anti-deficiency and related legislation, numerous other federal
and state statutory provisions, including the federal bankruptcy laws and state
laws affording relief to debtors, may interfere with or affect the ability of
the secured mortgage lender to realize upon collateral and/or enforce a
deficiency judgment. For example, if a mortgagor is in a proceeding under the
federal Bankruptcy Code, a lender may not foreclose on the mortgaged premises
without the permission of the bankruptcy court. The rehabilitation plan proposed
by the debtor may provide, if the court determines that the value of the
mortgaged premises is less than the principal balance of the mortgage loan, for
the reduction of the secured indebtedness to the value of the mortgaged premises
as of the date of the commencement of the bankruptcy, rendering the lender a
general unsecured creditor for the difference, and also may reduce the monthly
payments due under such mortgage loan, change the rate of interest and alter the
mortgage loan repayment schedule. The effect of any such proceedings under the
federal Bankruptcy Code, including, but not limited to, any automatic stay,
could result in delays in receiving payments on the Mortgage Loans underlying a
Series of Certificates and possible reductions in the aggregate amount of such
payments. Some states also have homestead exemption laws which would protect a
principal residence from a liquidation in bankruptcy.
Federal and local real estate tax laws provide priority to certain tax liens
over the lien of a mortgage or secured party. Numerous federal and state
consumer protection laws impose substantive requirements upon mortgage lenders
in connection with the origination, servicing and enforcement of Single Family
Loans and Cooperative Loans. These laws include the federal Truth-in-Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act and related states and
regulations. 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.
<PAGE>
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares and
the related proprietary lease or occupancy agreement. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of all
branches of the military on active duty, including draftees and reservists in
military service, (i) are entitled to have interest rates reduced and capped at
6% per annum on obligations (including mortgage loans) incurred prior to the
commencement of military service for the duration of military service, (ii) may
be entitled to a stay of proceedings on any kind of foreclosure or repossession
action in the case of defaults on such obligations incurred prior to the
commencement of military service and (iii) may have the maturity of such
obligations incurred prior to the commencement of military service extended, the
payments lowered and the payment schedule readjusted for a period of time after
the completion of military service. The benefits of (i), (ii), or (iii) above
are subject to challenge by creditors, however, and if, in the opinion of the
court, the ability of a person to comply with such obligations is not materially
impaired by military service, the court may apply equitable principles
accordingly. If a borrower's obligation to repay amounts otherwise due on a
Mortgage Loan included in the Trust for a Series is relieved pursuant to the
Soldiers' and Sailors' Civil Relief Act of 1940, neither the Servicer, the
Master Servicer nor the Trustee will be required to advance such amounts and any
loss in respect thereof may reduce the amounts available to be paid to the
holders of the Certificates of such Series. If so specified in the Prospectus
Supplement for a Series, any shortfalls in interest collections on Mortgage
Loans included in the Trust for such Series resulting from application of the
Soldiers' and Sailors' Civil Relief Act of 1940 will be allocated to each Class
of Certificates of such Series that is entitled to receive interest in respect
of such Mortgage Loans in proportion to the interest that each such Class of
Certificates would have otherwise been entitled to receive in respect of such
Mortgage Loans had such interest shortfall not occurred.
ENVIRONMENTAL CONSIDERATIONS
Environmental conditions may diminish the value of the Mortgage Assets and give
rise to liability of various parties, including federal, state and local
environmental laws, regulations and ordinances concerning hazardous waste,
hazardous substances, petroleum, underground and aboveground storage tanks,
solid waste, lead and copper in drinking water, asbestos, lead-based paint and
other materials ("Adverse Environmental Conditions") under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended ("CERCLA"). A secured party which participates in management of a
facility, participates in the management of the owner of a facility, takes a
deed in lieu of foreclosure or purchases a mortgaged premises at a foreclosure
sale may become liable in certain circumstances for the costs of a remedial
action ("Cleanup Costs") if hazardous substances have been released or disposed
of on the property. Such Cleanup Costs may be substantial. The U.S.
Environmental Protection Agency (the "EPA") has established a Policy Towards
Owners of Residential Property at Superfund Sites (July 3, 1991) which provides
that EPA will not proceed against owners of residential property contaminated
with hazardous substances under certain circumstances. Similarly, EPA and the
Department of Justice have adopted a policy not to proceed against lenders which
are acting primarily to protect a security interest at the inception of loan,
during a workout, in foreclosure or after foreclosure or the taking of a deed in
lieu of foreclosure. Policy on CERCLA Enforcement Against lenders and Government
Entities that Acquire Property Involuntarily (September 22, 1995). These
policies are not binding on the EPA, a state or third parties who may have a
cause of action under CERCLA, however, and are subject to certain limitations
and conditions. Many state or local laws, regulations or ordinances may also
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.
<PAGE>
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.
"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.
<PAGE>
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.
TEXAS HOME EQUITY LOANS
Generally, any "cash-out" refinance transaction or other non-purchase money
transaction (except rate/term refinances and certain other narrow exceptions)
secured by a Texas resident's principal residence is subject to the provisions
set forth in Section 50(a)(6) of Article XVI of the Constitution of Texas (the
"Texas Home Equity Laws"). The Texas Home Equity Laws provide certain disclosure
requirements, caps on allowable fees, required loan closing procedures,
restrictions on land parcel size, and other restrictions. Failure, inadvertent
or otherwise, by the loan originator to comply with any requirement of the Texas
Home Equity Laws may create an opportunity for the borrower to argue that the
Mortgage Loan is unenforceable and/or the lien on the Mortgaged Premises is
invalid. Because the Texas Home Equity Laws, which first became effective on
January 1, 1998, did not grant authority to any government agency to promulgate
interpretive regulations, definitive authority for determining compliance is not
available to the same extent as for federal and state mortgage laws and
regulations. Any Mortgage Loan subject to the Texas Home Equity Laws can be
foreclosed only pursuant to court order, rather than non-judicial foreclosure as
is available for other types of mortgage loans in Texas, which may result in
delay and increased losses in connection with foreclosures. If a court were to
find that any requirement of the Texas Home Equity Laws was not complied with,
the court could refuse to allow foreclosure to proceed, declare the lien on the
Mortgaged Premises to be invalid, or require the originating lender or the
holder of the Mortgage Note to forfeit some or all principal and interest of the
related Mortgage Loan. In addition. The Texas Home Equity Laws may be voided in
their entirety, possibly affecting the validity of any existing liens originated
pursuant to the Texas Home Equity Laws, if it is determined that federal law
preempts any portion of the Texas Home Equity Laws. Title insurance generally
available on such Mortgage Loans may exclude coverage for some of the risks
described in this paragraph.
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 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.
<PAGE>
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 the following
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"), (ii) Certificates ("FASIT Certificates") representing interests in
all or a portion of a Trust ("FASIT Mortgage Pool") for which an election is
made to treat it as a financial asset securitization trust ("FASIT") under Code
Section 860L, (iii) Certificates ("Trust Certificates") representing interests
in a Trust for which neither of such elections is made, (iv) Certificates
("Partnership Interests") issued under arrangements treated as partnership
interests for federal income tax purposes and (v) Certificates ("Debt
Certificates") issued under arrangements treated for federal income tax purposes
as debt. The discussion is based upon the advice of Arter & Hadden, LLP, special
counsel to the Depositor. Arter & Hadden LLP 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:
(i) the Internal Revenue Code of 1986, as amended (the "Code");
(ii) the final regulations on REMICs (the "REMIC Regulations") promulgated
on December 23, 1992;
(iii) the final regulations under Sections 1271 through 1273 and 1275 of the
Code (the "OID Regulations") concerning debt instruments promulgated
on January 21, 1994;
(iv) the final regulations concerning debt instruments providing for
contingent payments (the "Contingent Payment Regulations") promulgated
on June 11, 1996;
(v) the final mark-to-market regulations under Section 475 (the
"Mark-To-Market regulations") promulgated December 31, 1996;
(vi) the regulations concerning withholding for foreign persons (the
"Withholding Regulations") published on October 6, 1997, for
application to payments after December 31, 1999; and
(vii) the regulations concerning amortization of premium (the "Premium
Regulations") effective for debt instruments acquired after March 2,
1998.
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.
<PAGE>
REMIC CERTIFICATES
With respect to each series of REMIC Certificates relating to a REMIC Mortgage
Pool, Arter & Hadden, LLP, 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 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 "-- 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:
(i) 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,
(ii) any qualified replacement mortgage,
(iii) any regular interest in another REMIC transferred to the REMIC on
the Closing Date in exchange for REMIC Certificates or
(iv) beginning on September 1, 1997, certain regular interests in a
financial asset securitization investment trust.
Any property acquired as a result of a foreclosure or deed in lieu with respect
to a Qualified Mortgage ("foreclosure property") is required generally to be
disposed of within two years. 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.
<PAGE>
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 Certificateholders will receive reports annually (or more frequently if
required) 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 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 Closing 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.
<PAGE>
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 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 compel 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 securities
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 "-- Market Discount" and "-- Premium".
<PAGE>
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 of (i)
the sum of (A) the present value of all the distributions remaining to be made
on the REMIC Regular Certificate, 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 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).
<PAGE>
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. A REMIC
Regular Certificate 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 Closing 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 the Closing Date 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
Regulations applicable to variable rate debt instruments, it may be subject to
the Contingent Debt Regulations. The application of the 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 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 "REMIC 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.
<PAGE>
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 "REMIC 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 REMIC Regular Certificate 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 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 "-- 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 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 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 Premium Regulations
do not apply to debt instruments subject to Code Section 1272(a)(6).
Nevertheless, if a Certificateholder elects to amortize premium for the taxable
year containing the effective date of March 2, 1998, the Premium Regulations
will apply to all the Certificateholder's debt instruments held on or after the
first day of that taxable year.
<PAGE>
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 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, "Trust Certificates -- 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).
<PAGE>
TIERED REMIC STRUCTURES. For certain series of Certificates, two or more
separate elections may be made to treat designated portions of the related Trust
as REMICs ("Tiered REMICs") for federal income tax purposes. Upon the issuance
of any such series of Certificates, Arter & Hadden LLP, 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 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 MORTGAGE POOL. 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 "-- REMIC 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.
<PAGE>
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.
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 excess 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.
<PAGE>
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 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.
<PAGE>
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 "-- 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 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 "-- 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 with a maximum marginal tax rate for long-term
capital gains of individuals at 28% (lower rates may apply depending on the
holding period of the capital asset). There is no such rate differential for
corporations. In addition, the distinction between a capital gain or loss and
ordinary income or loss is 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.
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.
<PAGE>
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 service providers, such as servicing
compensation of the Master Servicer and the Servicers, 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.
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 Asset 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 REMICS. 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.
<PAGE>
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. One 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.
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 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.
<PAGE>
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 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
"REMIC 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 Withholding Regulations may affect the United States taxation of foreign
investors in REMIC Certificates. The Withholding Regulations are generally
proposed to be effective for payments after December 31, 1999, regardless of the
issue date of the REMIC Certificate with respect to which such payments are
made, subject to certain transition rules. The Withholding Regulations 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 Withholding Regulations 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.
<PAGE>
FASIT CERTIFICATES
General. With respect to a particular series of Certificates, an election may be
made to treat the Trust or one or more trusts or segregated pools of assets
therein as one or more FASITs within the meaning of Code Section 860L. The FASIT
provisions of the Code were enacted by the Small Business Job Protection Act of
1996 and create a new elective statutory vehicle for the issuance of
mortgage-backed and asset-backed securities. A Trust or a portion or portions
thereof as to which one or more FASIT elections will be made will be referred to
as a "FASIT Pool." For purposes of this discussion, Certificates of a series as
to which one or more FASIT elections are made are referred to as "FASIT
Certificates" and will consist of one or more classes of "FASIT Regular
Certificates" and one "Ownership Interest Security" in the case of each FASIT
Pool. Although the FASIT provisions of the Code became effective on September 1,
1997, no Treasury regulations or other administrative guidance has been issued
with respect to those provisions. Accordingly, definitive guidance cannot be
provided with respect to many aspects of the tax treatment of Holders of FASIT
Certificates . Investors also should note that the FASIT discussion contained
herein constitutes only a summary of the federal income tax consequences to
Holders of FASIT Certificates.
Qualification as a FASIT requires ongoing compliance with certain conditions.
With respect to each Series of FASIT Certificates, Special Counsel has advised
the Depositor that in their opinion (unless otherwise limited in the related
Prospectus Supplement) , assuming (i) the making of an appropriate election,
(ii) compliance with all provisions of the related Agreement and (iii)
compliance with the applicable provisions of the law, including any amendments
to the Code or applicable Treasury regulations thereunder, each FASIT Pool will
qualify as a FASIT. In such case, the FASIT Regular Certificates will be
considered to be "regular interests" in the FASIT Pool and generally will be
treated for federal income tax purposes as if they were newly originated debt
instruments, and the Ownership Interest Security will be considered to be the
"ownership interest" in the FASIT Pool, which generally is not treated as debt
for such purposes, but rather as representing rights and responsibilities with
respect to the taxable income or loss of the FASIT Pool. The Prospectus
Supplement for each series of Certificates will indicate whether one or more
FASIT elections with respect to the related Trust will be made and will also
cover any material federal income tax consequences applicable to the holders of
FASIT Certificates.
Status of FASIT Regular Certificates. FASIT Regular Certificates held by a REIT
will qualify as "real estate assets" within the meaning of section 856(c)(4)(A)
of the Code, and interest on such Certificates will be considered Qualifying
REIT Interest to the same extent that REMIC Certificates would be so considered.
FASIT Regular Certificates held by a Thrift Institution taxed as a "domestic
building and loan association" will represent qualifying assets for purposes of
the qualification requirements set forth in Code Section 7701(a)(19) to the same
extent that REMIC Certificates would be so considered. See "-- REMIC
Certificates -- Status as REMIC Certificates." In addition, FASIT Regular
Certificates held by a financial institution to which Code Section 585 applies
will be treated as evidences of indebtedness for purposes of Code Section
582(c)(1). FASIT Certificates will not qualify as "Government Securities" for
either REIT or RIC qualification purposes.
Qualification as a FASIT. On order for the FASIT Pool to qualify as a FASIT,
there must be ongoing compliance on the part of the FASIT Pool with the
requirements set forth in the Code. The FASIT Pool will qualify under the Code
as a FASIT in which the FASIT Regular Certificates and the Ownership Interest
Security will constitute the "regular interests" and the "ownership interest,"
respectively, if (i) a FASIT election is in effect, (ii) certain tests
concerning (a) the composition of the FASIT Pool's assets and (b) the nature of
the Holders' interests in the FASIT Pool are met on a continuing basis and (iii)
the FASIT Pool is not a regulated company as defined in Code Section 851(a).
Asset Composition. In order for a FASIT Pool to be eligible for FASIT status,
substantially all of the assets of the FASIT Pool must consist of "permitted
assets" as of the close of the third month beginning after the Closing Date and
at all times thereafter (the "FASIT Qualification Test"). Permitted assets
include (i) cash or cash equivalents, (ii) debt instruments with fixed terms
that would qualify as REMIC regular interests if issued by a REMIC (generally,
instruments that provide for interest at a fixed rate, a qualifying variable
rate, or a qualifying interest-only type rate), (iii) foreclosure property, (iv)
certain hedging instruments (generally, interest and currency rate swaps and
credit enhancement contracts) that are reasonably required to guarantee or hedge
against the FASIT's risks associated with being the obligor on FASIT interests,
(v) contract rights to acquire qualifying debt instruments or qualifying hedging
instruments, (vi) FASIT regular interests and (vii) REMIC regular interests.
Permitted assets do not include any debt instruments issued by the Holder of the
Ownership Interest Security or by any person related to such Holder.
<PAGE>
Interests in a FASIT. In addition to the FASIT Qualification Test, the interests
in a FASIT also must meet certain requirements. All the interests in a FASIT
must belong to either of the following: (i) one or more classes of regular
interests or (ii) a single class of ownership interest that is held directly by
a fully taxable domestic corporation. A FASIT interest generally qualifies as a
regular interest if (i) it is designated as a regular interest, (ii) it has a
stated maturity (including options to renew) no greater than thirty years, (iii)
it entitles its Holder to a specified principal amount, (iv) the issue price of
the interest does not exceed 125% of its stated principal amount, (v) the yield
to maturity of the interest is less than the applicable federal rate published
by the IRS plus 5% and (vi) if it pays interest, such interest is payable at
either (a) a fixed rate with respect to the principal amount of the regular
interest or (b) a permissible variable rate with respect to such principal
amount. Permissible variable rates for FASIT regular interests are the same as
those for REMIC regular interest (i.e., certain qualified floating rates and
weighted average rates). See "-- REMIC Certificates -- Taxation of Regular
Certificates -- Variable Rate Regular Certificates."
If a FASIT Security fails to meet one or more of the requirements set out in
clauses (iii), (iv) or (v) above, but otherwise meets the above requirements, it
may still qualify as a type of regular interest known as a "High-Yield
Interest." In addition, if a FASIT Security fails to meet the requirements of
clause (vi), but the interest payable on the Security consists of a specified
portion of the interest payments on permitted assets and that portion does not
vary over the life of the Security, the Security also will qualify as a
High-Yield Interest. A High-Yield Interest may be held only by domestic
corporations that are fully subject to corporate income tax ("Eligible
Corporations"), other FASITs and dealers in securities who acquire such
interests as inventory, rather than for investment. In addition, Holders of
High-Yield Interests are subject to limitations on the use of losses to offset
income derived from such interest. See "-- FASIT Certificates -- Tax Treatment
of FASIT Regular Certificates -- Treatment of High-Yield Interests."
Consequences of Disqualification. If a FASIT Pool fails to comply with one or
more of the Code's ongoing requirements for FASIT status during any taxable
year, the Code provides that its FASIT status may be lost for that year and
thereafter. If FASIT status is lost, the treatment of the former FASIT and the
interests therein for federal income tax purposes is uncertain. The former FASIT
might be treated as a grantor trust, as a separate association taxable as a
corporation, or as a partnership. The FASIT Regular Certificates could be
treated as debt instruments for federal income tax purposes or as equity
interests in the former FASIT. Although the Code authorizes the Treasury to
issue regulations that address situations where a failure to meet the
requirements for FASIT status occurs inadvertently and in good faith, such
regulations have not yet been issued. It is possible that disqualification
relief might be accompanied by sanctions, such as the imposition of a corporate
tax on all or a portion of the FASIT's income for a period of time in which the
requirements for FASIT status are not satisfied.
Tax Treatment of FASIT Regular Certificates. Payments received by Holders of
FASIT Regular Certificates generally should be accorded the same tax treatment
under the Code as payments received on other taxable corporate debt instruments
and on REMIC Regular Certificates. As in the case of Holders of REMIC Regular
Certificates, Holders of FASIT Regular Certificates must report income from such
Certificates under an accrual method of accounting, even if they otherwise would
have used the cash receipts and disbursements method. Except in the case of
FASIT Regular Certificates issued with original issue discount or acquired with
market discount or premium, interest paid or accrued on a FASIT Regular Security
generally will be treated as ordinary income to the Holder and a principal
payment on such Security will be treated as a return of capital to the extent
that the Holder's basis is allocable to that payment. Holders of FASIT Regular
Certificates issued with original issue discount or acquired with market
discount or premium generally will treat interest and principal payments on such
Certificates in the same manner described for REMIC Regular Certificates. See
"-- REMIC Certificates --Taxation of Regular Certificates -- Market Discount,"
and "--Premium."
If a FASIT Regular Security is sold or exchanged, the Holder generally will
recognize gain or loss upon the sale in the same manner as that described for
REMIC Regular Certificates. See "-- REMIC Certificates -- Taxation of Regular
Certificates -- Sale or Exchange of Regular Certificates." In addition, if a
FASIT Regular Security becomes wholly or partially worthless as a result of
default and delinquencies of the underlying assets, the Holder of such Security
should be allowed to deduct the loss sustained (or alternatively be able to
report a lesser amount of income).
<PAGE>
Treatment of High-Yield Interests. High-Yield Interests are subject to taxation
as FASIT Regular Interests. In addition, High-Yield Interests are subject to
special rules regarding the eligibility of Holders of such interests, and the
ability of such Holders to offset income derived from their FASIT Security with
losses. High-Yield Interests may be held only by Eligible Corporations, other
FASITs, and dealers in securities who acquire such interests as inventory. If a
securities dealer (other than an Eligible Corporation) initially acquires a
High-Yield Interest as inventory, but later begins to hold it for investment or
ceases to be a dealer, the dealer will become subject to an excise tax equal to
the income from the High-Yield Interest multiplied by the highest corporate
income tax rate. In addition, transfers of High-Yield Interests to disqualified
Holders will be disregarded for federal income tax purposes, and the transferor
still will be treated as the Holder of the High-Yield Interest.
The Holder of a High-Yield Interest may not use non-FASIT current losses or net
operating loss carryforwards or carrybacks to offset any income derived from the
High-Yield Interest, for either regular income tax purposes or for alternative
minimum tax purposes. In addition, the FASIT provisions contain an anti-abuse
rule that imposes corporate income tax on income derived from a FASIT Regular
Security that is held by a pass-through entity (other than another FASIT) that
issues debt or equity securities backed by the FASIT Regular Security and that
have the same features as High-Yield Interests.
Tax Treatment of Ownership Interest Security. A FASIT is not subject to
taxation. An Ownership Interest Security represents the residual equity interest
in a FASIT. As such, the Holder of an Ownership Interest Security determines its
taxable income by taking into account all assets, liabilities and items of
income, gain, deduction, loss and credit of a FASIT (other than those allocable
to prohibited transactions as described below). In general, the character of the
income to the Holder of an Ownership Interest Security will be the same as the
character of such income of the FASIT, except that any tax-exempt interest
income taken into account by the Holder of an Ownership Interest Security is
treated as ordinary income. In determining that taxable income, the Holder of an
Ownership Interest Security must determine the amount of interest, original
issue discount, market discount and premium recognized with respect to the
FASIT's assets and the FASIT Regular Certificates issued by the FASIT according
to a constant yield methodology and under an accrual method of accounting. In
addition, the Holder of Ownership Interest Certificates are subject to the same
limitations on its ability to use losses to offset income from its FASIT
Security as are the Holders of High-Yield Interests. See "-- FASIT Certificates
- --- Treatment of High-Yield Interests."
Rules similar to the wash sale rules applicable to REMIC Residual Certificates
also will apply to Ownership Interest Certificates. Accordingly, losses on
dispositions of an Ownership Interest Security generally will be disallowed
where, within six months before or after the disposition, the seller of such
Security acquires any other Ownership Interest Security or, in the case of a
FASIT holding mortgage assets, any interest in a taxable mortgage pool that is
economically comparable to an Ownership Interest Security. In addition, if any
security that is sold or contributed to a FASIT by the Holder of the related
Ownership Interest Security was required to be marked-to-market under Code
section 475 by such Holder, then section 475 will continue to apply to such
securities, except that the amount realized under the mark-to-market rules will
be a greater of the securities' value under present law or the securities' value
after applying special valuation rules contained in the FASIT provisions. Those
special valuation rules generally require that the value of debt instruments
that are not traded on an established securities market be determined by
calculating the present value of the reasonably expected payments under the
instrument using a discount rate of 120% of the applicable federal rate,
compounded semiannually.
The Holder of an Ownership Interest Security will be subject to a tax equal to
100% of the net income derived by the FASIT from any "prohibited transactions."
Prohibited transactions include (i) the receipt of income derived from assets
that are not permitted assets, (ii) certain dispositions of permitted assets,
(iii) the receipt of any income derived from any loan originated by a FASIT and
(iv) in certain cases, the receipt of income representing a servicing fee or
other compensation. Any FASIT Pool for which a FASIT election is made generally
will be structured in order to avoid application of the prohibited transaction
tax.
Backup Withholding, Reporting and Tax Administration. Holders of FASIT
Certificates will be subject to backup withholding to the same extent as Holders
of REMIC Certificates. See "-- REMIC Certificates -- Backup Withholding." For
purposes of reporting and tax administration, Holders of FASIT Certificates
generally will be treated in the same manner as Holders of
REMIC Certificates.
<PAGE>
TRUST CERTIFICATES
CLASSIFICATION OF TRUST CERTIFICATES. With respect to each series of Trust
Certificates for which no REMIC or FASIT election is made and which are not
subject to partnership treatment or debt treatment (without reference to the
REMIC Provisions and the FASIT Provisions), Arter & Hadden LLP, special counsel
to the Depositor, will deliver their opinion (unless otherwise limited by the
related Prospectus Supplement) generally to the effect that the arrangements
pursuant to which the related Trust 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 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, 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 (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 LLP, 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 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, 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. The assets of certain Trusts 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 Trusts that include Buydown
Mortgage Loans.
<PAGE>
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 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 "-- 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 "-- 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.
<PAGE>
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 LLP, special
counsel to the Depositor, will deliver their opinion (unless otherwise limited
by the related Prospectus Supplement) generally to the effect 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 Assets (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 of or all 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 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 Certificates -- Original Issue Discount". Those regulations also
provide that 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 Regulations 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 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.
<PAGE>
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 Certificates -- Original Issue Discount") from Unstripped
Mortgage Assets as and 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 Certificates -- Original Issue Discount" and "-- Application of Stripped
Bond Rules" and "-- 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.
<PAGE>
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 under "REMIC 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.
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 -- Market Discount" and "--
Premium" for a discussion of the application of the 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 therefor 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 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 LLP, special counsel to the Depositor, will deliver
their opinion (unless otherwise limited by the related Prospectus Supplement)
generally to the effect 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.
<PAGE>
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 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.
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 under
"REMIC 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.
<PAGE>
Because the treatment of the Trust Interest Certificates under current law and
the potential application of the 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 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 Certificates -- 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 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 Certificates --
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 Mortgage Assets 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 Withholding Regulations, under "REMIC
Certificates--Foreign Investors in REMIC Certificates".
CERTIFICATES CLASSIFIED AS PARTNERSHIP INTERESTS
Certain arrangements may be treated as partnerships for federal income tax
purposes. In such event, the related Certificates will characterized, for
federal income tax purposes, as "Partnership Interests" as discussed in the
related Prospectus Supplement. With respect to Certificates classified as
Partnership Interests, Arter & Hadden LLP, special counsel to the Depositor,
will deliver their opinion (unless otherwise limited in the related Prospectus
Supplement) generally to the effect that the arrangement pursuant to which such
Certificates are issued will be characterized as a partnership and not as an
association taxable as a corporation for federal income tax purposes.
<PAGE>
DEBT CERTIFICATES
GENERAL. Debt Certificates may be treated, for federal income tax purposes,
either as (i) non-recourse debt of the Depositor secured by the related Mortgage
Assets, in which case the related Trust will constitute only a security device
which constitutes a collateral arrangement for the issuance of secured debt and
not an entity for federal income tax purposes or (ii) debt of a partnership, in
which case the related Trust will constitute a partnership for federal income
tax purposes, in either case without reliance on the REMIC Provisions or the
FASIT Provisions. Arter & Hadden LLP, special counsel to the Depositor, will
deliver their opinion (unless otherwise limited by the related Prospectus
Supplement) generally to the effect that, for federal income tax purposes,
assuming compliance with all the provisions of the related Agreement, (i) the
Debt Certificates will be characterized as debt issued by, and not equity in,
the related Trust and (ii) the related Trust will not be characterized as an
association (or publicly traded partnership within the meaning of Code Section
7704) taxable as a corporation or as a taxable mortgage pool within the meaning
of Code Section 7701(i). Because, however, different criteria are used to
determine the accounting treatment of the issuance of Debt Certificates, the
Depositor may treat such transactions, for financial accounting purposes, as a
transfer of an ownership interest in the related Mortgage Assets to the related
Trust and not as the issuance of debt obligations. In that regard, it should be
noted that the IRS has issued a notice stating that, upon examination, it will
scrutinize instruments treated as debt for federal income tax purposes but as
equity for regulatory, rating agency or financial accounting purposes to
determine if their purported status as debt for federal income tax purposes is
appropriate. Assuming that Debt Certificates will be treated as indebtedness for
federal income tax purposes, holders of Debt Certificates, using their method of
tax accounting, will follow the federal income tax treatment hereinafter
described.
ORIGINAL ISSUE DISCOUNT. It is likely that the Debt Certificates will be treated
as having been issued with "original issue discount" within the meaning of Code
Section 1273(a) because interest payments on the Debt Certificates may, in the
event of certain shortfalls, be deferred for periods exceeding one year. As a
result, interest payments may not be considered "qualified stated interest"
payments.
In general, a holder of a Debt Certificate having original issue discount must
include original issue discount in ordinary income as it accrues in advance of
receipt of the cash attributable to the discount, regardless of the method of
accounting otherwise used. The amount of original issue discount on a Debt
Certificate will be computed generally as described under "-- REMIC Certificates
- -- Original Issue Discount". The Depositor intends to report any information
required with respect to the Debt Certificates based on the OID Regulations.
MARKET DISCOUNT. A purchaser of a Debt Certificate may be subject to the market
discount rules of Code Sections 1276 through 1278. In general, "market discount"
is the amount by which the stated redemption price at maturity (or, in the case
of a Debt Certificate issued with original issue discount, the adjusted issue
price) of the Debt Certificate exceeds the purchaser's basis in a Debt
Certificate. The holder of a Debt Certificate that has market discount generally
will be required to include accrued market discount in ordinary income to the
extent payments includible in the stated redemption price at maturity of such
Debt Certificate are received. The amount of market discount on a Debt
Certificate will be computed generally as described under "-- REMIC Certificates
- -- Market Discount".
PREMIUM. A Debt Certificate purchased at a cost greater than its stated
redemption price at maturity is considered to be purchased at a premium. A
holder of a Debt Certificate who holds a Debt Certificate as a "capital asset"
within the meaning of Code Section 1221 may elect under Code Section 171 to
amortize the premium under the constant interest method. That election will
apply to all premium obligations that the holder of a Debt Certificate acquires
on or after the first day of the taxable year for which the election is made,
unless the IRS permits the revocation of the election. In addition, it appears
that the same rules that apply to the accrual of market discount on installment
obligations are intended to apply in amortizing premium on installment
obligations such as the Debt Certificates. The treatment of premium incurred
upon the purchase of a Debt Certificate will be determined generally as
described above under "-- REMIC Certificates -- Premium".
SALE OR EXCHANGE OF DEBT CERTIFICATES. If a holder of a Debt Certificate sells
or exchanges a Debt Certificate, such holder will recognize gain or loss equal
to the difference, if any, between the amount received and such holder's
adjusted basis in the Debt Certificate. The adjusted basis in the Debt
Certificate generally will equal its initial cost, increased by any original
issue discount or market discount with respect to the Debt Certificate
previously included in such holder's gross income and reduced by the payments
previously received on the Debt Certificate, other than payments of qualified
stated interest, and by any amortized premium.
<PAGE>
In general, except as described above with respect to market discount, and
except for certain financial institutions subject to Code Section 582(c), any
gain or loss on the sale or exchange of a Debt Certificate recognized by an
investor who holds the Debt Certificate as a capital asset (within the meaning
of Code Section 1221), will be capital gain or loss and will be long term or
short term depending on whether the Debt Certificate has been held for more than
one year. For corporate taxpayers, there is no preferential rate afforded to
long-term capital gains. For individual taxpayers, net capital gains are subject
to varying tax rates depending upon the holding period of the Debt Certificates.
BACKUP WITHHOLDING. Holders of Debt Certificates will be subject to backup
withholding rules identical to those applicable to REMIC Regular Certificates.
See "-- REMIC Certificates -- Backup Withholding" with respect to REMIC
Certificates.
TAX TREATMENT OF FOREIGN INVESTORS. Holders of Debt Certificates who are foreign
investors will be subject to taxation in the same manner as foreign holders of
REMIC Regular Securities. See "-- REMIC Certificates -- Foreign Investors in
REMIC Certificates".
For federal income tax purposes, (i) Debt Certificates held by a thrift
institution taxed as a "mutual savings bank" or "domestic building and loan
association" will not represent interests in "qualifying real property loans"
within the meaning of Code Section 593(d)(1); (ii) Debt Certificates held by a
thrift institution taxed as a domestic building and loan association will not
constitute "loans ... secured by an interest in real property" within the
meaning of Code Section 7701(a)(19)(C)(v); (iii) interest on Debt Certificates
held by a real estate investment trust will not be treated as "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); (iv) Debt
Certificates held be a real estate investment trust will not constitute "real
estate assets" or "Government securities" within the meaning of Code Section
856(c)(5)(A); and (v) Debt Certificates held by a regulated investment company
will not constitute "Government securities" within the meaning of Code Section
851(b)(4)(A)(i).
TAXATION OF CERTIFICATES CLASSIFIED AS PARTNERSHIP INTERESTS
Certain Trusts may be treated as partnerships for Federal income tax purposes.
In such event, the Trusts may issue Securities characterized as "Partnership
Interests" as discussed in the related Prospectus Supplement. With respect to
such Series of Partnership Interests, Arter & Hadden LLP, special counsel to the
Depositor, will deliver their opinion (unless otherwise limited by the related
Prospectus Supplement) generally to the effect that the Trust will be
characterized as a partnership and not an association taxable as a corporation
or taxable mortgage pool for federal income tax purposes. The related Prospectus
Supplement will also cover any material federal income tax consequences
applicable to the Owners.
STATE AND LOCAL TAX CONSIDERATIONS
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 or FASIT Mortgage Pool or Non-REMIC or Non-FASIT Trust 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.
<PAGE>
CANADIAN INCOME TAX CONSIDERATIONS
With respect to Canadian Mortgage Loans, interest payments may be subject to
Canadian withholding tax as described in the relates Prospectus Supplement.
Potential investors should consult their own tax and legal advisors with respect
to the consequences of ownership of the Certificates and the receipt of income
related to Canadian Mortgage Loans.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain requirements and restrictions on employee benefit plans within
the meaning of Section 3(3) of ERISA (including collective investment funds,
separate accounts and insurance company general accounts in which such plans are
invested). ERISA also imposes certain duties on those persons who are
fiduciaries with respect to employee benefit plans that are subject to ERISA.
Investments by employee benefit plans covered by ERISA are subject to the
general fiduciary requirements of ERISA, including the requirement of investment
prudence and diversification, and the requirement that the employee benefit
plan's investments be made in accordance with the documents governing the
employee benefit plan.
In addition, employee benefit plans subject to ERISA (including collective
investment funds, separate accounts and insurance company general accounts in
which such plans are invested), and individual retirement accounts and annuities
or certain types of Keogh plans not subject to ERISA but subject to Section 4975
of the Code (each, a "Plan"), are prohibited from engaging in a broad range of
transactions involving Plan assets and persons having certain specified
relationships to a Plan ("parties in interest" under ERISA and "disqualified
persons" under the Code). Such transactions are treated as "prohibited
transactions" under Sections 406 and 407 of ERISA and excise taxes are imposed
upon disqualified persons by Section 4975 of the Code (or, in some cases, a
civil penalty may be assessed pursuant to Section 502(i) of ERISA). The
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.
<PAGE>
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 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.
<PAGE>
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, 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. 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.
<PAGE>
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 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).
<PAGE>
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
Page
----
1996 Contingent Payment Regulations................................52
Adjustable Rate....................................................21
adjusted issue price...............................................57
Advance............................................................35
AFR................................................................61
Agreement..........................................................10
applicable federal rate............................................61
ARM Loans..........................................................22
backup withholding tax.............................................66
Balloon Loans.......................................................7
Bankruptcy Bond....................................................32
Beneficial Owner...................................................11
Book-Entry Certificates............................................11
Buy-Down Loans.....................................................23
Certificate Guaranty Insurance Policy..............................29
Certificate Insurer................................................29
Certificateholder..................................................17
Certificates........................................................1
Class...............................................................1
Closing Date.......................................................20
Code................................................................3
Committee Report...................................................53
Compound Interest Certificates.....................................17
Converted Mortgage Loan............................................25
Cooperative Loans...................................................2
Cooperatives........................................................2
current value......................................................55
Custodial Account..................................................35
daily accruals.....................................................61
daily portions.....................................................56
Delinquent Mortgage Loan...........................................25
Depositor...........................................................1
Depository.........................................................11
disqualified organizations.........................................64
disqualified persons...............................................77
Distribution Date...................................................1
DTC................................................................11
equity interest....................................................77
Excess inclusions..................................................61
FHLMC...............................................................2
Financial Intermediary.............................................11
Fixed Rate.........................................................21
GNMA................................................................2
GPM Loans..........................................................23
Gross Margin.......................................................21
HELOCs..............................................................2
Home Improvement Loans..............................................2
Index..............................................................21
Interest Adjustment Date...........................................21
Interest Portion...................................................72
issue price........................................................54
Junior Mortgage Loans..............................................24
Lockout Periods....................................................22
market discount....................................................58
Mark-To-Market Regulations.........................................53
Master Servicer.....................................................2
Master Servicer Custodial Account..................................35
Mortgage Assets.....................................................2
Mortgage Interest Rate.............................................21
Mortgage Loans......................................................2
Mortgage Note......................................................21
mortgage pool......................................................77
Mortgage Pool Insurance Policy.....................................30
Mortgaged Premises.................................................21
mortgage-related securities.........................................3
Multifamily Loans...................................................2
Multiple Variable Rate.............................................57
non-conforming credit...............................................8
Non-U.S. Person....................................................66
objective rate.....................................................55
OID Regulations....................................................52
original issue discount............................................54
parties in interest................................................77
pass-through entity................................................64
Pass-Through Rate...................................................1
Periodic Rate Cap..................................................21
Permitted Investments..............................................41
Plan...............................................................76
Pool Insurer.......................................................30
Pre-Funding Account.................................................2
Pre-Funding Agreement...............................................2
Prepayment Assumption..............................................54
Primary Mortgage Insurance Policies................................22
prohibited transactions............................................65
Proposed Premium Regulations.......................................53
Proposed Withholding Regulations...................................53
PTCE 83-1..........................................................77
qualified floating rate............................................55
qualified mortgages................................................53
qualified stated interest..........................................55
Rating Agency.......................................................4
Realized Loss......................................................17
regular interests..................................................53
REMIC...............................................................3
REMIC Certificates.................................................52
REMIC Mortgage Pool................................................52
REMIC Provisions...................................................52
REMIC Regular Certificate..........................................53
REMIC Regulations..................................................52
REMIC Residual Certificate.........................................53
Remittance Date....................................................35
REO Properties......................................................2
Reserve Fund.......................................................32
residual interests.................................................53
Residual Owner.....................................................60
Retained Yield.....................................................69
Security Instrument................................................20
Seller..............................................................1
Series..............................................................1
Servicer............................................................2
Servicer Custodial Account.........................................35
Servicing of Mortgage Loans.........................................2
Single Family Loans.................................................2
Single Variable Rate...............................................55
single-class REMIC.................................................64
SMI.................................................................1
SMMEA...............................................................3
Special Hazard Insurance Policy....................................31
Special Hazard Insurer.............................................31
Special Servicer....................................................2
Standard Hazard Insurance Policies.................................37
stated redemption price at maturity................................54
Stripped Interest..................................................72
Stripped Mortgage Asset............................................69
tax matters person.................................................65
Tiered REMICs......................................................60
Trust Certificates.................................................52
Trust Fractional Certificate.......................................67
Trust Fractional Certificateholder.................................68
Trust Interest Certificate.........................................67
Trust Interest Certificateholder...................................72
Trustee.............................................................1
United States shareholder..........................................66
Unstripped Mortgage Assets.........................................71
<PAGE>
You should rely only on the information contained or incorporated by
reference in this Prospectus Supplement and the accompanying Prospectus. We have
not authorized anyone to provide you with different information..
We are not offering the Offered Certificates in any state where the
offer is not permitted.
We not claim the accuracy of the information in this Prospectus
Supplement and the accompanying Prospectus as of any date other than the dates
stated on their cover pages.
TABLE OF CONTENTS
Prospectus Supplement
Summary....................................................S-1
Risk Factors...............................................S-6
The Mortgage Loan Pool.....................................S-8
Use of Proceeds...........................................S-18
Prepayment and Yield Considerations.......................S-18
Description of the Offered Certificates...................S-25
The Agreement.............................................S-33
Certain Federal Income Tax Consequences...................S-35
ERISA Considerations......................................S-36
Ratings...................................................S-38
Legal Investment Considerations...........................S-38
Underwriting..............................................S-38
Certain Legal Matters.....................................S-39
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
Dealers will deliver a Prospectus Supplement and Prospectus when acting as
underwriters of the Certificates and with respect to their unsold allotments of
subscriptions. In addition, all dealers selling the Offered Certificates will
deliver a Prospectus Supplement and Prospectus until 90 days after the date of
the Prospectus Supplement.
[logo]
SAXON
Saxon Mortgage, Inc.
$---,---,---
Saxon Asset Securities Trust 1998-__
Saxon Asset Securities Company,
as Depositor
$__,___,000 Class AF-1 Certificates
$__,___,000 Class AF-2 Certificates
$__,___,000 Class AF-3 Certificates
$__,___,000 Class AF-4 Certificates
$__,___,000 Class AF-5 Certificates
$__,___,000 Class AF-6 Certificates
$__,___,000 Class MF-1 Certificates
$__,___,000 Class MF-2 Certificates
$__,___,000 Class BF-1 Certificates
$___,000,000 Class AV-1 Certificates
$__,___,000 Class AV-2 Certificates
$__,000,000 Class MV-1 Certificates
$_,___,000 Class MV-2 Certificates
$_,___,000 Class BV-1 Certificates
Mortgage Loan Asset Backed Certificates
Series 1998-__
1st Underwriter
2nd Underwriter
3rd Underwriter
4th Underwriter
PROSPECTUS SUPPLEMENT
______________ __, 1998
<PAGE>
PART II
Item 14. Other Expenses of Issuance and Distribution
The following is an itemized list of the estimated expenses to be incurred
in connection with the offering of the securities being offered hereunder other
than underwriting discounts and commissions.
Registration Fee ..................................... $ 737,500
Printing and Engraving................................ 250,000
Trustee's Fees ..................................... 250,000
Legal Fees and Expenses............................... 500,000
Blue Sky Fees and Expenses............................ 25,000
Accountants' Fees and Expenses........................ 450,000
Rating Agency Fees.................................... 450,000
Miscellaneous Fees.................................... 37,500
Total ..................................... $2,700,000
==========
Item 15. Indemnification of Directors and Officers
Article 10 of the Virginia Stock Corporation Act provides in substance that
Virginia corporations shall have the power, under specified circumstances, to
indemnify their directors, officers, employees and agents in connection with
actions, suits or proceedings brought against them by a third party or in the
right of the corporation, by reason of the fact that they were or are such
directors, officers, employees or agents, against expenses incurred in any such
action, suit or proceeding. The Virginia Stock Corporation Act also provides
that Virginia corporations may purchase insurance on behalf of any such
director, officer, employee or agent.
Under certain sales agreements entered into by the Depositor and various
transferors of mortgage-related collateral, such transferors are obligated to
indemnify the Depositor against certain expenses and liabilities.
Reference is made to the Standard Terms to Underwriting Agreement filed as
an exhibit hereto for provisions relating to the indemnification of directors,
officers and controlling persons of the Depositor against certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
Item 16. Exhibits and Financial Statements
(a) Exhibits
1.1 Form of Underwriting Agreement (including Standard Terms January
1997 Edition) incorporated by reference to Exhibit 1.1 to
Registration Statement No. 333-20025.
3.1 Articles of Incorporation incorporated by reference to Exhibit 3.1
to Registration Statement No. 333-4127.
3.2 Bylaws incorporated by reference to Exhibit 3.2 to Registration
Statement No. 333-4127.
4.1* Form of Agreement (including Forms of Certificates and Standard
Terms July 1998 Edition).
5.1* Opinion of Arter & Hadden LLP with respect to legality.
8.1* Opinion of Arter & Hadden LLP with respect to tax matters.
23.1* Consent of Arter & Hadden LLP (included in its opinion filed as
Exhibit 5.1).
23.2* Consent of Arter & Hadden LLP (included in its opinion filed as
Exhibit 8.1).
- -------------
*Filed With the Registration Statement.
(a) Financial Statements
All financial statements, schedules and historical financial information
have been omitted as they are not applicable.
II-1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
Amendment No. 1 to its Registration Statement (No. 333-59479) to be signed on
its behalf by the undersigned, thereunto duly authorized, in Glen Allen,
Commonwealth of Virginia, on September 21, 1998.
SAXON ASSET SECURITIES COMPANY
By: /s/ Bradley D. Adams
--------------------------
Bradley D. Adams
Vice President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed on September 21, 1998, by the
following persons in the capacities indicated.
Signature Title
--------- -----
*/s/ Charles Coudriet Principal Executive Officer
- -------------------- and Director
Charles Coudriet
*/s/ Robert Partlow Principal Executive
- -------------------- Officer and Director
Robert Partlow
*/s/ David L. Heavenridge Director
- ------------------------
David L. Heavenridge
*/s/ Hayden D. McMillian Director
- -----------------------
Hayden D. McMillian
*/s/ Bryan S. Reid Director
- ---------------------
Bryan S. Reid
*By: /s/ Bradly D. Adams
- -------------------------
Bradley D. Adams
Attorney in-fact
