Filed pursuant to Rule 424(b)(5)
File No. 333-4127
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED FEBRUARY 19, 1997)
- -------------------------------------------------------------------------------
$446,404,000
SAXON ASSET SECURITIES TRUST 1998-2
<TABLE>
<CAPTION>
<S> <C>
$65,000,000 Class AF-1 Certificates $23,382,000 Class AF-6 Certificates $125,442,000 Class AV-1 Certificates
$50,000,000 Class AF-2 Certificates $11,691,000 Class MF-1 Certificates $56,001,000 Class AV-2 Certificates
$19,000,000 Class AF-3 Certificates $8,184,000 Class MF-2 Certificates $16,801,000 Class MV-1 Certificates
$34,000,000 Class AF-4 Certificates $6,430,000 Class BF-1 Certificates $12,880,000 Class MV-2 Certificates
$10,873,000 Class AF-5 Certificates $6,720,000 Class BV-1 Certificates
</TABLE>
[SAXON MORTGAGE, INC. LOGO}
Mortgage Loan Asset Backed Certificates, Series 1998-2
Saxon Asset Securities Company
AS DEPOSITOR
-------------------------------
The Mortgage Loan Asset Backed Certificates, Series 1998-2, will consist
of: (a) the following Group I Offered Certificates: (i) Class AF-1, Class AF-2,
Class AF-3, Class AF-4, Class AF-5 and Class AF-6 Certificates, (ii) Class MF-1
and Class MF-2 Certificates and (iii) Class BF-1 Certificates; (b) the following
Group II Offered Certificates: (i) Class AV-1 and Class AV-2 Certificates, (ii)
Class MV-1 and Class MV-2 Certificates and (iii) Class BV-1 Certificates; and
(c) 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").
Only the Group I Offered Certificates and the Group II Offered Certificates
(collectively, the "Offered Certificates") are offered hereby.
Interest will accrue on the Class AF-1, Class AF-2, Class AF-3, Class
AF-4 and Class AF-6 Certificates at the respective fixed Pass-Through Rates set
forth herein and on the Class AF-5, Class MF-1, Class MF-2 and Class BF-1
Certificates at the Pass-Through Rates set forth herein equal to the lesser of
(i) the applicable fixed interest rate set forth herein and (ii) the weighted
average net Mortgage Interest Rates on the Mortgage Loans in Group I. The
Pass-Through Rates for the Group II Certificates (other than the Class AV-2
Certificates) will adjust monthly and with respect to the first Distribution
Date will be determined on June 23, 1998, by the Trustee. The Pass-Through Rate
on the Class AV-2 Certificates will equal the lesser of (i) the fixed
Pass-Through Rate set forth herein and (ii) the Group II Available Funds Cap.
FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING INVESTMENT IN THE
OFFERED CERTIFICATES, SEE "RISK FACTORS" ON PAGE S-9 HEREIN AND ON PAGE 5 IN
THE PROSPECTUS.
The Certificates will represent undivided ownership interests in two
pools of mortgage loans (the "Mortgage Loans") held by a trust (the "Trust")
created pursuant to a Trust Agreement dated as of June 1, 1998 (the
"Agreement"), among Saxon Asset Securities Company (the "Depositor"), Saxon
Mortgage, Inc., as Master Servicer (the "Master Servicer"), and Chase Bank of
Texas, National Association, as trustee (the "Trustee"). The Mortgage Loans will
be acquired by the Depositor from Saxon Mortgage, Inc. ("the Seller"), an
affiliate of the Depositor which originated or acquired the Mortgage Loans from
various mortgage banking institutions. (Cover continued on next page)
----------------------------
THE OFFERED CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN THE TRUST ONLY AND DO
NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR, THE MASTER
SERVICER, THE TRUSTEE, ANY SELLER, ANY SERVICER OR ANY OF THEIR AFFILIATES.
NEITHER THE OFFERED CERTIFICATES NOR THE MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY ANY GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
----------------------------
The Offered Certificates will be purchased by the Underwriters from the
Depositor and will be offered by the Underwriters from time to time in
negotiated transactions or otherwise, at varying prices to be determined at the
time of sale. Proceeds to the Depositor are expected to be approximately
$445,289,022, plus accrued interest, before deducting expenses payable by the
Depositor estimated to be $410,000. See "Underwriting" herein.
The Offered Certificates are offered by the Underwriters, subject to
prior sale, withdrawal, cancellation or modification of the offer without
notice, to delivery and acceptance by the Underwriters and certain other
conditions. It is expected that delivery of the Offered Certificates in
book-entry form will be made on or about June 25, 1998, only through the
facilities of The Depository Trust Company, CEDEL S.A. and the Euroclear System.
MORGAN STANLEY DEAN WITTER
MERRILL LYNCH & CO.
J. P. MORGAN & CO.
PRUDENTIAL SECURITIES INCORPORATED
- -------------------------------------------------------------------------------
The date of this Prospectus Supplement is June 18, 1998
<PAGE>
(Cover continued from previous page)
The assets of the Trust will include two pools (each, a "Mortgage Loan
Group" or "Group") of mortgage loans (the "Mortgage Loans") secured by first or
second mortgages or deeds of trust (the "Mortgages") on residential properties,
including investment properties, which may be detached, attached, two-to-four
family dwellings, condominiums, townhouses, manufactured housing or units in a
planned unit development (the "Mortgaged Premises"), to be conveyed by the
Depositor to the Trust on the Closing Date. The Mortgage Loans will be serviced
by Meritech Mortgage Services, Inc., an affiliate of the Depositor.
Distributions in respect of the Group I Certificates will generally be
calculated with reference to a pool of fixed-rate first or second lien Mortgage
Loans ("Group I"). Distributions in respect of the Group II Certificates will
generally be calculated with reference to a pool of adjustable-rate first lien
Mortgage Loans ("Group II"). See "DESCRIPTION OF THE OFFERED CERTIFICATES " in
this Prospectus Supplement.
All the Mortgage Loans were originated or acquired in accordance with
the Seller's loan programs for non-conforming credits. See "RISK FACTORS -- Risk
of Higher Delinquencies Associated With Underwriting Standards" in this
Prospectus Supplement.
Distributions of principal and interest to each Class of the Offered
Certificates will be made on the 25th day of each month or, if the 25th day is
not a business day, the first business day thereafter (each, a "Distribution
Date"), commencing on July 27, 1998. Distributions on the Subordinated
Certificates and the Private Certificates are subordinate to distributions on
the Class A Certificates to the extent described herein.
One or more elections will be made to treat certain assets of the Trust
as real estate mortgage investment conduits ("REMIC") for federal income tax
purposes. As described more fully herein, each Class of Offered Certificates
will constitute a "regular interest" in a REMIC. See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES" in this Prospectus Supplement and "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES -- REMIC Certificates" in the Prospectus. Only the Class AV-1,
Class AV-2 and Class MV-1 Certificates will constitute "mortgage related
securities" for purposes of SMMEA (as defined herein). See "LEGAL INVESTMENT
CONSIDERATIONS" in this Prospectus Supplement.
There is currently no secondary market for the Offered Certificates.
Each Underwriter intends to make a secondary market in the Offered Certificates
offered by such Underwriter but has no obligation to do so. There can be no
assurance that a secondary market for the Offered Certificates will develop or,
if it does develop, that it will continue.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<PAGE>
PAGE
SUMMARY..................................................1
RISK FACTORS.............................................9
THE MORTGAGE LOAN POOL..................................12
General............................................12
Underwriting Standards.............................12
Characteristics of the Mortgage Loans..............14
Additional Information.............................18
Servicing of the Mortgage Loans....................18
Servicing and Other Compensation and
Payment of Expenses; Repurchase................19
Advances and Month End Interest....................19
Interest Payments on the Mortgage Loans............19
The Master Servicer................................20
USE OF PROCEEDS.........................................20
PREPAYMENT AND YIELD CONSIDERATIONS.....................20
General............................................20
Prepayments and Yields for Offered Certificates....21
Payment Delay Feature of Group I Certificates......27
DESCRIPTION OF THE OFFERED CERTIFICATES.................27
General............................................27
Distributions......................................28
Crosscollateralization Provisions..................32
Calculation of One Month LIBOR.....................33
Book Entry Registration of the
Offered Certificates...........................33
THE AGREEMENT...........................................34
Formation of the Trust.............................34
Reports to Certificateholders......................35
Delivery and Substitution of Mortgage Loans........35
The Trustee........................................35
Voting Rights......................................35
Termination........................................35
Sale of Mortgage Loans.............................36
Events of Default..................................37
Governing Law......................................37
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................37
REMIC Elections....................................37
ERISA CONSIDERATIONS....................................37
UNDERWRITING............................................40
RATINGS.................................................40
LEGAL INVESTMENT CONSIDERATIONS.........................41
CERTAIN LEGAL MATTERS...................................41
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS..........A-1
--------------------------
<PAGE>
The Certificates offered by this Prospectus Supplement will be part of
a separate series of Certificates being offered by the Seller pursuant to its
Prospectus dated February 19, 1997, of which this Prospectus Supplement is a
part and which accompanies this Prospectus Supplement. The Prospectus contains
important information regarding this offering which is not contained herein, and
prospective investors are urged to read the Prospectus and this Prospectus
Supplement in full.
Information under "THE MORTGAGE LOAN POOL -- Servicing of Mortgage
Loans" and "PREPAYMENT AND YIELD CONSIDERATIONS" in this Prospectus Supplement
includes "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933. Such statements are qualified by the important factors
discussed under such captions that could cause actual results to differ
materially from those in the forward-looking statements.
<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus. Reference is made to the "Index to Location of
Principal Defined Terms" in this Prospectus Supplement and in the Prospectus for
definitions of capitalized terms.
TRUST: Saxon Asset Securities Trust 1998-2 (the "Trust").
CERTIFICATES: The Mortgage Loan Asset Backed Certificates, Series
1998-2, will consist of: (a) the following Group I
Offered Certificates: (i) Class AF-1, Class AF-2, Class
AF-3, Class AF-4, Class AF-5 and Class AF-6
Certificates, (ii) Class MF-1 and Class MF-2
Certificates and (iii) Class BF-1 Certificates; (b)
the following Group II Offered Certificates: (i) Class
AV-1 and Class AV-2 Certificates, (ii) Class MV-1 and
Class MV-2 Certificates and (iii) Class BV-1
Certificates; and (c) 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"). Only the Group I Offered Certificates
and the Group II Offered Certificates (collectively, the
"Offered Certificates") are offered hereby. 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".
CERTIFICATES OFFERED: The Initial Certificate Principal Balances, the
Pass-Through Rates and the Last Scheduled Distribution
Dates for the Offered Certificates are as follows:
<TABLE>
<CAPTION>
INITIAL CERTIFICATE PASS-THROUGH LAST SCHEDULED
CLASS PRINCIPAL BALANCE RATES DISTRIBUTION DATE(1)
Group I
<S> <C>
Class AF-1 $65,000,000 6.55% March 25, 2013
Class AF-2 $50,000,000 6.22% March 25, 2018
Class AF-3 $19,000,000 6.31% April 25, 2022
Class AF-4 $34,000,000 6.45% January 25, 2027
Class AF-5 $10,873,000 6.79% (2) February 25, 2028
Class AF-6 $23,382,000 6.36% March 25, 2013
s MF-1 $11,691,000 6.69% (2) December 25, 2027
Class MF-2 $8,184,000 6.99% (2) Septmeber 27, 2027
Class BF-1 $6,430,000 7.45% (2) May 25, 2027
Group II
Class AV-1 $125,442,000 (3) February 25, 2028
Class AV-2 $56,001,000 6.20% (3) April 25, 2017
Class MV-1 $16,801,000 (3) January 25, 2028
Class MV-2 $12,880,000 (3) December 25, 2027
Class BV-1 $6,720,000 (3) October 25, 2027
</TABLE>
The aggregate Initial Certificate Principal Balance of
the Private Certificates is equal to $11,421,000. The
Pass-Through Rates on the Private Certificates will be
set prior to the Closing Date and will be not higher
than the weighted average Interest Rates on the Mortgage
loans in the related Mortgage Loan Group.
- ---------------------------
1 Calculated in accordance with the assumptions for the determination of Last
Scheduled Distribution Date set forth under "PREPAYMENT AND YIELD
Considerations--Prepayments and Yields for Offered Certificates" in this
Prospectus Supplement. It is expected that the actual last Distribution Date for
each Class of Certificates will occur significantly earlier.
2 The Pass-Through Rates for the indicated Group I Certificates on any
Distribution Date will equal the lesser of (i) the per annum rate for such Class
set forth above (increased, for the Class AF-5 Certificates, by 0.50% for any
Distribution Date after the Initial Optional Termination Date (as defined under
"Optional Termination" in this Summary)) and (ii) the weighted average Mortgage
Interest Rates on the Mortgage Loans in Group I less the Servicing Fee Rate and
the Master Servicing Fee Rate.
3 The Pass-Through Rates for the Group II Certificates (other than the Class
AV-2 Certificates) adjust monthly as described on the next page. The
Pass-Through Rate per annum for the Class AV-2 Certificates will be equal to the
lesser of (i) (i) the per annum rate for such Class set forth above and (ii) the
Group II Available Funds Cap.
<PAGE>
The Pass-Through Rates per annum for the Group II
Certificates (other than the Class AV-2 Certificates)
will be equal to the least of (i) the London interbank
offered rate for one month United States dollar deposits
("One Month LIBOR") (calculated as described under
"DESCRIPTION OF THE OFFERED CERTIFICATES -- Calculation
of One Month LIBOR" in this Prospectus Supplement) as of
the second business day prior to the immediately
preceding Distribution Date (June 23, 1998, for the
first Distribution Date) plus the Applicable Spread per
annum (ii) the weighted average of the maximum lifetime
Mortgage Interest Rates on the Mortgage Loans in Group
II less, in each case, the applicable Servicing Fee Rate
and Master Servicing Fee Rate and (iii) the Group II
Available Funds Cap.
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 (30 days in the case of the Class AV-2
Certificates) and (z) multiplied by 360.
The Applicable Spread is as follows: for any
Distribution Date before the Initial Optional
Termination Date: Class AV-1, 0.165%, Class MV-1, 0.33%;
Class MV-2, 0.55%, and Class BV-1, 1.15%; and for any
Distribution Date on or after the Initial Optional
Termination Date: Class AV-1, 0.33%; Class MV-1, 0.495%;
Class MV-2, 0.825%; and Class BV-1, 1.725%.
If on any Distribution Date the Pass-Through Rate for a
Class of the Group II Certificates (other than the Class
AV-2 Certificates) is based upon the Group II Available
Funds Cap, the excess of (i) the amount of interest that
such Class would have been entitled to receive on such
Distribution Date had the Variable Pass-Through Rate for
that Class not been calculated based on the Group II
Available Funds Cap over (ii) the amount of interest
such Class received on such Distribution Date based on
the Group II Available Funds Cap, together with the
unpaid portion of any such excess from prior
Distribution Dates (and interest accrued thereon at the
then applicable Pass-Through Rate, without giving effect
to the Group II Available Funds Cap), is the "Group II
Certificates Carryover" for such Class. Any Group II
Certificates Carryover will be payable on future
Distribution Dates (to the extent available funds are
sufficient therefor but only on or prior to the last
Distribution Date with respect to a Class (other than
the Class AV-2 Certificates)) as described herein. The
rating of the Group II Certificates does not address the
likelihood of the payment of any Group II Certificates
Carryover.
MORTGAGE LOANS: The Trust assets will include two pools (each, a
"Mortgage Loan Group" or "Group") of mortgage loans
(the "Mortgage Loans") secured by mortgages or deeds
of trust (the "Mortgages") on residential properties
including investment properties, which may be
detached, attached, two-to-four family dwellings,
condominium units, townhouses, manufactured housing or
units in a planned unit development (the "Mortgaged
Premises"), to be conveyed to the Trust.
Distributions on the Group I Certificates will
generally be made from payments on a pool of fixed-rate
first or second lien Mortgage Loans ("Group I").
Distributions on the Group II Certificates will
generally be made from payments on a pool of
adjustable-rate first lien Mortgage Loans ("Group II").
See "DESCRIPTION OF THE OFFERED CERTIFICATES" in this
Prospectus Supplement.
References to the characteristics of the Mortgage
Loans (or to the Mortgage Loans in a Group) or to a
percentage thereof are approximate and are based on
the Scheduled Principal Balances of the Mortgage Loans
(or the Mortgage Loans in a Group) as of the Cut-Off
Date. See "THE MORTGAGE LOAN POOL-- Additional
Information" in this Prospectus Supplement.
The Mortgage Loans consist of 4,511 fixed-rate and
adjustable-rate Mortgage Loans of which approximately
1.7% were 30 days or more delinquent as of the Cut-Off
Date.
Group I. The following summarizes the characteristics
of the Mortgage Loans in Group I (percentages are
based on the Scheduled Principal Balances of Group I):
<TABLE>
<CAPTION>
<S> <C>
Aggregate Scheduled Principal Balances $233,821,791.61
Average Scheduled Principal Balance $89,553
Range of Scheduled Principal Balances $7,976 - $594,991
Range of Mortgage Interest Rates 6.88% - 16.50%
Weighted Average Mortgage Interest Rate 9.77%
Weighted Average Original Loan-to-Value Ratio 74.54%
Weighted Average Combined Original Loan-to-Value Ratio 77.25%
Weighted Average Remaining Amortization Term 332 Months
Range of Remaining Amortization Terms 49 - 360 Months
Second Liens 4.8%
Balloon Mortgage Loans 28.3%
Mortgaged Premises
Single-family detached dwellings 83.7%
Single-family attached dwellings 2.0%
Planned unit developments 2.5%
Condominiums 3.7%
Manufactured Housing 3.5%
2-4 Family 4.5%
Weighted Average Servicing Fee Rate 0.51%
Master Servicing Fee Rate 0.03%
Group II. The following summarizes the characteristics
of the Mortgage Loans in Group II (percentages are based
on the Scheduled Principal Balances of Group II):
Aggregate Scheduled Principal Balances $224,004,422.08
Average Scheduled Principal Balance $117,897
Range of Scheduled Principal Balances $9,984 - 1,149,285
Mortgage Interest Rates (1)
Weighted Average By Type of Index:
Six Month LIBOR 8.85%
2/28, 3/27 and 5/25 LIBOR 9.75%
One Year CMT 9.13%
Two Step/LIBOR 9.99%
Gross Margin Range:
Six Month LIBOR 3.25% - 8.25%
2/28, 3/27 and 5/25 LIBOR 3.00 - 10.25%
One Year CMT 3.38 - 7.38%
Two Step/LIBOR 6.25 - 6.25%
Current Weighted Average Mortgage Interest Rate 9.54%
Range of Current Mortgage Interest Rates 5.88% - 14.63%
Weighted Average Maximum Lifetime Mortgage Interest Rate 16.25%
Range of Maximum Lifetime Mortgage Interest Rates 11.88% - 21.50%
Weighted Average Lifetime Minimum Mortgage Interest Rate 9.43%
Range of Minimum Lifetime Mortgage Interest Rates 3.88% - 14.63%
Weighted Average Original Loan-to-Value Ratio 76.94%
Weighted Average Remaining Amortization Term 356 Months
Range of Remaining Amortization Terms 176 - 360 Months
Second Lien Mortgage Loans None
Mortgaged Premises
Single-family detached dwelling 87.4%
Single-family attached dwelling 1.0%
Planned unit developments 4.0%
Condominiums 3.5%
2-4 Family 3.0%
Weighted Average Servicing Fee Rate 0.50%
Master Servicing Fee Rate 0.03%
</TABLE>
- ---------------
(1)All the Mortgage Loans in Group II are expected to be subject to
periodic interest rate adjustment caps, lifetime interest rate ceilings and
lifetime interest rate floors. Substantially all such Mortgage Loans had
interest rates which were not fully indexed (i.e., the Mortgage Interest Rates
did not equal the sum of the gross margin and the applicable index) as of the
Cut-Off Date. See The Mortgage Loan Pool--General".
<PAGE>
See "THE MORTGAGE LOAN POOL --
Characteristics of the Mortgage Loans" in this Prospectus Supplement.
The Seller originated or purchased all the
Mortgage Loans in accordance with its
mortgage loan program. As a general matter,
the Seller's mortgage loan program consists
of the origination (or purchase) and
packaging of mortgage loans relating to
non-conforming credits. A non-conforming
credit means a mortgage loan which is
ineligible for purchase by Federal National
Mortgage Association ("Fannie Mae") due to
credit characteristics that do not meet
Fannie Mae guidelines. Mortgage loans
originated under the Seller's mortgage loan
program are likely to experience rates of
delinquency, bankruptcy and loss that are
higher (perhaps significantly) than mortgage
loans originated under Fannie Mae
guidelines. See "RISK FACTORS -- Risk of
Higher Delinquencies Associated with
Underwriting Standards" in this Prospectus
Supplement.
AGREEMENT: The Certificates will be issued pursuant
to a trust agreement to be dated as of June
1, 1998, among the Depositor, the Master
Servicer and the Trustee.
DENOMINATIONS: The Offered Certificates are issuable in
book entry form in minimum denominations of
$1,000 in original principal amount and
integral multiples thereof.
DEPOSITOR: Saxon Asset Securities Company, a Virginia
corporation and wholly owned limited purpose
financing subsidiary of Dominion Mortgage
Services, Inc. The Depositor's principal
executive offices are located at 4880 Cox
Road, Glen Allen, Virginia 23060, and its
phone number is (804) 967-7400.
SELLER AND MASTER SERVICER: Saxon Mortgage, Inc. a Virginia corporation
and an affiliate of the Depositor.
TRUSTEE: Chase Bank of Texas, National Association, a
national banking association.
SERVICER: Meritech Mortgage Services, Inc., an
affiliate of the Depositor (the "Servicer").
CLOSING DATE: On or about June 25, 1998.
CUT-OFF DATE: As of the close of business on June 1, 1998.
DISTRIBUTIONS, GENERALLY: Distributions on the Certificates
will be made on the 25th day of each
calendar month, or if such day is not a
business day, the next succeeding business
day (each, a "Distribution Date") commencing
July 27, 1998, to the holders of record as
of the last business day of the month
immediately preceding the calendar month in
which such Distribution Date occurs, or the
Closing Date in the case of the first
Distribution Date (each a "Record Date").
DISTRIBUTIONS OF INTEREST: On each Distribution Date, interest
distributable with respect to the Group
I Certificates and the 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; 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 refe rred 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 and the Class AV-2 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 (other than the Class AV-2
Certificates) will be made on the basis of
the actual number of days and a year of 360
days.
DISTRIBUTIONS OF PRINCIPAL: On each Distribution Date, monthly
distributions in reduction of the
Certificate Principal Balances of the
Offered Certificates will generally reflect
collections of principal in respect of the
Mortgage Loans in the related Group. See
"DESCRIPTION OF THE OFFERED CERTIFICATES --
Distributions" and "--
Crosscollateralization Provisions" in this
ProspectuS Supplement.
CREDIT ENHANCEMENT: General: The Credit Enhancement provided
for the benefit of the Holders of the
Offered Certificates consists of (x) with
respect to the Class A Certificates and, t
a lesser extent, the Class M-1, Class M-2
and Class B-1 Certificates, the provisions
with respect to preferential distributions
of principal and interest described herein
and (y) the application of excess interest
on the Mortgage Loans to the extent provided
herein.
Preferential Distributions: Initially
principal will be distributed exclusively to
the Class A Certificates of a Group (in the
manner described herein) until the excess of
the aggregate Scheduled Principal Balances
of the Mortgage Loans of the related Group
over the Class A Certificate Principal
Balances of such Group is equal to or
exceeds 27% for Group I (38% 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 July 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 17%
for Group I (23% 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
10% for Group I (11.5% 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 4.5%
for Group I (5.5% 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 July 2001,
principal will be distributed exclusively
to the Class M-1 Certificates of the
related Group until July 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 July 2001, exclusively to the Class
M-2 Certificates of the related Group until
July 2001 (or until the Certificate
Principal Balance thereof has been reduced
to zero), if the Certificate Principal
Balance of the related Class M-2
Certificates has been reduced to zero
before July 2001, exclusively to the Class
B-1 Certificates of the related Group until
July 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 July 2001, exclusively to the Class
B-2 Certificates of the related Group until
July 2001 (or until the Certificate
Principal Balance thereof has been reduced
to zero)
See "DESCRIPTION OF OFFERED CERTIFICATES--
Distributions-- Distributions of Principal"
in this Prospectus Supplement.
If on any Distribution Date the Certificate
Principal Balances of the Certificates of a
Group, after the application of all
Principal Funds and Interest Funds for such
Distribution Date, exceed the Scheduled
Principal Balances of the Mortgage Loans in
the related Group, the Certificate
Principal Balances of the related
Subordinated Certificates (but not the
Class A Certificates) will be reduced, in
reverse order of seniority by the amount of
the excess; any such excess is referred to
as an "Applied Realized Loss Amount".
Thereafter, such Subordinated Certificates
will only be entitled to distributions of
interest and principal with respect to
their Certificate Principal Balances as so
reduced, and distributions with respect to
Applied Realized Loss Amounts will be made
only to the extent of future excess cash
flow as described herein. See "DESCRIPTION
OF THE OFFERED CERTIFICATES--
Crosscollateralization Provisions".
ADVANCES AND MONTH
END INTEREST: The Servicer will be obligated to make
advances with respect to delinquent
payments of interest (at the related
Mortgage Interest Rate less the Servicing
Fee, as defined below) and scheduled
principal due on each Mortgage Loan
serviced by it if it is determined, in good
faith, that such advances will be
recoverable. See "SERVICING OF MORTGAGE
LOANS-- Advances" in the Prospectus. In
addition, the Servicer will be required to
deposit an amount equal to Month End
Interest (as defined herein) with respect
to the preceding prepayment period but only
to the extent of the Servicing Fee payable
with respect to the related remittance
date.
SERVICING FEE: The Servicer will be entitled to (i) a
monthly servicing fee with respect to each
Mortgage Loan (the "Servicing Fee"), in an
amount equal to one-twelfth of a fixed
percentage per annum (the "Servicing Fee
Rate") multiplied by the Scheduled
Principal Balance of such Mortgage Loan on
the first day of the Due Period (the period
from and including the second day of a
month to and including the first day of the
following month) with respect to each
Distribution Date and (ii) additional
servicing compensation described herein.
See "THE MORTGAGE LOAN POOL-- Servicing and
Other Compensation and Payment of Expenses;
Repurchase" in this Prospectus Supplement
and "SERVICING OF THE MORTGAGE LOANS" in
the Prospectus.
MASTER SERVICING FEE: The Master Servicer will be entitled to a
monthly fee with respect to each Mortgage
Loan (the "Master Servicing Fee"), on each
Distribution Date, in an amount equal to
one-twelfth of the Master Servicing Fee
Rate multiplied by the Scheduled Principal
Balance of such Mortgage Loan on the first
day of the Due Period with respect to each
Distribution Date. The Master Servicer will
pay the Trustee its monthly fees out of the
Master Servicing Fee. See "THE MORTGAGE
LOAN POOL-- The Master Servicer" in this
Prospectus Supplement and "SERVICING OF
MORTGAGE LOANS-- Master Servicer Duties" in
the Prospectus.
OPTIONAL TERMINATION: The 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 first such Distribution Date, the
"Initial Optional Termination Date"). Any
such repurchase will result in the early
retirement of the Certificates. See "THE
AGREEMENT -- Termination" in this Prospectus
Supplement.
RATINGS: It is a condition of the original issuance
of the Offered Certificates that the
Offered Certificates receive ratings by
("Moody's") and Fitch IBCA, Inc. ("Fitch"),
as follows:
<TABLE>
<CAPTION>
GROUP I CERTIFICATES MOODY'S FITCH
-------------------- ------- -----
<S> <C>
Class AF-1 Aaa AAA
Class AF-2 Aaa AAA
Class AF-3 Aaa AAA
Class AF-4 Aaa AAA
Class AF-5 Aaa AAA
Class AF-6 Aaa AAA
Class MF-1 Aa2 AA
Class MF-2 A2 A
Class BF-1 Baa2 BBB
Class AV-1 Aaa AAA
Class AV-2 Aaa AAA
Class MV-1 Aa2 AA
Class MV-2 A2 A
Class BV-1 Baa2 BBB
</TABLE>
A security rating is not a recommendation to
buy, sell or hold securities and may be
subject to revision or withdrawal at any
time by the assigning entity. The ratings do
not represent any assessment of the
likelihood or rate of principal prepayments,
or the likelihood that any Group II
Certificates Carryover will be paid. See
"PREPAYMENT AND YIELD CONSIDERATIONS" and
"RATINGS" in this Prospectus Supplement and
"MATURITY, PREPAYMENT AND YIELD
CONSIDERATIONS" in the Prospectus.
FEDERAL INCOME TAX ASPECTS: For Federal income tax purposes one or more
elections will be made to treat certain
assets of the Trust as a "real estate
mortgage investment conduit" ("REMIC"). Each
Class of the Offered Certificates and the
Private Certificates (other than the Class R
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. Th
Class R Certificates will represent the
beneficial ownership of the sole class of
"residual interests" in the REMICs. See
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES" in
this Prospectus Supplement and in the
Prospectus.
ERISA CONSIDERATIONS: Fiduciaries of employee benefit plans
subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"),
or plans subject to Section 4975 of the
Internal Revenue Code of 1986 (the "Code")
should carefully review with their legal
advisors whether the purchase or holding of
the Class A Certificates could give rise to
a transaction prohibited or not otherwise
permissible under ERISA or the Code. THE
SUBORDINATED CERTIFICATES MAY NOT BE
PURCHASED BY EMPLOYEE BENEFIT PLANS THAT
ARE SUBJECT TO ERISA EXCEPT AS PROVIDED
HEREIN. See "ERISA CONSIDERATIONS" in this
Prospectus Supplement and in the
Prospectus.
LEGAL INVESTMENT
CONSIDERATIONS: The Class AV-1, Class AV-2 and Class MV-1
Certificates will constitute "mortgage
related securities" for purposes of the
Secondary Mortgage Market Enhancement Act
of 1984 ("SMMEA") for so long as they are
rated in one of the two highest rating
categories by one or more nationally
recognized statistical rating
organizations. As such, they will be legal
investments for certain entities to the
extent provided in SMMEA, subject to state
laws overriding SMMEA. In addition,
institutions whose investment activities
are subject to review by federal or state
regulatory authorities may be or may become
subject to restrictions, which may be
retroactively imposed by such regulatory
authorities, on the investment by such
institutions in certain forms of mortgage
related securities. Furthermore, certain
states have enacted legislation overriding
the legal investment provisions of SMMEA.
ALTHOUGH THE CLASS A CERTIFICATES IN GROUP
I AND THE CLASS MF-1 CERTIFICATES ARE
EXPECTED TO BE RATED IN ONE OF THE TWO
HIGHEST RATING CATEGORIES BY MOODY'S AND
FITCH, THEY WILL NOT CONSTITUTE "MORTGAGE
RELATED SECURITIES" FOR PURPOSES OF SMMEA
BECAUSE SOME OF THE MORTGAGE LOANS IN GROUP
I ARE SECURED BY SECOND LIENS. Accordingly,
many institutions with legal authority to
invest in comparably rated securities may
not be legally authorized to invest in
those Certificates.
BOOK-ENTRY REGISTRATION OF
THE OFFERED CERTIFICATES: The Offered Certificates will initially be
issued in book-entry form. Persons
acquiring beneficial ownership interests in
Offered Certificates ("Beneficial Owners")
may elect to hold their interests through
The Depository Trust Company ("DTC"), in
the United States, or CEDEL Bank, S.A.
("CEDEL"), or the Euroclear System
("Euroclear"), in Europe. Transfers within
DTC, CEDEL or Euroclear, as the case may
be, will be made in accordance with the
usual rules and operating procedures of the
relevant system. So long as the Offered
Certificates are Book-Entry Certificates
(as defined in the Prospectus), such
Certificates will be evidenced by one or
more Certificates registered in the name of
Cede & Co. ("Cede"). Cross-market transfers
between persons holding directly or
indirectly through DTC, on the one hand,
and counterparties holding directly or
indirectly through CEDEL or Euroclear, on
the other, will be effected in DTC through
Citibank, N.A. ("Citibank") or The Chase
Manhattan Bank ("Chase", and together with
Citibank, the "European Depositaries"), the
relevant depositaries of CEDEL and
Euroclear, respectively, and each a
participating member of DTC. No Beneficial
Owner will be entitled to receive a
definitive certificate representing such
person's interest, except in the event that
Definitive Certificates (as defined herein)
are issued under the limited circumstances
described herein. All references in this
Prospectus Supplement to any Offered
Certificates reflect the rights of
Beneficial Owners only as such rights may
be exercised through DTC and its
participating organizations for so long as
such Offered Certificates are held by DTC.
See "DESCRIPTION OF THE OFFERED
CERTIFICATES-- Book-Entry Registration of
the Offered Certificates" and "-- Global
Clearance, Settlement and Tax Documentation
Procedures" in the Prospectus.
<PAGE>
RISK FACTORS
Prospective investors in the Offered Certificates should consider the
following factors (as well as the factors set forth under "RISK FACTORS" in the
Prospectus) in connection with the purchase of the Offered Certificates.
RISK OF MORTGAGE LOAN INTEREST RATES REDUCING PASS-THROUGH RATE FOR
GROUP II CERTIFICATES. In general, the interest rates on the Mortgage Loans in
Group II adjust semi-annually based upon Six Month LIBOR, annually based upon
One Year CMT or semi-annually based upon Six Month LIBOR beginning from two to
five years after origination. The Pass-Through Rates for the Group II
Certificates (other than the Class AV-2 Certificates) are based upon the value
of an index (One Month LIBOR) subject to the Group II Available Funds Cap.
Because such Pass-Through Rates adjust monthly, while the interest rates of the
Mortgage Loans in Group II adjust less frequently, the Group II Available Funds
Cap may be lower than the otherwise applicable Pass-Through Rates for extended
periods in a rising interest rate environment. In addition, One Month LIBOR and
the indices applicable to such Mortgage Loans may respond to different economic
and market factors, and there is not necessarily any correlation between them.
Thus, it is possible, for example, that One Month LIBOR may rise during periods
in which such indices are stable or are falling or that, even if One Month LIBOR
and such indices rise during the same period, One Month LIBOR may rise much more
rapidly than such indices. 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. 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 and, to the
extent funds are available (as to which no assurances can be given) on
subsequent Distribution Dates in accordance with the priority of payment
provisions set forth in the Agreement, will be distributed to the Group II
Certificates (other than the Class AV-2 Certificates). The ratings on the Group
II Certificates do not represent an assessment of the likelihood of payment of
any Group II Certificates Carryover.
RISK OF HIGHER DELINQUENCIES ASSOCIATED WITH UNDERWRITING STANDARDS.
All the Mortgage Loans will be originated or acquired by the Seller in
accordance with its mortgage loan program as described herein and in the
Prospectus. As a general matter, the Seller's mortgage loan program consists of
the origination (or purchase) and packaging of mortgage loans relating to
non-conforming credits. A non-conforming credit means a mortgage loan which is
ineligible for purchase by Fannie Mae due to credit characteristics that do not
meet Fannie Mae guidelines. Mortgage loans originated under the Seller's
mortgage loan program are likely to experience rates of delinquency, bankruptcy
and loss that are higher (perhaps significantly) than mortgage loans originated
under Fannie Mae guidelines. Nevertheless, approximately 35.2% and approximately
14.5% (by aggregate Scheduled Principal Balances as of the Cut-off Date) of the
Mortgage Loans in Group I and Group II, respectively, had a first monthly
payment due on or before June 1, 1998. Therefore, it was not possible for any
Mortgage Loan other than such Mortgage Loans to have had a monthly payment that
was delinquent 30 days or more.
SUBORDINATION--LIMITED PROTECTION AFFORDED TO CLASS A CERTIFICATES. The
rights of the Class M-1 Certificates of each Group to receive distributions with
respect to the Mortgage Loans of such Group will be subordinate to the rights of
the Class A Certificates of such Group to receive such distributions, the rights
of the Class M-2 Certificates to receive distributions with respect to the
Mortgage Loans of such Group will be subordinate to the rights of the Class A
and the Class M-1 Certificates of such Group to receive such distributions and
the rights of the Class B-1 Certificates of such Group to receive distributions
with respect to the Mortgage Loans of such Group will be subordinate to the
rights of the Class A, Class M-1 and Class M-2 Certificates of such Group to
receive such distributions. The subordination of the Subordinated Certificates
of each Group relative to the Class A Certificates of such Group (and of the
more lower-ranking Classes of the Subordinated Certificates of each Group to the
higher-ranking Classes thereof) is intended to enhance the likelihood of regular
receipt by each Class of the Class A Certificates (and such higher ranking
Classes) of the full amount of the monthly distributions allocable to them and
to afford protection against losses.
<PAGE>
SUBORDINATION--ALLOCATION OF LOSSES TO SUBORDINATED CERTIFICATES. If
Realized Losses are incurred with respect to the Mortgage Loans in a Group to
the extent that the aggregate Certificate Principal Balances of the Certificates
of such Group exceed the Scheduled Principal Balances of the Mortgage Loans in
such Group, the Certificate Principal Balances of the Subordinated Certificates
of such Group will be reduced in reverse order of seniority by the amount of the
excess. SEE "DESCRIPTION OF THE OFFERED CERTIFICATES -- Crosscollateralization
Provisions". Consequently, the yields actually realized on the Class M-1, Class
M-2 and Class B-1 Certificates of each Group will be sensitive, in varying
degrees, to defaults on the Mortgage Loans in such Group (and the timing
thereof). Investors should fully consider the risks associated with an
investment in the Class M-1, Class M-2 or Class B-1 Certificates, including the
possibility that such investors may not fully recover their initial investment
as a result of Realized Losses on the Mortgage Loans. See "DESCRIPTION OF THE
OFFERED CERTIFICATES -- Crosscollateralization Provisions" and "-- Risk of
Higher Delinquencies Associated with Underwriting Standards".
RISK OF HIGHER DEFAULT RATES ASSOCIATED WITH CALIFORNIA REAL PROPERTY.
Because the Mortgaged Premises for approximately 11.0% of the Mortgage Loans
(approximately 15.2% by Scheduled Principal Balance) in Group I and
approximately 17.1% of the Mortgage Loans (approximately 27.0% by Scheduled
Principal Balance) in Group II are located in California, an overall decline in
the California residential real estate market could adversely affect the values
of the Mortgaged Premises securing such Mortgage Loans, causing the Scheduled
Principal Balances of the related Mortgage Loans to equal or exceed the value of
such Mortgaged Premises.
The standard hazard insurance policy required to be maintained under
the terms of each Mortgage Loan does not insure against physical damage arising
from earth movement (including earthquakes, landslides and mudflows). See
"SERVICING OF MORTGAGE LOANS -- Standard Hazard Insurance Policies" in the
Prospectus. Accordingly, if any such event causes losses in respect of the
Mortgage Loans and the protection afforded by excess interest on the Mortgage
Loans as compared to the Certificates of the related Group is insufficient to
cover such losses, the Holders of the Offered Certificates could experience a
loss on their investment.
RISK OF HIGHER DEFAULT RATES ASSOCIATED WITH SECOND LIENS; DECLINE IN
MARKET VALUE; BREACHES OF REPRESENTATIONS. Because approximately 4.8% of the
aggregate Scheduled Principal Balance of the Mortgage Loans in Group I are
secured by second liens subordinate to the rights of the mortgagee or
beneficiary under the related first mortgage or deed of trust, the proceeds from
any liquidation, insurance or condemnation proceedings with respect to such
Mortgage Loans will be available to satisfy the outstanding balance of such a
Mortgage Loan only to the extent that the claims of such first mortgagee or
beneficiary have been satisfied in full, including any related foreclosure
costs. In addition, a second mortgagee may not foreclose on the property
securing a second mortgage unless it forecloses subject to the first mortgage,
in which case it must either pay the entire amount due on the first mortgage to
the first mortgagee at or prior to the foreclosure sale or undertake the
obligation to make payments on the first mortgage in the event the mortgagor is
in default thereunder. The Trust will have no source of funds to satisfy the
first mortgage or make payments due to the first mortgagee. See "MORTGAGE LOAN
POOL -- Advances and Month-End Investment" herein.
An overall decline in the residential real estate market, the general
condition of Mortgaged Premises, or other factors, could adversely affect the
values of the Mortgaged Premises such that the outstanding balances of the
Mortgage Loans, together with any senior liens on the Mortgaged Premises, equal
or exceed the value of the Mortgaged Premises. A decline in the value of
Mortgaged Premises would affect the interest of the Trust in the Mortgaged
Premises before having any effect on the interest of the related first
mortgagee, and could cause the Trust's interest in the Mortgaged Premises to be
extinguished. If such a decline occurs, the actual rates of delinquencies,
foreclosures and losses on the Mortgage Loans could be higher than those
currently experienced in the mortgage lending industry in general. In addition,
adverse economic conditions (which may or may not affect real property values)
may affect the timely payment by borrowers of scheduled payments of principal
and interest on the Mortgage Loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to the Trust.
Under the Sales Agreement between the Seller and the Depositor, the
Seller will represent and warrant that, upon default by a borrower and
subsequent foreclosure of each Mortgaged Premises, the holder of the related
Mortgage Loan will be able to obtain good and merchantable title to the related
Mortgaged Premises; however, for a second Mortgage Loan with a balance of less
than $50,000, the Seller may not have obtained title insurance. In the event of
an uncured breach of such representation and warranty that materially and
adversely affects the interests of Certificateholders, the Seller will be
required to repurchase the affected Mortgage Loan or substitute another mortgage
loan therefor.
<PAGE>
LEGAL RISKS ASSOCIATED WITH TEXAS HOME EQUITY LOANS Approximately 6.2%
of the Mortgage Loans (approximately 4.0% by Scheduled Principal Balance) in
Group I and approximately 0.1% of the Mortgage Loans (approximately 0.2% by
Scheduled Principal Balance) in Group II represent Mortgage Loans which are
subject to Section 50(a)(6) of Article XVI of the Constitution of Texas (the
"Texas Home Equity Laws"). Generally, the Texas Home Equity Laws 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.
RISK OF HIGHER DEFAULT RATES FOR BALLOON LOANS. Approximately 28.3% of
the aggregate Scheduled Principal Balance of the Mortgage Loans in Group I are
"balloon loans" that provide for the payment of the unamoritized principal
balance in a single payment at maturity ("Balloon Loans"). Balloon Loans provide
for equal monthly payments, consisting of principal and interest, generally
based on a 30-year amortization schedule, and a single payment of the remaining
balance of the Balloon Loan, generally five, seven, ten or 15 years after
origination. Amortization of a Balloon Loan based on a scheduled period that is
longer than the term of the loan results in a remaining principal balance at
maturity that is substantially larger than the regular scheduled payments. The
Depositor does not have any information regarding the default history or
prepayment history of payments on Balloon Loans. Because borrowers of Balloon
Loans are required to make substantial single payments at maturity and because
the ability to repay such amounts is frequently dependent upon the ability to
obtain refinancing, it is possible that the default risk associated with Balloon
Loans is greater than that associated with fully-amortizing Mortgage Loans.
Neither the Servicers nor the Master Servicer will be required to advance
defaulted payments at maturity on Balloon Loans.
OTHER LEGAL CONSIDERATIONS; LITIGATION. Applicable state laws generally
regulate interest rates and other charges, require certain disclosures, and
require licensing of the Seller and the other originators. In addition, other
state laws, public policy and general principles of equity relating to the
protection of consumers, unfair and deceptive practices and debt collection
practices may apply to the origination, servicing and collection of the Mortgage
Loans. The Seller has represented that all applicable federal and state laws
were complied with in connection with the origination of the Mortgage Loans. If
such representation is breached in respect of any Mortgage Loan in a manner that
materially and adversely affects Certificateholders, the Seller will be
obligated to repurchase the affected Mortgage Loan at a price equal to the
unpaid principal balance thereof plus accrued interest or to substitute a new
mortgage loan in place of the affected Mortgage Loan. Unscheduled recoveries of
principal of Mortgage Loans due to any such repurchase by the Seller, depending
on the magnitude thereof and the availability of funds therefor, will accelerate
the timing of principal distributions to holders of the related Certificates and
thereby affect the yields and weighted average lives of such Certificates,
especially those purchased at a premium. See "PREPAYMENT AND YIELD
CONSIDERATIONS" herein. In addition, depending on the provisions of the
applicable law and the specific facts and circumstances involved, violations of
these laws, policies and principles may limit the ability of the Trust to
collect all or part of the principal of or interest on the Mortgage Loans, may
entitle the borrower to a refund of amounts previously paid and, in addition,
could subject the Depositor to damages and administrative enforcement. See
"CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS -- Anti-Deficiency Legislation and
Other Limitations on Lenders" in the Prospectus.
<PAGE>
HIGHER BALANCE MORTGAGE LOANS. Certain of the Mortgage Loans are
expected to have high principal balances (in one case, $1,149,285 as of the
Cut-Off Date). As a result, the payment experience on any such Mortgage Loan may
have a disproportionate effect on the amortization of the related Certificates,
the default experience of the Subordinated Certificates and, in the case of the
Group I Certificates, the related Pass-Through Rates thereof.
RISK OF SELLER INSOLVENCY. The Seller believes that the transfer of the
Mortgage Loans by the Seller to the Depositor and by the Depositor to the Trust
constitute sales by the Seller to the Depositor and by the Depositor to the
Trust and, accordingly, that the Mortgage Loans will not be part of the assets
of the Seller or the Depositor in the event of the insolvency of the Seller and
will not be available to the creditors of the Seller. Nevertheless, in the event
of an insolvency, it is possible that a bankruptcy trustee or a creditor of the
Seller may argue that the transaction between the Seller and the Depositor was a
pledge of such Mortgage Loans in connection with a borrowing by the Seller
rather than a true sale. Such an attempt, even if unsuccessful, could result in
delays in distributions on the Certificates.
On the Closing Date, the Trustee, the Depositor and the Rating Agencies
will have received an opinion of Arter & Hadden 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.
THE MORTGAGE LOAN POOL
GENERAL
The Mortgaged Premises (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 6.875% with respect to Group I; and at least
5.875% 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 expected to be subject to
periodic interest rate adjustment caps, lifetime interest rate ceilings and
lifetime interest rate floors. Substantially all such Mortgage Loans had
interest rates which were not fully indexed (i.e., the Mortgage Interest Rates
did not equal the sum of the gross margin and the applicable index) as of the
Cut-Off Date. Six Month LIBOR Mortgage Loans bear interest at a rate that
adjusts semiannually based on the London interbank offered rate for six month
United States Dollar deposits in the London market based on quotations of major
banks as published in The Wall Street Journal ("Six Month LIBOR"); 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 at 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; and One Year CMT
Mortgage Loans bear interest at a rate that adjusts annually based on the weekly
average yield on United States Treasury Securities adjusted to a constant
maturity of one year as made available by the Federal Reserve Board ("One Year
CMT").
<PAGE>
UNDERWRITING STANDARDS
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.
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 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 philosophy is to analyze the overall situation
of the borrower and to take into account compensating factors which may be used
to offset certain areas of weakness. Specific compensating factors include
loan-to-value, mortgage payment history, employment stability and years at
residence.
The Seller's underwriting standards are applied in accordance with
applicable federal and state laws and regulations and require a qualified
appraisal of the mortgaged property which conforms to Federal Home Loan Mortgage
Corporation ("FHLMC"") and 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 -- 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 existence of the
business is verified; and the business must have been in
existence for at least two years.
No Ratio -- specifically created for borrowers that want to
be qualified based primarily on their equity positions in
their homes and their individual credit profiles.
The Stated Income and the No Ratio programs are not available to
borrowers that fall under the A+ credit classification. In addition, the Seller
may, from time-to-time, apply underwriting criteria which are either more
stringent or more flexible depending on the economic conditions of a particular
market.
<PAGE>
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.
The Seller's general guidelines are set forth below.
<TABLE>
<CAPTION>
A+ A A- B C D
<S> <C>
MORTGAGE HISTORY
No late payments No late payments Maximum of two 30-day Maximum of four Maximum of five Maximum of six 30-day,
late payments in last 30-day late payments 30-day and one two 60-day and one
12 months (maximum of or two 30-day and 60-day late 90-day late payments
one 30-day late payment one 60-day late payments or
if LTV is greater than payments in last four 30-day
85%) 12 months and one 90-day
late payments
in last 12
months
SECONDARY CREDIT
Maximum of two Maximum of three Maximum of three 30-day Maximum of four Discretionary Discretionary
30-day late payments 30-day late payments late payments on 30-day and one 60-day
on revolving credit; on revolving credit; revolving credit; three late payments on
one 30-day late three 30-day late 30-day late payments on revolving credit;
payment on payments on installment credit three 30-day and one
installment credit installment credit (isolated 60-day late 60-day late payments
payments acceptable) on installment credit
(isolated 90-day late
payments acceptable)
BANKRUPTCY FILINGS
Chapters 7 & 13 - Chapter 7- Discharged Chapter 7 - Discharged Chapter 7 - Discharged Chapter 7 - Chapter 7 & 13- 1 day
Discharged 3 years 2 years 2 years 2 years Discharged 1 from discharge
(re-established Chapter 13-Discharged Chapter 13- 1 year from Chapter 13- 1 year from year
credit since the 1 year (re-established date of filing with date of filing with Chapter 13 -1
discharge) credit since discharge) proof paid as agreed proof paid as agreed day after
(must be discharged) (must be discharged) discharge with
proof paid
as agreed
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 homes 100% (Second homes 100% (Second 100% (Second homes
90% to $1 million 90% to $1 million and Investor Properties and Investor Properties homes and and Investor
reduce by 5%) reduce by 5%) Investor Properties reduce
Properties- by 5%)
reduce by 5%)
</TABLE>
The following table shows the distribution of the Mortgage Loans in
relation to the classifications described above:
<TABLE>
<CAPTION>
GROUP I GROUP II
_____________________________________________ _________________________________________________
<S> <C>
SAXON NUMBER
CREDIT OF NUMBER OF CURRENT CURRENT NUMBER OF NUMBER OF CURRENT CURRENT
GRADE LOANS LOANS(%) BALANCE BALANCE(%) LOANS LOANS(%) BALANCE BALANCE(%)
A+ 141 5.40% $14,064,962.70 6.02% 3 0.16% $591,953.68 0.26%
A 961 36.81 95,120,653.14 40.68 194 10.214 29,285,331.86 13.07
A- 873 33.44 79,813,289.23 34.13 966 50.846 122,028,816.84 54.48
B 400 15.32 28,357,252.85 12.13 372 19.582 39,831,472.83 17.78
C 185 7.09 13,445,309.49 5.75 261 13.741 24,102,340.97 10.76
D 51 1.95 3,020,324.20 1.29 104 5.47 8,164,505.90 3.64
------ -------- ---------------- -------- ----- -------- --------------- -------
Totals 2,611 100.00% $233,821,791.61 100.00% 1,900 100.00% $224,004,422.08 100.00%
===== ========= =============== ======= ====== ======== ================= =======
</TABLE>
CHARACTERISTICS OF THE MORTGAGE LOANS
The information in the following tables (including the textual
information beneath each table) has been based solely on the Mortgage Loans as
of the Cut-Off Date. Totals may not sum to 100% due to rounding. All the
calculations are a percent of the given pool.
<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(%)
$0 - 24,999 6.8 1.5 2.4 0.4
25,000 - 49,999 24.4 10.5 15.2 5.1
50,000 - 74,999 24.7 17.2 17.9 9.7
75,000 - 99,999 14.2 13.8 17.3 12.8
100,000 -124,999 9.9 12.5 15.1 14.3
125,000 -149,999 6.2 9.3 9.8 11.5
150,000 -174,999 3.9 7.0 5.5 7.5
175,000 -199,999 3.1 6.4 5.4 8.6
200,000 -224,999 1.7 4.0 3.6 6.4
225,000 -249,999 1.5 3.9 1.7 3.4
250,000 -274,999 1.2 3.6 1.5 3.3
275,000 -299,999 0.6 1.8 0.8 2.0
300,000 -399,999 1.3 4.7 1.5 4.4
400,000 -499,999 0.4 2.1 1.3 5.0
500,000 -599,999 0.3 1.7 0.6 2.9
600,000 -699,999 0.0 0.0 0.1 0.6
700,000 -799,999 0.0 0.0 0.1 0.7
800,000 -899,999 0.0 0.0 0.1 0.4
900,000 -999,999 0.0 0.0 0.1 0.4
1,000,000 and greater 0.0 0.0 0.1 0.5
---- --- --- ---
Totals: 100.0 100.0 100.0 100.0
===== ===== ====== =======
The average Scheduled Principal Balance is (a) $101,491 for the Mortgage Loans,
(b) $89,553 for Group I and (c) $117,897 for Group II. The minimum and maximum
Scheduled Principal Balances of the Mortgage Loans are $7,976 and $1,149,285,
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 0.0 0.0 0.1 0.1
6.00 - 6.49 0.0 0.0 0.1 0.0
6.50 - 6.99 0.1 0.1 0.3 0.3
7.00 - 7.49 0.5 0.5 1.1 1.6
7.50 - 7.99 1.8 2.6 3.3 4.2
8.00 - 8.49 6.0 8.8 5.5 7.1
8.50 - 8.99 16.4 20.3 17.5 19.4
9.00 - 9.49 12.0 13.8 12.5 13.5
9.50 - 9.99 17.5 19.3 24.0 25.9
10.00 - 10.49 7.8 7.4 11.5 10.2
10.50 - 10.99 11.8 10.5 12.3 10.4
11.00 - 11.49 7.6 5.4 4.6 3.0
11.50 - 11.99 7.0 5.0 3.5 2.0
12.00 - 12.49 3.4 2.1 1.5 0.7
12.50 - 12.99 3.2 2.0 0.7 0.6
13.00 - 13.49 1.6 0.9 0.7 0.5
13.50 - 13.99 1.5 0.8 0.5 0.3
14.00 - 14.49 0.8 0.4 0.2 0.1
14.50 - 14.99 0.5 0.2 0.1 0.1
15.00 - 15.49 0.3 0.1 0.0 0.0
15.50 - 15.99 0.1 0.0 0.0 0.0
16.00 - 16.49 0.2 0.0 0.0 0.0
16.50 - 16.99 0.0 0.0 0.0 0.0
---- ---- ------ -------
Totals: 100.00 100.00 100.0 100.0
====== ====== ===== =======
The weighted average current Mortgage Interest Rate is (a) 9.66% per
annum for the Mortgage Loans, (b) 9.77% per annum for Group I and (c) 9.54% per
annum for Group II. The current minimum and maximum Mortgage Interest Rates are
5.875% and 16.500%, respectively.
<PAGE>
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 0.1 0.1
12.00 - 12.49 0.1 0.0
12.50 - 12.99 0.2 0.2
13.00 - 13.49 0.4 0.7
13.50 - 13.99 1.7 1.9
14.00 - 14.49 2.4 3.5
14.50 - 14.99 6.4 7.9
15.00 - 15.49 6.7 8.0
15.50 - 15.99 18.9 20.3
16.00 - 16.49 12.6 12.7
16.50 - 16.99 20.5 22.1
17.00 - 17.49 10.1 8.5
17.50 - 17.99 10.3 8.2
18.00 - 18.49 3.8 2.4
18.50 - 18.99 2.7 1.5
19.00 - 19.49 1.4 0.8
19.50 - 19.99 0.7 0.6
20.00 - 20.49 0.5 0.2
20.50 - 20.99 0.4 0.2
21.00 - 21.49 0.1 0.1
21.50 - 21.99 0.1 0.0
--- ---
Totals: 100.0 100.0
===== =====
The weighted average maximum lifetime Mortgage Interest Rate is 16.25%.
4) Minimum Lifetime Mortgage Interest Rates on Group II
Minimum Lifetime No. of Scheduled
Mortgage Interest Mortgage Principal
----------------- -------- ---------
Rates(%) Loans(%) Balance(%)
-------- -------- ----------
3.50 - 3.99 0.1 0.1
4.50 - 4.99 0.1 0.1
5.00 - 5.49 0.3 0.6
5.50 - 5.99 0.5 0.5
6.00 - 6.49 0.7 1.2
6.50 - 6.99 1.1 1.1
7.00 - 7.49 1.1 1.7
7.50 - 7.99 3.2 3.8
8.00 - 8.49 5.2 6.4
8.50 - 8.99 17.4 19.3
9.00 - 9.49 12.4 13.0
9.50 - 9.99 23.6 25.5
10.00 - 10.49 11.2 9.9
10.50 - 10.99 11.7 9.8
11.00 - 11.49 4.4 2.8
11.50 - 11.99 3.5 2.0
12.00 - 12.49 1.4 0.6
12.50 - 12.99 0.7 0.6
13.00 - 13.49 0.7 0.5
13.50 - 13.99 0.5 0.3
14.00 - 14.49 0.2 0.1
14.50 - 14.99 0.1 0.1
--- ---
Totals: 100.0 100.0
===== =====
The weighted average minimum lifetime Mortgage Interest Rate for Group II
is 9.43% per annum. Substantially all the Group II Mortgage Loans have a
minimum lifetime Mortgage Interest Rate greater than the applicable Gross
Margin.
<PAGE>
5) Next Interest Adjustment Date (Group II)
Interest No. of Scheduled
Adjustment Date Mortgage Loans(%) Principal Balance(%)
--------------- ----------------- --------------------
July 1998 1.0 1.4
August 1998 1.1 1.8
September 1998 4.2 4.4
October 1998 2.9 3.1
November 1998 2.3 2.5
December 1998 1.2 1.3
February 1999 0.2 0.5
March 1999 1.3 2.1
April 1999 3.2 3.5
May 1999 4.4 5.5
June 1999 1.6 1.5
August 1999 0.5 0.3
September 1999 0.7 0.7
October 1999 1.3 1.5
November 1999 1.6 1.9
December 1999 3.4 3.8
January 2000 21.6 18.6
February 2000 13.2 12.5
March 2000 16.2 14.9
April 2000 9.0 10.3
May 2000 4.5 4.0
June 2000 0.3 0.1
August 2000 0.1 0.1
November 2000 0.1 0.1
December 2000 0.3 0.1
January 2001 0.5 0.4
February 2001 1.5 1.2
March 2001 0.9 0.8
April 2001 0.7 0.5
May 2001 0.4 0.4
February 2003 0.1 0.1
---- ----
Totals: 100.0 100.0
===== =====
The weighted average next Interest Adjustment Date for Group II occurs in
October 1999.
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 6.6 4.0 4.7 3.6
50.01 - 55.00 1.9 1.9 2.2 1.7
55.01 - 60.00 3.8 3.1 4.4 3.9
60.01 - 65.00 5.6 4.8 6.0 5.6
65.01 - 70.00 8.4 7.5 10.6 9.5
70.01 - 75.00 12.8 13.4 14.8 13.9
75.01 - 80.00 30.8 34.9 28.3 30.3
80.01 - 85.00 10.1 9.6 11.1 10.6
85.01 - 90.00 15.7 16.9 17.4 20.5
90.01 - 95.00 2.8 3.0 0.5 0.5
Greater than 95.00 1.4 0.8 0.0 0.0
---- ---- ---- ----
Totals: 100.0 100.0 100.0 100.0
===== ===== ===== =====
(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 77.25% for Group I and 76.94% for Group II.
6) Gross Margins on Group II
No. of Scheduled
Gross Margin (%) Mortgage Loans(%) Principal Balance(%)
---------------- ----------------- ---------------------
3.00 - 3.49 0.2 0.5
3.50 - 3.99 0.7 1.3
4.00 - 4.49 0.7 1.3
4.50 - 4.99 2.1 2.2
5.00 - 5.49 7.8 8.5
5.50 - 5.99 23.3 24.7
6.00 - 6.49 29.1 29.9
6.50 - 6.99 21.2 20.2
7.00 - 7.49 8.6 7.3
7.50 - 7.99 4.7 3.0
8.00 - 8.49 0.8 0.4
8.50 - 8.99 0.3 0.2
9.00 - 9.49 0.3 0.1
9.50 - 9.99 0.2 0.1
10.00 - 10.49 0.1 0.1
--- ---
Totals: 100.0 100.0
===== =====
The weighted average Gross Margin for Group II is 6.12%
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 91.1 92.7 90.5 93.7
Second Home 1.0 0.9 1.3 0.9
Investor 7.9 6.3 8.3 5.4
---- ---- ---- ---
Totals: 100.0 100.0 100.0 100.0
(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 76.4 69.9 72.5 69.2
Limited 9.5 13.6 6.6 9.0
Documentation(1)
Stated Income(2) 12.8 15.3 20.7 21.5
No Ratio 1.3 1.2 0.3 0.3
---- ---- ---- ----
Totals: 100.0 100.0 100.0 100.0
===== ===== ===== =====
(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 22.3 23.2 30.6 31.9
Refinance(Cash-Out) 60.6 57.6 54.0 51.5
Refinance(No Cash-Out) 17.2 19.2 15.4 16.6
---- ---- ---- ----
Totals: 100.0 100.0 100.0 100.0
===== ===== ===== =====
<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 6.4 6.8 2.4 2.3
359 20.9 22.0 11.3 12.1
358 21.0 24.9 14.5 16.1
357 15.7 18.6 20.0 20.2
356 5.1 5.9 15.2 15.9
355 1.9 2.0 20.4 17.8
354 1.6 1.6 5.8 5.7
238-353 5.3 4.7 10.2 9.8
178-237 13.7 9.2 0.1 0.0
1-177 8.5 4.4 0.2 0.0
---- ---- ---- ----
Totals: 100.0 100.0 100.0 100.0
===== ===== ===== =====
The weighted average remaining amortization term is 332 months for Group I and
356 months for Group II.
12) Property Types of Mortgaged Premises
Group I Group II
-------- --------
No. of Scheduled No. of Scheduled
Mortgage Principal Mortgage Principal
Property Type Loans(%) Balance(%) Loans(%) Balance(%)
Single Family Detached 82.5 83.7 86.7 87.4
Single Family Attached 2.8 2.0 1.3 1.0
De Minimis PUD 0.1 0.1 0.1 0.1
PUD 1.9 2.5 3.3 4.0
Condominium Low Rise 2.9 2.6 3.9 3.2
Manufactured Housing 5.0 3.5 1.4 0.9
Condominium High Rise 0.8 1.1 0.2 0.3
Townhouse 0.3 0.1 0.1 0.0
2-4 Family 3.6 4.5 3.1 3.0
---- ---- ---- ----
Totals: 100.0 100.0 100.0 100.0
===== ===== ===== =====
<PAGE>
<TABLE>
<CAPTION>
13) State Distribution of Mortgaged Premises
Group I Group II
------- ---------
<S> <C>
State No. of Mortgage Scheduled Principal No. of Mortgage Scheduled Principal
Loans(%) Balance(%) Loans(%) Balance(%)
--------------- ------------------- -------------- -------------------
Alaska 0.1 0.1 0.1 0.1
Arizona 4.4 4.2 2.5 2.3
Arkansas 0.4 0.2 0.1 0.1
California 11.0 15.2 17.1 27.0
Colorado 2.0 2.6 6.0 5.8
Connecticut 1.0 1.6 1.6 2.1
Delaware 0.9 0.7 0.4 0.4
District of Columbia 0.3 0.3 0.2 0.3
Florida 9.3 8.1 2.9 1.8
Georgia 4.0 3.6 2.5 2.1
Hawaii 0.2 0.2 0.2 0.8
Idaho 0.4 0.4 2.3 1.5
Illinois 2.0 2.1 1.6 1.3
Indiana 1.8 1.4 1.8 1.3
Iowa 0.4 0.3 0.3 0.1
Kansas 0.3 0.2 0.9 0.4
Kentucky 0.5 0.4 1.9 1.3
Louisiana 0.4 0.2 1.1 0.6
Maryland 2.1 2.2 0.8 0.8
Massachusetts 0.2 0.3 2.5 2.6
Michigan 3.3 2.7 3.9 2.4
Minnesota 1.0 0.9 0.7 0.9
Mississippi 0.4 0.3 0.2 0.1
Missouri 1.6 1.1 2.0 1.1
Montana 0.0 0.1 0.9 0.7
Nebraska 0.0 0.0 0.1 0.0
Nevada 0.3 0.7 0.8 1.1
New Hampshire 0.0 0.0 0.2 0.2
New Jersey 2.0 2.6 1.3 1.5
New Mexico 1.6 1.4 0.9 0.9
New York 1.7 2.4 0.5 0.8
North Carolina 3.3 2.7 2.8 2.3
Ohio 3.6 3.1 4.4 3.1
Oklahoma 1.3 1.1 0.7 0.6
Oregon 4.6 5.8 4.5 4.6
Pennsylvania 5.9 5.0 3.2 2.0
Rhode Island 0.0 0.0 0.1 0.1
South Carolina 1.7 1.1 0.6 0.4
South Dakota 0.0 0.0 0.2 0.1
Tennessee 3.5 3.0 1.5 1.1
Texas 11.3 8.1 4.0 3.6
Utah 2.0 3.0 7.9 8.2
Vermont 0.0 0.0 0.1 0.0
Virginia 3.1 3.5 1.1 1.3
Washington 5.2 6.2 8.2 8.5
West Virginia 0.3 0.2 0.3 0.2
Wisconsin 0.3 0.5 2.3 1.4
Wyoming 0.2 0.1 0.1 0.1
---- ---- ---- ----
Totals: 100.0 100.0 100.0 100.0
===== ===== ===== =====
</TABLE>
<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. Mortgage Loans may be removed
prior to closing as a result of incomplete documentation or non-compliance with
representations and warranties set forth in the Agreement or if the Depositor
deems such removal necessary or appropriate, and the Depositor may substitute
other Mortgage Loans subject to certain terms and conditions set forth in the
Agreement. Neither the deletion of Mortgage Loans nor the addition of Mortgage
Loans are expected to cause material variances from the information set forth
herein.
A current report on Form 8-K will be available to purchasers of the
Offered Certificates and will be filed with the Commission, together with the
Agreement, within fifteen days after the initial issuance of the Offered
Certificates. Any Mortgage Loans that are added to, or removed from, the pool as
set forth in the preceding paragraph will be noted in the current report on Form
8-K. Also, the Depositor intends to file certain additional yield tables and
other computational materials with the Commission in a report on Form 8-K. Such
tables and materials were prepared by the Underwriters at the request of certain
prospective investors, based on assumptions provided by, and satisfying the
special requirements of, such prospective investors. Such tables and assumptions
may be based on assumptions that differ from the Modeling Assumptions; see
"PREPAYMENT AND YIELD CONSIDERATIONS" in this Prospectus Supplement.
Accordingly, such tables and other materials may not be relevant to or
appropriate for investors other than those specifically requesting them.
SERVICING OF THE MORTGAGE LOANS
GENERAL. Meritech Mortgage Services, Inc., an affiliate of the
Depositor (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 servicing agreement requires the
related Servicer to obtain approvals of the Master Servicer with respect to
certain servicing activities. See "SERVICING OF THE MORTGAGE LOANS" in the
Prospectus.
As of March 31, 1998, the Servicer serviced a portfolio of
approximately 23,796 one- to- four family conventional residential mortgage
loans totaling approximately $2,611 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(1)
--------------------------------------------------------------------------------------------
MARCH 31, 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 4.93% 4.60% 6.25% 5.82% 3.72% 3.10% 3.56% 3.25%
61 to 90 days 1.68 1.85 1.49 1.61 1.02 1.03 0.65 0.71
91 days or more 1.60 1.71 1.20 1.37 1.33 1.48 1.57 2.30
Percentage of Total
Portfolio
Delinquent 8.22 8.17 8.95 8.81 6.08 5.62 5.79 6.27
Foreclosed 1.55 2.23 1.47 2.07 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
<PAGE>
mortgage loans in the Servicer's servicing portfolio, including mortgage loans
with a variety of payment and other characteristics, including geographic
locations and underwriting standards. Not all the mortgage loans in 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 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 unless the
Master Servicer deems such advance to be nonrecoverable. 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
<PAGE>
month after the respective preceding payment date, the outstanding principal
balance 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, 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
<PAGE>
payment of principal of the Mortgage Loans the greater the effect on an
investor's yield to maturity. As a result, the effect on an investor's yield of
principal prepayments occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the issuance
of the Offered Certificates may not be offset by a subsequent like reduction (or
increase) in the rate of principal prepayments. Investors must make their own
decisions as to the appropriate prepayment assumptions to be used in deciding
whether to purchase any of the Offered Certificates. The Depositor does not make
any representations or warranties as to the rate of prepayment or the factors to
be considered in connection with such determination.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a Certificate until each dollar of principal
of such Certificate will be distributed to the investor. As described above, the
weighted average life and yield to maturity (if purchased at a price other than
par) of each class of the Offered Certificates will be influenced by the rate at
which principal payments on the Mortgage Loans in the related Mortgage Loan
Group are paid, which may be in the form of scheduled amortization or
prepayments (for this purpose, the term "prepayment" includes prepayments,
liquidations due to default or early termination of the Trust).
The Class AF-6 and Class AV-2 Certificates will not be entitled to
distributions of principal (either scheduled or unscheduled) until July 2001 and
November 1999, respectively (except as otherwise described herein). The relative
entitlement of the Class AF-6 and Class AV-2 Certificates after such dates to
payments in respect of principal is determined by the definitions of the Class
AF-6 Principal Distribution Amount and the Class AV-2 Principal Distribution
Amount, respectively. 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 AF-5, Class MF-1, Class
MF-2 and Class BF-1 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 6.88% to 16.50% per annum and, under certain scenarios,
it is likely that principal prepayments will be concentrated among Mortgage
Loans with higher Mortgage Interest Rates, thus potentially reducing the
Pass-Through Rates on such Certificates. The Weighted Average Net Rate of Group
I as of the Cut-Off Date is expected to be approximately 9.23% 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
<PAGE>
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 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. 24% HEP (Scenario IV for Group I) assumes prepayment rates of
2.4% per annum of the then outstanding principal balance of the related Mortgage
Loans in the first month of the life of such Mortgage Loans and an additional
2.4% 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, 24% HEP assumes a constant prepayment rate of 24% per
annum. For Group II, the model used in this Prospectus Supplement ("Constant
Prepayment Rate" or "CPR") represents an assumed rate of constant prepayment
relative to the then outstanding principal balance of the pool of mortgage loans
for the life of such mortgage loans. 30% CPR (Scenario IV for Group II) assumes
a constant prepayment rate of 30% per annum. As used in the table below, 0%
Prepayment Assumption (Scenario I for each Group below) assumes prepayment rates
equal to 0% of the Prepayment Assumption, i.e., no prepayments on the mortgage
loans having the characteristics described below. Neither prepayment assumption
purports to be a historical description of prepayment experience or a prediction
of the anticipated rate of prepayment of any pool of mortgage loans, including
the related Mortgage Loans.
The following tables have been prepared on the basis of, among other
things, 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 July 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 July 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 June 1998, and include 30 days' interest
thereon;
(v) the level of Six-Month LIBOR remains constant at 5.75%;
(vi) the level of One Year CMT remains constant at 5.44%;
(vii) the Pass-Through Rates for the Group II Certificates remain
constant (based on One-Month LIBOR of 5.65625%);
(viii) the Closing Date for the Certificates is June 25, 1998;
(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) no optional termination is exercised except as indicated;
(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.
<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>
Balloon $66,268,896.37 10.247% 0.547% 9.700% 358 356 179 177
Level 73,737.14 12.316 0.625 11.691 60 59 NA NA
Level 1,625,418.33 10.379 0.569 9.810 119 117 NA NA
Level 26,916,438.54 9.758 0.578 9.180 180 178 NA NA
Level 4,691,982.87 9.998 0.593 9.405 240 237 NA NA
Level 574,328.43 9.501 0.530 8.971 300 297 NA NA
Level 133,670,198.32 9.527 0.530 8.997 359 357 NA NA
</TABLE>
VARIABLE RATE GROUP
<TABLE>
<CAPTION>
INITIAL
CURRENT NET ORIGINAL REMAINING GROSS PERIODIC PERIODIC LIFE RESET NEXT
BALANCE WAC SERVICING WAC TERM TERM MARGIN CAP CAP CAP FLOOR FREQUENCY RESET
<S> <C>
SIX MONTH LIBOR LOANS
$ 3,183,527.81 8.895% 0.530% 8.365% 360 355 5.571% 1.103% 1.103% 15.628% 8.876% 6 1
3,950,144.40 8.749 0.530 8.219 356 352 5.537 1.108 1.108 15.409 8.645 6 2
9,879,865.99 8.893 0.530 8.363 358 355 5.800 1.032 1.028 15.582 8.471 6 3
7,038,696.78 9.012 0.530 8.482 359 356 5.945 1.038 1.211 15.648 8.637 6 4
5,577,655.97 8.881 0.530 8.351 360 358 5.751 1.010 1.010 15.379 8.707 6 5
2,765,670.71 9.020 0.530 8.490 360 357 5.767 1.009 1.016 15.755 8.659 6 6
153,860,496.33 9.732 0.530 9.202 359 355 6.231 1.311 2.463 16.442 9.687 6 20
7,901,697.16 9.899 0.530 9.369 360 356 6.201 1.280 2.509 16.465 9.803 6 32
269,188.83 7.490 0.530 6.960 360 356 5.900 1.500 1.500 14.490 7.490 6 56
ONE YEAR CMT LOANS
173,089.02 8.750 0.530 8.220 360 354 4.375 2.000 2.000 15.750 6.750 12 6
29,403,967.00 9.136 0.530 8.606 360 358 5.941 1.995 2.000 15.999 8.886 12 10
</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% 10% 18% 24% 30% 35% 40%
Group II (CPR): 0% 15% 25% 30% 35% 40% 45%
</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%.
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
CLASS AF-1 SCENARIO
----------------------------------------
I II III IV V VI VII
Initial Percent 100 100 100 100 100 100 100
06/25/99 97 69 47 30 13 0 0
06/25/00 93 33 0 0 0 0 0
06/25/01 88 1 0 0 0 0 0
06/25/02 84 0 0 0 0 0 0
06/25/03 79 0 0 0 0 0 0
06/25/04 74 0 0 0 0 0 0
06/25/05 69 0 0 0 0 0 0
06/25/06 64 0 0 0 0 0 0
06/25/07 59 0 0 0 0 0 0
06/25/08 54 0 0 0 0 0 0
06/25/09 48 0 0 0 0 0 0
06/25/10 41 0 0 0 0 0 0
06/25/11 33 0 0 0 0 0 0
06/25/12 24 0 0 0 0 0 0
06/25/13 0 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
06/25/27 0 0 0 0 0 0 0
Weighted Average
Life1)
Maturity 9.65 1.58 1.00 0.80 0.68 0.61 0.56
Optional 9.65 1.58 1.00 0.80 0.68 0.61 0.56
Termination
CLASS AF-2 SCENARIO
--------------------------------------
I II III IV V VI VII
Initial Percent 100 100 100 100 100 100 100
06/25/99 100 100 100 100 100 99 80
06/25/00 100 100 86 46 8 0 0
06/25/01 100 100 24 0 0 0 0
06/25/02 100 66 0 0 0 0 0
06/25/03 100 35 0 0 0 0 0
06/25/04 100 9 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 32 0 0 0 0 0 0
06/25/14 26 0 0 0 0 0 0
06/25/15 20 0 0 0 0 0 0
06/25/16 13 0 0 0 0 0 0
06/25/17 6 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
06/25/27 0 0 0 0 0 0 0
Weighted Average
Life1)
Maturity 15.66 4.61 2.63 2.01 1.63 1.41 1.24
Optional 15.66 4.61 2.63 2.01 1.63 1.41 1.24
Termination
CLASS AF-3 SCENARIO
----------------------------------------
I II III IV V VI VII
Initial Percent 100 100 100 100 100 100 100
06/25/99 100 100 100 100 100 100 100
06/25/00 100 100 100 100 100 44 0
06/25/01 100 100 100 34 0 0 0
06/25/02 100 100 61 0 0 0 0
06/25/03 100 100 0 0 0 0 0
06/25/04 100 100 0 0 0 0 0
06/25/05 100 81 0 0 0 0 0
06/25/06 100 60 0 0 0 0 0
06/25/07 100 35 0 0 0 0 0
06/25/08 100 10 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
06/25/14 100 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 94 0 0 0 0 0 0
06/25/19 73 0 0 0 0 0 0
06/25/20 49 0 0 0 0 0 0
06/25/21 22 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
06/25/27 0 0 0 0 0 0 0
Weighted Average
Life1)
Maturity 21.92 8.43 4.21 3.02 2.36 2.02 1.76
Optional 21.92 8.43 4.21 3.02 2.36 2.02 1.76
Termination
CLASS AF-4 SCENARIO
--------------------------------------
I II III IV V VI VII
Initial Percent 100 100 100 100 100 100 100
06/25/99 100 100 100 100 100 100 100
06/25/00 100 100 100 100 100 100 84
06/25/01 100 100 100 100 56 11 0
06/25/02 100 100 100 78 32 0 0
06/25/03 100 100 96 42 2 0 0
06/25/04 100 100 69 21 0 0 0
06/25/05 100 100 49 8 0 0 0
06/25/06 100 100 44 7 0 0 0
06/25/07 100 100 35 2 0 0 0
06/25/08 100 100 24 0 0 0 0
06/25/09 100 91 14 0 0 0 0
06/25/10 100 77 6 0 0 0 0
06/25/11 100 64 0 0 0 0 0
06/25/12 100 52 0 0 0 0 0
06/25/13 100 18 0 0 0 0 0
06/25/14 100 11 0 0 0 0 0
06/25/15 100 5 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 96 0 0 0 0 0 0
06/25/23 79 0 0 0 0 0 0
06/25/24 59 0 0 0 0 0 0
06/25/25 38 0 0 0 0 0 0
06/25/26 15 0 0 0 0 0 0
06/25/27 0 0 0 0 0 0 0
Weighted Average
Life1)
Maturity 26.41 13.78 7.93 5.15 3.59 2.74 2.30
Optional 26.40 13.48 7.47 5.05 3.59 2.74 2.30
Termination
- ---------------------------------------------------------
(1) In years. The weighted average life of the Offered Certificates is
determined by (i) multiplying the amount of each principal payment by the number
of years from the date of issuance to the related Distribution Date, (ii) adding
the results, and (iii) dividing the sum by the initial respective Certificate
Principal Balance for such Class of Offered Certificates.
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
CLASS AF-5 SCENARIO
-----------------------------------------
I II III IV V VI VII
Initial Percent 100 100 100 100 100 100 100
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 9
06/25/02 100 100 100 100 100 98 8
06/25/03 100 100 100 100 100 27 0
06/25/04 100 100 100 100 64 7 0
06/25/05 100 100 100 100 44 5 0
06/25/06 100 100 100 100 44 5 0
06/25/07 100 100 100 100 44 5 0
06/25/08 100 100 100 84 36 5 0
06/25/09 100 100 100 65 26 5 0
06/25/10 100 100 100 49 15 0 0
06/25/11 100 100 94 36 7 0 0
06/25/12 100 100 74 25 1 0 0
06/25/13 100 100 39 7 0 0 0
06/25/14 100 100 31 2 0 0 0
06/25/15 100 100 23 0 0 0 0
06/25/16 100 100 15 0 0 0 0
06/25/17 100 85 10 0 0 0 0
06/25/18 100 72 5 0 0 0 0
06/25/19 100 61 1 0 0 0 0
06/25/20 100 50 0 0 0 0 0
06/25/21 100 41 0 0 0 0 0
06/25/22 100 33 0 0 0 0 0
06/25/23 100 24 0 0 0 0 0
06/25/24 100 15 0 0 0 0 0
06/25/25 100 7 0 0 0 0 0
06/25/26 100 0 0 0 0 0 0
06/25/27 66 0 0 0 0 0 0
Weighted Average
Life(1)
Maturity 29.21 22.42 15.51 12.24 8.36 5.06 2.99
Optional 28.50 14.75 9.50 7.42 5.79 4.62 2.99
Termination
CLASS AF-6 SCENARIO
-------------------------------------- ---
I II III IV V VI VII
Initial Percent 100 100 100 100 100 100 100
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 99 94 89 89 91 93 100
06/25/03 99 87 81 79 77 77 61
06/25/04 97 77 68 62 57 54 36
06/25/05 95 67 55 46 39 34 21
06/25/06 88 46 28 21 20 21 12
06/25/07 81 31 14 8 8 13 5
06/25/08 74 21 7 3 2 6 1
06/25/09 66 14 4 1 1 1 0
06/25/10 59 9 2 0 0 0 0
06/25/11 51 6 1 0 0 0 0
06/25/12 44 4 0 0 0 0 0
06/25/13 0 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
06/25/27 0 0 0 0 0 0 0
Weighted Average
Life(1)
Maturity 12.14 8.08 7.01 6.62 6.48 6.51 5.87
Optional 12.14 8.08 6.86 6.23 5.44 4.85 4.32
Termination
CLASS MF-1 SCENARIO
--------------------------------------- ---
I II III IV V VI VII
Initial Percent 100 100 100 100 100 100 100
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 91 68 50 38 28
06/25/03 100 100 73 51 35 24 17
06/25/04 100 100 59 38 24 16 10
06/25/05 100 89 48 28 16 10 6
06/25/06 100 78 38 21 11 6 0
06/25/07 100 69 31 16 8 1 0
06/25/08 100 60 24 12 4 0 0
06/25/09 100 53 19 9 0 0 0
06/25/10 100 46 15 6 0 0 0
06/25/11 100 40 12 2 0 0 0
06/25/12 100 34 10 0 0 0 0
06/25/13 94 20 4 0 0 0 0
06/25/14 90 17 1 0 0 0 0
06/25/15 87 15 0 0 0 0 0
06/25/16 83 13 0 0 0 0 0
06/25/17 78 11 0 0 0 0 0
06/25/18 74 9 0 0 0 0 0
06/25/19 69 8 0 0 0 0 0
06/25/20 63 6 0 0 0 0 0
06/25/21 58 4 0 0 0 0 0
06/25/22 51 1 0 0 0 0 0
06/25/23 44 0 0 0 0 0 0
06/25/24 36 0 0 0 0 0 0
06/25/25 28 0 0 0 0 0 0
06/25/26 19 0 0 0 0 0 0
06/25/27 8 0 0 0 0 0 0
Weighted Average
Life(1)
Maturity 23.36 12.30 7.80 6.00 4.96 4.50 4.29
Optional 23.28 11.30 6.93 5.31 4.42 4.05 3.92
Termination
CLASS MF-2 SCENARIO
--------------------------------------- ---
I II III IV V VI VII
Initial Percent 100 100 100 100 100 100 100
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 91 68 50 38 28
06/25/03 100 100 73 51 35 24 17
06/25/04 100 100 59 38 24 16 10
06/25/05 100 89 48 28 16 10 0
06/25/06 100 78 38 21 11 1 0
06/25/07 100 69 31 16 4 0 0
06/25/08 100 60 24 12 0 0 0
06/25/09 100 53 19 7 0 0 0
06/25/10 100 46 15 1 0 0 0
06/25/11 100 40 12 0 0 0 0
06/25/12 100 34 9 0 0 0 0
06/25/13 94 20 0 0 0 0 0
06/25/14 90 17 0 0 0 0 0
06/25/15 87 15 0 0 0 0 0
06/25/16 83 13 0 0 0 0 0
06/25/17 78 11 0 0 0 0 0
06/25/18 74 8 0 0 0 0 0
06/25/19 69 4 0 0 0 0 0
06/25/20 63 1 0 0 0 0 0
06/25/21 58 0 0 0 0 0 0
06/25/22 51 0 0 0 0 0 0
06/25/23 44 0 0 0 0 0 0
06/25/24 36 0 0 0 0 0 0
06/25/25 28 0 0 0 0 0 0
06/25/26 19 0 0 0 0 0 0
06/25/27 6 0 0 0 0 0 0
Weighted Average
Life(1)
Maturity 23.34 12.15 7.75 5.90 4.84 4.32 4.01
Optional 23.28 11.30 6.93 5.30 4.38 3.93 3.69
Termination
- ----------------------------
(1) In years, the weighted average life of the Offered Certificates is
determined by (i) multiplying the amount of each principal payment by the number
of years from the date of issuance to the related Distribution Date, (ii) adding
the results, and (iii) dividing the sum by the initial respective Certificate
Principal Balance for such Class of Offered Certificates.
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
CLASS BF-1 SCENARIO
----------------------------------- --
I II III IV V VI VII
Initial Percent 100 100 100 100 100 100 100
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 91 68 50 38 28
06/25/03 100 100 73 51 35 24 12
06/25/04 100 100 59 38 24 10 0
06/25/05 100 89 48 28 12 0 0
06/25/06 100 78 38 20 2 0 0
06/25/07 100 69 31 10 0 0 0
06/25/08 100 60 24 3 0 0 0
06/25/09 100 53 17 0 0 0 0
06/25/10 100 46 10 0 0 0 0
06/25/11 100 40 4 0 0 0 0
06/25/12 100 34 0 0 0 0 0
06/25/13 94 18 0 0 0 0 0
06/25/14 90 13 0 0 0 0 0
06/25/15 87 9 0 0 0 0 0
06/25/16 83 5 0 0 0 0 0
06/25/17 78 2 0 0 0 0 0
06/25/18 74 0 0 0 0 0 0
06/25/19 69 0 0 0 0 0 0
06/25/20 63 0 0 0 0 0 0
06/25/21 58 0 0 0 0 0 0
06/25/22 51 0 0 0 0 0 0
06/25/23 44 0 0 0 0 0 0
06/25/24 36 0 0 0 0 0 0
06/25/25 28 0 0 0 0 0 0
06/25/26 16 0 0 0 0 0 0
06/25/27 0 0 0 0 0 0 0
Weighted Average
Life(1)
Maturity 23.26 11.72 7.50 5.67 4.63 4.10 3.77
Optional 23.25 11.30 6.93 5.30 4.35 3.87 3.58
Termination
CLASS AV-1 SCENARIO
---------------------------------- -- --
I II III IV V VI VII
Initial Percent 100 100 100 100 100 100 100
06/25/99 99 72 55 46 37 28 19
06/25/00 99 64 42 32 21 11 1
06/25/01 99 63 38 26 14 4 0
06/25/02 99 54 33 25 14 4 0
06/25/03 99 47 25 18 12 4 0
06/25/04 99 40 19 13 8 4 0
06/25/05 99 34 14 9 5 3 0
06/25/06 99 29 10 6 3 2 0
06/25/07 99 24 8 4 2 1 0
06/25/08 99 20 6 3 1 0 0
06/25/09 99 17 4 2 1 0 0
06/25/10 99 14 3 1 0 0 0
06/25/11 99 12 2 1 0 0 0
06/25/12 99 10 2 0 0 0 0
06/25/13 99 8 1 0 0 0 0
06/25/14 99 7 1 0 0 0 0
06/25/15 99 6 0 0 0 0 0
06/25/16 99 5 0 0 0 0 0
06/25/17 97 4 0 0 0 0 0
06/25/18 91 3 0 0 0 0 0
06/25/19 83 2 0 0 0 0 0
06/25/20 75 2 0 0 0 0 0
06/25/21 65 1 0 0 0 0 0
06/25/22 55 1 0 0 0 0 0
06/25/23 48 0 0 0 0 0 0
06/25/24 40 0 0 0 0 0 0
06/25/25 30 0 0 0 0 0 0
06/25/26 20 0 0 0 0 0 0
06/25/27 8 0 0 0 0 0 0
Weighted Average
Life(1)
Maturity 24.40 5.91 3.14 2.34 1.68 1.08 0.65
Optional 24.31 5.54 2.95 2.15 1.51 0.96 0.65
Termination
CLASS AV-2 SCENARIO
-------------------------------------- --
I II III IV V VI VII
Initial Percent 100 100 100 100 100 100 100
06/25/99 100 100 100 100 100 100 100
06/25/00 99 66 52 47 44 42 41
06/25/01 97 24 5 2 0 0 0
06/25/02 94 6 2 2 0 0 0
06/25/03 92 2 0 0 0 0 0
06/25/04 89 0 0 0 0 0 0
06/25/05 86 0 0 0 0 0 0
06/25/06 82 0 0 0 0 0 0
06/25/07 78 0 0 0 0 0 0
06/25/08 74 0 0 0 0 0 0
06/25/09 69 0 0 0 0 0 0
06/25/10 63 0 0 0 0 0 0
06/25/11 56 0 0 0 0 0 0
06/25/12 49 0 0 0 0 0 0
06/25/13 41 0 0 0 0 0 0
06/25/14 32 0 0 0 0 0 0
06/25/15 21 0 0 0 0 0 0
06/25/16 10 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
06/25/27 0 0 0 0 0 0 0
Weighted Average
Life(1)
Maturity 12.84 2.54 2.17 2.07 2.00 1.97 1.96
Optional 12.84 2.54 2.17 2.07 2.00 1.97 1.96
Termination
CLASS MV-1 SCENARIO
-------------------------------------- ---
I II III IV V VI VII
Initial Percent 100 100 100 100 100 100 100
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 88
06/25/02 100 100 62 47 72 100 88
06/25/03 100 86 46 33 23 48 50
06/25/04 100 73 34 23 15 16 27
06/25/05 100 61 26 16 9 5 13
06/25/06 100 52 19 11 6 1 4
06/25/07 100 43 14 8 3 0 0
06/25/08 100 36 10 5 0 0 0
06/25/09 100 31 8 2 0 0 0
06/25/10 100 26 6 0 0 0 0
06/25/11 100 21 4 0 0 0 0
06/25/12 100 18 1 0 0 0 0
06/25/13 100 15 0 0 0 0 0
06/25/14 100 12 0 0 0 0 0
06/25/15 100 10 0 0 0 0 0
06/25/16 100 8 0 0 0 0 0
06/25/17 100 7 0 0 0 0 0
06/25/18 100 5 0 0 0 0 0
06/25/19 100 4 0 0 0 0 0
06/25/20 100 2 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 86 0 0 0 0 0 0
06/25/24 71 0 0 0 0 0 0
06/25/25 55 0 0 0 0 0 0
06/25/26 36 0 0 0 0 0 0
06/25/27 15 0 0 0 0 0 0
Weighted Average
Life(1)
Maturity 27.15 9.64 5.80 5.07 4.84 5.19 5.25
Optional 26.99 9.04 5.51 4.79 4.57 4.74 4.14
Termination
- ----------------------------------------------------
(1) In years, the weighted average life of the Offered Certificates is
determined by (i) multiplying the amount of each principal payment by the number
of years from the date of issuance to the related Distribution Date, (ii) adding
the results, and (iii) dividing the sum by the initial respective Certificate
Principal Balance for such Class of Offered Certificates.
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
CLASS MV-2 SCENARIO
I II III IV V VI VII
Initial Percent 100 100 100 100 100 100 100
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 62 47 35 26 23
06/25/03 100 86 46 33 23 15 10
06/25/04 100 73 34 23 15 9 2
06/25/05 100 61 26 16 9 2 0
06/25/06 100 52 19 11 3 0 0
06/25/07 100 43 14 6 0 0 0
06/25/08 100 36 10 2 0 0 0
06/25/09 100 31 7 0 0 0 0
06/25/10 100 26 3 0 0 0 0
06/25/11 100 21 0 0 0 0 0
06/25/12 100 18 0 0 0 0 0
06/25/13 100 15 0 0 0 0 0
06/25/14 100 12 0 0 0 0 0
06/25/15 100 10 0 0 0 0 0
06/25/16 100 8 0 0 0 0 0
06/25/17 100 5 0 0 0 0 0
06/25/18 100 2 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 86 0 0 0 0 0 0
06/25/24 71 0 0 0 0 0 0
06/25/25 55 0 0 0 0 0 0
06/25/26 36 0 0 0 0 0 0
06/25/27 15 0 0 0 0 0 0
Weighted Average
Life(1)
Maturity 27.14 9.52 5.67 4.84 4.37 4.17 3.94
Optional 26.99 9.04 5.47 4.63 4.16 3.99 3.79
Termination
CLASS BV-1 SCENARIO
-------------------------------------
I II III IV V VI VII
Initial Percent 100 100 100 100 100 100 100
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 62 47 35 25 18
06/25/03 100 86 46 33 23 12 2
06/25/04 100 73 34 23 11 1 0
06/25/05 100 61 26 14 1 0 0
06/25/06 100 52 19 4 0 0 0
06/25/07 100 43 10 0 0 0 0
06/25/08 100 36 3 0 0 0 0
06/25/09 100 31 0 0 0 0 0
06/25/10 100 26 0 0 0 0 0
06/25/11 100 21 0 0 0 0 0
06/25/12 100 17 0 0 0 0 0
06/25/13 100 12 0 0 0 0 0
06/25/14 100 7 0 0 0 0 0
06/25/15 100 3 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 86 0 0 0 0 0 0
06/25/24 71 0 0 0 0 0 0
06/25/25 55 0 0 0 0 0 0
06/25/26 36 0 0 0 0 0 0
06/25/27 11 0 0 0 0 0 0
Weighted Average
Life(1)
Maturity 27.11 9.21 5.45 4.60 4.09 3.79 3.47
Optional 26.99 9.03 5.41 4.55 4.01 3.72 3.42
Termination
- --------------------------------------------------
(1) In years. 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 1998-2, will
consist of: (a) the following Group I Offered Certificates: (i) Class AF-1,
Class AF-2, Class AF-3, Class AF-4, Class AF-5 and Class AF-6 Certificates, (ii)
Class MF-1 and Class MF-2 Certificates and (iii) Class BF-1 Certificates; (b)
the following Group II Offered Certificates: (i) Class AV-1 and Class AV-2
Certificates, (ii) Class MV-1 and Class MV-2 Certificates and (iii) Class BV-1
Certificates; and (c) 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
<PAGE>
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"). 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 1998-2, 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 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).
Persons in whose name 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 Owners will be
entitled to receive a definitive certificate representing such person's interest
in the Trust, except in the event that physical Certificates are issued under
limited circumstances set forth in the Agreement. All references herein to the
Holders of Offered Certificates shall mean and include the rights of Holders as
such rights may be exercised through DTC and its participating organizations,
except as otherwise specified in the Agreement.
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.
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, (iv) any Substitution Shortfall (the amount, if any, by which the
aggregate unpaid principal balance of any substitute Mortgage Loans is less than
the aggregate unpaid principal balance of any deleted Mortgage Loans) delivered
by the Depositor in connection with a substitution of Mortgage Loans and (v) all
liquidation proceeds collected by the Servicer during the related Due Period (to
the extent such liquidation proceeds related to principal) less all
non-recoverable advances relating to principal reimbursed during the related Due
Period.
DISTRIBUTIONS
General. Distributions on each Class of the Certificates will be made
on each Distribution Date to Holders of each Class of the Certificates as of the
immediately preceding Record Date in an amount equal to the product of such
Holder's Percentage Interest and the amount to be distributed to each such Class
on such Distribution Date. The "Percentage Interest" represented by any
Certificate will be equal to the percentage obtained by dividing the Certificate
Principal Balance of such Certificate by the Certificate Principal Balance of
all Certificates of the same Class.
<PAGE>
Distributions of Interest. On each Distribution Date, interest
distributable with respect to the Group I Certificates and the 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; 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 and the Class
AV-2 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 (other than the Class AV-2 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.
"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 27% for Group I (38% 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 July 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
<PAGE>
sum of the Class A and Class M-1 Certificate Principal Balances of the related
Group is equal to or exceeds 17% for Group I (23% 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 10% for Group I (11.5% 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
4.5% for Group I (5.5% 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 July 2001, principal will be distributed exclusively to the Class
M-1 Certificates of the related Group until July 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 July 2001, exclusively to the Class M-2 Certificates of the related Group
until July 2001 (or until the Certificate Principal Balance thereof has been
reduced to zero), if the Certificate Principal Balance of the related Class M-2
Certificates has been reduced to zero before July 2001, exclusively to the Class
B-1 Certificates of the related Group until July 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 July 2001, exclusively to the Class B-2 Certificates of the related Group
until July 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, that the Class A Principal Distribution Amount for
Group I is required to be distributed as follows: first, the
Class AF-6 Principal Distribution Amount to the Class AF-6
Certificates and then the balance of such Class A Principal
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 class
designation shall have been reduced to zero and 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; and provided, further, that, on any
Distribution Date on which the Certificate Principal Balances
for the Class A Certificates with respect to a Group are equal
to or greater than the Scheduled Principal Balances of the
Mortgage Loans in such Group, the Class A Principal
Distribution Amount for such Group will be distributed pro
rata to such Class A 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;
<PAGE>
(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 (i) the related Class A Certificate Principal Balance immediately
prior to such Distribution Date over (ii) the lesser of (A) 73% for Group I (62%
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 $1,169,109 for Group
I ($1,120,022 for Group II).
"Class AF-6 Principal 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
----------------- ----------
July 1998 - June 2001 0%
July 2001 - June 2003 45%
July 2003 - June 2004 80%
July 2004 - June 2005 100%
July 2005 and thereafter 300%
Class AV-2 Principal Distribution Amount" (i) for any Distribution Date
on or before June 2003, 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
----------------- ----------
July 1998 - October 1999 0%
November 1999 - June 2003 500%
and (ii) for any Distribution Date after June 2003 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) 83% for Group I (77% for Group II) of the Scheduled Principal
Balances of the Mortgage Loans in such Group on the preceding Due Date and (B)
the Scheduled Principal Balances of the Mortgage Loans in such Group on the
preceding Due Date less $1,169,109 for Group I ($1,120,022 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
<PAGE>
prior to such Distribution Date over (ii) the lesser of (A) 90% for Group I
(88.5% for Group II) of the aggregate Scheduled Principal Balances of the
Mortgage Loans in such Group on the preceding Due Date and (B) the Scheduled
Principal Balances of the Mortgage Loans in such Group on the preceding Due Date
less $1,169,109 for Group I ($1,120,022 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) 95.5% for Group I (94.5% for Group
II) of the Scheduled Principal Balances of the Mortgage Loans in such Group on
the preceding Due Date and (B) the Scheduled Principal Balances of the Mortgage
Loans in such Group on the preceding Due Date less $1,169,109 for Group I
($1,120,022 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) 98% for Group I (98% for Group II) of the Scheduled
Principal Balances of the Mortgage Loans in such Group on the preceding Due Date
and (B) the Scheduled Principal Balances of the Mortgage Loans in such Group on
the preceding Due Date less $1,169,109 for Group I ($1,120,022 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 July 2001 and (B) the
first Distribution Date on which (I) the Class A Certificate Principal Balance
of such Group (less the Principal Funds for such Group on such date) is less
than or equal to (II) 73% for Group I (62% for Group II) of the Scheduled
Principal Balances of the Mortgage Loans in such Group and (ii) the Distribution
Date on which the Certificate Principal Balance of the related Class A
Certificates has been reduced to zero.
A "Trigger Event", with respect to each Group and a Distribution Date
after the Stepdown Date, exists if the product, expressed as a percentage, of
(i) two times for Group I (2.5 times for Group II), (ii) the quotient of (A) the
aggregate Scheduled Principal Balance of all 60 and over day delinquent Mortgage
loans for such Group and (B) the Scheduled Principal Balance of that Group as of
the preceding Master Servicer Remittance Date equals or exceeds 27% for Group I
(38% 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;
<PAGE>
(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 (other
than the Class AV-2 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.
"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 (June 23,
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
<PAGE>
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
In addition to the provisions of the Agreement summarized elsewhere in
this Prospectus Supplement, there is set forth below a summary of certain other
provisions of the Agreement. See also "THE AGREEMENT -- The Trustee", "--
Administration of Accounts", "-- Events of Default and Remedies", "--
Amendment", and "-- Termination" in the Prospectus.
FORMATION OF THE TRUST
On the Closing Date, the 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.
<PAGE>
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 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 upon the last to
<PAGE>
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, "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 required to review each such file on or before the
Closing and again prior to the first anniversary of the Closing Date
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
<PAGE>
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 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 regular interests in the Pooling REMIC;
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 LLP, 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.
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
<PAGE>
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 Morgan Stanley & Co. Incorporated, an individual
prohibited transaction exemption, Prohibited Transaction Exemption 90-24 (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 Morgan Stanley &
Co. Incorporated or any of its affiliates is the sole underwriter or the manager
or co-manager of the underwriting syndicate; provided that the conditions and
requirements of the Exemption are met. The loans covered by the Exemption
include mortgage loans such as the Mortgage Loans.
Among the conditions that must be satisfied for the Exemption to apply
to the Class A Certificates are the following:
(1) the acquisition of Class A Certificates by a Plan is on
terms (including the price therefor) that are at least as favorable to
the Plan as they would be in an arm's-length transaction with an
unrelated party;
(2) the rights and interests evidenced by Class A Certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the trust;
(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 Ratings Services, a
Division of The McGraw-Hill Companies, 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
<PAGE>
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
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).
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement for the sale of the Offered Certificates, the Depositor has agreed to
cause the Trust to sell and the Underwriters named below (the Underwriters")
have severally agreed to purchase the principal amount of Offered Certificates
set forth below.
<TABLE>
<CAPTION>
MERRILL LYNCH, PIERCE, PRUDENTIAL
MORGAN STANLEY & CO. FENNER & SMITH J. P. MORGAN SECURITIES, SECURITIES
CLASS INCORPORATED INCORPORATED INC. INCORPORATED
<S> <C>
AF-1 $26,000,000 $9,750,000 $14,625,000 $14,625,000
AF-2 20,000,000 7,500,000 11,250,000 11,250,000
AF-3 7,600,000 2,850,000 4,275,000 4,275,000
AF-4 13,600,000 5,100,000 7,650,000 7,650,000
AF-5 4,349,200 1,630,950 2,446,425 2,446,425
AF-6 9,352,800 3,507,300 5,260,950 5,260,950
MF-1 4,676,400 1,753,650 2,630,475 2,630,475
MF-2 3,273,600 1,227,600 1,841,400 1,841,400
BF-1 2,572,000 964,500 1,446,750 1,446,750
AV-1 50,176,800 18,816,300 28,224,450 28,224,450
AV-2 22,400,400 8,400,150 12,600,225 12,600,225
MV-1 6,720,400 2,520,150 3,780,225 3,780,225
MV-2 5,152,000 1,932,000 2,898,000 2,898,000
BV-1 2,688,000 1,008,000 1,512,000 1,512,000
</TABLE>
The Underwriters have advised the Depositor that they propose to offer
the Offered Certificates for sale from time to time in one or more negotiated
transactions or otherwise, at market prices prevailing at the time of sale, at
prices related to such market prices or at negotiated prices. The Underwriters
may effect such transactions by selling Offered Certificates to or through
dealers, and such dealers may receive compensation in the form of underwriting
discounts, concessions or commissions from the Underwriters or purchasers of the
Offered Certificates for whom they may act as agent. Any dealers that
participate with the Underwriters in the distribution of the Certificates
purchased by the Underwriters may be deemed to be underwriters, and any
discounts or commissions received by them or the Underwriters and any profit on
the resale of Offered Certificates by them or the Underwriters may be deemed to
be underwriting discounts or commissions under the Securities Act.
The Depositor expects to receive proceeds of approximately
$445,289,022, plus accrued interest, before deducting expenses payable by it
estimated to be $410,000. In connection with the purchase and sale of the
Offered Certificates, the Underwriters may be deemed to have received
compensation from the Depositor in the form of underwriting discounts.
The Depositor and the Seller have agreed to indemnify the Underwriters
against certain liabilities including liabilities under the Securities Act of
1933, as amended.
Certain of the Mortgage Loans may have been the subject of financing
provided by affiliates of the Underwriters. Morgan Stanley & Co. Incorporated
has been retained by the Depositor to place certain Classes of ]the Private
Certificates.
RATINGS
It is a condition of the issuance of the Offered Certificates that they
receive ratings set forth under Ratings in the Summary.
The ratings do not represent any assessment of the likelihood or rate
of principal prepayments, or the likelihood that any Group II Certificates
Carryover will be paid.
<PAGE>
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. The security rating assigned to the Offered
Certificates should be evaluated independently of similar security ratings
assigned to other kinds of securities.
Explanations of the significance of such ratings may be obtained from
Moody's, 90 Church Street, New York, New York, 10006, and Fitch, One State
Street Plaza, 33rd Floor, New York, New York 10004. Such ratings will be the
views only of such rating agencies. There is no assurance that any such ratings
will continue for any period of time or that such ratings will not be revised or
withdrawn. Any such revision or withdrawal of such ratings may have an adverse
effect on the market price of the Offered Certificates.
LEGAL INVESTMENT CONSIDERATIONS
The Class AV-1, Class AV-2 and Class MV-1 Certificates will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") for so long as they are rated in one of the
two highest rating categories by one or more nationally recognized statistical
rating organizations. As such, they will be legal investments for certain
entities to the extent provided in SMMEA, subject to state laws overriding
SMMEA. In addition, institutions whose investment activities are subject to
review by federal or state regulatory authorities may be or may become subject
to restrictions, which may be retroactively imposed by such regulatory
authorities, on the investment by such institutions in certain forms of mortgage
related securities. Furthermore, certain states have enacted legislation
overriding the legal investment provisions of SMMEA.
Although the Class A 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.
<PAGE>
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
Page
2/28/LIBOR Mortgage Loans..........................12
3/27/LIBOR Mortgage Loans..........................12
Actuarial Loans....................................20
Agreement...........................................4
Applied Realized Loss Amount.......................33
Asset Proceeds Account.............................28
Beneficial Owners...................................8
Book Entry Certificates............................33
Cede................................................8
CEDEL...............................................8
Certificate Principal Balance......................27
Class A Principal Distribution Amount..............30
Class AF-1..........................................1
Class AF-2..........................................1
Class AF-3..........................................1
Class AF-4..........................................1
Class AF-5..........................................1
Class AF-6..........................................1
Class AF-6 Distribution Amount.....................30
Class AV-1..........................................1
Class AV-2..........................................1
Class AV-2 Distribution Amount.....................31
Class B-1 Principal Distribution Amount............31
Class B-2 Principal Distribution Amount............31
Class B-3 Principal Distribution Amount............31
Class BF-1..........................................1
Class BV-1..........................................1
Class C.............................................1
Class M-1 Principal Distribution Amount............31
Class M-2 Principal Distribution Amount............31
Class MF-1..........................................1
Class MF-2..........................................1
Class MV-1..........................................1
Class MV-2..........................................1
Closing Date........................................4
Code................................................7
Constant Prepayment Rate...........................22
CPR................................................22
Credit Enhancement..................................5
Current Interest...................................29
Cut-Off Date........................................4
Denominations.......................................4
Depositor...........................................4
Distribution Account...............................28
Distribution Date...................................4
DOL................................................37
DTC.................................................8
Due Period..........................................6
ERISA...............................................7
Euroclear...........................................8
European Depositaries...............................8
Exemption..........................................37
Extra Principal Distribution.......................32
Fannie Mae..........................................4
Fitch...............................................7
Group...............................................2
Group II...........................................2
Group I.............................................2
Group I Certificates................................1
Group I Offered Certificates........................1
Group II Available Funds Cap........................2
Group II Certificates...............................1
Group II Certificates Carryover.....................2
Group II Offered Certificates.......................1
HEP................................................21
Holder.............................................28
Home Equity Prepayment.............................21
Interest Carry Forward Amount......................29
Interest Determination Date........................33
Interest Funds.....................................28
Last Scheduled Distribution Dates...................1
Master Servicer.....................................4
Master Servicer Remittance Date....................28
Master Servicing Fee................................6
Master Servicing Fee Rate...........................3
Modeling Assumptions...............................22
Month End Interest.................................19
Moody's.............................................7
Mortgage...........................................12
Mortgage Loan Group.................................2
mortgage related securities.........................2
Mortgages...........................................2
One Month LIBOR.....................................2
One Year CMT.......................................12
One Year CMT Mortgage Loans........................12
Participants.......................................33
Percentage Interest................................28
Permitted Investments..............................28
Plan...............................................37
Plan Asset Regulation..............................37
Principal Distribution Amount......................30
Principal Funds....................................28
Private Certificates................................1
Realized Loss......................................33
Record Date.........................................4
REMIC...............................................7
Restricted Group...................................38
Seller..............................................4
Servicer............................................4
Servicing Fee.......................................6
Servicing Fee Rate..................................6
Simple Interest Loans..............................19
Six Month LIBOR....................................12
Six Month LIBOR Mortgage Loans.....................12
SMMEA..............................................40
Stepdown Date......................................32
Substitution Shortfall.............................28
Trigger Event......................................32
Trust...............................................1
Trustee.............................................4
Underwriters.......................................39
Unpaid Realized Loss Amount........................33
weighted average life..............................21
<PAGE>
[SAXON LOGO]
SAXON ASSET SECURITIES COMPANY
(Depositor)
MORTGAGE LOAN ASSET BACKED CERTIFICATES
(Issuable in Series)
This Prospectus relates to Mortgage Loan Asset Backed Certificates (the
"Certificates") to be issued from time to time in one or more Series (each, a
"Series") on terms determined at the time of sale and described in this
Prospectus and the related Prospectus Supplement. Each Series of Certificates
will be issued by a separate trust (each, a "Trust") and will evidence
beneficial ownership interests in one or more segregated pools of
mortgage-related assets as described herein (the "Mortgage Assets") and certain
other assets.
Each Series of Certificates will be issued in one or more classes
(each, a "Class"). One or more Classes of Certificates of a Series may be
subordinated in right to receive distributions and be subject to allocation of
losses in favor of one or more other Classes of Certificates of the same Series
as specified in the related Prospectus Supplement. Each Series of Certificates
will be entitled to receive distributions at the intervals and on the dates
specified in the related Prospectus Supplement from the assets of the related
Trust. The Depositor or an affiliate of the Depositor may make or obtain for the
benefit of any Series of Certificates limited representations and warranties
with respect to the Mortgage Assets included in the related Trust. Neither the
Depositor nor any affiliate of the Depositor will have any other obligation with
respect to any Series of Certificates.
The yield on each Series of Certificates will be affected by, among
other things, the rate and timing of payments of principal (including
prepayments) of the Mortgage Assets included in the related Trust. Each Series
of Certificates will be subject to early termination under the circumstances
described herein and in the related Prospectus Supplement.
If specified in the Prospectus Supplement for a Series, one or more
elections may be made to treat the related Trust or specified portions thereof
as real estate mortgage investment conduits (each, a "REMIC") for federal income
tax purposes. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES" herein and in the
related Prospectus Supplement.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
See "RISK FACTORS" herein at page 85 and in the related Prospectus
Supplement. Prospective purchasers should carefully review the information in
the related Prospectus Supplement concerning the risks associated with different
types and Classes of Certificates.
See "ERISA CONSIDERATIONS" herein and in the related Prospectus
Supplement for a discussion of restrictions on the acquisition of Certificates
by "plan fiduciaries."
THE CERTIFICATES OF EACH SERIES WILL BE ENTITLED TO PAYMENT ONLY FROM
THE ASSETS OF THE RELATED TRUST. THE CERTIFICATES DO NOT REPRESENT AN INTEREST
IN OR OBLIGATION OF THE DEPOSITOR, ANY SELLER, ANY SERVICER, ANY MASTER
SERVICER, ANY TRUSTEE OR ANY OF THEIR AFFILIATES, EXCEPT AS SET FORTH HEREIN AND
IN THE RELATED PROSPECTUS SUPPLEMENT. NEITHER THE CERTIFICATES NOR THE
UNDERLYING MORTGAGE ASSETS WILL BE GUARANTEED OR INSURED BY ANY GOVERNMENTAL
AGENCY OR INSTRUMENTALITY OR BY THE DEPOSITOR, ANY SELLER, ANY SERVICER, ANY
MASTER SERVICER, ANY TRUSTEE OR ANY OF THEIR AFFILIATES, EXCEPT AS SET FORTH IN
THE RELATED PROSPECTUS SUPPLEMENT.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON
OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY
IS UNLAWFUL.
--------------------
Offers of the Certificates may be made through one or more different
methods, including offerings through underwriters, as more fully described
herein and in the related Prospectus Supplement. See "PLAN OF DISTRIBUTION"
herein. There can be no assurance that a secondary market will develop for the
Certificates of any Series or, if such a market does develop, that it will
provide the holders of such Certificates with liquidity of investment or that it
will continue for the life of such Certificates. This Prospectus may not be used
to consummate sales of Certificates unless accompanied by a Prospectus
Supplement.
--------------------
The date of this Prospectus is February 19, 1997
<PAGE>
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY............................................1
RISK FACTORS..................................................5
DESCRIPTION OF THE CERTIFICATES...............................8
General..................................................8
Classes of Certificates..................................8
Book-Entry Procedures....................................9
Global Clearance, Settlement and Tax
Documentation Procedures..............................12
Allocation of Distributions.............................14
Allocation of Losses and Shortfalls.....................15
Mortgage Assets.........................................16
Optional Termination....................................16
MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS................16
THE TRUSTS...................................................18
Assignment of Mortgage Assets...........................18
The Mortgage Loans--General.............................19
Single Family Loans.....................................20
Cooperative Loans.......................................21
Multi-Family Loans......................................21
Junior Mortgage Loans...................................21
Home Improvement Loans..................................22
Home Equity Lines of Credit.............................22
Repurchase of Converted Mortgage Loans..................22
Repurchase of Delinquent Mortgage Loans.................23
Substitution of Mortgage Loans..........................23
Mortgage-Backed Securities..............................23
Pre-Funding Account.....................................24
Asset Proceeds Account..................................24
CREDIT ENHANCEMENT...........................................25
General.................................................25
Subordination...........................................25
Certificate Guaranty Insurance Policies.................26
Overcollateralization...................................26
Cross Support...........................................26
Mortgage Pool Insurance Policies........................27
Special Hazard Insurance Policies.......................27
Bankruptcy Bonds........................................28
Reserve Funds...........................................29
Other Credit Enhancement................................29
ORIGINATION OF MORTGAGE LOANS................................29
General.................................................29
Representations and Warranties..........................30
SERVICING OF MORTGAGE LOANS..................................31
General.................................................31
Payments on Mortgage Loans..............................32
Advances................................................32
Collection and Other Servicing Procedures...............33
Primary Mortgage Insurance Policies.....................33
Standard Hazard Insurance Policies......................34
Maintenance of Insurance Policies; Claims
Thereunder and Other Realization Upon
Defaulted Mortgage Loans..............................35
Modification of Mortgage Loans..........................35
Evidence as to Servicing Compliance.....................36
Events of Default and Remedies..........................36
Master Servicer Duties..................................36
Special Servicing Agreement.............................37
THE AGREEMENT................................................37
The Trustee.............................................37
Administration of Accounts..............................38
Reports to Certificateholders...........................38
Events of Default and Remedies..........................38
Amendment...............................................39
Termination.............................................40
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS......................40
General.................................................40
The Mortgage Loans......................................40
Foreclosure.............................................41
Junior Mortgage Loans; Rights of Senior
Mortgagees............................................43
Right of Redemption.....................................44
Anti-Deficiency Legislation and Other
Limitations on Lenders................................45
Soldiers' and Sailors' Civil Relief Act of 1940.........45
Environmental Considerations............................46
"Due-on-Sale" Clauses...................................47
Enforceability of Certain Provisions....................47
THE DEPOSITOR................................................47
USE OF PROCEEDS..............................................48
CERTAIN FEDERAL INCOME TAX CONSEQUENCES......................48
REMIC Certificates......................................48
Securities Classified as Partnership Interests..........69
State and Local Taxation................................69
STATE TAX CONSIDERATIONS.....................................69
ERISA CONSIDERATIONS.........................................69
LEGAL INVESTMENT MATTERS.....................................71
PLAN OF DISTRIBUTION.........................................72
AVAILABLE INFORMATION........................................73
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE..................................................73
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS.................74
REPORTS TO CERTIFICATEHOLDERS
The Depositor will cause to be provided to the Certificateholders of
each Series periodic and annual reports concerning the Certificates of such
Series and the related Trust as described herein and in the related Prospectus
Supplement. See "THE AGREEMENT -- Reports to Certificateholders."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each Series of Certificates contained in the
related Prospectus Supplement and in the Agreement with respect to such Series.
Depositor: Saxon Asset Securities Company (the
"Depositor"), a wholly owned, limited-purpose
financing subsidiary of Dominion Mortgage
Services, Inc., a Virginia corporation
("Dominion Mortgage"). Neither Dominion
Resources nor the Depositor has guaranteed, or
is otherwise obligated with respect to, the
Certificates of any Series. The principal
executive offices of the Depositor are located
at 4880 Cox Road, Glen Allen, Virginia 23060,
and the telephone number of the Depositor is
(804) 967-7400. See "THE DEPOSITOR."
Sellers: Saxon Mortgage, Inc. ("SMI"), a wholly
owned subsidiary of Dominion Mortgage and an
affiliate of the Depositor, and one or more
other mortgage originators named in the
related Prospectus Supplement (each a
"Seller").
Certificates Offered: Mortgage Loan Asset Backed Certificates (the
"Certificates"), issuable in one or more
Series (each, a "Series"), all as more fully
described in the related Prospectus
Supplement. The Certificates of each Series
will be issued by a separate trust (each, a
"Trust") and will evidence beneficial
ownership interests in one or more segregated
pools of Mortgage Assets and certain other
assets. Each Series of Certificates will be
issued in one or more classes (each, a
"Class") as specified in the related
Prospectus Supplement. The Certificates of
each Series will be entitled to payment only
from the assets of the related Trust.
The Certificates of any Class of any Series
(i) may be entitled to receive distributions
allocable only to principal, only to interest
or to any combination of principal and
interest, (ii) may be entitled to receive
distributions allocable to prepayments of
principal throughout the life of such
Certificates or only during specified periods,
(iii) may be subordinated in right to receive
distributions and be subject to allocation of
losses in favor of one or more other Classes
of Certificates of such Series, (iv) may be
entitled to receive distributions only after
the occurrence of specified events, (v) may be
entitled to receive distributions in
accordance with a specified schedule or
formula or on the basis of distributions on
specified portions of the Mortgage Assets,
(vi) in the case of Certificates entitled to
receive distributions allocable to interest,
may be entitled to receive interest at a
specified rate (a "Pass-Through Rate"), which
may be fixed, variable or adjustable and may
differ from the rate at which other Classes of
Certificates of such Series are entitled to
receive interest and (vii) in the case of
Certificates entitled to receive distributions
allocable to interest, may be entitled to
receive such distributions only after the
occurrence of specified events and may accrue
interest until such events occur, in each case
as specified in the related Prospectus
Supplement.
The Certificates of each Series will be issued
as fully registered certificates in
certificated or book-entry form in the
authorized denominations specified in the
related Prospectus Supplement. Neither the
Certificates nor the underlying Mortgage
Assets will be guaranteed or insured by any
governmental agency or instrumentality or by
the Depositor, any Seller, any Servicer, any
Master Servicer, any Trustee or any of their
affiliates, except as set forth in the related
Prospectus Supplement. The Depositor, a Seller
or one of their affiliates may retain or hold
for sale from time to time one or more Classes
of Certificates. See "DESCRIPTION OF THE
CERTIFICATES."
Agreement: Each Series of Certificates will be issued
pursuant to one or more trust agreements or
pooling and servicing agreements (each, an
"Agreement") with the Depositor and the
trustee (the "Trustee") identified in the
related Prospectus Supplement. Pursuant to an
Agreement, the Depositor will assign and
<PAGE>
transfer the Mortgage Assets and other assets
to be included in the related Trust to the
Trustee in exchange for a Series of
Certificates. See "THE TRUSTS Assignment of
Mortgage Assets."
Distributions: The Prospectus Supplement for each Series of
Certificates will specify (i) whether
distributions with respect to such
Certificates will be made monthly, quarterly,
semi-annually or at other intervals, (ii) the
date for each such distribution (each, a
"Distribution Date"), and (iii) the amount of
each such distribution allocable to principal
and interest. The amount available to be
distributed on each Distribution Date with
respect to each Series of Certificates will
be determined as set forth in the related
Agreement and will be described in the related
Prospectus Supplement. See "DESCRIPTION OF
THE CERTIFICATES -- Allocation of
Distributions."
The Scheduled Principal Balance of the
Mortgage Assets and the amount of any other
assets included in the Trust for each Series
of Certificates (including amounts held in any
Pre- Funding Account for such Series) will
equal or exceed the aggregate original
principal balance of the Certificates of such
Series. See "DESCRIPTION OF THE CERTIFICATES
-- Valuation of Mortgage Assets."
Mortgage Assets: The Mortgage Assets assigned or transferred to
the Trust for a Series may consist of one or
more of the following:
A. Mortgage Loans: "Mortgage Loans" may include: (i) one- to
four-family mortgage loans secured by first,
second or more junior liens on residential
and mixed use properties (or participation
interests in such loans) ("Single Family
Loans"), (ii) loans secured by security
interests in or similar liens on shares in
private, non-profit cooperative housing
corporations ("Cooperatives") and on the
related proprietary leases or occupancy
agreements granting exclusive rights to
occupy specific dwelling units in the
buildings owned by the Cooperatives (or
participation interests in such loans)
("Cooperative Loans"), (iii) multi-family
mortgage loans secured by first, second or
more junior liens on residential and mixed
use properties, including buildings owned by
Cooperatives (or participation interests in
such loans) ("Multi-Family Loans"), (iv) home
improvement mortgage loans secured by first,
second or more junior liens on various types
of properties (or participation interests in
such loans) ("Home Improvement Loans"), and
(v) home equity lines of credit ("HELOCs").
B. Mortgage-Backed
Securities "Mortgage-Backed Securities" may include (i)
private (that is not guaranteed or insured by
the United States or any agency or
instrumentality thereof) mortgage
participation or pass- through certificates
or other mortgage-backed securities
(representing either debt or equity) or (ii)
securities insured or guaranteed by Federal
National Mortgage Association ("FNMA"),
Federal Home Loan Mortgage Corporation
("FHLMC") or Government National Mortgage
Association ("GNMA"). See "THE TRUSTS --
Mortgage-Backed Securities."
Pre-Funding Account: If so specified in the related Prospectus
Supplement, a Trust may enter into an
agreement (each, a "Pre-Funding Agreement")
with the Depositor under which the Depositor
transfers additional Mortgage Assets to such
Trust following the date on which such Trust
is established and the related Certificates
are issued. If a Pre-Funding Agreement is
used, the related Trustee will be required to
deposit in a segregated account (each, a
"Pre-Funding Account") a portion of the
proceeds received by the Trustee in connection
with the sale of Certificates of the related
Series. Additional Mortgage Assets will
thereafter be transferred to the related
Trust in exchange for money released to the
Depositor from the related Pre-Funding
Account. If all moneys originally deposited
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in such Pre-Funding Account are not applied to
the acquisition of additional Mortgage Assets
by the end of the period specified in the Pre-
Funding Agreement (which may not exceed three
months), then any remaining moneys will be
applied as a mandatory prepayment of one or
more Classes of Certificates as specified in
the related Prospectus Supplement. See "THE
TRUSTS -- Pre-Funding Account."
Servicer: One or more servicers (each, a "Servicer"),
which may include an affiliate of the
Depositor, will perform certain customary
servicing functions with respect to the
Mortgage Loans included in the Trust for any
Series of Certificates. See "SERVICING OF
MORTGAGE LOANS."
Master Servicer: If specified in the Prospectus Supplement for
a Series, a master servicer (the "Master
Servicer"), which may include an affiliate of
the Depositor, will perform, directly or
indirectly through one or more sub-servicers,
certain administrative and supervisory
functions with respect to the Mortgage
Assets included in the related Trust. See
"SERVICING OF MORTGAGE LOANS."
Special Servicer: If specified in the Prospectus Supplement for
a Series, a special servicer (a "Special
Servicer") may be appointed to service, make
certain decisions with respect to and take
various actions with respect to delinquent or
defaulted Mortgage Loans or Mortgage Loans
that are secured by Mortgaged Premises
acquired by foreclosure or by deed-in-lieu
of foreclosure (collectively, "REO
Properties").
Assets Proceeds
Account: If so specified in the Prospectus Supplement
for a Series, the Servicers of the Mortgage
Loans included in the related Trust and, to
the limited extent described herein, the
Master Servicer are, obligated to advance
funds to such Trust to cover (i) delinquent
payments on such Mortgage Loans, (ii)
delinquent payments of taxes, insurance
premiums or other escrowed items and (iii)
foreclosure costs, including reasonable
attorney's fees ("Advances"). Any such
advance obligation may be limited to amounts
deemed to be recoverable from late payments or
liquidation proceeds, to amounts due holders
of specified Classes of Certificates of the
related Series, to specified periods of time,
to certain dollar amounts or to any
combination of the foregoing, in each case
as specified in the related Prospectus
Supplement. Any such Advance will be
recoverable as specified in the related
Prospectus Supplement. See "SERVICING OF
MORTGAGE LOANS -- General" and " -- Advances."
Credit Enhancement: If so specified in the Prospectus Supplement
for a Series, the related Trust may include,
or the related Certificates may be entitled
to the benefits of, certain ancillary or
incidental assets intended to provide credit
enhancement for the ultimate or timely
distribution of proceeds from the Mortgage
Assets to the holders of such Certificates,
including reserve accounts, insurance
policies, guaranties, surety bonds, letters
of credit, guaranteed investment contracts,
swap agreements and option agreements. In
addition, if so specified in the Prospectus
Supplement for a Series, one or more Classes
of Certificates of such Series may be entitled
to the benefits of other credit enhancement
arrangements, including subordination,
overcollateralization or cross support.
The protection against losses or delays
afforded by any such assets or credit
enhancement arrangements may be limited.
See "CREDIT ENHANCEMENT."
Optional Termination: To the extent and under the circumstances
specified in the Prospectus Supplement for a
Series, the early retirement of the
Certificates of such Series may be effected.
See "DESCRIPTION OF THE CERTIFICATES --
Optional Termination."
Certain Federal Income
Tax Consequences: The federal income tax consequences to the
holders of the Certificates of any Series
will depend on, among other factors, whether
an election is made to treat the related
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<PAGE>
Trust or specified portions thereof as "real
estate mortgage investment conduits" (each, a
"REMIC") under the provisions of the Internal
Revenue Code of 1986, as amended (the "Code")
or, if no REMIC election is made, whether the
Certificates are considered to be Pass-Through
Certificates or Strip Certificates. The
Prospectus Supplement for each series of
Certificates will specify whether a REMIC
election will be made. Investors are urged to
consult their tax advisors concerning the
application of federal income tax laws to
their particular situations. See "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES" herein and in
the related Prospectus Supplement.
Legal Investment
Matters: If so specified in the related Prospectus
Supplement, the Certificates of the related
Series will constitute "mortgage-related
securities" under the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA") and,
as such, will be "legal investments" for
certain types of institutional investors to
the extent provided in SMMEA, subject, in each
case, to state laws overriding SMMEA and to
any other regulations which may govern
investments by such institutional investors.
If so specified in the related Prospectus
Supplement, all or certain Classes of
Certificates may not constitute
"mortgage-related securities" under SMMEA.
Securities that do not constitute
"mortgage-related securities" under SMMEA
will require registration, qualification or
an exemption under applicable state
securities laws and may not be "legal
investments" to the same extent as
"mortgage-related securities." See "LEGAL
INVESTMENT MATTERS" herein and in the related
Prospectus Supplement.
ERISA Considerations: Fiduciaries of employee benefit plans or
other retirement plans or arrangements,
including individual retirement accounts,
certain Keogh plans, and collective investment
funds, separate accounts and insurance company
general accounts in which such plans,
accounts or arrangements are invested, that
are subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"),
or the Code, should carefully review with
their legal advisors whether an investment in
Certificates will cause the assets of the
related Trust to be considered plan assets
under the Department of Labor ("DOL")
regulations set forth in 29 C.F.R. Section
2510.3-101 (the "Plan Asset Regulations"),
thereby subjecting the Trustee and the Master
Servicer to the fiduciary responsibility
standards of ERISA, and whether the purchase,
holding or transfer of Certificates gives
rise to a transaction that is prohibited
under ERISA or subject to the excise tax
provisions of Section 4975 of the Code.
Certain Classes of Certificates may not be
offered for sale or transferable to Plans
(as defined herein). See "ERISA
CONSIDERATIONS" herein and in the related
Prospectus Supplement.
Ratings: Each Class of Certificates offered hereby and
by the related Prospectus Supplement will be
rated in one of the four highest rating
categories by one or more nationally
recognized statistical rating organizations
(each, a "Rating Agency").
Risk Factors: An investment in the Certificates will be
subject to one or more risk factors, including
declines in the value of Mortgaged Premises,
prepayment of Mortgage Loans, limitations on
credit enhancement, consumer credit laws
affecting the Mortgage Assets, the risk of
higher losses with respect to particular
types of Mortgage Loans and various other
factors. See "RISK FACTORS" herein and in
the related Prospectus Supplement.
4
<PAGE>
RISK FACTORS
Prospective investors should consider, among other things, the
following risk factors and the risk factors identified in the related Prospectus
Supplement in connection with a purchase of the Certificates of any Series. See
"Risk Factors" in the related Prospectus Supplement.
Limited Obligations. The Certificates will not represent an interest in
or obligation of the Depositor, any Seller, any Servicer, any Master Servicer or
any Trustee or any of their affiliates and will not be insured by any government
agency or instrumentality. Each Trust is expected to have no significant assets
other than the Mortgage Assets and any other assets assigned to the Trust by the
Depositor. Prospective purchasers of the Certificates of a Series must rely
primarily upon payments on the related Mortgage Assets, the security therefor
and the sources of credit enhancement, if any, identified in the related
Prospectus Supplement. The related Mortgage Assets will not be guaranteed or
insured by any governmental agency or instrumentality or by the Depositor, any
Servicer, any Master Servicer, any Trustee or any of their affiliates, except as
set forth in the related Prospectus Supplement.
Limitations on Credit Enhancement. The credit enhancement, if any, for
any Series of Certificates may be limited in amount and may be subject to
periodic reduction in accordance with a schedule or formula. In addition, such
credit enhancement may provide only very limited coverage as to certain types of
losses and may provide no coverage as to certain other types of losses. The
Trustee may be permitted to reduce, terminate or substitute all or a portion of
the credit enhancement for any Series of Certificates to the extent specified in
the related Prospectus Supplement. See "CREDIT ENHANCEMENT."
Declining Real Estate Market. If the residential real estate market in
general or a regional or local area where the Mortgage Assets for a Trust are
concentrated should experience an overall decline in property values or a
significant downturn in economic conditions, rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. To the extent such losses are not covered by
credit enhancement, holders of the Certificates of the related Series will have
to look primarily to the value of the Mortgaged Premises for recovery of the
outstanding principal and unpaid interest of the defaulted Mortgage Loans.
Bankruptcy. The Sellers and the Depositor intend that the transfers of
the Mortgage Assets to the Depositor and, in turn, to the related Trust
constitute sales rather than pledges to secure indebtedness for insolvency
purposes. If a Seller were to become a debtor under the federal Bankruptcy Code,
however, a creditor, trustee-in-bankruptcy or receiver of that Seller might
argue that such transfers were pledges rather than sales. This position, if
argued or accepted by a court, could result in a delay in or reduction of
distributions on the Certificates of the related Series.
Regulatory Risks. In addition to anti-deficiency and related
legislation, numerous other federal and state statutory provisions, including
the federal bankruptcy laws, the federal Soldiers and Sailors Civil Relief Act
of 1940 and state laws affording relief to debtors, may interfere with or affect
the ability of a secured mortgage lender to realize upon its security. The
Internal Revenue Code of 1986, as amended, provides priority to certain tax
liens over the lien of a mortgage or deed of trust. Other federal and state laws
provide priority to certain tax and other liens over the lien of a mortgage or
deed of trust. Numerous federal and some state consumer protection laws impose
substantive requirements upon mortgage lenders in connection with the
origination, servicing and enforcement of mortgage loans. These laws include the
federal Truth in Lending Act, Real Estate Settlement Procedures Act, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act, and
related statutes and regulations. These federal laws and state laws impose
specific statutory liabilities upon lenders who originate or service mortgage
loans and who fail to comply with the provisions of the law. In some cases, this
liability may affect assignees of the mortgage loans. See "CERTAIN LEGAL ASPECTS
OF MORTGAGE LOANS -- Anti-Deficiency Legislation and Other Limitations on
Lenders."
Modification of Mortgage Loans May Delay or Reduce Certificate
Payments. With respect to a Mortgage Loan on which a material default has
occurred or a payment default is imminent, the related Servicer, may enter into
a forbearance or modification agreement with the borrower. The terms of any such
forbearance or modification agreement may affect the amount and timing of
payments on the Mortgage Loan and, consequently, the amount and timing of
payments on one or more Classes of the related Series of Certificates. For
example, a modification agreement that results in a lower Mortgage Interest
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<PAGE>
Rate would lower the Pass-Through Rate of any related Class of Certificates that
accrues interest at a rate based on the weighted average Net Rate of the
Mortgage Loans. See "SERVICING OF MORTGAGE LOANS -- Modification of Mortgage
Loans."
Payment Considerations. The prepayment experience on the Mortgage
Assets underlying a particular Series of Certificates will affect (i) the
average life of each Class of such Certificates and (ii) for Certificates
purchased at a price other than par, the effective yield on such Certificates.
The timing and amount of prepayments on mortgage loans are influenced by a
variety of economic, geographic, legal, social and other factors, including
changes in interest rate levels. In general, if mortgage interest rates fall,
the rate of prepayment would be expected to increase. Conversely, if mortgage
interest rates rise, the rate of prepayment would be expected to decrease.
Prepayments may also result from foreclosure, condemnation and other
dispositions of the Mortgaged Premises (including amounts paid by insurers under
applicable insurance policies), from the repurchase of any Mortgage Loan as to
which there has been a material breach of warranty or defect in documentation
(or from the deposit of certain amounts in respect of the delivery of a
substitute Mortgage Loan), from the repurchase of Mortgage Loans modified in
lieu of refinancing, from the repurchase of any liquidated Mortgage Loan or
delinquent Mortgage Loan, if applicable, or from the repurchase by the Depositor
of all the Certificates of a Series or all the Mortgage Loans or Mortgage
Certificates in certain circumstances. The yields realized by the holders of
certain Certificates of a Series with disproportionate allocations of principal
or interest will be extremely sensitive to levels of prepayments on the Mortgage
Assets of the related Trust. No assurance can be given as to the prepayment
experience of the mortgage loans underlying any Series of Certificates. Each
prospective investor must make its own decision as to the appropriate prepayment
assumption. See "MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS."
Limited Liquidity. There can be no assurance that a secondary market
will develop for the Certificates of any Series or, if such a market does
develop, that it will provide the holders of such Certificates with liquidity of
investment or that it will continue for the life of such Certificates. Certain
Classes of Certificates may not constitute "mortgage related securities" under
SMMEA, and certain investors may be subject to legal restrictions that preclude
their purchase of any such non-SMMEA Certificates. In addition, if so specified
in the related Prospectus Supplement, certain Classes of Certificates may be
restricted as to transferability to certain entities. Any restrictions on the
purchase or transferability of the Certificates of a Series may have a negative
effect on the development of a secondary market for such Certificates. See
"LEGAL INVESTMENT MATTERS."
Book-Entry Certificates. If so specified in the related Prospectus
Supplement, certain Certificates of a Series may initially be registered in
book-entry form ("Book-Entry Certificates"). Issuance of the Certificates in
book-entry form may reduce the liquidity of such Certificates in the secondary
market because investors may be unwilling to purchase Certificates for which
they cannot obtain physical certificates. In addition, since transfers of
Book-Entry Certificates will, in most cases, be able to be effected only through
persons or entities that participate in the book-entry system, the ability of a
Certificateholder to pledge a Book-Entry Certificate to persons or entities that
do not participate in the book-entry system, or otherwise to take actions with
respect to a Book-Entry Certificate, may be impaired since physical certificates
representing the Certificates will generally not be available.
Certificateholders may experience some delay in their receipt of distributions
of interest on and principal of the Book-Entry Certificates because
distributions may be required to be forwarded by the Trustee through book-entry
system participants which thereafter will be required to credit them to the
accounts of the applicable Certificates, whether directly or indirectly through
financial intermediaries. See "DESCRIPTION OF THE CERTIFICATES -- Book-Entry
Procedures."
Limited Nature of Ratings. The rating of Certificates credit-enhanced
through external credit enhancement, such as a letter of credit, financial
guaranty insurance policy or mortgage pool insurance policy, will depend
primarily on the creditworthiness of the provider of such external credit
enhancement. Any lowering of the rating assigned to the claims-paying ability of
any such provider below the rating initially given to the Certificates of the
related Series would likely result in a lowering of the rating assigned to such
Certificates. Any such rating is not a recommendation to buy, sell or hold
Certificates and is subject to revision or withdrawal at any time by the Rating
Agency issuing such rating. The Depositor will not be obligated to obtain
additional credit enhancement if necessary to maintain the rating initially
assigned to the Certificates of any Series.
Original Issue Discount. Compound Interest Certificates and certain
other Classes of Certificates that are entitled only to interest distributions
will be, and certain other Classes of Certificates may be, issued with original
issue discount for federal income tax purposes. The holder of a
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<PAGE>
Certificate issued with original issue discount will be required to include
original issue discount in ordinary gross income for federal income tax purposes
as it accrues, in advance of receipt of the cash attributable to such income.
Accrued but unpaid interest on such Certificates generally will be treated as
original issue discount for this purpose. See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES."
Balloon Loans. A portion of the Mortgage Assets may include "balloon
loans" that provide for the payment of the unamortized principal balance of such
Mortgage Loans in a single payment at maturity ("Balloon Loans"). Balloon Loans
provide for equal monthly payments, consisting of principal and interest,
generally based on a 30-year amortization schedule, and a single payment of the
remaining balance of the Balloon Loan, generally five, seven, ten or 15 years
after origination. Amortization of a Balloon Loan based on a scheduled period
that is longer than its term results in a remaining principal balance at
maturity that is substantially larger than the regular scheduled payments. The
Depositor does not have any information regarding the default history or
prepayment history of payments on Balloon Loans. Because borrowers of Balloon
Loans are required to make substantial single payments at maturity, it is
possible that the default risk associated with Balloon Loans is greater than
that associated with fully-amortizing Mortgage Loans. The ability of a borrower
to repay a Balloon Loan at maturity frequently will depend upon such borrower's
ability to refinance such loan. Neither the Depositor nor the Trustee is
obligated to obtain refinancing. Any loss on a Balloon Loan resulting from a
borrower's inability to obtain refinancing will be borne by Certificateholders
if not covered by credit enhancement.
Junior Loans. A portion of the Mortgage Assets may include loans
secured by second or more junior liens on residential properties. Because the
rights of a holder of a second or more junior lien are subordinate to the rights
of senior lienholders, the position of such Trust and the holders of the
Certificates of such Series could be more adversely affected by a reduction in
the value of the Mortgaged Premises than would the position of the senior
lienholders. In the event of a default by the related borrower, liquidation or
other proceeds may be insufficient to satisfy a second or more junior lien after
satisfaction of the senior lien and the payment of any liquidation expenses. See
"THE TRUSTS -- Junior Mortgage Loans."
Non-Owner Occupied Mortgage Premises. A portion of the Mortgage Assets
may be secured by liens on Mortgaged Premises which are not owner occupied. It
is possible that the rate of delinquencies, foreclosures and losses on such
Mortgage Loans could be higher than on Mortgage Loans secured by liens on
Mortgaged Premises which are the primary residences of the owner.
Non-Conforming Credits. All or a portion of the Mortgage Assets may
consist of mortgage loans underwritten in accordance with the underwriting
standards for "non-conforming credits." A mortgage loan made to a
"non-conforming credit" means a mortgage loan that is ineligible for purchase by
FNMA or FHLMC due to borrower credit characteristics, property characteristics,
loan documentation guidelines or other characteristics that do not meet FNMA or
FHLMC underwriting guidelines, including a loan made to a borrower whose
creditworthiness and repayment ability do not satisfy such FNMA or FHLMC
underwriting guidelines and a borrower who may have a record of major derogatory
credit items such as default on a prior mortgage loan, credit write-offs,
outstanding judgments or prior bankruptcies. As a consequence, delinquencies and
foreclosures can be expected to be more prevalent with respect to such Mortgage
Loans than with respect to mortgage loans originated in accordance with FNMA or
FHLMC underwriting guidelines and changes in the values of the Mortgaged
Premises may have a greater effect on the loss experience of such Mortgage Loans
than on mortgage loans originated in accordance with FNMA or FHLMC underwriting
guidelines. Each prospective investor must make its own decision as to the
effect of non-conforming credits upon the delinquency, foreclosure, and
prepayment experience of the Mortgage Loans. See "ORIGINATION OF MORTGAGE
LOANS."
Delinquent Mortgage Loans. All or a portion of the Mortgage Loans may
be delinquent upon the issuance of the related Certificates. Credit enhancement
provided with respect to a particular Series of Certificates may not cover all
losses related thereto. Prospective investors should consider the risk that the
inclusion of such Mortgage Loans in the Trust for a Series may cause the rate of
defaults and prepayments on the Mortgage Loans to increase and, in turn, may
cause losses to exceed the available credit enhancement for such Series and
affect the yield on the Certificates of such Series. See "THE TRUSTS -- The
Mortgage Loans -- General."
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DESCRIPTION OF THE CERTIFICATES
General
The Mortgage Loan Asset Backed Certificates described herein and in the
related Prospectus Supplement (the "Certificates") will be issued from time to
time in Series pursuant to one or more trust agreements or pooling and servicing
agreements (each, an "Agreement"). The provisions of each Agreement will vary
depending upon the nature of the Certificates to be issued thereunder and the
nature of the related Trust. The following summaries describe the material
provisions common to each Series of Certificates. The summaries do not purport
to be complete and are subject to the Prospectus Supplement and the Agreement
with respect to a particular Series. The material terms of the Agreement with
respect to a Series of Certificates will be further described in the related
Prospectus Supplement and a copy thereof will be filed with the Commission on
Form 8-K
The Certificates of a Series will be entitled to payment only from the
assets of the related Trust. The Certificates do not represent an interest in or
obligation of the Depositor, any Seller, any Servicer, any Master Servicer, any
Trustee or any of their affiliates, except as set forth herein and in the
related Prospectus Supplement. Neither the Certificates nor the underlying
Mortgage Assets will be guaranteed or insured by any governmental agency or
instrumentality or by the Depositor, any Seller any Servicer, any Master
Servicer, any Trustee or any of their affiliates, except as set forth in the
related Prospectus Supplement. To the extent that delinquent payments on or
losses in respect of defaulted Mortgage Loans are not advanced by the applicable
Servicer or any other entity or paid from any applicable credit enhancement,
such delinquencies may result in delays in the distribution of payments to the
holders of one or more Classes of Certificates and such losses may be allocated
to the holders of one or more Classes of Certificates.
The Certificates of each Series will be issued as fully registered
certificates in certificated or book-entry form in the authorized denominations
for each Class specified in the related Prospectus Supplement. The Certificates
of each Series in certificated form may be transferred (subject to the
limitations on transfer, if any, specified in the related Agreement) or
exchanged at the corporate trust office of the Trustee without the payment of
any service charge, other than any tax or other governmental charge payable in
connection therewith. If so specified in the Prospectus Supplement for a Series,
distributions of principal and interest on each Certificate in certificated form
will be made on each Distribution Date by or on behalf of the Trustee (i) by
check mailed to each holder of such a Certificate at the address of such holder
appearing on the books and records of the Trust or (ii) by wire transfer of
immediately available funds upon timely request to the Trustee in writing by any
holder of such a Certificate having an initial principal amount of at least
$1,000,000 or such other amount as may be specified in the related Prospectus
Supplement; provided, however, that the final distribution in retirement of a
Certificate of a Series in certificated form will be made only upon presentation
and surrender of such Certificates at the corporate trust office of the Trustee.
Distributions of principal and of interest on each Class of Certificates in
book-entry form will be made as set forth below.
Classes of Certificates
Each Series of Certificates will be issued in one or more classes
(each, a "Class") as specified in the related Prospectus Supplement. The
Certificates of any Class of any Series (i) may be entitled to receive
distributions allocable only to principal, only to interest or to any
combination of principal and interest, (ii) may be entitled to receive
distributions allocable to prepayments of principal throughout the life of such
Certificates or only during specified periods, (iii) may be subordinated in
right to receive distributions and may be subject to allocation of losses in
favor of one or more other Classes of Certificates of such Series, (iv) may be
entitled to receive distributions only after the occurrence of specified events,
(v) may be entitled to receive distributions in accordance with a specified
schedule or formula or on the basis of distributions on specified portions of
the Mortgage Assets, (vi) in the case of Certificates entitled to receive
distributions allocable to interest, may be entitled to receive interest at a
specified rate (a "Pass-Through Rate"), which may be fixed, variable or
adjustable and may differ from the rate at which other Classes of Certificates
of such Series are entitled to receive interest and (vii) in the case of
Certificates entitled to receive distributions allocable to interest, may be
entitled to receive such distributions only after the occurrence of specified
events and may accrue interest until such events occur, in each case as
specified in the related Prospectus Supplement.
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Book-Entry Procedures
The Prospectus Supplement for a Series may specify that certain Classes
of Certificates will initially be issued in book-entry form ("Book-Entry
Certificates") in the authorized denominations specified therein. Each such
Class will be represented by a single certificate registered in the name of the
nominee of the depository, which is expected to be The Depository Trust Company
("DTC" and, together with any successor or other depository selected by the
Depositor, the "Depository"). The Depository or its nominee will be registered
as the record holder of each Class of Book-Entry Certificates in the certificate
register maintained by the Trustee for the related Trust. Except as described
below, no person acquiring a Book-Entry Certificate (each, a "Beneficial Owner")
will be entitled to receive a physical certificate representing such
Certificate, the only "Holder" of the Book-Entry Certificates will be the
nominee of the Depository and Beneficial Owners will not be "Holders" as that
term is used in the Agreement. In general, beneficial ownership of Book-Entry
Certificates will be subject to the rules, regulations and procedures governing
the Depository and participants in the Depository ("Depository Participants"),
as in effect from time to time.
A Beneficial Owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains such
Beneficial Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of the Depository (or of a Depository Participant which acts as agent
for the Financial Intermediary and whose interest in turn will be recorded on
the records of the Depository, if the Beneficial Owner s Financial Intermediary
is not a Depository Participant). Therefore, the Beneficial Owner must rely on
the foregoing procedures to evidence its beneficial ownership of a Book-Entry
Certificate, and beneficial ownership of a Book-Entry Certificate may only be
transferred by compliance with the procedures of such Financial Intermediaries
and Depository Participants.
DTC, which is a New York-chartered limited-purpose trust company,
performs services for its participants some of whom (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each participant in DTC in the
Book-Entry Certificates, whether held for its own account or as a nominee for
another person. If DTC is the Depository (except under the circumstances
described below), under the rules, regulations and procedures creating and
affecting DTC and its operations (the "Rules"), DTC is required to make
book-entry transfers among its participants on whose behalf it acts with respect
to such Certificates and is required to receive and transmit distributions of
principal of, and interest on, such Certificates. DTC participants and indirect
participants with whom Beneficial Owners have accounts with respect to
Book-Entry Certificates are similarly required to make book-entry transfers and
receive and transmit such distributions on behalf of their respective Beneficial
Owners. Accordingly, although Beneficial Owners will not possess Certificates,
the Rules provide a mechanism by which Beneficial Owners will receive
distributions and will be able to transfer their interests.
Because transactions in Book-Entry Certificates may be effected only
through the Depository, participating organizations, indirect participants and
certain banks, the ability of the Beneficial Owner of a Book-Entry Certificate
to pledge such Certificate to persons or entities that do not participate in the
Depository, or otherwise to take actions in respect of such Certificate, may be
limited due to the lack of a physical certificate representing such Certificate.
Issuance of the Book-Entry Certificates in book-entry form may reduce the
liquidity of such Certificates in the secondary trading market because investors
may be unwilling to purchase Book-Entry Certificates for which they cannot
obtain physical certificates.
The Prospectus Supplement for a Series may also specify that CEDEL
Bank, S.A. ("CEDEL") and Euroclear System ("Euroclear") will hold omnibus
positions on behalf of their participants through customers securities accounts
in CEDEL's and Euroclear's names on the books of their respective depositaries
which in turn will hold such positions in customers securities accounts in the
depositaries names on the books of the Depository. Citibank, N.A., acts as
depositary for CEDEL and Chase Manhattan Bank acts as depositary for Euroclear
(in such capacities, individually the "Relevant Depositary" and collectively the
"European Depositaries").
CEDEL. CEDEL is incorporated under the laws of Luxembourg as a
professional depository. CEDEL holds securities for its participant
organizations ("CEDEL Participants") and facilitates the clearance and
settlement of securities transactions between CEDEL Participants through
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electronic book-entry changes in accounts of CEDEL Participants, thereby
eliminating the need for physical movement of certificates. Transactions may be
settled in CEDEL in any of 28 currencies, including United States dollars. CEDEL
provides to CEDEL Participants, among other things, services for safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. CEDEL interfaces with domestic markets in
several countries. As a professional depository, CEDEL is subject to regulation
by the Luxembourg Monetary Institute. CEDEL Participants are recognized
financial institutions around the world, including underwriters, securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations. Indirect access to CEDEL is also available to others, such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear. Euroclear was created in 1968 to hold securities for
participants of Euroclear ("Euroclear Participants") and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of certificates and any risk from lack of simultaneous transfers of
securities and cash. Transactions may now be settled in any of 32 currencies,
including United States dollars. Euroclear includes various other services,
including securities lending and borrowing and interfaces with domestic markets
in several countries generally similar to the arrangements for cross-market
transfers with DTC described above. Euroclear is operated by Morgan Guaranty
Trust Company of New York, Brussels Office (the "Euroclear Operator"), under
contract with Euroclear Clearance Systems S.C., a Belgian cooperative
corporation (the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear Securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative establishes policy for Euroclear on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries.
Indirect access to Euroclear is also available to other firms that clear through
or maintain a custodial relationship with a Euroclear Participant, either
directly or indirectly.
The Euroclear Operator is an office of a New York trust company which
is a member bank of the Federal Reserve System. As such, it is regulated and
examined by the Board of Governors of the Federal Reserve System and the New
York State Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Because of time zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a Depository Participant
will be made during subsequent securities settlement processing and dated the
business day following the settlement date for the Depository. Such credits or
any transactions in such securities settled during such processing will be
reported to the relevant Euroclear or CEDEL participants on such business day.
Cash received in CEDEL or Euroclear as a result of sales of securities by or
through a CEDEL Participant (as defined below) or Euroclear Participant (as
defined below) to a Depository Participant will be received with value on the
settlement date for the Depository but will be available in the relevant CEDEL
or Euroclear cash account only as of the business day following settlements in
the Depository. For information with respect to tax documentation procedures
relating to the Certificates, see "CERTAIN FEDERAL INCOME TAX CONSEQUENCES --
Backup Withholding" and "-- Global Clearance, Settlement and Tax Documentation
Procedures Certain U.S. Federal Income Tax Documentation Requirements".
Transfers between Depository Participants will occur in accordance with
the rules of the Depository. Transfers between CEDEL Participants and Euroclear
Participants will occur in accordance with their respective rules and operating
procedures.
Cross-market transfers between persons holding directly or indirectly
through the Depository, on the one hand, and directly or indirectly through
CEDEL Participants or Euroclear Participants, on the other, will be effected in
the Depository in accordance with its rules on behalf of the
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relevant European international clearing system by the Relevant Depositary;
however, such cross market transactions will require delivery of instructions to
the relevant European international clearing system by the counterparty in such
system in accordance with its rules and procedures and within its established
deadlines (European time). The relevant European international clearing system
will, if the transaction meets its settlement requirements, deliver instructions
to the Relevant Depositary to take action to effect final settlement on its
behalf by delivering or receiving securities in the Depository, and making or
receiving payment in accordance with normal procedures for same day funds
settlement applicable to DTC. CEDEL Participants and Euroclear Participants may
not deliver instructions directly to the European Depositaries.
Beneficial Owners of the Book-Entry Certificates may experience some
delay in their receipt of payments, since such payments will be forwarded by the
Paying Agent to the Depository. Distributions with respect to Certificates held
through CEDEL or Euroclear will be credited to the cash accounts of CEDEL
Participants or Euroclear Participants in accordance with the relevant system's
rules and procedures, to the extent received by the Relevant Depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. Because the Depository can only act on
behalf of Financial Intermediaries, the ability of a Beneficial Owner to pledge
Book-Entry Certificates to persons or entities that do not participate in the
Depository system, or otherwise take actions in respect of such Book-Entry
Certificates, may be limited due to the lack of physical certificates for such
Book-Entry Certificates. In addition, issuance of the Book-Entry Certificates in
book-entry form may reduce the liquidity of such Certificates in the secondary
market since certain potential investors may be unwilling to purchase
Certificates for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust provided by the Master Servicer
to the Depository, may be made available by the Depository to Beneficial Owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting the Depository, and to the Depository Participants to whose
accounts the Book-Entry Certificates of such Beneficial Owners are credited.
So long as the Certificates are held as Book-Entry Certificates by the
Depository, it is expected that the Depository will take any action permitted to
be taken by the Holders of the Certificates under the Agreement only at the
direction of one or more Depository Participants to whose accounts the
Book-Entry Certificates are credited. CEDEL or the Euroclear Operator, as the
case may be, will take any action permitted to be taken by a Holder under the
Agreement on behalf of a CEDEL Participant or Euroclear Participant only in
accordance with its relevant rules and procedures and subject to the ability of
the Relevant Depositary to effect such actions on its behalf through the
Depository. The Depository may take actions, at the direction of the Depository
Participants, with respect to some Certificates which conflict with actions
taken with respect to other Certificates.
None of the Sellers, the Depositor, the Servicers, the Master Servicer,
any Certificate Insurer or the Trustee will have any responsibility for any
aspect of the records relating to or payments made on account of beneficial
ownership interests of the Book-Entry Certificates or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
Definitive Certificates will be issued to Beneficial Owners of the
Book-Entry Certificates, or their nominees, rather than to the Depository, only
if (a) the Depository or the Depositor advises in writing that the Depository is
no longer willing, qualified or able to discharge properly its responsibilities
as a nominee and depository with respect to the Book- Entry Certificates and the
Depositor or the Trustee is unable to locate a qualified successor, (b) the
Depositor, at its sole option, elects to terminate a book-entry system through
the Depository or (c) the Depository, at the direction of the Depository
Participants to whose accounts are credited a majority of the outstanding
Book-Entry Certificates, advises the Trustee in writing that the continuation of
a book-entry system through DTC (or a successor thereto) is no longer in the
best interests of Beneficial Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Beneficial
Owners of the occurrence of such event and the availability through the
Depository of Definitive Certificates. Upon surrender by the Depository of the
global certificate or certificates representing the Book- Entry Certificates and
instructions for re-registration, the Certificate Registrar will issue
Definitive Certificates, and thereafter the Certificate Registrar will recognize
the holders of such Definitive Certificates as Holders under the Agreement.
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Global Clearance, Settlement and Tax Documentation Procedures
The Prospectus Supplement for a Series may specify that Certificates of
a Series will be tradeable as home market instruments in both the European and
U.S. domestic markets. Initial settlement and all secondary trades will settle
in same-day funds.
Secondary market trading between investors through CEDEL and Euroclear
will be conducted in the ordinary way in accordance with the normal rules and
operating procedures of CEDEL and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through the Depository will
be conducted according to its rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between CEDEL or Euroclear and
Depository Participants will be effected on a delivery-against-payment basis
through the Relevant Depositaries (in such capacity) and as Depository
Participants.
Non-U.S. holders (as described below) will be subject to U.S.
withholding taxes unless they meet certain requirements and deliver appropriate
U.S. tax documents to the securities clearing organizations or their
participants.
Initial Settlement. All Certificates will be held in book-entry form by
the Depository. Investors interests in the Certificates will be represented
through financial institutions acting on their behalf as direct and indirect
participants in the Depository. As a result, CEDEL and Euroclear will hold
positions on behalf of their participants through their Relevant Depositary
which in turn will hold such positions in its account as a Depository
Participant.
Investors electing to hold through the Depository will follow its
settlement practices. Investor securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold through CEDEL or Euroclear accounts will
follow the settlement procedures applicable to conventional eurobonds, except
that there will be no temporary global security and no "lock-up" or restricted
period. Certificates will be credited to the securities custody accounts on the
settlement date against payment in same-day funds.
Secondary Market Trading. Because the purchaser determines the place of
delivery, it is important to establish at the time of the trade where both the
purchaser's and seller's accounts are located to ensure that settlement can be
made on the desired value date.
Trading between Depository Participants. Secondary market trading
between Depository Participants will be settled using the procedures applicable
to prior asset-backed certificates issues in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between Depository Participant as Seller and CEDEL or Euroclear
Participant as Purchaser. When Certificates are to be transferred from the
account of a Depository Participant to the account of a CEDEL Participant or a
Euroclear Participant, the purchaser will send instructions to CEDEL or
Euroclear through a CEDEL Participant or Euroclear Participant at least one
business day prior to settlement. CEDEL or Euroclear will instruct the Relevant
Depositary, as the case may be, to receive the Global Securities against
payment. Payment will include interest accrued on the Certificates from and
including the last distribution date to and excluding the settlement date, on
the basis of the actual number of days in such accrual period and a year assumed
to consist of 360 days or a 360-day year of twelve 30-day months as applicable
to the related class of Certificates. For transactions settling on the 31st of
the month, payment will include interest accrued to and excluding the first day
of the following month. Payment will then be made by the Relevant Depositary to
the account of the Depository Participant against delivery of the Certificates.
After settlement has been completed, the Certificates will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the CEDEL Participant's or Euroclear Participant's account.
The securities credit will appear the next day (European time) and the cash debt
will be back-valued to, and the interest on the Certificates will accrue from,
the value date (which
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will be the preceding day when settlement occurred in New York). If settlement
is not completed on the intended value date (i.e., the trade fails), the CEDEL
or Euroclear cash debt will be valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within CEDEL or Euroclear. Under this
approach, they may take on credit exposure to CEDEL or Euroclear until the
Certificates are credited to their account one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit
to them, CEDEL Participants or Euroclear Participants may elect not to
preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, CEDEL Participants or Euroclear Participants
purchasing Certificates would incur overdraft charges for one day, assuming they
cleared the overdraft when the Certificates were credited to their accounts.
Nevertheless, interest on the Certificates would accrue from the value date.
Therefore, in many cases the interest accruing on the Certificates during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although the result will depend on each CEDEL Participant's or
Euroclear Participant's particular cost of funds.
Because the settlement is taking place during New York business hours,
Depository Participants may employ their usual procedures for crediting
Certificates to the respective European Depositary for the benefit of CEDEL
Participants or Euroclear Participants. The sale proceeds will be available to
the seller on the settlement date. Thus, to the Depository Participants a
cross-Depository market transaction will settle no differently than a trade
between two Depository Participants.
Trading between CEDEL or Euroclear Participant as Seller and
Participant as Purchaser. Due to time zone differences in their favor, CEDEL
Participants and Euroclear Participants may employ their customary procedures
for transactions in which Certificates are to be transferred by the respective
clearing system, through the respective Depository, to a Depository Participant.
The seller will send instructions to CEDEL or Euroclear through a CEDEL
Participant or Euroclear Participant at least one business day prior to
settlement. In these cases CEDEL or Euroclear will instruct the respective
Depositary, as appropriate, to credit the Certificates to the Depository
Participant's account against payment. Payment will include interest accrued on
the Certificates from and including the last distribution to and excluding the
settlement date on the basis of the actual number of days in such accrual period
or a year assumed to consist of 360 days or a 360-day year of twelve 30-day
months as applicable to the related class of Certificates. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. The payment will then be
reflected in the account of CEDEL Participant or Euroclear Participant the
following day, and receipt of the cash proceeds in the CEDEL Participant's or
Euroclear Participant's account will be back-valued to the value date (which
will be the preceding day, when settlement occurred in New York). Should the
CEDEL Participant or Euroclear Participant have a line of credit with its
respective clearing system and elect to be in debt in anticipation of receipt of
the sale proceeds in its account, the back- valuation will extinguish any
overdraft incurred over that one-day period. If settlement is not completed on
the intended value date (i.e., the trade fails), receipt of the cash proceeds in
the CEDEL Participant's or Euroclear Participant's account will instead be
valued as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase
Certificates from Depository Participants for delivery to CEDEL Participants or
Euroclear Participants should note that these trades would automatically fail on
the sale side unless affirmative action is taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the
purchase side of the trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Certificates in the U.S. from a Depository
Participant no later than one day prior to settlement, which would give the
Certificates sufficient time to be reflected in their CEDEL or Euroclear account
in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the Depository Participant is at
least one day prior to the value date for the sale to the CEDEL Participant or
Euroclear Participant.
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Certain U.S. Federal Income Tax Documentation Requirements. A
Beneficial Owner of Certificates holding through CEDEL or Euroclear (or through
the Depository Participant if the holder has an address outside the U.S.) will
be subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons (as defined below), unless (i) each clearing system, bank or other
financial institution that holds customers securities in the ordinary course of
its trade or business in the chain of intermediaries between such Beneficial
Owner and the U.S. entity required to withhold tax complies with applicable
certification requirements and (ii) such Beneficial Owner takes one of the
following steps to obtain an exemption or reduced tax rate:
Exemption for Non-U.S. Persons (Form W-8). Beneficial Owners of
Certificates that are Non-U.S. Persons (as defined below) can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate of
Foreign Status). If the information shown on Form W-8 changes, a new Form W-8
must be filed within 30 days of such change.
Exemption for Non-U.S. Persons with effectively connected income (Form
4224). A Non-U.S. Person (as defined below), including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States).
Exemption or reduced rate for Non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons residing in a country that has a tax
treaty with the United States can obtain an exemption or reduced tax rate
(depending on the treaty terms) by filing Form 1001 (Holdership, Exemption or
Reduced Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by the Holder of a Certificate or their
agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's
Request for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Holder of a
Certificate or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds the
security (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity organized in or under
the laws of the United States or any political subdivision thereof, (iii) an
estate or trust that is subject to U.S. federal income tax regardless of the
source of its income or (iv) a trust for which (a) a Court within the United
States is able to exercise primary supervision over the administration of the
trust and (b) one or more United States trustees have the authority to control
all substantial decisions of the trust. The term "Non-U.S. Person" means any
person who is not a U.S. Person. This summary does not deal with all aspects of
U.S. Federal income tax withholding that may be relevant to foreign holders of
the Certificates. Investors are advised to consult their own tax advisors for
specific tax advice concerning their holding and disposing of the Certificates.
Allocation of Distributions
The Prospectus Supplement for each Series of Certificates will specify
(i) whether distributions on such Certificates will be made monthly, quarterly,
semi-annually or at other intervals, (ii) the date for each such distribution
(each, a "Distribution Date") and (iii) the amount of each such distribution
allocable to principal and interest. All distributions with respect to each
Certificate of a Series will be made to the person in whose name such
Certificate is registered (the "Certificateholder") as of the close of business
on the record date specified in the related Prospectus Supplement.
The amount available to be distributed on each Distribution Date with
respect to each Series of Certificates will be determined as set forth in the
related Agreement and will be described in the related Prospectus Supplement and
in general, will be equal to the amount of principal and interest actually
collected, advanced or received during the related Due Period or Prepayment
Period, net of applicable servicing fees, master servicing fees, special
servicing fees, administrative and guarantee fees, insurance premiums,
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amounts required to reimburse any unreimbursed Advances and any other amounts
specified in the related Prospectus Supplement. The amount distributed will be
allocated among the Classes of Certificates in the proportion and order of
application set forth in the related Agreement and described in the related
Prospectus Supplement. If so specified in the related Prospectus Supplement,
amounts received in respect of the Mortgage Assets representing excess interest
may be applied in reduction of the principal balance of one or more specified
Classes.
"Due Period" means, with respect to any Distribution Date, the period
commencing on the second day of the calendar month preceding the calendar month
in which such Distribution Date occurs and continuing through the first day of
the calendar month in which such Distribution Date occurs, or such other period
as may be specified in the related Prospectus Supplement.
"Prepayment Period" means, with respect to any Distribution Date, the
time period or periods specified in the servicing agreement for each Servicer to
identify prepayments or other unscheduled payments of principal or interest
received with respect to Mortgage Assets that will be used to pay
Certificateholders of such Series on such Distribution Date.
The Prospectus Supplement for each Series of Certificates will specify
the Pass-Through Rate, or the method for determining the Pass-Through Rate, for
each applicable Class of Certificates. One or more Classes of Certificates may
be represented by a notional principal amount. The notional principal amount is
used solely for purposes of determining interest distributions and certain other
rights and obligations of the holders of such Certificates and does not
represent a beneficial interest in principal payments on the Mortgage Assets in
the related Trust. One or more Classes of Certificates may provide for interest
that accrues but is not currently payable ("Compound Interest Certificates").
Any interest that has accrued but is not paid with respect to a Compound
Interest Certificate on any Distribution Date will be added to the principal
balance of such Compound Interest Certificate on such Distribution Date.
The Prospectus Supplement for each Series of Certificates will specify
the method by which the amount of principal to be distributed on each
Distribution Date will be calculated and the manner in which such amount will be
allocated among the Classes of Certificates of such Series entitled to
distributions of principal. The aggregate original principal balance of the
Certificates of each Series will equal the aggregate distributions allocable to
principal that such Certificates will be entitled to receive. One or more
Classes of Certificates may be entitled to payments of principal in specified
amounts on specified Distribution Dates, to the extent of the amount available
therefor on such Distribution Dates, or may be entitled to payments of principal
from the amount by which the available amount exceeds specified amounts. One or
more Classes of Certificates may be subordinated in right to receive
distributions and may be subject to allocation of losses in favor of one or more
other Classes of Certificates of the same Series as specified in the related
Prospectus Supplement.
Allocation of Losses and Shortfalls
The Prospectus Supplement for each Series of Certificates will specify
the method by which realized losses or interest shortfalls will be allocated. A
loss may be realized with respect to a Mortgage Loan (a "Realized Loss") as a
result of (i) the final liquidation of such Mortgage Loan through foreclosure
sale, disposition of the related Mortgaged Premises if acquired by deed-in-lieu
of foreclosure, or otherwise, (ii) the reduction of the unpaid principal balance
of a Mortgage Loan or the modification of the payment terms of such Mortgage
Loan in connection with a proceeding under the federal Bankruptcy Code or
otherwise, (iii) certain physical damage to the related Mortgaged Premises of a
type not covered by Standard Hazard Insurance Policies or (iv) fraud, dishonesty
or misrepresentation in the origination of such Mortgage Loan. An interest
shortfall may occur with respect to a Mortgage Loan as a result of a failure on
the part of the Servicer, Master Servicer or Trustee to advance funds to cover
delinquent payments of principal or interest on such Mortgage Loan, the
application of the Soldiers and Sailors Civil Relief Act of 1940 or the
prepayment in full of such Mortgage Loan and the failure of the Servicer or, in
certain cases, the Master Servicer to pay interest to month-end.
If so specified in the related Prospectus Supplement, the Senior
Certificates of a Series will not bear any Realized Losses on the related
Mortgage Loans until the Subordinated Certificates of such Series have borne
realized losses up to a specified amount or loss limit or until the principal
amount of the Subordinated Certificates has been reduced to zero, either through
the allocation of Realized Losses, the priority of distributions or both. If so
specified in the related Prospectus Supplement, interest
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shortfalls may result in a reallocation to the Senior Certificates of a Series
of amounts otherwise distributable to the Subordinated Certificates of such
Series.
Mortgage Assets
The Scheduled Principal Balance of the Mortgage Assets and the amount
of any other assets included in the Trust for each Series of Certificates
(including amounts held in any Pre-Funding Account for such Series) will equal
or exceed the aggregate original principal balance of the Certificates of such
Series.
"Scheduled Principal Balance" means, with respect to any Mortgage Loan
as of any date of determination, the scheduled principal balance of such
Mortgage Loan as of the Cut-Off Date, increased by the amount of negative
amortization, if any, with respect thereto and reduced by (i) the principal
portion of all scheduled monthly payments due on or before such date of
determination, whether or not received, (ii) all amounts allocable to
unscheduled principal payments received on or before the last day of the
preceding Prepayment Period, and (iii) without duplication, the amount of any
Realized Loss that has occurred with respect to such Mortgage Loan on or before
such date of determination.
"Cut-Off Date" means, with respect to any Series, the date specified in
the related Prospectus Supplement after which payments on the Mortgage Assets
included in the related Trust are for the account of the Certificateholders of
such Series.
Optional Termination
To the extent and under the circumstances specified in the Prospectus
Supplement for a Series, the Certificates of such Series may be terminated at
the option of the Depositor or such other party as may be specified in the
related Prospectus Supplement for a purchase price calculated as specified in
such Prospectus Supplement. Upon termination of the Certificates, at the option
of the terminating party, (i) the related Trust may be terminated, thereby
causing the sale of the remaining Mortgage Assets, or (ii) such Certificates may
be held or resold by the redeeming party. If so specified in the Prospectus
Supplement for a Series, the right to redeem the Certificates of such Series
will be conditioned upon the passage of a certain date specified in such
Prospectus Supplement and/or Scheduled Principal Balance of the Mortgage Assets
in the Trust or the outstanding principal balance of a specified Class of
Certificates at the time of purchase aggregating less than a percentage,
specified in such Prospectus Supplement, of the Scheduled Principal Balance of
the Mortgage Assets in the Trust or the outstanding principal balance of a
specified Class of Certificates at the time of the issuance of such Series of
Certificates. Notice will be given to Certificateholders as provided in the
related Agreement.
MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS
The prepayment experience on the Mortgage Assets will affect (i) the
average life of each Class of Certificates issued by the related Trust and (ii)
for Certificates purchased at a price other than par, the effective yield on
such Certificates.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model, such as the Single Monthly Mortality ("SMM")
prepayment model, the Constant Prepayment Rate ("CPR") model or the prepayment
speed assumption ("PSA") model. The Prospectus Supplement for a Series may
contain a table setting forth percentages of the original principal amount of
each Class of Certificates of such Series to be outstanding after each of the
dates shown in the table based on the prepayment assumption model. It is
unlikely that the prepayment of the Mortgage Assets of any Trust will conform to
any of the percentages of the prepayment assumption model described in any table
set forth in the related Prospectus Supplement.
A number of social, economic, tax, geographic, demographic, legal and
other factors may influence prepayments, including the age of the mortgage
loans, the geographic distribution of the mortgaged premises, the payment terms
of the mortgage loans, the characteristics of the borrowers, homeowner mobility,
economic conditions generally and in the geographic area in which the mortgaged
premises are located, enforceability of "due-on-sale" clauses, servicing
decisions, prevailing mortgage market interest rates in relation to the interest
rates on the mortgage loans, the availability of mortgage funds, the use of
second or home equity loans by borrowers, the availability of refinancing
opportunities, the use of the mortgaged premises as second or vacation homes,
the net equity of the borrowers in the mortgaged
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premises and, if the mortgage loans are secured by investment properties,
tax-related considerations and the availability of other investments. The
prepayment rate may also be subject to seasonal variations.
The prepayment rate on pools of conventional housing loans has
fluctuated significantly in recent years. In general, if prevailing interest
rates were to fall significantly below the interest rates on a pool of mortgage
loans, the mortgage loans in that pool would be expected to prepay at higher
rates than if prevailing interest rates were to remain at or above the interest
rates on those mortgage loans. Conversely, if interest rates were to rise above
the interest rates on a pool of the mortgage loans, the mortgage loans in that
pool would be expected to prepay at lower rates than if prevailing interest
rates were to remain at or below interest rates on the mortgage loans. In
general, junior mortgage loans have smaller average principal balances than
senior or first mortgage loans and are not viewed by borrowers as permanent
financing. Accordingly, junior mortgage loans may experience a higher rate of
prepayment than senior or first mortgage loans. In addition, any future
limitations on the right of borrowers to deduct interest payments on mortgage
loans for federal income tax purposes may affect in the rate of prepayment of
mortgage loans.
Distributions on the Certificates of a Series on any Distribution Date
generally will include interest accrued through a date specified in the related
Prospectus Supplement that may precede such Distribution Date. Because interest
generally will not be distributed to the Certificateholders of such Series until
the Distribution Date, the effective yield to such Certificateholders will be
lower than the yield otherwise produced by the applicable Pass-Through Rate and
purchase price for such Certificates.
The yield to maturity of any Certificate will be affected by the rate
of interest and, in the case of certificates purchased at a price other than
par, timing of payments of principal on the Mortgage Loans. If the purchaser of
a Certificate offered at a discount calculates the anticipated yield to maturity
of such Certificate based on an assumed rate of payment of principal that is
faster than that actually received on the Mortgage Loans (or on the mortgage
loans underlying Mortgage Backed Securities), the actual yield to maturity will
be lower than that so calculated. Conversely, if the purchaser of a Certificate
offered at a premium calculates the anticipated yield to maturity of such
Certificate based on an assumed rate of payment of principal that is slower than
that actually received on the Mortgage Loans (or on the mortgage loans
underlying Mortgage Backed Securities), the actual yield to maturity will be
lower than that so calculated.
If so specified in a related Prospectus Supplement, amounts received in
respect of the Mortgage Assets representing excess interest may be applied in
reduction of the principal balance of one or more specified Classes. The amount
of excess interest required so to be applied may effect the weighted average
life of the related Series of Certificates.
The timing of changes in the rate of prepayments on the Mortgage Loans
(or on the mortgage loans underlying Mortgage Backed Securities) may
significantly affect an investor's actual yield to maturity, even if the average
rate of principal payments experienced over time is consistent with such
investor's expectation. In general, the earlier a prepayment of principal on the
Mortgage Loans (or on the mortgage loans underlying Mortgage Backed Securities),
the greater will be the effect on the investor s yield to maturity. As a result,
the effect on an investor's yield of principal payments occurring at a rate
higher (or lower) than the rate anticipated by the investor during the period
immediately following the issuance of the Certificates would not be fully offset
by a subsequent like reduction (or increase) in the rate of principal payments.
Because the rate of principal payments (including prepayments) on the Mortgage
Loans (or on the mortgage loans underlying Mortgage Backed Securities) will
significantly affect the weighted average life and other characteristics of any
Class of Certificates, prospective investors are urged to consider their own
estimates as to the anticipated rate of future prepayments and the suitability
of the Certificates to their investment objectives.
Under certain circumstances, the Master Servicer, certain insurers, the
holders of REMIC Residual Certificates or certain other entities specified in
the related Prospectus Supplement may have the option to effect earlier
retirement of the related Series of Certificates. See "THE TRUSTS -- Repurchase
of Converted Mortgage Loans" and "-- Repurchase of Delinquent Mortgage Loans"
and "THE AGREEMENT -- Termination."
Factors other than those identified herein and in the related
Prospectus Supplement could significantly affect principal prepayments at any
time and over the lives of the Certificates. The relative contribution of
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the various factors affecting prepayment may also vary from time to time. There
can be no assurance as to the rate of payment of principal at any time or over
the lives of the Certificates.
THE TRUSTS
Assignment of Mortgage Assets
Pursuant to the applicable Agreement, the Depositor will cause the
Mortgage Assets and other assets to be included in the related Trust to be
assigned and transferred to the Trustee together with all principal and interest
paid on such Mortgage Assets from the date or dates specified in the related
Prospectus Supplement. The Trustee will deliver to the order of the Depositor,
in exchange for the Mortgage Assets so transferred, Certificates of the related
Series in authorized denominations registered in such names as the Depositor may
request representing the beneficial ownership interest in the related Trust.
Each Mortgage Loan or Mortgage Backed Security included in a Trust will be
identified in a schedule appearing as an exhibit to the related Agreement. Such
schedule will include information as to the Scheduled Principal Balance of each
Mortgage Loan or Mortgage Backed Securities as of the specified date and its
interest rate, its original principal balance and certain other information.
In addition, the Depositor will take such steps as are necessary to
have the Trustee become the registered owner of each Mortgage Loan or Mortgage
Backed Security which is included in a Trust and to provide for all payments
thereon after the specified date or dates to be made directly to the Trustee. As
to each Mortgage Loan, the Depositor will deliver or cause to be delivered to
the Trustee the related Mortgage Note endorsed to the order of the Trustee,
evidence of recording of the related mortgage or deed of trust (a "Security
Instrument"), an assignment of such Security Instrument in recordable form
naming the related Servicer, the Trustee or a custodian acting on its behalf as
assignee and certain other original documents evidencing or relating to such
Mortgage Loan. Unless otherwise specified in the related Prospectus Supplement,
within one year following the date of initial delivery for a Series (the
"Closing Date"), the Depositor will cause the assignments of the Mortgage Loans
to be recorded in the appropriate public office for real property records
wherever necessary to protect the Trustee's interest in the Mortgage Loans. In
lieu of recording the assignments of Mortgage Loans in a particular
jurisdiction, the Depositor may deliver or cause to be delivered to the Trustee
an opinion of counsel to the effect that such recording is not required to
protect the right, title and interest of the Trustee in such Mortgage Loans. The
original mortgage documents are to be held by the Trustee or a custodian acting
on its behalf except to the extent released to the Servicer or the Master
Servicer from time to time in connection with servicing the Mortgage Loans.
The Depositor will make certain customary representations and
warranties in each Agreement with respect to each related Mortgage Asset. In
addition, SMI or other Sellers of Mortgage Assets may make customary
representations and warranties with respect to the Mortgage Assets in the sales
agreement pursuant to which the Mortgage Assets are assigned and transferred to
the Depositor. See "ORIGINATION OF MORTGAGE LOANS Representations and
Warranties." The right of the Depositor to enforce such representations and
warranties will be assigned to the Trustee under the related Agreement. If any
representation or warranty is breached, and such breach adversely affects the
interest of the Certificateholders, the Depositor or the Seller thereof will be
required, subject to the terms imposed under the related Agreement or sales
agreement, (i) to cure such breach, (ii) to substitute other Mortgage Assets for
the affected Mortgage Assets or (iii) to repurchase the affected Mortgage Assets
at a price generally equal to the unpaid principal balance of such Mortgage
Assets, together with accrued and unpaid interest thereon at the related
Mortgage Interest Rate. Neither the Depositor nor the Master Servicer will be
obligated to substitute Mortgage Assets or to repurchase Mortgage Assets, and no
assurance can be given that any Seller will perform its obligations with respect
to Mortgage Assets.
The following is a brief description of the Mortgage Assets expected to
be included in the Trusts. If specific information respecting the Mortgage
Assets is not known at the time the related Series of Certificates is initially
offered, more general information of the nature described below will be provided
in the Prospectus Supplement and specific information will be set forth in a
report on Form 8-K to be filed with the Commission within fifteen days after the
initial issuance of such Certificates. A copy of the Agreement with respect to
each Series of Certificates will be attached to the Form 8-K and will be
available for inspection at the corporate trust office of the Trustee specified
in the related Prospectus Supplement.
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The Mortgage Loans -- General
The Mortgage Loans will be evidenced by promissory notes (each, a
"Mortgage Note") and will be secured by first, second or more junior liens on
(i) the related real property or leasehold interest, together with improvements
thereon, or (ii) with respect to Cooperative Loans, the shares issued by the
related Cooperative (the "Mortgaged Premises").
The payment terms of the Mortgage Loans to be included in the Trust for
any Series will be described in the related Prospectus Supplement and may
include any of the following features or combinations thereof or any other
features described in such Prospectus Supplement:
(a) Interest may be payable at a fixed rate (a "Fixed Rate") or
may be payable at a rate that is adjustable from time to time
on specified adjustment dates (each, an "Interest Adjustment
Date") by adding a specified fixed percentage (the "Gross
Margin") to a specified index (the "Index") (which sum may be
rounded), that otherwise varies from time to time, that is
fixed for a period of time or under certain circumstances and
is followed by a rate that is adjustable from time to time as
described above or that otherwise varies from time to time or
that is convertible from an adjustable rate to a fixed rate
(each, an "Adjustable Rate"). Changes to an Adjustable Rate
may be subject to periodic limitations (a "Periodic Rate
Cap"), maximum rate, a minimum rate or a combination of such
limitations. Accrued interest may be deferred and added to
the principal of a Mortgage Loan for such periods and under
such circumstances as may be specified in the related
Prospectus Supplement. Mortgage Loans may permit the payment
of interest at a rate lower than the interest rate on the
related Mortgage Note (the "Mortgage Interest Rate") for a
period of time or for the life of the Mortgage Loan, and the
amount of any difference may be contributed from funds
supplied by the seller of the related Mortgaged Premises or
another source or may be treated as accrued interest and added
to the principal balance of the Mortgage Loan.
(b) Principal may be payable on a level basis to amortize
fully the Mortgage Loan over its term, may be calculated
on the basis of an assumed amortization schedule that is
significantly longer than the original term of the Mortgage
Loan or on an interest rate that is different from the
related Mortgage Interest Rate or may not be amortized during
all or a portion of such original term. Payment of all or a
substantial portion of the principal may be due at maturity.
Principal may include interest that has been deferred and
added to the principal balance of the Mortgage Loan.
(c) Payments may be fixed for the life of the Mortgage Loan, may
increase over a specified period of time or may change from
period to period. Mortgage Loans may include limits on periodic
increases or decreases in the amount of monthly payments and
may include maximum or minimum amounts of monthly payments.
(d) Prepayments of principal may be subject to a prepayment fee,
which may be fixed for the life of the Mortgage Loan or may
adjust or decline over time, and may be prohibited for the
life of the Mortgage Loan or for certain periods ("Lockout
Periods"). Certain Mortgage Loans may permit prepayments
after expiration of the applicable Lockout Period and may
require the payment of a prepayment fee in connection with
any such subsequent prepayment. Other Mortgage Loans may
permit prepayments without payment of a prepayment fee
unless the prepayment occurs during specified time periods.
The Mortgage Loans may include due-on-sale clauses which
permit the mortgagee to demand payment of the entire Mortgage
Loan in connection with the sale or certain other transfers
of the related Mortgaged Premises. Other Mortgage Loans
may be assumable by persons meeting the then applicable
underwriting standards of the Originator.
The Mortgaged Premises (and, with respect to Cooperative Loans, the
buildings owned by Cooperatives) may be located in any state, territory or
possession of the United States (including the District of Columbia or Puerto
Rico). The Mortgaged Premises generally will be covered by Standard Hazard
Insurance Policies insuring against losses due to fire and various other causes.
The Mortgage Loans may be covered by Primary Mortgage Insurance Policies
insuring against all or a portion of any loss sustained by reason of nonpayments
by borrowers to the extent specified in the related Prospectus Supplement.
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The Prospectus Supplement for each Series of Certificates will contain
information with respect to the Mortgage Loans expected to be included in the
related Trust. Such information may include: (i) the expected aggregate
outstanding principal balance and the expected average outstanding principal
balance of the Mortgage Loans as of the date set forth in the Prospectus
Supplement, (ii) the largest expected principal balance and the smallest
expected principal balance of any of the Mortgage Loans, (iii) the types of
Mortgaged Premises and/or other assets securing the Mortgage Loans, (iv) the
original terms to maturity of the Mortgage Loans, (v) the expected weighted
average term to maturity of the Mortgage Loans as of the date set forth in the
Prospectus Supplement and the expected range of the terms to maturity, (vi) the
expected aggregate outstanding Principal Balance of Mortgage Loans having
loan-to-value ratios at origination exceeding 80%, (vii) the expected Mortgage
Interest Rates and the range of Mortgage Interest Rates, (viii) in the case of
ARM Loans, the expected weighted average of the Adjustable Rates, (ix) the
expected aggregate outstanding Scheduled Principal Balance, if any, of Buy-Down
Loans as of the date set forth in the Prospectus Supplement, (x) the expected
aggregate outstanding principal balance, if any, of GPM Loans as of the date set
forth in the Prospectus Supplement, (xi) the amount of any Mortgage Pool
Insurance Policy, Special Hazard Insurance Policy or Bankruptcy Bond to be
maintained with respect to the related Trust, (xii) to the extent different from
the amounts described herein, the amount of any Standard Hazard Insurance Policy
required to be maintained with respect to each Mortgage Loan, (xiii) the amount,
if any, and terms of any other credit enhancement to be provided with respect to
all or a material portion of the Mortgage Loans and (xv) the expected geographic
location of the Mortgaged Premises (or, in the case of a Cooperative Loan, the
building owned by the related Cooperative). If specific information respecting
the Mortgage Loans is not known to the Depositor at the time the related
Certificates are initially offered, more general information of the nature
described above will be provided in the Prospectus Supplement and specific
information will be set forth in the Detailed Description.
"ARM Loans" means Mortgage Loans providing for periodic adjustments to
the related Mortgage Interest Rate to equal the sum (which may be rounded) of a
Gross Margin and an Index.
Buy-Down Loans" means Mortgage Loans as to which funds have been
provided (and deposited into an escrow account) to reduce the monthly payments
of the borrowers during the early years of such Mortgage Loans.
"GPM Loans" means Mortgage Loans providing for monthly payments during
the early years of such Mortgage Loans which are or may be less than the amount
of interest due on such Mortgage Loans and as to which unpaid interest is added
to the principal balance of such Mortgage Loans (resulting in negative
amortization) and paid, together with interest thereon, in later years.
No assurance can be given that values of the Mortgaged Premises have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the real estate market should experience an overall
decline in property values such that the outstanding principal balances of the
Mortgage Loans (plus any additional financing by other lenders on the same
Mortgaged Premises) in the related Trust become equal to or greater than the
value of such Mortgaged Premises, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry.
If specified in the Prospectus Supplement for a Series, the Mortgage
Assets in the related Trust may include Mortgage Loans that are delinquent upon
the issuance of the related Certificates. The inclusion of such Mortgage Loans
in the Trust for a Series may cause the rate of defaults and prepayments on the
Mortgage Loans to increase and, in turn, may cause losses to exceed the
available credit enhancement for such Series and affect the yield on the
Certificates of such Series.
Single Family Loans
Single Family Loans will consist of mortgage loans secured by liens on
one- to four-family residential and mixed use properties. The Mortgaged Premises
which secure Single Family Loans will consist of detached or semi-detached one-
to four-family dwelling units, townhouses, row houses, individual condominium
units in condominium buildings, individual units in planned unit developments,
and certain mixed use and other dwelling units. Such Mortgaged Premises may
include vacation and second homes or investment properties. A portion of a
dwelling unit may contain a commercial enterprise.
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Cooperative Loans
Cooperative Loans generally will be secured by security interests in or
similar liens on stock, shares or membership certificates issued by Cooperatives
and in the related proprietary leases or occupancy agreements granting exclusive
rights to occupy specific dwelling units in the buildings owned by such
Cooperatives. A Cooperative is owned by tenant-stockholders who, through
ownership of stock, shares or membership certificates in the corporation,
receive proprietary leases or occupancy agreements which confer exclusive rights
to occupy specific apartments or units. In general, a tenant-stockholder of a
Cooperative must make a monthly payment to the Cooperative representing such
tenant-stockholder's pro rata share of the Cooperative's payments for its
mortgage loans, real property taxes, maintenance expenses and other capital or
ordinary expenses. Those payments are in addition to any payments of principal
and interest the tenant-stockholder must make on any loans to the
tenant-stockholder secured by its shares in the Cooperative. The Cooperative is
directly responsible for management and, in most cases, payment of real estate
taxes and hazard and liability insurance. A Cooperative's ability to meet debt
service obligations on a mortgage loan on the building owned by the Cooperative,
as well as all other operating expenses, will be dependent in large part on the
receipt of maintenance payments from the tenant-stockholders, as well as any
rental income from units or commercial areas the Cooperative might control.
Unanticipated expenditures may in some cases have to be paid by special
assessments on the tenant-stockholders.
Multi-Family Loans
Multi-Family Loans will consist of mortgage loans secured by liens on
rental apartment buildings, mixed-use properties or projects containing five or
more residential units including high-rise, mid-rise and garden apartments and
projects owned by Cooperatives.
Junior Mortgage Loans
If specified in the Prospectus Supplement for a Series, the Mortgage
Loans assigned and transferred to the related Trust may include Mortgage Loans
secured by second or more junior liens on residential properties ("Junior
Mortgage Loans"). Because the rights of a holder of a junior lien are
subordinate to the rights of senior lienholders, the position of such Trust and
the holders of the Certificates of such Series could be more adversely affected
by a reduction in the value of the Mortgaged Premises than would the position of
the senior lienholders. In the event of a default by the related borrower,
liquidation or other proceeds would be applied first to the payment of court
costs and fees in connection with the foreclosure, second to unpaid real estate
taxes, and third in satisfaction of all principal, interest, prepayment or
acceleration penalties, if any, and any other sums due and owing to the senior
lienholders. The claims of the senior lienholders would be satisfied in full out
of the proceeds of the liquidation of the Mortgaged Premises, if such proceeds
are sufficient, before the Trust would receive any payments. If the proceeds
from a foreclosure or similar sale of Mortgaged Premises on which the Trust
holds a junior lien are insufficient to satisfy the senior lienholders in the
aggregate, the Trust, as the holder of the junior lien, and the holders of the
Certificates of the related Series bear (i) the risk of delay in distributions
while a deficiency judgment, if any, against the borrower is obtained and (ii)
the risk of loss if the deficiency judgment, if any, is not realized upon. In
addition, deficiency judgments may not be available in certain jurisdictions.
Even if the Mortgaged Premises provide adequate security for the
related Junior Mortgage Loan, substantial delays could be encountered in
connection with the liquidation of such Junior Mortgage Loan, and corresponding
delays in the receipt of related proceeds by the holders of the Certificates of
the related Series could occur. An action to foreclose on Mortgaged Premises
securing a Mortgage Loan is regulated by state statutes and rules and is subject
to many of the delays and expenses of other lawsuits if defenses or
counterclaims are interposed, sometimes requiring several years to complete. In
addition, in some states, an action to obtain a deficiency judgment is not
permitted following a nonjudicial sale of the related Mortgaged Premises. In the
event of a default by a borrower, these restrictions, among other things, may
impede the ability of the Servicer to obtain liquidation proceeds sufficient to
repay all amounts due on the related Mortgage Loan. In addition, the Servicer
generally will be entitled to deduct from related liquidation proceeds all
expenses reasonably incurred in attempting to recover amounts due on defaulted
Mortgage Loans and not yet repaid, including payments to senior lienholders,
legal fees and costs of legal action, real estate taxes and maintenance and
preservation expenses.
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Home Improvement Loans
The Home Improvement Loans will consist of secured loans, the proceeds
of which generally will be used to improve or protect the basic livability or
utility of the property. To the extent set forth in the related Prospectus
Supplement, Home Improvement Loans will be fully amortizing and will bear
interest at a fixed or variable rate. To the extent a material portion of the
Mortgage Assets included in a Trust consists of Home Improvement Loans, the
related Prospectus Supplement will describe the material provisions of such
Mortgage Loans and the programs under which they were originated.
Home Equity Lines of Credit
HELOCs will consist of home equity lines of credit or certain balances
thereof secured by mortgages on one- to four-family residential properties,
including condominium units and cooperative dwellings, or mixed-use properties.
The HELOCs may be subordinated to other mortgages on such properties.
As more fully described in the related Prospectus Supplement, interest
on each HELOC, excluding introductory rates offered from time to time during
promotional periods, may be computed and payable monthly on the average daily
outstanding principal balance of such loan. Principal amounts on the HELOCs may
be drawn down (up to a maximum amount as set forth in the related Prospectus
Supplement) or repaid under each HELOC from time to time. If specified in the
related Prospectus Supplement, new draws by borrowers under HELOCs automatically
will become part of the Trust for a Series. As a result, the aggregate balance
of the HELOCs will fluctuate from day to day as new draws by borrowers are added
to the Trust and principal payments are applied to such balances, and such
amounts usually will differ each day, as more specifically described in the
Prospectus Supplement. Under certain circumstances more fully described in the
related Prospectus Supplement, a borrower under a HELOC may choose an interest
only payment option and is obligated to pay only the amount of interest which
accrues on such loan during the billing cycle. An interest only payment option
may be available for a specified period before the borrower may begin paying at
least the minimum monthly payment or a specified percentage of the average
outstanding balance of the loan.
The Mortgaged Premises relating to HELOCs will include one- to
four-family residential properties, including condominium units and Cooperative
dwellings, and mixed-use properties. Mixed-use properties will consist of one-
to four-family residential dwelling units and space used for retail,
professional or other commercial uses. The Mortgaged Premises may consist of
detached individual dwellings, individual condominiums, townhouses, duplexes,
row houses, individual units in planned unit developments and other attached
dwelling units. Each one- to four-family dwelling unit will be located on land
owned in fee simple by the borrower or, if so specified in the related
Prospectus Supplement, on land leased by the borrower for a term of at least ten
years greater than the term of the related HELOC. Attached dwellings may include
owner-occupied structures where each borrower owns the land upon which the unit
is built, with the remaining adjacent land owned in common, or dwelling units
subject to a proprietary lease or occupancy agreement in a cooperatively-owned
apartment building.
The aggregate principal balance of HELOCs secured by Mortgaged Premises
that are owner-occupied will be disclosed in the related Prospectus Supplement.
If so specified in the related Prospectus Supplement, the sole basis for a
representation that a given percentage of the HELOCs are secured by one- to
four-family dwelling units that are owner-occupied will be either (i) the making
of a representation by the borrower at origination of the HELOC either that the
underlying Mortgaged Premises will be used by the borrower for a period of at
least six months every year or that the borrower intends to use the Mortgaged
Premises as a primary residence or (ii) a finding that the address of the
underlying Mortgaged Premises is the borrower's mailing address as reflected in
the Master Servicer's records. If so specified in the related Prospectus
Supplement, the Mortgaged Premises may include non-owner occupied investment
properties and vacation and second homes.
Repurchase of Converted Mortgage Loans
Unless otherwise specified in the Prospectus Supplement for a Series,
the Trust for such Series may include Mortgage Loans with respect to which the
related Mortgage Interest Rate is convertible from an Adjustable Rate to a Fixed
Rate at the option of the borrower upon the fulfillment of certain conditions.
If so specified in such Prospectus Supplement, the applicable Servicer (or other
party specified in such Prospectus Supplement) may be obligated to repurchase
from the Trust any Mortgage Loan with respect to which
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the related Mortgage Interest Rate has been converted from an Adjustable Rate to
a Fixed Rate (a "Converted Mortgage Loan") at a purchase price equal to the
unpaid principal balance of such Converted Mortgage Loan plus 30 days of
interest thereon at the applicable Mortgage Interest Rate. If the applicable
Servicer (other than a successor servicer) is not obligated to purchase
Converted Mortgage Loans, the Master Servicer may be obligated to purchase such
Converted Mortgage Loans to the extent provided in such Prospectus Supplement.
Any such purchase price will be treated as a prepayment of the related Mortgage
Loan.
Repurchase of Delinquent Mortgage Loans
If so specified in the Prospectus Supplement for a Series, the
Depositor may, but will not be obligated to, repurchase from the Trust any
Mortgage Loan as to which the borrower is delinquent in payments by 90 days or
more (a "Delinquent Mortgage Loan") at a purchase price equal to the greater of
the unpaid principal balance of such Delinquent Mortgage Loan plus interest
thereon at the applicable Mortgage Interest Rate from the date on which interest
was last paid to the last day of the month in which such purchase price occurs
or the fair market value of the Delinquent Mortgage Loan at the time of its
purchase. Any such purchase price will be treated as a prepayment of the related
Mortgage Loan.
Substitution of Mortgage Loans
If so specified in the Prospectus Supplement for a Series, the
Depositor may, within three months of the Closing Date for such Series, deliver
to the Trustee other Mortgage Loans in substitution for any one or more Mortgage
Loans initially included in the Trust for such Series. In general, any
substitute Mortgage Loan must, on the date of such substitution, (i) have an
unpaid principal balance not greater than the unpaid principal balance of any
deleted Mortgage Loan, (ii) have a Mortgage Interest Rate not less than (and not
more than one percentage point in excess of) the Mortgage Interest Rate of the
deleted Mortgage Loan, (iii) have a Net Rate that is not less than the Net Rate
of the deleted Mortgage Loan, (iv) have a remaining term to maturity not greater
than (and not more than one year less than) that of the deleted Mortgage Loans,
(v) have a loan-to-value ratio as of the first day of the month in which the
substitution occurs equal to or less than the loan- to-value ratio of the
deleted Mortgage Loans as of such date (in each case, using the value at
origination and after taking into account the payment due on such date), and
(vi) comply with each applicable representation and warranty relating to the
Mortgage Loans. In general, no ARM Loan may be substituted unless the deleted
Mortgage Loan is an ARM Loan, in which case the substituted Mortgage Loan must
also (i) have a minimum lifetime Mortgage Interest Rate that is not less than
the minimum lifetime Mortgage Interest Rate on the deleted Mortgage Loan, (ii)
have a maximum lifetime Mortgage Interest Rate that is not less than the maximum
lifetime Mortgage Interest Rate on the deleted Mortgage Loans, (iii) provide for
a lowest possible Net Rate that is not lower than the lowest possible Net Rate
for the deleted Mortgage Loans and a highest possible Net Rate that is not lower
than the highest possible Net Rate for the deleted Mortgage Loans, (iv) have a
Gross Margin that is not less than the Gross Margin of the deleted Mortgage
Loans, (v) have a Periodic Rate Cap equal to the Periodic Rate Cap on the
deleted Mortgage Loans, (vi) have a next Interest Adjustment Date that is the
same as the next Interest Adjustment Date for the deleted Mortgage Loan or
occurs not more than two months prior to the next Interest Adjustment Date for
the deleted Mortgage Loans and (vii) not be a Mortgage Loan with respect to
which the Mortgage Interest Rate may be converted from an Adjustable Rate to a
Fixed Rate unless the Mortgage Interest Rate on the deleted Mortgage Loan may be
so converted. If more than one Mortgage Loan is substituted for a deleted
Mortgage Asset, one or more of the foregoing characteristics may be applied on a
weighted average basis as described in the Agreement.
Mortgage-Backed Securities
The Mortgage-Backed Securities may include (i) private (that is not
guaranteed or insured by the United States or any agency or instrumentality
thereof) mortgage participation or pass-through certificates or other
mortgage-backed securities or (representing either debt or equity) (ii)
Certificates insured or guaranteed by FNMA, FHLMC or GNMA. Private
Mortgage-Backed Securities will not include participations in previously issued
mortgage-backed securities unless such securities (i) have been previously
registered under the Securities Act of 1933, as amended, or held for the
required holding period under Rule 144(k) thereunder or (ii) were acquired in a
bona fide secondary market transaction from someone other than an affiliate of
the Depositor. Private Mortgage-Backed Securities will have been issued pursuant
to a PMBS Agreement (the "PMBS Agreement").
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The related Prospectus Supplement for a series of Certificates that
evidence interests in Mortgage-Backed Securities will specify (i) the
approximate aggregate principal amount and type of any Mortgage-Backed
Securities to be included in the Trust, (ii) to the extent known to the
Depositor, certain characteristics of the mortgage loans underlying the
Mortgage-Backed Securities including (A) the payment features of such mortgage
loans, (B) the approximate aggregate principal balance, if known, of underlying
mortgage loans insured or guaranteed by a governmental entity, (C) the servicing
fee or range of servicing fees with respect to the underlying mortgage loans and
(D) the minimum and maximum stated maturities of the underlying mortgage loans
at origination, (iii) the maximum original term-to-stated maturity of the
Mortgage-Backed Securities, (iv) the weighted average term-to-stated maturity of
the Mortgage-Backed Securities, (v) the pass-through or certificate rate of the
Mortgage-Backed Securities, (vi) the weighted average pass-through or
certificate rate of the Mortgage-Backed Securities, (vii) the issuer, servicer
and trustee of the Mortgage- Backed Securities, (viii) certain characteristics
of credit support, if any, such as reserve funds, insurance policies, surety
bonds, letters of credit or guaranties, relating to the mortgage loans
underlying the Mortgage-Backed Securities or to MBSthe Mortgage-Backed
Securities themselves, (ix) the terms on which the underlying mortgage loans
may, or are required to, be repurchased prior to their stated maturity or the
stated maturity of the Mortgage-Backed Securities and (x) the terms on which
other mortgage loans may be substituted for those originally underlying the
Mortgage-Backed Securities.
Pre-Funding Account
If so specified in the related Prospectus Supplement, a Trust may enter
into an agreement (each, a "Pre-Funding Agreement") with the Depositor under
which the Depositor will transfer additional Mortgage Assets to such Trust
following the Closing Date. Any Pre-Funding Agreement will require that any
Mortgage Loans so transferred conform to the requirements specified in such
Pre-Funding Agreement. If a Pre-Funding Agreement is used, the related Trustee
will be required to deposit in a segregated account (each, a "Pre-Funding
Account") upon receipt a portion of the proceeds received by the Trustee in
connection with the sale of Certificates of the related Series. The additional
Mortgage Assets will thereafter be transferred to the related Trust in exchange
for money released to the Depositor from the related Pre-Funding Account. Each
Pre-Funding Agreement will specify a period during which any such transfer must
occur. If all moneys originally deposited in such Pre- Funding Account are not
used by the end of such specified period, then any remaining moneys will be
applied as a mandatory prepayment of one or more Classes of Certificates as
specified in the related Prospectus Supplement. The specified period for the
acquisition by a Trust of additional Mortgage Loans will not exceed three months
from the date such Trust is established and the maximum deposit of Mortgage
Loans to the Pre-Funding Account will not exceed thirty-five percent of the
aggregate proceeds received from the sale of all Classes of Certificates of the
related Series.
Asset Proceeds Account
All payments and collections received or advanced on the Mortgage
Assets assigned or transferred to the Trust for the Certificates of a Series
will be remitted to one or more accounts (collectively, the "Asset Proceeds
Account") established and maintained in trust on behalf of the holders of such
Certificates. In general, reinvestment income, if any, on amounts in the Asset
Proceeds Account will not accrue for the benefit of the holders of the
Certificates of such Series.
If so specified in the Prospectus Supplement for a Series, payments on
the Mortgage Loans included in the related Trust will be remitted to the
Servicer Custodial Account or the Master Servicer Custodial Account and then to
the Asset Proceeds Account for such Series, net of amounts required to pay
servicing fees and any amounts that are to be included in any Reserve Fund or
other fund or account for such Series. All payments received on Mortgage-Backed
Securities included in the Trust for a Series will be remitted to the Asset
Proceeds Account. All or a portion of the amounts in such Asset Proceeds
Account, together with reinvestment income thereon if payable to the
Certificateholders, will be available, to the extent specified in the related
Prospectus Supplement, for the payment of Trustee fees, certain and any other
fees to be paid directly by the Trustee and to make distributions with respect
to Certificates of such Series in accordance with the respective allocations set
forth in the related Prospectus Supplement.
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CREDIT ENHANCEMENT
General
If so specified in the Prospectus Supplement for a Series, the related
Trust may include, or the related Certificates may be entitled to the benefits
of, certain ancillary or incidental assets intended to provide credit
enhancement for the ultimate or timely distribution of proceeds from the
Mortgage Assets to the holders of such Certificates, including reserve accounts,
insurance policies, guaranties, surety bonds, letters of credit, guaranteed
investment contracts, swap agreements and option agreements. In addition, if so
specified in the Prospectus Supplement for a Series, one or more Classes of
Certificates of such Series may be entitled to the benefits of other credit
enhancement arrangements, including subordination, overcollateralization or
cross support. The protection against losses or delays afforded by any such
assets or credit enhancement arrangements may be limited.
Credit enhancement will not provide protection against all risks of
loss and will not guarantee repayment of the entire principal balance of the
Certificates and interest thereon. If losses exceed the amount covered by credit
enhancement or are not covered by credit enhancement, holders of one or more
Classes of Certificates will bear their allocable share of any resulting losses.
If a form of credit enhancement applies to several Classes of Certificates, and
if distributions with respect to principal equal to the aggregate principal
balances of certain Classes of Certificates are distributed prior to such
distributions to other Classes of Certificates, the Classes of Certificates
which receive such distributions at a later time are more likely to bear any
losses which exceed the amount covered by credit enhancement. In certain cases,
credit enhancement may be canceled or reduced if such cancellation or reduction
would not adversely affect the rating of the related Certificates.
Subordination
If so specified in the related Prospectus Supplement, a Series may
include one or more Classes of Certificates (the "Subordinated Certificates")
that are subordinated in right to receive distributions or subject to the
allocation of losses in favor of one or more other Classes of Certificates of
such Series (the "Senior Certificates"). If so specified in the Prospectus
Supplement, distributions in respect of scheduled principal, principal
prepayments, interest or any combination thereof that otherwise would have been
payable to one or more Classes of Subordinated Certificates of a Series may
instead be payable to one or more Classes of Senior Certificates of such Series
under the circumstances and to the extent specified in such Prospectus
Supplement. If so specified in the Prospectus Supplement, delays in receipt of
scheduled payments on the Mortgage Assets and losses with respect thereto will
be borne first by Classes of Subordinated Certificates and thereafter by one or
more Classes of Senior Certificates, under the circumstances and subject to the
limitations specified in such Prospectus Supplement. The aggregate distributions
in respect of delinquent payments on the Mortgage Assets over the lives of the
Certificates or at any time, the aggregate losses which must be borne by the
Subordinated Certificates by virtue of subordination and the amount of the
distributions otherwise payable to the Subordinated Certificates that will be
payable to the Senior Certificates on any Distribution Date may be limited as
specified in the Prospectus Supplement. If aggregate distributions in respect of
delinquent payments on the Mortgage Assets or aggregate losses were to exceed
the total amounts payable and available for distribution to holders of
Subordinated Certificates or, if applicable, were to exceed a specified maximum
amount, holders of Senior Certificates could experience losses on the
Certificates.
If so specified in the related Prospectus Supplement, all or any
portion of distributions otherwise payable to the holders of Subordinated
Certificates on any Distribution Date may instead be deposited into one or more
reserve accounts established by the Trustee for specified periods or until the
balance in any such reserve account has reached a specified amount and,
following payments from such reserve account to the holders of Senior
Certificates or otherwise, thereafter to the extent necessary to restore the
balance of such reserve account to required levels. If so specified in the
Prospectus Supplement, amounts on deposit in any such reserve account may be
released to the Depositor or a Seller or the holders of any Class of
Certificates at the times and under the circumstances specified in the
Prospectus Supplement.
If so specified in the related Prospectus Supplement, one or more
Classes of Certificates may bear the risk of losses not covered by credit
enhancement prior to other Classes of Certificates. Such subordination might be
effected by reducing the principal balance of the Subordinated Certificates
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on account of such losses, thereby decreasing the proportionate share of
distributions allocable to such Certificates, or by another means specified in
the Prospectus Supplement.
If so specified in the related Prospectus Supplement, various Classes
of Senior Certificates and Subordinated Certificates may themselves be
subordinate in their right to receive certain distributions to other Classes of
Senior Certificates and Subordinated Certificates, respectively, through a
cross-support mechanism or otherwise. If so specified in the Prospectus
Supplement, the same Class of Certificates may constitute Senior Certificates
with respect to certain types of payments or losses and Subordinated
Certificates with respect to other types of payments or losses.
Distributions may be allocated among Classes of Senior Certificates and
Classes of Subordinated Certificates (i) in the order of their scheduled final
distribution dates, (ii) in accordance with a schedule or formula, (iii) in
relation to the occurrence of events or (iv) otherwise, in each case as
specified in the Prospectus Supplement. As between Classes of Subordinated
Certificates, payments to holders of Senior Certificates on account of
delinquencies or losses and payments to any reserve account will be allocated as
specified in the Prospectus Supplement.
Certificate Guaranty Insurance Policies
If so specified in the related Prospectus Supplement, one or more
certificate guaranty insurance policies (each, a "Certificate Guaranty Insurance
Policy") will be obtained and maintained for one or more Classes or Series of
Certificates. The issuer of any such Certificate Guaranty Insurance Policy (the
"Certificate Insurer") will be named in the related Prospectus Supplement. In
general, Certificate Guaranty Insurance Policies unconditionally and irrevocably
guarantee that the full amount of the distributions of principal and interest to
which the holders of the related Certificates are entitled under the related
Agreement, as well as any other amounts specified in the related Prospectus
Supplement, will be received by an agent of the Trustee for distribution by the
Trustee to such holders.
The specific terms of any Certificate Guaranty Insurance Policy will be
set forth in the related Prospectus Supplement. Certificate Guaranty Insurance
Policies may have limitations including, but not limited to, limitations on the
obligation of the Certificate Insurer to guarantee any Servicer's obligation to
repurchase or substitute for any Mortgage Loans, to guarantee any specified rate
of prepayments or to provide funds to redeem Certificates on any specified date.
The Certificate Insurer may be subrogated to the rights of the holders of the
related Certificates to receive distributions to which they are entitled, as
well as certain other amounts specified in the related Prospectus Supplement, to
the extent of any payments made by such Certificate Insurer under the related
Certificate Guaranty Insurance Policy.
Overcollateralization
If so specified in the related Prospectus Supplement, the aggregate
principal balance of the Mortgage Assets included in a Trust may exceed the
original principal balance of the related Certificates. In addition, if so
specified in the related Prospectus Supplement, certain Classes of Certificates
may be entitled to receive distributions, creating a limited acceleration of the
payment of the principal of such Certificates relative to the amortization of
the related Mortgage Assets by applying excess interest collected on the
Mortgage Assets to distributions of principal on such Classes of Certificates.
Such acceleration feature may continue for the life of the applicable Classes of
Certificates or may be limited. In the case of limited acceleration, once the
required level of overcollateralization is reached, and subject to certain
provisions specified in the related Prospectus Supplement, the acceleration
feature will cease unless necessary to maintain the required
overcollateralization level.
Cross Support
If so specified in the related Prospectus Supplement, the ownership
interests of separate Trusts or separate groups of assets may be evidenced by
separate Classes of the related Series of Certificates. In such case, credit
enhancement may be provided by a cross-support feature which requires that
distributions be made with respect to certain Certificates evidencing interests
in one or more Trusts or asset groups prior to distributions to other
Certificates evidencing interests in other Trusts or asset groups. If so
specified in the related Prospectus Supplement, the coverage provided by one or
more forms of credit enhancement may apply concurrently to two or more separate
Trusts or asset groups, without priority among such Trusts or asset
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groups, until the credit enhancement is exhausted. If applicable, such
Prospectus Supplement will identify the Trusts or asset groups to which such
credit enhancement relates and the manner of determining the amount of the
coverage provided thereby and of the application of such coverage to the
identified Trusts or asset groups.
Mortgage Pool Insurance Policies
If so specified in the related Prospectus Supplement, one or more
mortgage pool insurance policies (each, a "Mortgage Pool Insurance Policy")
insuring, subject to their provisions and certain limitations, against defaults
on the related Mortgage Loans will be obtained and maintained for the related
Series in an amount specified in such Prospectus Supplement. The issuer of any
such Mortgage Pool Insurance Policy (the "Pool Insurer") will be named in the
related Prospectus Supplement. A Mortgage Pool Insurance Policy for a Series
will not be a blanket policy against loss because claims thereunder may only be
made for particular defaulted Mortgage Loans and only upon satisfaction of
certain conditions precedent described in the related Prospectus Supplement. A
Mortgage Pool Insurance Policy generally will not cover losses due to a failure
to pay or denial of a claim under a Primary Mortgage Insurance Policy.
A Mortgage Pool Insurance Policy will generally not insure (and many
Primary Mortgage Insurance Policies may not insure) against Special Hazard
Losses or losses sustained by reason of a default arising from, among other
things, (i) fraud or negligence in the origination or servicing of a Mortgage
Loan, including misrepresentation by the borrower or persons involved in the
origination thereof, (ii) failure to construct Mortgaged Premises in accordance
with plans and specifications or (iii) a claim in respect of a defaulted
Mortgage Loan occurring when the Servicer of such Mortgage Loan, at the time of
default or thereafter, was not approved by the Pool Insurer. A failure of
coverage attributable to one of the foregoing events might result in a breach of
the representations and warranties of the Seller or Servicer and, in such event,
subject to certain limitations, might give rise to an obligation on the part of
the Seller or Servicer to purchase the defaulted Mortgage Loan if the breach
cannot be cured. See "ORIGINATION OF MORTGAGE LOANS -- Representations and
Warranties", see "SERVICING OF MORTGAGE LOANS -- General" and -- Maintenance of
Insurance Policies; Claims Thereunder and Other Realization Upon Defaulted
Mortgage Loans."
The original amount of coverage under any Mortgage Pool Insurance
Policy assigned to the Trust for a Series will be reduced over the life of the
Certificates of such Series by the aggregate dollar amount of claims paid less
the aggregate of the net amounts realized by the Pool Insurer upon disposition
of all foreclosed Mortgaged Premises covered thereby. The amount of claims paid
includes certain expenses incurred by the Servicer or the Master Servicer of the
defaulted Mortgage Loan, as well as accrued interest on delinquent Mortgage
Loans to the date of payment of the claim. The net amounts realized by the Pool
Insurer will depend primarily on the market value of the Mortgaged Premises
securing the defaulted Mortgage Loan. The market value of the Mortgaged Premises
will be determined by a variety of economic, geographic, social, environmental
and other factors and may be affected by matters that were unknown and could not
reasonably have been anticipated at the time the original Mortgage Loan was
made. If aggregate net claims paid under a Mortgage Pool Insurance Policy reach
the original policy limit, any further losses may affect adversely distributions
to holders of the Certificates of such Series. The original amount of coverage
under a Mortgage Pool Insurance Policy assigned to the Trust for a Series may
also be reduced or canceled to the extent each Rating Agency that provides, at
the request of the Depositor, a rating for the Certificates of such Series
confirms that such reduction will not result in a lowering or withdrawal of such
rating.
If so specified in the related Prospectus Supplement, a Mortgage Pool
Insurance Policy may insure against losses on mortgage loans that secure other
mortgage-backed securities or collateralized mortgage obligations; provided,
however, that any subsequent extension of coverage (and the corresponding
assignment of the Mortgage Pool Insurance Policy) to such other securities or
obligations does not, at the time of such extension, result in the downgrade or
withdrawal of any credit rating assigned, at the request of the Depositor, to
the outstanding Certificates of such Series.
Special Hazard Insurance Policies
If so specified in the related Prospectus Supplement, one or more
special hazard insurance policies (each, a "Special Hazard Insurance Policy")
insuring, subject to their provisions and certain limitations, against certain
losses not covered by Standard Hazard Insurance Policies will be obtained and
maintained for the related Series in an amount specified in such Prospectus
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Supplement. The issuer of any such Special Hazard Insurance Policy (the "Special
Hazard Insurer") will be named in the related Prospectus Supplement. A Special
Hazard Insurance Policy will, subject to the limitations described below,
protect the holders of the Certificates of such Series from (i) loss by reason
of damage to the Mortgaged Premises underlying defaulted Mortgage Loans caused
by certain hazards (including vandalism and earthquakes and, except where the
borrower is required to obtain flood insurance, floods and mudflows) not covered
by the Standard Hazard Insurance Policies with respect to such Mortgage Loans
and (ii) loss from partial damage to such Mortgaged Premises caused by reason of
the application of the coinsurance clause contained in such Standard Hazard
Insurance Policies. A Special Hazard Insurance Policy for a Series will not,
however, cover losses occasioned by war, nuclear reaction, nuclear or atomic
weapons, insurrection, normal wear and tear or certain other risks.
Subject to the foregoing limitations, the Special Hazard Insurance Policy
with respect to a Series will provide that, when there has been damage to the
Mortgaged Premises securing a defaulted Mortgage Loan and such damage is not
covered by the Standard Hazard Insurance Policy maintained by the borrower or
the Servicer or the Master Servicer with respect to such Mortgage Loan, the
Special Hazard Insurer will pay the lesser of (i) the cost of repair of such
Mortgaged Premises or (ii) upon transfer of such Mortgaged Premises to it, the
unpaid principal balance of such Mortgage Loan at the time of the acquisition of
such Mortgaged Premises, plus accrued interest to the date of claim settlement
(excluding late charges and penalty interest), and certain expenses incurred in
respect of such Mortgaged Premises. No claim may be validly presented under a
Special Hazard Insurance Policy unless (i) hazard insurance on the Mortgaged
Premises securing the defaulted Mortgage Loan has been kept in force and other
reimbursable protection, preservation and foreclosure expenses have been paid
(all of which must be approved in advance as necessary by the Special Hazard
Insurer and (ii) the insured has acquired title to the Mortgaged Premises as a
result of default by the borrower. If the sum of the unpaid principal amount
plus accrued interest and certain expenses is paid by the Special Hazard
Insurer, the amount of further coverage under the Special Hazard Insurance
Policy will be reduced by such amount less any net proceeds from the sale of the
Mortgaged Premises. Any amount paid as the cost of repair of the Mortgaged
Premises will reduce coverage by such amount.
The terms of the Agreement with respect to a Series will require the
Master Servicer to maintain the Special Hazard Insurance Policies for such
Series in full force and effect throughout the term of such Agreement, subject
to certain conditions contained therein, present claims thereunder on behalf of
the Depositor, the Trustee and the holders of the Certificates of such Series
for all losses not otherwise covered by the applicable Standard Hazard Insurance
Policies and take all reasonable steps necessary to permit recoveries on such
claims. See "SERVICING OF MORTGAGE LOANS." To the extent specified in the
Prospectus Supplement for a Series, a deposit may be made of cash, an
irrevocable letter of credit or any other instrument acceptable to each Rating
Agency that provides, at the request of the Depositor, a rating for the
Certificates of such Series in the related Trust to provide protection in lieu
of or in addition to that provided by a Special Hazard Insurance Policy.
If so specified in the related Prospectus Supplement, a Special Hazard
Insurance Policy may insure against losses on mortgage loans that secure other
mortgage-backed securities or collateralized mortgage obligations; provided,
however, that any subsequent extension of coverage (and the corresponding
assignment of the Special Hazard Insurance Policy) to any other Series or such
other securities or obligations does not, at the time of such extension, result
in the downgrade or withdrawal of the credit rating assigned, at the request of
the Depositor, to the outstanding Certificates of such Series.
Bankruptcy Bonds
If so specified in the related Prospectus Supplement, one or more
mortgagor bankruptcy bonds (each, a "Bankruptcy Bond") covering certain losses
resulting from proceedings under the federal Bankruptcy Code will be obtained
and maintained for the related Series in an amount specified in such Prospectus
Supplement. The issuer of any such Bankruptcy Bond will be named in the related
Prospectus Supplement. Each Bankruptcy Bond will cover certain losses resulting
from a reduction by a bankruptcy court of scheduled payments of principal and
interest on a Mortgage Loan or a reduction by such court of the principal amount
of a Mortgage Loan and will cover certain unpaid interest on the amount of such
a principal reduction from the date of the filing of a bankruptcy petition. To
the extent specified in the Prospectus Supplement for a Series, a deposit may be
made of cash, an irrevocable letter of credit or any other instrument acceptable
to each Rating Agency that provides, at the request of the Depositor, a rating
for the Certificates of such Series in the related Trust to provide protection
in lieu of or in addition to that provided by a Bankruptcy Bond. See "CERTAIN
LEGAL ASPECTS OF MORTGAGE LOANS -- Anti-Deficiency Legislation and Other
Limitations on Lenders."
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Reserve Funds
If so specified in the related Prospectus Supplement, cash, U.S. Treasury
securities, instruments evidencing ownership of principal or interest payments
thereon, letters of credit, surety bonds, demand notes, certificates of deposit
or a combination thereof in the aggregate amount specified in such Prospectus
Supplement will be deposited by the Depositor in one or more accounts (each, a
"Reserve Fund") established and maintained with the Trustee. In addition, if so
specified in the related Prospectus Supplement, a Reserve Fund may be funded
with all or a portion of the interest payments on the related Mortgage Assets
not needed to make required distributions. Such cash and the principal and
interest payments on such other investments will be used to enhance the
likelihood of timely payment of principal of, and interest on, or, if so
specified in such Prospectus Supplement, to provide additional protection
against losses in respect of, the assets in the related Trust, to pay the
expenses of such Trust or for such other purposes as may be specified in such
Prospectus Supplement. If a letter of credit is deposited with the Trustee, such
letter of credit will be irrevocable. Any instrument deposited therein will name
the Trustee as a beneficiary and will be issued by an entity acceptable to each
Rating Agency that provides, at the request of the Depositor, a rating for the
Certificates of such Series. Additional information with respect to such
instruments deposited in the Reserve Funds may be set forth in the related
Prospectus Supplement.
Other Credit Enhancement
If so specified in the Prospectus Supplement for a Series, the related
Trust may include, or the related Certificates may be entitled to the benefits
of, certain other assets including reserve accounts, insurance policies,
guaranties, surety bonds, letters of credit, guaranteed investment contracts or
similar arrangements (i) for the purpose of maintaining timely payments or
providing additional protection against losses on the assets included in such
Trust, (ii) for the purpose of paying administrative expenses, (iii) for the
purpose of establishing a minimum reinvestment rate on the payments made in
respect of such assets or principal payment rates on such assets, (iv) for the
purpose of guaranteeing timely distributions with respect to the Certificates or
(v) for such other purposes as may be specified in such Prospectus Supplement.
These arrangements may be in addition to or in substitution for any forms of
credit enhancement described in this Prospectus. Any such arrangement must be
acceptable to each Rating Agency that provides, at the request of the Depositor,
a rating for the Certificates of the related Series.
ORIGINATION OF MORTGAGE LOANS
General
As set forth in the related Prospectus Supplement, each Mortgage Loan
included in the Trust for a Series of Certificates will be originated by a
savings and loan association, savings bank, commercial bank, credit union,
insurance company or similar institution that is supervised and examined by a
federal or state authority. In originating a Mortgage Loan, the Originator will
follow either (i) its own credit approval process, to the extent that such
process conforms to underwriting standards generally acceptable to FNMA or
FHLMC, or (ii) credit, appraisal and underwriting standards and guidelines
approved by the Depositor. The underwriting guidelines with respect to loan
programs approved by the Depositor may be less stringent than those of FNMA or
FHLMC, primarily in that they generally may permit the borrower to have a higher
debt- to-income ratio and a larger number of derogatory credit items than do the
guidelines of FNMA or FHLMC. These underwriting guidelines are intended to
provide for the origination of single family mortgage loans for non-conforming
credits. A mortgage loan made to a "non-conforming credit" means a mortgage loan
that is ineligible for purchase by FNMA or FHLMC due to borrower credit
characteristics that do not meet FNMA or FHLMC underwriting guidelines,
including a loan made to a borrower whose creditworthiness and repayment ability
do not satisfy such FNMA or FHLMC underwriting guidelines or a borrower who may
have a record of major derogatory credit items such as default on a prior
mortgage loan, credit write-offs, outstanding judgments and prior bankruptcies.
Accordingly, Mortgage Loans underwritten pursuant to these guidelines are likely
to experience rates of delinquency and foreclosure that are higher, and may be
substantially higher, than mortgage loans originated in accordance with FNMA or
FHLMC underwriting guidelines.
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The underwriting standards are applied in a manner intended to comply
with applicable federal and state laws and regulations. The purpose of applying
these standards is to evaluate each prospective borrower's credit standing and
repayment ability and the value and adequacy of the related Mortgaged Premises
as collateral.
In general, a prospective borrower is required to complete a detailed
application designed to provide pertinent credit information. The prospective
borrower generally is required to provide a current list of assets as well as an
authorization for a credit report which summarizes the borrower's credit history
with merchants and lenders as well as any suits, judgments or bankruptcies that
are of public record. The borrower may also be required to authorize
verification of deposits at financial institutions where the borrower has demand
or savings accounts.
In determining the adequacy of the Mortgaged Premises as collateral, an
appraisal is made of each property considered for financing by a qualified
independent appraiser. The appraiser is required to inspect the property and
verify that it is in good repair and that construction, if new, has been
completed. The appraisal is based on the market value of comparable homes and,
if considered applicable by the appraiser, the estimated rental income of the
property and a replacement cost and analysis based on the current cost of
constructing a similar home. All appraisals generally are expected to conform to
FNMA or FHLMC appraisal standards then in effect.
Once all applicable employment, credit and property information is
received, a determination generally is made as to whether the prospective
borrower has sufficient monthly income available (i) to meet the borrower s
monthly obligations on the proposed mortgage loan (generally determined on the
basis of the monthly payments due in the year of origination) and other expenses
related to the Mortgaged Premises (such as property taxes and insurance
premiums) and (ii) to meet other financial obligations and monthly living
expenses. The underwriting standards applied, particularly with respect to the
level of income and debt disclosure on the application and verification, may be
adjusted in appropriate cases where factors such as low loan- to-value ratios or
other favorable compensating factors exist.
A prospective borrower applying for a loan pursuant to the full
documentation program is required to provide, in addition to the above, a
statement of income, expenses and liabilities (existing or prior). An employment
verification is obtained from an independent source (typically the prospective
borrower's employer), which verification generally reports the length of
employment with that organization, the prospective borrower s current salary and
whether it is expected that the prospective borrower will continue such
employment in the future. If a prospective borrower is self-employed, the
borrower may be required to submit copies of signed tax returns. For other than
self-employed borrowers, income verification may be accomplished by W-2 forms or
pay stubs that indicate year to date earnings.
Under the limited documentation program or stated income program,
greater emphasis is placed on the value and adequacy of the Mortgaged Premises
as collateral rather than on credit underwriting, and certain credit
underwriting documentation concerning income and employment verification is
therefore waived. Accordingly, the maximum permitted loan-to-value ratios for
loans originated under such program are generally lower than those permitted for
other similar loans originated pursuant to the full documentation program.
Representations and Warranties
The Depositor generally will acquire the Mortgage Loans from SMI. SMI
will make certain customary representations and warranties with respect to the
Mortgage Loans in the sales agreement by which SMI transfers its interest in the
Mortgage Loans to the Depositor. SMI will represent and warrant, among other
things, (i) that each Mortgage Loan has been originated in compliance with all
applicable laws, rules and regulations, (ii) that each Primary Mortgage
Insurance Policy is issued by the related mortgage insurer, (iii) that each note
and Security Instrument has been executed and delivered by the borrower and the
Security Instrument has been duly recorded where the Mortgage Premises are
located in order to make effective lien on the related Mortgaged Premises and
(iv) that upon foreclosure on the Mortgage Premises, the holders of the Mortgage
Loan will be able to deliver good and merchantable title to such Mortgaged
Premises. If so specified in the Prospectus Supplement for a Series, SMI is
required to submit to the Trustee with each Mortgage Loan a mortgagee title
insurance policy, title insurance binder, preliminary title report, or other
satisfactory evidence of title insurance. If a preliminary title report is
delivered initially, SMI is required to deliver a final title insurance policy
or satisfactory evidence of the existence of such a policy.
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If SMI breaches a representation or warranty made with respect to a
Mortgage Loan or if any principal document executed by the borrower relating to
a Mortgage Loan is found to be defective in any material respect and such breach
or defect cannot be cured within the number of days specified in the Agreement,
the Trustee may require SMI to purchase such Mortgage Loan from the related
Trust upon deposit with the Trustee of funds equal to the then unpaid principal
balance of such Mortgage Loan plus accrued interest thereon at the related
Mortgage Interest Rate through the end of the month in which the purchase
occurs. In the event of a breach by SMI of a representation or warranty with
respect to a Mortgage Loan or the delivery by SMI to the Trustee of a materially
defective document with respect to a Mortgage Loan, SMI may under certain
circumstances, in lieu of repurchasing such Mortgage Loan, substitute a Mortgage
Loan having characteristics substantially similar to those of the defective
Mortgage Loan. SMI s obligation to purchase a Mortgage Loan will not be
guaranteed by the Depositor or any other party.
SERVICING OF MORTGAGE LOANS
General
For each Trust that includes Mortgage Loans, one or more Servicers,
which may include an affiliate of the Depositor, will perform certain customary
servicing functions with respect to such Mortgage Loans pursuant to one or more
servicing agreements (each, a "Servicing Agreement") which will be assigned to
the Trustee. If specified in the Prospectus Supplement for a Series, a master
servicer (the "Master Servicer"), which may include an affiliate of the
Depositor, will perform, directly or indirectly through one or more
sub-servicers, certain administrative and supervisory functions with respect to
such Mortgage Loans. The Master Servicer is deemed to be a Servicer for purposes
of the following discussion to the extent the Master Servicer is directly
servicing any of the Mortgage Loans in a Trust. The Servicers will be entitled
to withhold their servicing fees and certain other fees and charges from
remittances of payments received on Mortgage Loans serviced by them. If
specified in the Prospectus Supplement for a Series, a special servicer (a
"Special Servicer") may be appointed to service, make certain decisions with
respect to and take various actions with respect to delinquent or defaulted
Mortgage Loans or related REO Properties. The related Prospectus Supplement will
describe the duties and obligations of the Special Servicer, if any. A Special
Servicer will be entitled to a special servicing fee.
Each Servicer generally will be approved or will utilize a sub-servicer
that is approved by FNMA or FHLMC as a servicer of mortgage loans and must be
approved by the Master Servicer. In determining whether to approve a Servicer,
the Depositor will review the credit of the Servicer and, if necessary for the
approval of the Servicer, the sub-servicer, including capitalization ratios,
liquidity, profitability and other similar items that indicate ability to
perform financial obligations. In addition, the Depositor will review the
Servicer's and, if necessary, the sub-servicer s servicing record and will
evaluate the ability of the Servicer and, if necessary, the sub-servicer to
conform with required servicing procedures. Generally, the Depositor will not
approve a Servicer unless either the Servicer or the sub-servicer, if any, (i)
has serviced conventional mortgage loans for a minimum of two years, (ii)
maintains a loan servicing portfolio of at least $300,000,000 and (iii) has
tangible net worth (determined in accordance with generally accepted accounting
principles) of at least $3,000,000. The Depositor will continue to monitor on a
regular basis the credit and servicing performance of the Servicer and, to the
extent the Servicer does not meet the foregoing requirements, the sub-servicer,
if any.
The duties to be performed by the Servicers with respect to the
Mortgage Loans included in the Trust for each Series will include the
calculation, collection and remittance of principal and interest payments on the
Mortgage Loans, the administration of mortgage escrow accounts, as applicable,
the collection of insurance claims, the administration of foreclosure procedures
and, if necessary, the advance of funds to the extent certain payments are not
made by the borrowers and are recoverable from late payments made by the
borrowers, under the applicable insurance policies with respect to such Series
or from proceeds of the liquidation of such Mortgage Loans. Each Servicer also
will provide such accounting and reporting services as are necessary to enable
the Master Servicer to provide required information to the Depositor and the
Trustee with respect to such Mortgage Loans. Each Servicer is entitled to (i) a
periodic servicing fee equal to a specified percentage of the outstanding
principal balance of each Mortgage Loan serviced by such Servicer and (ii)
certain other fees, including, but not limited to, late payments, conversion or
modification fees and assumption fees. Certain servicing obligations of a
Servicer may be delegated to an approved sub-servicer; provided, however, that
the Servicer remains fully
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responsible and liable for all its obligations under the Servicing Agreement.
The rights of the Depositor under each Servicing Agreement with respect to a
Series will be assigned to the Trust for such Series.
Payments on Mortgage Loans
Each Servicing Agreement with respect to a Series will require the
related Servicer to establish and maintain one or more separate, insured (to the
available limits) custodial accounts (collectively, the "Custodial Account")
into which the Servicer will be required to deposit on a daily basis payments of
principal and interest received with respect to Mortgage Loans serviced by such
Servicer included in the Trust for such Series. To the extent deposits in each
Custodial Account are required to be insured by the FDIC, if at any time the
sums in any Custodial Account exceed the limits of insurance on such account,
the Servicer will be required within one business day to withdraw such excess
funds from such account and remit such amounts (i) to a custodial account
maintained by the Trustee or at a separate institution (the "Servicer Custodial
Account") or (ii) to the Trustee or the Master Servicer for deposit in either
the Asset Proceeds Account for such Series or a custodial account maintained by
the Master Servicer (the "Master Servicer Custodial Account"). The amount on
deposit in any Servicer Custodial Account, Asset Proceeds Account or Master
Servicer Custodial Account will be invested in or collateralized as described
herein.
Each Servicing Agreement with respect to a Series will require the
related Servicer, not later than the day of the month specified in such
Servicing Agreement (each, a "Remittance Date"), to remit to the Master Servicer
Custodial Account (i) amounts representing scheduled installments of principal
and interest on the Mortgage Loans included in the Trust for such Series
received or advanced by the Servicer that were due during the related Due Period
and (ii) principal prepayments, insurance proceeds, guarantee proceeds and
liquidation proceeds (including amounts paid in connection with the withdrawal
from the related Trust of defective Mortgage Loans or the purchase from the
related Trust of Converted Mortgage Loans) received during the Prepayment Period
specified in such Servicing Agreement, with interest to the date of prepayment
or liquidation (subject to certain limitations); provided, however, that each
Servicer may deduct from such remittance all applicable servicing fees, certain
insurance premiums, amounts required to reimburse any unreimbursed Advances and
any other amounts specified in the related Servicing Agreement. On or before
each Distribution Date, the Master Servicer will withdraw from the Master
Servicer Custodial Account and remit to the Asset Proceeds Account those amounts
available for distribution on such Distribution Date. In addition, there will be
deposited in the Asset Proceeds Account for such Series any Advances of
principal and interest made by the Master Servicer or the Trustee pursuant to
the Agreement to the extent such amounts were not advanced by the Servicer.
Prior to each Distribution Date for a Series, the Master Servicer will
furnish to the Trustee a statement setting forth certain information with
respect to the Mortgage Loans included in the Trust for such Series.
Advances
If so specified in the Prospectus Supplement for a Series, each
Servicing Agreement with respect to such Series will provide that the related
Servicer will be obligated to advance funds (each, an "Advance") to cover, to
the extent that such amounts are deemed to be recoverable from any subsequent
payments on the Mortgage Loans, (i) delinquent payments of principal or interest
on such Mortgage Loans, (ii) delinquent payments of taxes, insurance premiums or
other escrowed items and (iii) foreclosure costs, including reasonable
attorney's fees. The failure of a Servicer to make any required Advance under
the related Servicing Agreement constitutes a default under such Servicing
Agreement for which the Servicer may be terminated. Upon a default by the
Servicer, the Master Servicer or the Trustee may, if so provided in the
Agreement, be required to make Advances to the extent necessary to make required
distributions on certain Certificates, provided that such party deems such
amounts to be recoverable.
As specified in the related Prospectus Supplement, the advance
obligation of the Master Servicer may be further limited to an amount specified
in the Agreement that has been approved by each Rating Agency that provides, at
the request of the Depositor, a rating for the Certificates of such Series. Any
required Advances by a Servicer, the Master Servicer or the Trustee, as the case
may be, must be deposited into the applicable Custodial Account or Master
Servicer Custodial Account or into the Asset Proceeds Account and will be due
not later than the Distribution Date to which such delinquent payment relates.
Amounts so advanced by a Servicer, the Master Servicer or the Trustee, as the
case may be, will be reimbursable out of future payments on the
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Mortgage Loans, insurance proceeds or liquidation proceeds of the Mortgage Loans
for which such amounts were advanced. If an Advance made by a Servicer, the
Master Servicer or the Trustee, as the case may be, later proves to be
unrecoverable, such Servicer, the Master Servicer or the Trustee, as the case
may be, will be entitled to reimbursement from funds in the Asset Proceeds
Account prior to the distribution of payments to the Certificateholders.
Any Advances made by a Servicer, the Master Servicer or the Trustee
with respect to Mortgage Loans included in the Trust for any Series are intended
to enable the Trustee to make timely payment of the scheduled distributions on
the Certificates of such Series. Neither the Servicer or the Master Servicer
will insure or guarantee the Certificates of any Series or the Mortgage Loans
included in the Trust for any Series, and their obligations to advance for
delinquent payments will be limited to the extent that such Advances will be
recoverable out of future payments on the Mortgage Loans, insurance proceeds or
liquidation proceeds of the Mortgage Loans for which such amounts were advanced.
Collection and Other Servicing Procedures
Each Servicing Agreement with respect to a Series will require the
related Servicer to make reasonable efforts to collect all payments required
under the Mortgage Loans included in the related Trust and, consistent with such
Servicing Agreement and the applicable insurance policies with respect to each
Mortgage Loan, to follow such collection procedures as it normally would follow
with respect to mortgage loans serviced for FNMA.
The Mortgage Note or Security Instrument used in originating a Mortgage
Loan may contain a "due-on-sale" clause. See "CERTAIN LEGAL ASPECTS OF MORTGAGE
LOANS -- "Due-On-Sale" Clauses." The Servicer will be required to use reasonable
efforts to enforce "due-on-sale" clauses with respect to any Mortgage Note or
Security Instrument containing such a clause, provided that the coverage of any
applicable insurance policy will not be adversely affected thereby. In any case
in which Mortgaged Premises have been or are about to be conveyed by the
borrower and the "due-on-sale" clause has not been enforced or the related
Mortgage Note is by its terms assumable, the Servicer will be authorized to take
or enter into an assumption agreement from or with the person to whom such
Mortgaged Premises have been or are about to be conveyed, if such person meets
certain loan underwriting criteria, including the criteria necessary to maintain
the coverage provided by the applicable Primary Mortgage Insurance Policies or
if otherwise required by law. If the Servicer enters into an assumption
agreement in connection with the conveyance of any such Mortgaged Premises, the
Servicer will release the original borrower from liability upon the Mortgage
Loan and substitute the new borrower as obligor thereon. In no event may an
assumption agreement permit a decrease in the Mortgage Interest Rate or an
increase in the term of a Mortgage Loan. Fees collected for entering into an
assumption agreement will be retained by the Servicer as additional servicing
compensation.
Primary Mortgage Insurance Policies
Each conventional Mortgage Loan that has an original loan-to-value
ratio of greater than 80% will, to the extent specified in the related
Prospectus Supplement, be covered by a primary mortgage insurance policy (a
"Primary Mortgage Insurance Policy") remaining in force until the principal
balance of such Mortgage Loan is reduced to 80% of the original fair market
value of the related Mortgaged Premises or, with the consent of the Master
Servicer and the mortgage insurer, after the related policy has been in effect
for more than two years if the loan-to-value ratio with respect to such Mortgage
Loan has declined to 80% or less based upon the current fair market value of
such Mortgaged Premises. Certain other Mortgage Loans may also be covered by
Primary Mortgage Insurance Policies to the extent specified in the related
Prospectus Supplement.
If so specified in the Prospectus Supplement for a Series, the amount
of a claim for benefits under a Primary Mortgage Insurance Policy covering a
Mortgage Loan included in the related Trust (the "Mortgage Insurance Loss") will
consist of the insured portion of the unpaid principal balance of the covered
Mortgage Loan plus accrued and unpaid interest on such unpaid principal balance
and reimbursement of certain expenses, less (i) all rents or other payments
collected or received by the insured (other than the proceeds of hazard
insurance) that are derived from or are in any way related to the related
Mortgaged Premises, (ii) hazard insurance proceeds in excess of the amount
required to restore such Mortgaged Premises and which have not been applied to
the payment of such Mortgage Loan, (iii) amounts expended but not approved by
the mortgage insurer, (iv) claim payments previously made by the mortgage
insurer and (v) unpaid premiums. If so specified in the Prospectus
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Supplement for a Series, the mortgage insurer will be required to pay to the
insured either (i) the Mortgage Insurance Loss or (ii) at its option under
certain of the Primary Mortgage Insurance Policies, the sum of the delinquent
scheduled payments plus any advances made by the insured, both to the date of
the claim payment, and, thereafter, scheduled payments in the amount that would
have become due under the Mortgage Loan if it had not been discharged plus any
advances made by the insured until the earlier of (A) the date the Mortgage Loan
would have been discharged in full if the default had not occurred and (B) the
date of an approved sale. Any rents or other payments collected or received by
the insured which are derived from or are in any way related to the Mortgaged
Premises securing such Mortgage Loan will be deducted from any claim payment.
Standard Hazard Insurance Policies
Each Servicing Agreement with respect to a Series will require the
related Servicer to cause to be maintained a Standard Hazard Insurance Policy
covering each Mortgaged Premises securing each Mortgage Loan covered by such
Servicing Agreement. Each Standard Hazard Insurance Policy is required to cover
an amount at least equal to the lesser of (i) the outstanding principal balance
of the related Mortgage Loan or (ii) 100% of the replacement value of the
improvements on the related Mortgaged Premises. All amounts collected by the
Servicer or the Master Servicer under any Standard Hazard Insurance Policy (less
amounts to be applied to the restoration or repair of the Mortgaged Premises and
other amounts necessary to reimburse the Servicer or the Master Servicer for
previously incurred advances or approved expenses, which may be retained by the
Servicer or the Master Servicer) will be deposited to the applicable Custodial
Account maintained with respect to such Mortgage Loan or the Asset Proceeds
Account. See " -- Payments on Mortgage Loans."
The Standard Hazard Insurance Policies will provide for coverage at
least equal to the applicable state standard form of fire insurance policy with
extended coverage. In general, the standard form of fire and extended coverage
policy will cover physical damage to, or destruction of, the improvements on the
Mortgaged Premises caused by fire, lightning, explosion, smoke, windstorm, hail,
riot, strike and civil commotion, subject to the conditions and exclusions
specified in each policy. Because the Standard Hazard Insurance Policies will be
underwritten by different insurers and will cover Mortgaged Premises located in
different states, such policies will not contain identical terms and conditions.
The basic terms thereof, however, generally will be determined by state law and
generally will be similar. Standard Hazard Insurance Policies typically will not
cover physical damage resulting from war, revolution, governmental actions,
floods and other water-related causes, earth movement (including earthquakes,
landslides and mudflows), nuclear reaction, wet or dry rot, vermin, rodents,
insects or domestic animals, theft or, in certain cases, vandalism. The
foregoing list is merely indicative of certain kinds of uninsured risks and is
not intended to be all-inclusive. If Mortgaged Premises are located in a flood
area identified by HUD pursuant to the National Flood Insurance Act of 1968, as
amended, the applicable Servicing Agreement will require that the Servicer or
the Master Servicer, as the case may be, cause to be maintained flood insurance
with respect to such Mortgaged Premises. The Depositor may acquire one or more
Special Hazard Insurance Policies covering certain of the uninsured risks
described above. See "CREDIT ENHANCEMENT -- Special Hazard Insurance Policies."
The Standard Hazard Insurance Policies covering Mortgaged Premises
securing Mortgage Loans typically will contain a "coinsurance" clause which, in
effect, will require the insured at all times to carry insurance of a specified
percentage (generally 80% to 90%) of the full replacement value of the
dwellings, structures and other improvements on the Mortgaged Premises in order
to recover the full amount of any partial loss. If the insured s coverage falls
below this specified percentage, such clause will provide that the insurer's
liability in the event of partial loss will not exceed the greater of (i) the
actual cash value (the replacement cost less physical depreciation) of the
dwellings, structures and other improvements damaged or destroyed or (ii) such
proportion of the loss, without deduction for depreciation, as the amount of
insurance carried bears to the specified percentage of the full replacement cost
of such dwellings, structures and other improvements.
A Servicer may satisfy its obligation to provide a Standard Hazard
Insurance Policy with respect to the Mortgage Loans it services by obtaining and
maintaining a blanket policy insuring against fire, flood and hazards of
extended coverage on all of such Mortgage Loans, to the extent that (i) such
policy names the Servicer as loss payee and (ii) such policy provides coverage
in an amount equal to the aggregate unpaid principal balance on the Mortgage
Loans without co-insurance. If the blanket policy contains a deductible clause
and there is a loss not covered by the blanket policy that would have been
covered by a Standard Hazard Insurance Policy covering the related Mortgage
Loan, then the Servicer will remit to the Master Servicer
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from the Servicer's own funds the difference between the amount paid under the
blanket policy and the amount that would have been paid under a Standard Hazard
Insurance Policy covering such Mortgage Loan.
Any losses incurred with respect to Mortgage Loans included in the
Trust for a Series due to uninsured risks (including earthquakes, landslides,
mudflows and floods) or insufficient insurance proceeds may reduce the value of
the assets included in the Trust for such Series to the extent such losses are
not covered by a Special Hazard Insurance Policy for such Series and could
affect distributions to holders of the Certificates of such Series.
Maintenance of Insurance Policies; Claims Thereunder and Other Realization Upon
Defaulted Mortgage Loans
The Master Servicer or Trustee may be required to maintain with respect
to a Series one or more Mortgage Pool Insurance Policies, Special Hazard
Insurance Policies or Bankruptcy Bonds in full force and effect throughout the
term of the related Trust, subject to payment of the applicable premiums. The
terms of any such policy or bond and any requirements in connection therewith
applicable to any Servicer or Master Servicer will be described in the related
Prospectus Supplement. If any such Mortgage Pool Insurance Policy, Special
Hazard Insurance Policy or Bankruptcy Bond is canceled or terminated for any
reason (other than the exhaustion of total policy coverage), the Master Servicer
or Trustee will be obligated to obtain from another insurer a comparable
replacement policy with a total coverage which is equal to the then existing
coverage (or a lesser amount if each Rating Agency that provides, at the request
of the Depositor, a rating for the Certificates of such Series confirms that
such lesser amount will not impair the rating on such Certificates) of such
Mortgage Pool Insurance Policy, Special Hazard Insurance Policy or Bankruptcy
Bond. If, however, the cost of any such replacement policy or bond is greater
than the cost of the policy or bond which has been terminated, then the amount
of the coverage will be reduced to a level such that the applicable premium will
not exceed the cost of the premium for such terminated policy or bond or such
replacement policy or other credit enhancement may be secured at such increased
cost, so long as such increase in cost will not adversely affect amounts
available to make payments of principal or interest on the Certificates.
If any Mortgaged Premises securing a defaulted Mortgage Loan included
in the Trust for a Series is damaged and the proceeds, if any, from the related
Standard Hazard Insurance Policy or any Special Hazard Insurance Policy are
insufficient to restore the damaged Mortgaged Premises to the condition
necessary to permit recovery under the related Mortgage Pool Insurance Policy,
the Servicer will not be required to expend its own funds to restore the damaged
Mortgaged Premises unless it determines that such expenses will be recoverable
to it through insurance proceeds or liquidation proceeds. Each Servicing
Agreement and the Agreement with respect to a Series will require the Servicer
or the Master Servicer, as the case may be, to present claims to the insurer
under any insurance policy applicable to the Mortgage Loans included in the
related Trust and to take such reasonable steps as are necessary to permit
recovery under such insurance policies with respect to defaulted Mortgage Loans
or losses on the Mortgaged Premises securing the Mortgage Loans.
If recovery under any applicable insurance policy is not available, the
Servicer or the Master Servicer nevertheless will be obligated to follow
standard practices and procedures to realize upon such defaulted Mortgage Loan.
The Servicer or the Master Servicer will sell the Mortgaged Premises pursuant to
foreclosure, or a trustee's sale or, in the event a deficiency judgment is
available against the borrower or another person, proceed to seek recovery of
the deficiency against the appropriate person. To the extent that the proceeds
of any such liquidation proceeding are less than the unpaid principal balance of
the defaulted Mortgage Loan, there will be a reduction in the value of the
assets of the Trust for the related Series such that holders of the Certificates
of such Series may not receive distributions of principal and interest on such
Certificates in full. See "CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS --
Anti-Deficiency Legislation and Other Limitations on Lenders."
Modification of Mortgage Loans
With respect to a Mortgage Loan on which a material default has
occurred or a payment default is imminent, the related Servicer may enter into a
forbearance or modification agreement with the borrower. The terms of any such
forbearance or modification agreement may affect the amount and timing of
principal and interest payments on the Mortgage Loan and, consequently, may
affect the amount and timing of payments on one or more
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Classes of the related Series of Certificates. For example, a modification
agreement that results in a lower Mortgage Interest Rate would lower the
Pass-Through Rate of any related Class of Certificates that accrues interest at
a rate based on the weighted average Net Rate of the Mortgage Loans.
As a condition to any modification or forbearance related to any
Mortgage Loan or to the substitution of a Mortgage Loan, the Servicer and, if
required, the Master Servicer, are required to determine, in their reasonable
business judgment, that such modification, forbearance or substitution will
maximize the recovery on such Mortgage Loan on a present value basis. In
determining whether to grant a forbearance or a modification, the Servicer and,
if required, the Master Servicer will take into account the willingness of the
borrower to perform on the Mortgage Loan, the general condition of the Mortgaged
Premises and the likely proceeds from the foreclosure and liquidation of the
Mortgaged Premises.
The Servicers will not exercise any discretion with respect to changes
in any of the terms of any Mortgage Loan (including, but not limited to, the
Mortgage Interest Rate and whether the term of the Mortgage Loan is extended for
a further period and the specific provisions applicable to such extension) or
the disposition of REO Properties without the consent of either the Master
Servicer or the Trustee.
Evidence as to Servicing Compliance
Within 120 days after the end of each of its fiscal years, each
Servicer must provide the Master Servicer or the Trustee with a copy of its
audited financial statements for such year and a statement from the firm of
independent public accountants that prepared such financial statements to the
effect that, in preparing such statements, it reviewed the results of the
Servicer's servicing operations in accordance with the Uniform Single-Audit
Procedures for mortgage banks developed by the Mortgage Bankers Association. In
addition, the Servicer will be required to deliver an officer's certificate to
the effect that it has fulfilled its obligations under the Servicing Agreement
during the preceding fiscal year or identifying any ways in which it has failed
to fulfill its obligations during such fiscal year and the steps that have been
taken to correct such failure.
The Master Servicer or the Trustee will review, on an annual basis, the
performance of each Servicer under the related Servicing Agreement and the
status of any fidelity bond and errors and omissions policy required to be
maintained by such Servicer under such Servicing Agreement.
Events of Default and Remedies
If so specified in the Prospectus Supplement for a Series, events of
default under the Servicing Agreement in respect of such Series will consist of
(i) any failure by the Servicer to remit to the Master Servicer Custodial
Account any payment required to be made by a Servicer under the terms of the
Servicing Agreement that is not remedied within at least one business day; (ii)
any failure on the part of a Servicer to observe or perform in any material
respect any of its other covenants or agreements contained in the Servicing
Agreement that continues unremedied for a specified period after the giving of
written notice of such failure to the Servicer by the Master Servicer; (iii)
certain events of insolvency, readjustment of debt, marshaling of assets and
liabilities or similar proceedings regarding the Servicer; or (iv) certain
actions by or on behalf of the Servicer indicating its insolvency or inability
to pay its obligations.
The Master Servicer or the Trustee will have the right pursuant to each
Servicing Agreement to terminate the related Servicer upon the occurrence of an
event of default under such Servicing Agreement. In the event of such
termination, the Master Servicer will appoint a substitute Servicer (which may
be the Master Servicer or the Trustee) (subject to written confirmation by each
Rating Agency that provides, at the request of the Depositor, a rating for the
Certificates of the related Series that such appointment will not adversely
effect the ratings then in effect on the Certificates). Any successor servicer,
including the Master Servicer or the Trustee, will be entitled to compensation
arrangements similar to those provided to the Servicer.
Master Servicer Duties
If so specified in the Prospectus Supplement for a Series, the Master
Servicer will (i) administer and supervise the performance by each Servicer of
its duties and responsibilities under the related Servicing Agreement, (ii)
maintain any insurance policies (other than property specific insurance
policies) providing coverage for losses on the Mortgage Loans for such Series,
(iii) calculate amounts payable to Certificateholders on each Distribution Date,
(iv) prepare periodic reports to the Trustee or the Certificateholders with
respect to the foregoing matters, (v) prepare federal and state tax and
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information returns and (vi) prepare reports, if any, required under the
Securities Exchange Act of 1934, as amended. In addition, the Master Servicer
will receive, review and evaluate all reports, information and other data
provided by each Servicer to enforce the provisions of the related Servicing
Agreement, to monitor each Servicer's servicing activities, to reconcile the
results of such monitoring with information provided by the Servicer and to make
corrective adjustments to records of the Servicer and the Master Servicer, as
appropriate. The Master Servicer may engage various independent contractors to
perform certain of its responsibilities; provided, however, that the Master
Servicer remains fully responsible and liable for all its obligations under each
Agreement (other than those specifically undertaken by a Special Servicer).
The Master Servicer will be entitled to a monthly master servicing fee
applicable to each Mortgage Loan expressed as a fixed percentage of the
remaining Scheduled Principal Balance of such Mortgage Loan.
The Master Servicer or the Trustee may terminate a Servicer who has
failed to comply with its covenants or breached one or more of its
representations and warranties contained in the related Servicing Agreement.
Upon termination of a Servicer by the Master Servicer or the Trustee, the Master
Servicer will assume certain servicing obligations of the terminated Servicer
or, at its option, may appoint a substitute Servicer acceptable to the Trustee
to assume the servicing obligations of the terminated Servicer. The Master
Servicer's obligation to act as a Servicer following the termination of a
Servicer will not require the Master Servicer to (i) purchase Mortgage Loans
from a Trust due to a breach by the Servicer of a representation or warranty
under the related Servicing Agreement, (ii) purchase from the Trust any
Converted Mortgage Loan or (iii) advance payments of principal and interest on a
delinquent Mortgage Loan in excess of the Master Servicer's independent advance
obligation under the related Agreement. The Master Servicer for a Series may
resign from its obligations and duties under the Agreement with respect to such
Series, but no such resignation will become effective until the Trustee or a
successor master servicer has assumed the Master Servicer's obligations and
duties. If specified in the Prospectus Supplement for a Series, the Depositor
may appoint a stand-by Master Servicer, which will assume the obligations of the
Master Servicer upon a default by the Master Servicer.
Special Servicing Agreement
The Master Servicer may appoint a Special Servicer to undertake certain
responsibilities of the Servicer with respect to certain defaulted Mortgage
Loans securing a Series. The Special Servicer may engage various independent
contractors to perform certain of its responsibilities; provided, however, that
the Special Servicer must remain fully responsible and liable for all its
responsibilities under the special servicing agreement (the "Special Servicing
Agreement"). As may be further specified in the related Prospectus Supplement,
the Special Servicer, if any, may be entitled to various fees, including, but
not limited to, (i) a monthly engagement fee applicable to each Mortgage Loan or
related REO Properties as of the first day of the immediately preceding Due
Period, (ii) a special servicing fee expressed as a fixed percentage of the
remaining Scheduled Principal Balance of each specially serviced Mortgage Loan
or related REO Properties, or (iii) a performance fee applicable to each
liquidated Mortgage Loan based upon the related liquidation proceeds.
THE AGREEMENT
The following summaries describe the material provisions common to each
Series of Certificates. The summaries do not purport to be complete and are
subject to the related Prospectus Supplement and the Agreement with respect to
such Series. The material provisions of a specific Agreement will be further
described in the related Prospectus Supplement. When particular provisions or
terms used in the Agreement are referred to, the actual provisions (including
definitions of terms) are incorporated by reference as part of such summaries.
The Trustee
The Trustee under each Agreement will be named in the related
Prospectus Supplement. The Trustee must be a corporation or a national banking
association organized under the laws of the United States or any state thereof
and authorized under the laws of the jurisdiction in which it is organized to
have corporate trust powers. The Trustee must also have combined capital and
surplus of at least $50,000,000 and be subject to regulation and examination by
state or federal regulatory authorities. Although the Trustee may not be an
affiliate of the Depositor or the Master Servicer, either the Depositor or the
Master Servicer may maintain normal banking relations with the Trustee if the
Trustee is a depository institution.
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The Trustee may resign at any time, in which event the Depositor will
be obligated to appoint a successor Trustee. The Depositor will also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Agreement or if the Trustee becomes insolvent. The Trustee may also be removed
at any time by the holders of outstanding Certificates of the related Series
entitled to at least 51% (or such other percentage as may be specified in the
related Prospectus Supplement) of the voting rights of such Series. Certificate
Insurers may obtain the right to exercise all voting rights of holders of
Certificates. Any resignation or removal of the Trustee and appointment of a
successor Trustee will not become effective until acceptance of the appointment
by the successor Trustee.
Administration of Accounts
Funds deposited in or remitted to the Asset Proceeds Account, any
Reserve Fund or any other funds or accounts for a Series are to be invested by
the Trustee, as directed by the Depositor, in certain eligible investments
("Permitted Investments"), which may include (i) obligations of the United
States or any agency thereof provided such obligations are backed by the full
faith and credit of the United States, (ii) within certain limitations,
securities bearing interest or sold at a discount issued by any corporation,
which securities are rated in the rating category required to support the then
applicable rating assigned to such Series, (iii) commercial paper which is then
rated in the commercial paper rating category required to support the then
applicable rating assigned to such Series, (iv) demand and time deposits,
certificates of deposit, bankers acceptances and federal funds sold by any
depository institution or trust company incorporated under the laws of the
United States or of any state thereof, provided that either the senior debt
obligations or commercial paper of such depository institution or trust company
(or the senior debt obligations or commercial paper of the parent company of
such depository institution or trust company) are then rated in the rating
category required to support the then applicable rating assigned to such Series,
(v) demand and time deposits and certificates of deposit issued by any bank or
trust company or savings and loan association and fully insured by the Federal
Deposit Insurance Corporation (the "FDIC"), (vi) guaranteed reinvestment
agreements issued by any insurance company, corporation or other entity
acceptable to each Rating Agency that provides, at the request of the Depositor,
a rating for the Certificates of such Series at the time of issuance of such
Series and (vii) certain repurchase agreements with respect to United States
government securities.
Permitted Investments with respect to a Series will include only
obligations or securities that mature on or before the date on which the Asset
Proceeds Account, Reserve Fund and other funds or accounts for such Series are
required or may be anticipated to be required to be applied for the benefit of
the holders of the Certificates of such Series. Any income, gain or loss from
such investments for a Series will be credited or charged to the appropriate
fund or account for such Series. In general, reinvestment income from Permitted
Investments will not accrue for the benefit of the Certificateholders of such
Series. If a reinvestment agreement is obtained with respect to a Series, the
related Agreement will require the Trustee to invest funds deposited in the
Asset Proceeds Account and any Reserve Fund or other fund or account for such
Series pursuant to the terms of the reinvestment agreement.
Reports to Certificateholders
Concurrently with each distribution on the Certificates of any Series,
there will be mailed to the holders of such Certificates a statement generally
setting forth, to the extent applicable to such Series, among other things: (i)
the aggregate amount of such distribution allocable to principal, separately
identifying the amount allocable to each Class of Certificates; (ii) the
aggregate amount of such distribution allocable to interest, separately
identifying the amount allocable to each Class of Certificates; (iii) the
aggregate principal balance of each Class of Certificates after giving effect to
distributions on the related Distribution Date; (iv) if applicable, the amount
otherwise distributable to any Class of Certificates that was distributed to any
other Class of Certificates; (v) if any Class of Certificates has priority in
the right to receive principal prepayments, the amount of principal prepayments
in respect of the related Mortgage Assets; and information regarding the levels
of delinquencies and losses on the Mortgage Loans. Customary information deemed
necessary for Certificateholders to prepare their tax returns will be furnished
annually.
Events of Default and Remedies
If so specified in the Prospectus Supplement for a Series, events of
default under the related Agreement will consist of (i) any default in the
performance or breach of any covenant or warranty of the Master Servicer under
such Agreement which continues unremedied for a specified period after the
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giving of written notice of such failure to the Master Servicer by the Trustee
or by the holders of Certificates entitled to at least 25% of the aggregate
voting rights, (ii) any failure by the Master Servicer to make required Advances
with respect to delinquent Mortgage Loans in the related Trust, (iii) certain
events of insolvency, readjustment of debt, marshaling of assets and liabilities
or similar proceedings regarding the Master Servicer, if any, and (iv) certain
actions by or on behalf of the Master Servicer indicating its insolvency or
inability to pay its obligations.
So long as an event of default by the Master Servicer under an
Agreement remains unremedied, the Trustee may, and, at the direction of the
holders of outstanding Certificates of a Series entitled to at least 51% of the
voting rights, the Trustee will, terminate all the rights and obligations of the
Master Servicer under the related Agreement, except that the holders of
Certificates may not direct the Trustee to terminate the Master Servicer for its
failure to make Advances. Upon termination, the Trustee will succeed to all the
responsibilities, duties and liabilities of the Master Servicer under such
Agreement (except that if the Trustee is prohibited by law from obligating
itself to make Advances regarding delinquent Mortgage Loans, then the Trustee
will not be so obligated) and will be entitled to similar compensation
arrangements. If the Trustee is unwilling or unable to act as successor Master
Servicer, the Trustee may appoint or, if the holders of Certificates of a Series
entitled to at least 51% of the voting rights of such Series (or a Certificate
Insurer entitled to exercise the voting rights of the holders of Certificates)
so request in writing, the Trustee shall appoint, or petition a court of
competent jurisdiction for the appointment of, an established mortgage loan
servicing institution acceptable to the Rating Agencies and having a net worth
of at least $15,000,000 to act as successor to the Master Servicer under the
Agreement. The Trustee and such successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
to the Master Servicer under the Agreement.
The Trustee will be under no obligation to exercise any of the trusts
or powers vested in it by the Agreement or to make any investigation of matters
arising thereunder or to institute, conduct or defend any litigation thereunder
or in relation thereto at the request, order or direction of any of the holders
of the Certificates of the related Series unless such Certificateholders have
offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred therein or thereby.
Amendment
The Agreement generally may be amended by the parties thereto with the
consent of the holders of outstanding Certificates of the related Series
entitled to at least 66% of the voting rights of such Series. Nevertheless, no
amendment shall (i) reduce in any manner the amount of, or delay the timing of,
payments received on the Mortgage Assets that are required to be distributed on
any Certificate without the consent of the Holder of such Certificate, (ii)
adversely affect in any material respect the interests of the Holders of any
Class of Certificates in a manner other than as described in (i) without the
consent of the Holders of Certificates of such Class evidencing 66% of the
voting rights of such class, or (iii) reduce the aforesaid percentage of
Certificateholders required to consent to any such amendment unless each holder
of a Certificate consents. A Certificate Insurer may obtain the right to
exercise all voting rights of the holders of Certificates. The Agreement may
also be amended by the parties thereto without the consent of Certificateholders
for the purpose of, among other things, (i) curing any ambiguity, (ii)
correcting or supplementing any provisions thereof which may be inconsistent
with any other provision thereof, (iii) modifying, eliminating or adding to any
of the provisions of the Agreement to such extent as shall be necessary or
appropriate to maintain the qualification of the Trust (or certain assets
thereof) either as a REMIC or as a grantor trust under the Code at all times
that any Certificates are outstanding or (iv) making any other provision with
respect to matters or questions arising under the Agreement or matters arising
with respect to the Trust which are not covered by the Agreement and which shall
not be inconsistent with the provisions of the Agreement, provided in each case
that such action shall not adversely affect in any material respect the
interests of any Certificateholder. Any such amendment or supplement shall be
deemed not to adversely affect in any material respect any Certificateholder if
there is delivered to the Trustee written notification from each Rating Agency
that provides, at the request of the Depositor, a rating for the Certificates of
the related Series to the effect that such amendment or supplement will not
cause such Rating Agency to lower or withdraw the then current rating assigned
to such Certificates.
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Termination
Each Agreement and the respective obligations and responsibilities
created thereby shall terminate upon the distribution to Certificateholders of
all amounts required to be paid to them pursuant to such related Agreement
following (i) to the extent specified in the related Prospectus Supplement, the
purchase of all the Mortgage Assets in such related Trust and all Mortgaged
Premises acquired in respect thereof or (ii) the later of the final payment or
other liquidation of the last Mortgage Asset remaining in the Trust or the
disposition of all Mortgaged Premises acquired in respect thereof. See
"DESCRIPTION OF THE CERTIFICATES -- Optional Termination." In no event, however,
will any Trust continue beyond the expiration of 21 years from the death of the
survivor of certain persons described in the related Agreement. Written notice
of termination of the Agreement will be given to each Certificateholder, and the
final distribution will be made only upon surrender and cancellation of the
Certificates of the related Series at the corporate trust office of the Trustee
or its agent.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
General
The following discussion contains summaries of certain legal aspects of
mortgage loans which are general in nature. Because such legal aspects are
governed by applicable state law (which laws may differ substantially), the
summaries do not purport to be complete nor to reflect the laws of any
particular state, nor to encompass the laws of all states in which the security
for the Mortgage Loans is situated.
The Mortgage Loans
Single Family Loans, Multi-Family Loans, Conventional Home Improvement
Loans, Title I Loans and HELOCs. The Single Family Loans, Multi-Family Loans,
Conventional Home Improvement Loans, Title I Loans and HELOCs generally will be
secured by mortgages, deeds of trust, security deeds or deeds to secure debt,
depending upon the prevailing practice in the state in which the related
Mortgaged Premises is located. A mortgage creates a lien upon the real property
encumbered by the mortgage, which lien is generally not prior to liens for real
estate taxes and assessments. Priority between mortgages depends on their terms
and generally on any order of recording with a state or county office. There are
two parties to a mortgage, the mortgagor, who is the borrower and owner of the
mortgaged premises, and the mortgagee, who is the lender. The mortgagor delivers
to the mortgagee a note or bond and the mortgage. Although a deed of trust is
similar to a mortgage, a deed of trust has three parties: the trustor, who is
the borrower and homeowner (similar to the mortgagor); the beneficiary, who is
the lender (similar to a mortgagee); and the trustee, who is a third-party
grantee. Under a deed of trust, the borrower grants the property, irrevocably
until the debt is paid, in trust, generally with a power of sale, to the trustee
to secure payment of the obligation. A security deed and a deed to secure debt
are special types of deeds which indicate on their face that they are granted to
secure an underlying debt. By executing a security deed or deed to secure debt,
the grantor conveys title to, as opposed to merely creating a lien upon, the
subject property to the grantee until such time as the underlying debt is
repaid. The mortgagee's authority under a mortgage, the trustee's authority
under a deed of trust and the grantee's authority under a security deed or deed
to secure debt are governed by law and, with respect to some deeds of trust, the
directions of the beneficiary.
Condominiums. Certain of the Mortgage Loans may be loans secured by
condominium units. The condominium building may include one or more multi-unit
buildings, or a group of buildings whether or not attached to each other,
located on property subject to condominium ownership. Condominium ownership is a
form of ownership of real property wherein each owner is entitled to the
exclusive ownership and possession of his or her individual condominium unit and
also owns a proportionate undivided interest in all parts of the condominium
building (other than the individual condominium units) and all areas or
facilities, if any, for the common use of the condominium units. The condominium
unit owners appoint or elect the condominium association to govern the affairs
of the condominium.
Cooperative Loans. Certain of the Mortgage Loans may be Cooperative
Loans. The Cooperative (i) owns all the real property that comprises the
project, including the land and the apartment building comprised of separate
dwelling units and common areas or (ii) leases the land generally by a long-term
ground lease and owns the apartment building. The Cooperative is directly
responsible for project management and, in most cases, payment of real estate
taxes and hazard and liability insurance. If there is a blanket mortgage on the
Cooperative and/or underlying land, as is generally the case, the Cooperative,
as project mortgagor, is also responsible for meeting these mortgage
obligations. A blanket mortgage is ordinarily incurred by the Cooperative in
connection with the
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construction or purchase of the Cooperative's apartment building. The interest
of the occupants under proprietary leases or occupancy agreements to which the
Cooperative is a party are generally subordinate to the interest of the holder
of the blanket mortgage in that building. If the Cooperative is unable to meet
the payment obligations arising under its blanket mortgage, the mortgagee
holding the blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements. In addition, the
blanket mortgage on a Cooperative may provide financing in the form of a
mortgage that does not fully amortize with a significant portion of principal
being due in one lump sum at final maturity. The inability of the Cooperative to
refinance this mortgage or make such final payment could lead to foreclosure by
the mortgagee providing the financing. A foreclosure in either event by the
holder of the blanket mortgage could eliminate or significantly diminish the
value of, in the case of a Trust including Cooperative Loans, the collateral
securing the Cooperative Loans.
A Cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
apartments or units. In general, a tenant-stockholder of a Cooperative must make
a monthly payment to the Cooperative representing such tenant-stockholder's pro
rata share of the Cooperative's payments for its mortgage loans, real property
taxes, maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying rights is financed through a
Cooperative share loan evidenced by a promissory note and secured by a security
interest in the occupancy agreement or proprietary lease and in the related
Cooperative shares. The lender takes possession of the share certificate and a
counterpart of the proprietary lease or occupancy agreement, and a financing
statement covering the proprietary lease or occupancy agreement and the
Cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant- stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of the
Cooperative shares.
Foreclosure
Single Family Loans, Multi-Family Loans, Conventional Home Improvement
Loans, Title I Loans and HELOCs. Foreclosure of a mortgage is generally
accomplished by judicial action. A foreclosure action generally is initiated by
the service of legal pleadings upon the borrower and any party having a
subordinate interest in the real estate including any holder of a junior
encumbrance on the real estate. Delays in completion of the foreclosure
occasionally may result from difficulties in locating necessary parties
defendant. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time-consuming. After the
completion of a judicial foreclosure proceeding, the court may issue a judgment
of foreclosure and appoint a receiver or other officer to conduct the sale of
the Mortgaged Premises. In some states, mortgages may also be foreclosed by
advertisement, pursuant to a power of sale provided in the mortgage. Foreclosure
of a mortgage by advertisement is essentially similar to foreclosure of a deed
of trust by non-judicial power of sale.
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale under a specific provision in the deed of trust that
authorizes the trustee to sell the Mortgaged Premises to a third party upon any
default by the borrower under the terms of the note or deed of trust. In certain
states, such foreclosure also may be accomplished by judicial action in the
manner provided for foreclosure of mortgages. In some states, the trustee must
record a notice of default and send a copy to the borrower and to any person who
has recorded a request for a copy of a notice of default and notice of sale. In
addition, the trustee must provide notice in some states to any other party
having a subordinate interest in the real estate, including any holder of a
junior encumbrance on the real estate. If the deed of trust is not reinstated
within any applicable cure period, a notice of sale must be posted in a public
place and, in most states, published for a specified period of time in one or
more newspapers. In addition, some state laws require that a copy of the notice
of sale be posted on the property and sent to all parties having an interest of
record in the property. When the beneficiary's right to foreclosure is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming.
In some states, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a statutorily prescribed
reinstatement period, cure a monetary default by paying the entire amount in
arrears plus other designated costs and expenses incurred in enforcing the
obligation. In general, state law controls the amount of foreclosure expenses
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and costs, including attorney's fees, which may be recovered by a lender. After
the reinstatement period has expired without the default having been cured, the
borrower or junior lienholder no longer has the right to reinstate the loan and
must pay the loan in full to prevent the scheduled foreclosure sale. If the
mortgage or deed of trust is not reinstated, a notice of sale must be posted in
a public place and, in most states, published for a specific period of time in
one or more newspapers. In addition, some state laws require that a copy of the
notice of sale be posted on the property and sent to all parties having an
interest in the real property. See " Junior Mortgage Loans; Rights of Senior
Mortgagees."
A sale conducted in accordance with the terms of the power of sale
contained in a mortgage or deed of trust is generally presumed to be conducted
regularly and fairly, and a conveyance of the real property by the referee
confers absolute legal title to the real property to the purchaser, free of all
junior mortgages and free of all other liens and claims subordinate to the
mortgage or deed of trust under which the sale is made (with the exception of
certain governmental liens and any redemption rights that may be granted to
borrowers pursuant to applicable state law). The purchaser's title is, however,
subject to all senior liens, encumbrances and mortgages. Thus, if the mortgage
or deed of trust being foreclosed is a junior mortgage or deed of trust, the
referee or trustee will convey title to the property to the purchaser, subject
to the underlying first mortgage or deed of trust and any other prior liens or
claims. A foreclosure under a junior mortgage or deed of trust generally will
have no effect on any senior mortgage or deed of trust, except that it may
trigger the right of a senior mortgagee or beneficiary to accelerate its
indebtedness under a "due-on-sale" clause or "due on further encumbrance" clause
contained in the senior mortgage.
In case of foreclosure under either a mortgage or a deed of trust, the
sale by the receiver or other designated officer or by the trustee is a public
sale. Nevertheless, because of the difficulty a potential buyer at the sale
would have in determining the exact status of title and because the physical
condition of the Mortgaged Premises may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the Mortgaged Premises
at the foreclosure sale. Rather, it is common for the lender to purchase the
Mortgaged Premises from the receiver or trustee for an amount which may be as
great as the unpaid principal balance of the Mortgage Note, accrued and unpaid
interest thereon and the expenses of foreclosure. Thereafter, subject to the
right of the borrower in some states to remain in possession during the
redemption period, the lender will assume the burdens of ownership, including
obtaining hazard insurance and making such repairs at its own expense as are
necessary to render the Mortgaged Premises suitable for sale. The lender
commonly will obtain the services of a real estate broker and pay the broker a
commission in connection with the sale of the Mortgaged Premises. Depending upon
market conditions, the ultimate proceeds of the sale of the Mortgaged Premises
may not equal the lender's investment therein. Any loss may be reduced by the
receipt of insurance proceeds. See "SERVICING OF MORTGAGE LOANS -- Primary
Mortgage Insurance Policies," "-- Standard Hazard Insurance Policies" and
"CREDIT ENHANCEMENT -- Special Hazard Insurance Policies." Mortgaged Premises
that are acquired through foreclosure must be sold by the Trustee within two
years of the date on which it is acquired in order to satisfy certain federal
income tax requirements applicable to REMICs. See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES." Foreclosure of a deed of trust is generally accomplished by a
non-judicial sale under a specific provision in the deed of trust which
authorizes the trustee to sell the property at public auction upon any default
by the borrower under the terms of the note or deed of trust. In some states,
the trustee must record a notice of default and send a copy to the
borrower-trustor, to any person who has recorded a request for a copy of any
notice of default and notice of sale, to any successor in interest to the
borrower-trustor, to the beneficiary of any junior deed of trust and to certain
other persons. In some states, a notice of sale must be posted in a public place
and published during a specific period of time in one or more newspapers, posted
on the property and sent to parties having an interest of record in the property
before such non- judicial sale takes place.
Courts have imposed general equitable principles upon foreclosure,
which are generally designed to mitigate the legal consequences to the borrower
of the borrower's defaults under the loan documents. Some courts have been faced
with the issue of whether federal or state constitutional provisions reflecting
due process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust does not involve sufficient state
action to afford constitutional protection to the borrower.
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Cooperative Loans. The Cooperative shares owned by the
tenant-stockholder and pledged to the lender are, in almost all cases, subject
to restrictions on transfer as set forth in the Cooperative's charter documents,
as well as the proprietary lease or occupancy agreement, and may be canceled by
the Cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by such tenant-stockholder, including mechanics
liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the Cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the Cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder on its obligations
under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that, in the event of a foreclosure
on a Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease.
In some states, foreclosure on the Cooperative shares is accomplished
by a sale in accordance with the provisions of Article 9 of the Uniform
Commercial Code (the "UCC") and the security agreement relating to those shares.
Article 9 of the UCC requires that a sale be conducted in a "commercially
reasonable" manner. Whether a foreclosure sale has been conducted in a
"commercially reasonable" manner will depend on the facts in each case. In
determining commercial reasonableness, a court will look to the notice given the
debtor and the method, manner, time, place and terms of the foreclosure.
Generally, a sale conducted according to the usual practice of banks selling
similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's rights to reimbursement
is subject to the right of the Cooperative to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant- stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency. See "-- Anti-Deficiency Legislation and Other
Limitations on Lenders."
Junior Mortgage Loans; Rights of Senior Mortgagees
Some of the Mortgage Loans included in a Trust may be secured by
mortgages or deeds of trust that are junior to other mortgages or deeds of
trust. The rights of the Trustee (and therefore the Certificateholders) as
mortgagee under a junior mortgage or beneficiary under a junior deed of trust
are subordinate to those of the mortgagee under the senior mortgage or
beneficiary under the senior deed of trust, including the prior rights of the
senior mortgagee to receive hazard insurance and condemnation proceeds and to
cause the property securing the Mortgage Loan to be sold upon default of the
mortgagor or trustor, thereby extinguishing the junior mortgagee's or junior
beneficiary's lien unless the junior mortgagee or junior beneficiary asserts its
subordinate interest in the property in foreclosure litigation and, possibly,
satisfies the defaulted senior mortgage or deed of trust. As discussed more
fully below, a junior mortgagee or junior beneficiary may satisfy a defaulted
senior loan in full and, in some states, may cure such default and bring the
senior loan current, in either event adding the amounts expended to the balance
due on the junior loan. In most states, no notice of
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default is required to be given to a junior mortgagee or junior beneficiary, and
junior mortgagees or junior beneficiaries are seldom given notice of defaults on
senior mortgages. In order for a foreclosure action in some states to be
effective against a junior mortgagee or junior beneficiary, the junior mortgagee
or junior beneficiary must be named in any foreclosure action, thus giving
notice to junior lienors.
The standard form of the mortgage or deed of trust used by most
institutional lenders confers on the mortgagee or beneficiary the right under
some circumstances both to receive all proceeds collected under any Standard
Hazard Insurance Policy and all awards made in connection with any condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage or deed of trust in such order as the mortgagee or beneficiary
may determine. Thus, in the event improvements on the property are damaged or
destroyed by fire or other casualty, or in the event the property is taken by
condemnation, the mortgagee or beneficiary under any underlying senior mortgage
may have the right to collect any insurance proceeds payable under a Standard
Hazard Insurance Policy and any award of damages in connection with the
condemnation and to apply the same to the indebtedness secured by the senior
mortgages or deeds of trust. Proceeds in excess of the amount of senior mortgage
indebtedness, in most cases, will be applied to the indebtedness of a junior
mortgage or trust deed.
A common form of mortgage or deed of trust used by institutional
lenders typically contains a "future advance" clause which provides, in essence,
that additional amounts advanced to or on behalf of the mortgagor or trustor by
the mortgagee or beneficiary are to be secured by the mortgage or deed of trust.
While such a clause is valid under the laws of most states, the priority of any
advance made under the clause depends, in some states, on whether the advance
was an "obligatory" or "optional" advance. If the mortgagee or beneficiary is
obligated to advance the additional amounts, the advance is entitled to receive
the same priority as amounts initially loaned under the mortgage or deed of
trust, notwithstanding that there may be intervening junior mortgages or deeds
of trust and other liens at the time of the advance. Where the mortgagee or
beneficiary is not obligated to advance the additional amounts (and, in some
jurisdictions, has actual knowledge of the intervening junior mortgages or deeds
of trust and other liens), the advance will be subordinate to such intervening
junior mortgages or deeds of trust and other liens. Priority of advances under
the clause rests, in many other states, on state statutes giving priority to all
advances made under the loan agreement at a "credit limit" amount stated in the
recorded mortgage.
Other provisions sometimes included in the form of the mortgage or deed
of trust used by institutional lenders obligate the mortgagor or trustor to pay,
before delinquency, all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee or beneficiary under the
mortgage or deed of trust. Upon a failure of the mortgagor or trustor to perform
any of these obligations, the mortgagee or beneficiary is given the right under
certain mortgages or deeds of trust to perform the obligation itself, at its
election, with the mortgagor or trustor agreeing to reimburse the mortgagee or
beneficiary for any sums expended by the mortgagee or beneficiary on behalf of
the mortgagor or trustor. All sums so expended by the mortgagee or beneficiary
become part of the indebtedness secured by the mortgage or deed of trust.
Right of Redemption
In some states, after foreclosure of a mortgage or sale pursuant to a deed
of trust, the borrower and certain foreclosed junior lienholders are given a
statutory period in which to redeem the Mortgaged Premises from the foreclosure
sale. Depending upon state law, the right of redemption may apply to sale
following judicial foreclosure or to sale pursuant to a non-judicial power of
sale. In some states, statutory redemption may occur only upon payment of the
foreclosure purchase price, accrued interest and taxes and certain of the costs
and expenses incurred in enforcing the obligation. In some states, the right to
redeem is a statutory right and in others it is a contractual right. The effect
of a right of redemption is to diminish the ability of the lender to sell the
foreclosed Mortgaged Premises while such right of redemption is outstanding. The
exercise of a right of redemption would defeat the title of any purchaser at a
foreclosure sale or of any purchaser from the lender subsequent to judicial
foreclosure or sale under a deed of trust. The practical effect of the
redemption right is to force the lender to maintain the property and pay the
expenses of ownership until the redemption period has run.
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Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory prohibitions which limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a mortgage.
In some states, statutes limit the right of the beneficiary or mortgagee to
obtain a deficiency judgment against the borrower following foreclosure or sale
under a deed of trust. A deficiency judgment would be a personal judgment
against the former borrower equal in most cases to the difference between the
amount due to the lender and the fair market value of the real property sold at
the foreclosure sale. As a result of these prohibitions, it is anticipated that
in many instances Servicers will not seek deficiency judgments against
defaulting borrowers.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws
and state laws affording relief to debtors, may interfere with or affect the
ability of the secured mortgage lender to realize upon collateral and/or enforce
a deficiency judgment. For example, if a mortgagor is in a proceeding under the
federal Bankruptcy Code, a lender may not foreclose on the mortgaged premises
without the permission of the bankruptcy court. The rehabilitation plan proposed
by the debtor may provide, if the court determines that the value of the
mortgaged premises is less than the principal balance of the mortgage loan, for
the reduction of the secured indebtedness to the value of the mortgaged premises
as of the date of the commencement of the bankruptcy, rendering the lender a
general unsecured creditor for the difference, and also may reduce the monthly
payments due under such mortgage loan, change the rate of interest and alter the
mortgage loan repayment schedule. The effect of any such proceedings under the
federal Bankruptcy Code, including, but not limited to, any automatic stay,
could result in delays in receiving payments on the Mortgage Loans underlying a
Series of Certificates and possible reductions in the aggregate amount of such
payments. Some states also have homestead exemption laws which would protect a
principal residence from a liquidation in bankruptcy.
Federal and local real estate tax laws provide priority to certain tax
liens over the lien of a mortgage or secured party. Numerous federal and state
consumer protection laws impose substantive requirements upon mortgage lenders
in connection with the origination, servicing and enforcement of Single Family
Loans and Cooperative Loans. These laws include the federal Truth-in-Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act and related states and
regulations. These federal and state laws impose specific statutory liabilities
upon lenders who fail to comply with the provisions of the law. In some cases,
this liability may affect assignees of mortgage loans.
Generally, Article 9 of the UCC governs foreclosure on Cooperative
shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted section 9-504 of the UCC to prohibit a deficiency award unless
the creditor establishes that the sale of the collateral (which, in the case of
a Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
Soldiers and Sailors Civil Relief Act of 1940
Under the Soldiers and Sailors Civil Relief Act of 1940, members of all
branches of the military on active duty, including draftees and reservists in
military service, (i) are entitled to have interest rates reduced and capped at
6% per annum on obligations (including mortgage loans) incurred prior to the
commencement of military service for the duration of military service, (ii) may
be entitled to a stay of proceedings on any kind of foreclosure or repossession
action in the case of defaults on such obligations incurred prior to the
commencement of military service and (iii) may have the maturity of such
obligations incurred prior to the commencement of military service extended, the
payments lowered and the payment schedule readjusted for a period of time after
the completion of military service. The benefits of (i), (ii), or (iii) above
are subject to challenge by creditors, however, and if, in the opinion of the
court, the ability of a person to comply with such obligations is not materially
impaired by military service, the court may apply equitable principles
accordingly. If a borrower's obligation to repay amounts otherwise due on a
Mortgage Loan included in the Trust for a Series is relieved pursuant to the
Soldiers and Sailors Civil Relief Act of 1940, neither the Servicer, the Master
Servicer nor the Trustee will be required to advance such amounts and any loss
in respect thereof may reduce the amounts available to be paid to the holders of
the Certificates of such Series. If so specified in the Prospectus Supplement
for a Series, any shortfalls in interest collections on Mortgage Loans included
in the Trust for such Series resulting from application of the Soldiers and
Sailors Civil Relief Act of 1940 will be allocated to each
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Class of Certificates of such Series that is entitled to receive interest in
respect of such Mortgage Loans in proportion to the interest that each such
Class of Certificates would have otherwise been entitled to receive in respect
of such Mortgage Loans had such interest shortfall not occurred.
Environmental Considerations
Environmental conditions may diminish the value of the Mortgage Assets
and give rise to liability of various parties, including federal, state and
local environmental laws, regulations and ordinances concerning hazardous waste,
hazardous substances, petroleum, underground and aboveground storage tanks,
solid waste, lead and copper in drinking water, asbestos, lead-based paint and
other materials ("Adverse Environmental Conditions") under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended ("CERCLA"). A secured party which participates in management of a
facility, participates in the management of the owner of a facility, takes a
deed in lieu of foreclosure or purchases a mortgaged premises at a foreclosure
sale may become liable in certain circumstances for the costs of a remedial
action ("Cleanup Costs") if hazardous substances have been released or disposed
of on the property. Such Cleanup Costs may be substantial. The U.S.
Environmental Protection Agency (the "EPA") has established a Policy Towards
Owners of Residential Property at Superfund Sites (July 3, 1991) which provides
that EPA will not proceed against owners of residential property contaminated
with hazardous substances under certain circumstances. Similarly, EPA and the
Department of Justice have adopted a policy not to proceed against lenders which
are acting primarily to protect a security interest at the inception of loan,
during a workout, in foreclosure or after foreclosure or the taking of a deed in
lieu of foreclosure. Policy on CERCLA Enforcement Against lenders and Government
Entities that Acquire Property Involuntarily (September 22, 1995). These
policies are not binding on the EPA, a state or third parties who may have a
cause of action under CERCLA, however, and are subject to certain limitations
and conditions. Many state or local laws, regulations or ordinances may also
require owners or operators of property (which may include a lender in certain
circumstances) to incur Cleanup Costs if hazardous substances, hazardous wastes,
petroleum or solid waste are released or otherwise exist on the property. It is
possible that Cleanup Costs under CERCLA or other federal, state or local laws,
regulations or ordinances could become a liability of a Trust and reduce the
amounts otherwise distributable to the Certificateholders if a Mortgaged
Premises securing a Mortgage Loan becomes the property of such Trust in certain
circumstances and if such Cleanup Costs were incurred. Moreover, certain states
or localities by statute or ordinance impose a lien for any Cleanup Costs
incurred by such state or locality on the property that is the subject of such
Cleanup Costs (a "Superlien"). Some Superliens take priority over all other
prior recorded liens, and others take the same priority as taxes in the
jurisdiction. In both instances, the Superlien would take priority over the
security interest of the Trustee in a Mortgaged Premises in the jurisdiction in
question.
It is possible that no environmental assessment or a very limited
environmental assessment of the Mortgaged Premises was conducted and no
representations or warranties are made by the Depositor or the Seller to the
Trustee or Certificateholders as to the absence or effect of Adverse
Environmental Conditions on any of the Mortgaged Premises. In addition, the
Servicers have not made any representations or warranties or assumed any
liability with respect to the absence or effect of Adverse Environmental
Conditions on any Mortgaged Premises or any casualty resulting from the presence
or effect of Adverse Environmental Conditions, and any loss or liability
resulting from the presence or effect of such Adverse Environmental Conditions
will reduce the amounts otherwise available to pay to the holders of the
Certificates.
If so specified in the Prospectus Supplement for a Series, the
Servicers are not permitted to foreclose on any Mortgaged Premises without the
approval of the Master Servicer or the Trustee. The Master Servicer or the
Trustee is not permitted to approve foreclosure on any property which it knows
or has reason to know is contaminated with or affected by hazardous wastes or
hazardous substances. The Master Servicer or the Trustee is required to inquire
of any Servicer requesting approval of foreclosure whether the property proposed
to be foreclosed upon is so contaminated. If a Servicer does not foreclose on
Mortgaged Premises, the amounts otherwise available to pay the holders of the
Certificates may be reduced. A Servicer will not be liable to the holders of the
Certificates if it fails to foreclose on Mortgaged Premises that it reasonably
believes may be so contaminated or affected, even if such Mortgaged Premises
are, in fact, not so contaminated or affected. In addition, a Servicer will not
be liable to the holders of the Certificates if, based on its reasonable belief
that no such contamination or effect exists, the Servicer forecloses on
Mortgaged Premises and takes title to such Mortgaged Premises and thereafter
such Mortgaged Premises are determined to be so contaminated or affected.
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"Due-on-Sale" Clauses
The forms of Mortgage Note, mortgage and deed of trust relating to
conventional Mortgage Loans may contain a "due-on- sale" clause permitting
acceleration of the maturity of a loan if the borrower transfers its interest in
the Mortgaged Premises. The Garn-St. Germain Depository Institutions Act of 1982
(the "Act") preempts state laws which prohibit the enforcement of due-on-sale
clauses by providing, among other matters, that "due-on-sale" clauses in certain
loans (which loans include conventional Mortgage Loans) made after the effective
date of the Act are enforceable within certain limitations as set forth in the
Act and the regulations promulgated thereunder.
By virtue of the Act, a mortgage lender generally may accelerate any
conventional Mortgage Loan which contains a "due- on-sale" clause upon transfer
of an interest in the Mortgaged Premises. With respect to any Mortgage Loan
secured by a residence occupied or to be occupied by the borrower, this ability
to accelerate will not apply to certain types of transfers, including (i) the
granting of a leasehold interest which has a term of three years or less and
which does not contain an option to purchase, (ii) a transfer to a relative
resulting from the death of a borrower, or a transfer where the spouse or one or
more children become owners of the Mortgaged Premises, in each case where the
transferee(s) will occupy the Mortgaged Premises, (iii) a transfer resulting
from a decree of dissolution of marriage, legal separation agreement or an
incidental property settlement agreement by which the spouse becomes an owner of
the Mortgaged Premises, (iv) the creation of a lien or other encumbrance
subordinate to the lender's security instrument which does not relate to a
transfer of rights of occupancy in the Mortgaged Premises (provided that such
lien or encumbrance is not created pursuant to a contract for deed), (v) a
transfer by devise, descent or operation of law on the death of a joint tenant
or tenant by the entirety and (vi) other transfers as set forth in the Act and
the regulations thereunder. As a result, a lesser number of Mortgage Loans which
contain "due-on-sale" clauses may extend to full maturity than earlier
experience would indicate with respect to single-family mortgage loans. The
extent of the effect of the Act on the average lives and delinquency rates of
the Mortgage Loans, however, cannot be predicted. See "MATURITY, PREPAYMENT AND
YIELD CONSIDERATIONS."
Enforceability of Certain Provisions
The forms of Mortgage Note, mortgage and deed of trust used by the
Servicers may contain provisions obligating the borrower to pay a late charge if
payments are not timely made and in some circumstances may provide for
prepayment fees or penalties if the obligation is paid prior to maturity. In
certain states, there are or may be specific limitations upon late charges which
a lender may collect from a borrower for delinquent payments. Certain states
also limit the amounts that a lender may collect from a borrower as an
additional charge if the loan is prepaid. Late charges and prepayment fees (to
the extent permitted by law and not waived by the Servicers) will generally be
retained by the related Servicer as additional servicing compensation.
Courts have imposed general equitable principles upon foreclosure.
These equitable principles are generally designed to relieve the borrower from
the legal effect of defaults under the loan documents. Examples of judicial
remedies that may be fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required lenders to reinstate loans or recast
payment schedules to accommodate borrowers who are suffering from temporary
financial disability. In some cases, courts have limited the right of lenders to
foreclose if the default under the security instrument is not monetary, such as
the borrower failing to adequately maintain the Mortgaged Premises or the
borrower executing a second mortgage or deed of trust affecting the Mortgaged
Premises. In other cases, some courts have been faced with the issue whether
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under deeds of trust receive notices in
addition to the statutorily-prescribed minimum requirements. For the most part,
these cases have upheld the notice provisions as being reasonable or have found
that the sale by a trustee under a deed of trust or under a mortgage having a
power of sale does not involve sufficient state action to afford constitutional
protections to the borrower.
THE DEPOSITOR
Saxon Asset Securities Company was incorporated in Virginia on May 6,
1996, as a wholly owned, limited-purpose financing subsidiary of Dominion
Mortgage Services, Inc., a Virginia corporation ("Dominion Mortgage"). Dominion
Mortgage is a wholly owned subsidiary of Dominion Capital, Inc., a Virginia
corporation ("Dominion Capital"). Dominion Capital is a wholly owned subsidiary
of Dominion Resources, Inc., a Virginia corporation ("Dominion
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Resources"). None of Dominion Resources, Dominion Capital, Dominion Mortgage or
the Depositor has guaranteed, or is otherwise obligated with respect to, the
Certificates of any Series. The principal executive offices of the Depositor are
located at 4880 Cox Road, Glen Allen, Virginia 23060, and the telephone number
of the Depositor is (804) 967-7400. The Depositor was formed solely for the
purpose of facilitating the financing and sale of Mortgage Assets and certain
other assets. It does not intend to engage in any business or investment
activities other than issuing and selling securities secured primarily by, or
evidencing interests in, Mortgage Assets and certain other assets and taking
certain action with respect thereto. The Depositor's Articles of Incorporation
limit the Depositor's business to the foregoing and place certain other
restrictions on the Depositor s activities.
USE OF PROCEEDS
Substantially all the net proceeds from the sale of the Certificates of
each Series will be applied by the Depositor to purchase the Mortgage Assets
assigned to the Trust underlying such Series and to fund any Pre-Funding
Account.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the anticipated material
federal income tax consequences of the purchase, ownership and disposition of
two general types of Certificates: (i) Certificates ("REMIC Certificates")
representing interests in all or a portion of a Trust ("REMIC Mortgage Pool")
for which an election is made to treat it as a real estate mortgage investment
conduit ("REMIC") under Code Sections 860A through 860G (the "REMIC Provisions")
and (ii) Certificates ("Trust Certificates") representing certain interests in a
Trust Fund for which such an election is not made. The discussion is based upon
the advice of Arter & Hadden, special counsel to the Depositor. Arter & Hadden
has delivered to the Depositor their opinion, which addresses issues identified
below as being covered thereby and states that the discussion of federal income
tax issues in this section accurately sets forth their views on those issues.
The discussion reflects the applicable provisions of: the Internal Revenue Code
of 1986, as amended (the "Code"); the final regulations on REMICs (the "REMIC
Regulations") promulgated on December 23, 1992; the final regulations under
Sections 1271 through 1273 and 1275 of the Code (the "OID Regulations")
concerning debt instruments promulgated on January 21, 1994; the final
regulations concerning debt instruments providing for contingent payments (the
"1996 Contingent Payment Regulations") promulgated on June 11, 1996; the final
mark-to- market regulations under Section 475 (the "Mark-To-Market regulations")
promulgated December 31, 1996; the proposed regulations concerning withholding
for foreign persons (the "Proposed Withholding Regulations") published on April
15, 1996; and the proposed regulations concerning amortization of premium (the
"Proposed Premium Regulations") published on June 27, 1996. The discussion does
not, however, purport to cover all federal income tax consequences applicable to
particular investors, some of which may be subject to special rules. In
addition, the authorities on which the discussion is based are subject to change
or differing interpretation, and any change or differing interpretation could be
applied retroactively. In some instances where the Treasury Department has not
adopted regulations implementing provisions of the Code, the discussion cites
the views expressed in the Conference Committee Report (the "Committee Report")
to the Tax Reform Act of 1986 which enacted the Code. The discussion does not
address the state or local tax consequences of the purchase, ownership and
disposition of Certificates. Investors should consult their own tax advisers in
determining the federal, state, local, or other tax consequences to them of the
purchase, ownership and disposition of the Certificates.
REMIC Certificates
With respect to each series of REMIC Certificates relating to a REMIC
Mortgage Pool, Arter & Hadden, special counsel for the Depositor, will deliver
their opinion generally to the effect that, assuming that (i) a REMIC election
is timely made in the required form, (ii) there is ongoing compliance with all
provisions of the related Agreement and (iii) certain representations set forth
in the Agreement are true, such REMIC Mortgage Pool will qualify as a REMIC and
the classes of interests offered will be considered to be "regular interests" or
"residual interests" in that REMIC Mortgage Pool within the meaning of the REMIC
Provisions. REMICs may issue one or more classes of "regular" interests and must
issue one and only one class of "residual" interest. A REMIC Certificate
representing a regular interest in a REMIC
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Mortgage Pool will be referred to as a "REMIC Regular Certificate" and a REMIC
Certificate representing a residual interest in a REMIC Mortgage Pool will be
referred to as a "REMIC Residual Certificate."
If an entity elects to be treated as a REMIC but fails to comply with
one or more of the ongoing requirements of the Code for REMIC status during any
taxable year, the entity will not qualify as a REMIC for such year and
thereafter. In such event, the entity may be subject to taxation as a separate
corporation, and the Certificates issued by the entity may not be accorded the
status described below under the heading "Status of REMIC Certificates". In the
case of an inadvertent termination of REMIC status, the Treasury Department has
authority to issue regulations providing relief; however, sanctions, such as the
imposition of a corporate tax on all or a portion of the entity's income for the
period during which the requirements for REMIC status are not satisfied, may
accompany any such relief.
Among the ongoing requirements to qualify for REMIC treatment is that
substantially all the assets of the REMIC Mortgage Pool (as of the close of the
third calendar month beginning after the creation of the REMIC and continually
thereafter) must consist of only "qualified mortgages" and "permitted
investments". A "Qualified Mortgage" means: (a) any obligation (including any
participation or certificate of beneficial ownership therein) which is
principally secured by an interest in real property (including for this purpose
any obligation secured by stock held by a person as a tenant stockholder in a
cooperative housing corporation) and which is transferred to the REMIC on the
Closing Date in exchange for REMIC Certificates or is purchased within three
months of the Closing Date, (b) any qualified replacement mortgage, (c) any
regular interest in another REMIC transferred to the REMIC on the Closing Date
in exchange for REMIC Certificates, or (d) beginning on September 1, 1997,
certain regular interests in a financial asset securitization investment trust.
The REMIC Regulations treat an obligation secured by a manufactured home that
has a minimum of 400 square feet of living space and a minimum width in excess
of 102 inches and that is of a kind customarily used at a fixed location as an
obligation secured by real property without regard to the treatment of the
obligation or the property under state law.
Taxation of REMIC Regular Certificates. Except as otherwise stated in
this discussion, the REMIC Regular Certificates will be treated for federal
income tax purposes as debt instruments issued by the REMIC Mortgage Pool and
not as ownership interests in the REMIC Mortgage Pool or its assets. In general,
interest, original issue discount and market discount paid or accrued on a REMIC
Regular Certificate will be treated as ordinary income to the holder of such
REMIC Regular Certificate. Distributions in reduction of the stated redemption
price at maturity of the REMIC Regular Certificate will be treated as a return
of capital to the extent of such holder's basis in such REMIC Regular
Certificate. Holders of REMIC Regular Certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to REMIC Regular Certificates under an accrual method.
Original Issue Discount. Certain REMIC Regular Certificates may be
issued with "original issue discount" within the meaning of Code Section
1273(a). Holders of REMIC Regular Certificates issued with original issue
discount generally will be required to include original issue discount in income
as it accrues, in accordance with a constant yield method that takes into
account the compounding of interest, in advance of the receipt of the cash
attributable to such income. The Master Servicer Certificateholders will receive
reports annually (or more frequently if required) to the contracting Internal
Revenue Service ("IRS") and to Certificateholders such information with respect
to the original issue discount accruing on the REMIC Regular Certificates as may
be required under Code Section 6049 and the regulations thereunder. See
"Reporting and Other Administrative Matters of REMICs".
Rules governing original issue discount are set forth in Code Sections
1271 through 1273 and 1275 and in the OID Regulations. Code Section 1272(a)(6)
provides special original issue discount rules applicable to REMIC Regular
Certificates. The OID Regulations do not apply to debt instruments subject to
Code Section 1272(a)(6).
Code Section 1272(a)(6) requires that a mortgage prepayment assumption
("Prepayment Assumption") be used in computing the accrual of original issue
discount on REMIC Regular Certificates and for certain other federal income tax
purposes. The Prepayment Assumption is to be determined in the manner prescribed
in Treasury regulations. To date, no such regulations have been promulgated. The
Committee Report indicates that the regulations should provide that the
Prepayment Assumption, if any, used with respect to a particular transaction
must be the same as that used by the parties in pricing the transaction. In
reporting original issue discount a Prepayment Assumption consistent with this
standard will be used. Nevertheless, the
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Depositor does not make any representation that prepayment will in fact be made
at the rate reflected in the Prepayment Assumption or at any other rate. Each
investor must make its own decision as to the appropriate prepayment assumption
to be used in deciding to purchase any of the REMIC Regular Certificates. The
Prospectus Supplement with respect to a Series of REMIC Certificates will
disclose the Prepayment Assumption to be used in reporting original issue
discount, if any, and for certain other federal income tax purposes.
The total amount of original issue discount on a REMIC Regular
Certificate is the excess of the "stated redemption price at maturity" of the
REMIC Regular Certificate over its "issue price". Except as discussed in the
following two paragraphs, in general, the issue price of a particular class of
REMIC Regular Certificates will be the price at which a substantial amount
thereof are first sold to the public (excluding bond houses and brokers). The
stated redemption price at maturity of a REMIC Regular Certificate is equal to
the total of all payments to be made on such Certificate other than "qualified
stated interest."
If a REMIC Regular Certificate is sold with accrued interest that
relates to a period prior to the issue date of such REMIC Regular Certificate,
the amount paid for the accrued interest will be treated instead as increasing
the issue price of the REMIC Regular Certificate. In addition, that portion of
the first interest payment in excess of interest accrued from the Closing Date
to the first Distribution Date will be treated for federal income tax reporting
purposes as includible in the stated redemption price at maturity of the REMIC
Regular Certificates, and as excludable from income when received as a payment
of interest on the first Distribution Date (except to the extent of any accrued
market discount as of that date). The OID Regulations suggest, however, that
some of or all this pre-issuance accrued interest may be treated as a separate
asset (and hence is not includible in a REMIC Regular Certificate's issue price
or stated redemption price at maturity), whose cost is recovered entirely out of
interest paid on the first Distribution Date.
Under the OID Regulations, "qualified stated interest" is interest that
is unconditionally payable at least annually during the entire term of the
Certificate at either (i) a single fixed rate that appropriately takes into
account the length of the interval between payments or (ii) a current value of a
single "qualified floating rate" or "objective rate" (each, a "Single Variable
Rate"). A "current value" is the value of a variable rate on any day that is no
earlier than three months prior to the first day on which that value is in
effect and no later than one year following that day. A "qualified floating
rate" is a rate whose variations can reasonably be expected to measure
contemporaneous variations in the cost of newly borrowed funds in the currency
in which the debt instrument is denominated. Such a rate remains qualified even
though it is multiplied by (i) a fixed, positive multiple greater than 0.65 but
not exceeding 1.35, (ii) increased or decreased by a fixed rate, or (iii) both
(i) and (ii). Certain combinations of rates constitute a single qualified
floating rate, including (i) interest stated at a fixed rate for an initial
period of less than one year followed by a qualified floating rate if the value
of the floating rate at the Closing Date is intended to approximate the fixed
rate and (ii) two or more qualified floating rates that can reasonably be
expected to have approximately the same values throughout the term of the debt
instrument. A combination of such rates is conclusively presumed to be a single
floating rate if the values of all rates on the Closing Date are within 0.25
percentage points of one another. A variable rate that is subject to an interest
rate cap, floor, governor or similar restriction on rate adjustment may be a
qualified floating rate only if such restriction is fixed throughout the term of
the instrument, or is not reasonably expected as of the Closing Date to cause
the yield on the debt instrument to differ significantly from the expected yield
absent the restriction. An "objective rate" is a rate determined using a single
fixed formula and based on objective financial information or economic
information (excluding a rate based on information that is in the control of the
issuer or that is unique to the circumstances of a related party). A combination
of interest stated at a fixed rate for an initial period of less than one year
followed by an objective rate is treated as a single objective rate if the value
of the objective rate at the Closing Date is intended to approximate the fixed
rate, such a combination of rates is conclusively presumed to be a single
objective rate if the objective rate on the Closing Date does not differ from
the fixed rate by more than 0.25 percentage points. Under the foregoing rules,
some of the payments of interest on a REMIC Regular Certificate bearing a fixed
rate of interest for an initial period followed by a qualified floating rate of
interest in subsequent periods could be treated as included in the stated
redemption price at maturity if the initial fixed rate were to differ
sufficiently from the rate that would have been set using the formula applicable
to subsequent periods. REMIC Regular Certificates other than such Certificates
providing for variable rates of interest are not anticipated to have stated
interest other than "qualified stated interest," but, if any such REMIC Regular
Certificates are so offered, appropriate disclosures will be made in the
Prospectus Supplement. Some of or all the payments on REMIC Regular Certificates
providing for the accretion of
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interest will be included in the stated redemption price at maturity of such
Certificates. Interest payments are unconditionally payable only if a late
payment or nonpayment is expected to be penalized or reasonable remedies exist
to compell payments. Certain debt securities may provide for default remedies in
the event of late payment or nonpayment of interest. The interest on such
securities will be unconditionally payable and constitute qualified stated
interest, not original issue discount. Nevertheless, absent clarification of the
OID Regulations, where debt securirites do not provide for default remedies, the
interest payments will be included in their stated redemption prices at maturity
and taxed as original issue discount. Any stated interest in excess of qualified
stated interest is included in the stated redemption price at maturity.
Under a de minimis rule in the Code, as interpreted in the OID
Regulations, original issue discount on a REMIC Regular Certificate will be
considered to be zero if it is less than 0.25% of the stated redemption price at
maturity of the REMIC Regular Certificate multiplied by the number of complete
years to its weighted average maturity. For this purpose, the weighted average
maturity is computed as the sum of the products of each payment (other than a
payment of qualified stated interest) multiplied by a fraction the numerator of
which is the number of complete years from the issue date until such payment is
made and the denominator of which is the stated redemption price at maturity.
The IRS may take the position that this rule should be applied taking into
account the Prepayment Assumption and the effect of any anticipated investment
income. Under the OID Regulations, REMIC Regular Certificates bearing only
qualified stated interest except for any "teaser" rate, interest holiday or
similar provision are treated as subject to the de minimis rule if the greater
of the foregone interest or any excess of stated principal balance over the
issue price is less than such de minimis amount.
The OID Regulations generally treat de minimis original issue discount
as includible in income as each principal payment is made, based on the product
of the total amount of such de minimis original issue discount and a fraction,
the numerator of which is the amount of such principal payment and the
denominator of which is the outstanding principal balance of the REMIC Regular
Certificate. The OID Regulations also permit a Certificateholder to elect to
accrue de minimis original issue discount (together with stated interest, market
discount and original issue discount) into income currently based on a constant
yield method. See "Taxation of Owners of REMIC Regular Certificates Market
Discount and Premium."
Each holder of a REMIC Regular Certificate must include in gross income
the sum of the "daily portions" of original issue discount on its REMIC Regular
Certificate for each day during its taxable year on which it held such REMIC
Regular Certificate. For this purpose, in the case of an original holder of a
REMIC Regular Certificate, a calculation will first be made of the portion of
the original issue discount that accrued during each accrual period, generally
each period that ends on a date that corresponds to a Distribution Date on the
REMIC Regular Certificate and begins on the first day following the immediately
preceding accrual period (or in the case of the first such period, begins on the
Closing Date). For any accrual period such portion will equal the excess, if
any, of (i) the sum of (A) the present value of all the distributions remaining
to be made on the REMIC Regular Certificate, if any, as of the end of the
accrual period that are included in the stated redemption price at maturity and
(B) distributions made on such REMIC Regular Certificate during the accrual
period of amounts included in the stated redemption price at maturity over (ii)
the adjusted issue price of such REMIC Regular Certificate at the beginning of
the accrual period. The present value of the remaining distributions referred to
in clause (i)(A) of the preceding sentence will be calculated based on (i) the
yield to maturity of the REMIC Regular Certificate, calculated as of the Closing
Date, giving effect to the Prepayment Assumption, (ii) events (including actual
prepayments) that have occurred prior to the end of the accrual period and (iii)
the Prepayment Assumption. The adjusted issue price of a REMIC Regular
Certificate at the beginning of any accrual period will equal the issue price of
such Certificate, increased by the aggregate amount of original issue discount
with respect to such REMIC Regular Certificate that accrued in prior accrual
periods and reduced by the amount of any distributions made on such REMIC
Regular Certificate in prior accrual periods of amounts included in the stated
redemption price at maturity. The original issue discount accruing during any
accrual period will then be allocated ratably to each day during the period to
determine the daily portion of original issue discount for each day. With
respect to an accrual period between the Closing Date and the first Distribution
Date that is shorter than a full accrual period, the OID Regulations permit the
daily portions of original issue discount to be determined according to any
reasonable method.
A subsequent purchaser of a REMIC Regular Certificate that purchases
such REMIC Regular Certificate at a cost (not including payment for accrued
qualified stated interest) less than its remaining stated redemption price at
maturity will also be required to include in gross income, for each day on which
it holds such REMIC Regular Certificate, the daily portions of original
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issue discount with respect to such REMIC Regular Certificate, but reduced, if
such cost exceeds the "adjusted issue price", by an amount equal to the product
of (i) such daily portions and (ii) a constant fraction, the numerator of which
is such excess and the denominator of which is the sum of the daily portions of
original issue discount on such REMIC Regular Certificate for all days on or
after the day of purchase. The adjusted issue price of a REMIC Regular
Certificate on any given day is equal to the sum of the adjusted issue price
(or, in the case of the first accrual period, the issue price) of the REMIC
Regular Certificate at the beginning of the accrual period during which such day
occurs and the daily portions of original issue discount for all days during
such accrual period prior to such day, reduced by the aggregate amount of
distributions made during such accrual period prior to such day other than
distributions of qualified stated interest.
The qualified stated interest payable with respect to REMIC Regular
Certificates which are certain variable rate debt instruments not bearing
interest at a Single Variable Rate generally is determined under the OID
Regulations by converting them into fixed rate debt instruments. REMIC Regular
Certificates required to be so treated generally include those providing for
stated interest at (i) more than one qualified floating rate or (ii) a single
fixed rate and (a) one or more qualified floating rates or (b) a single
"qualified inverse floating rate" (each, a "Multiple Variable Rate"). A
qualified inverse floating rate is an objective rate equal to a fixed rate
reduced by a qualified floating rate, the variations in which can reasonably be
expected to inversely reflect contemporaneous variations in the qualified
floating rate (disregarding permissible rate caps, floors, governors and similar
restrictions described above).
There is uncertainty concerning the application of Code Section
1272(a)(6) and the OID Regulations to REMIC Regular Certificates bearing
interest at one or more variable rates. In the absence of other authority, the
provisions of the OID Regulations governing variable rate debt instruments will
be used as a guide in adapting the provisions of Code Section 1272(a)(6) to such
Certificates for the purpose of preparing reports furnished to
Certificateholders. REMIC Regular Certificates bearing interest at a Single
Variable Rate will take into account for each accrual period an amount
corresponding to the sum of (i) the qualified stated interest accruing on the
outstanding principal balance of the REMIC Regular Certificate (as the stated
interest rate for that Certificate varies from time to time) and (ii) the amount
of original issue discount that would have been attributable to that period on
the basis of a constant yield to maturity for a bond issued at the same time and
issue price as the REMIC Regular Certificate, having the same principal balance
and schedule of payments of principal as such Certificate, subject to the same
Prepayment Assumption, and bearing interest at a fixed rate equal to the
applicable qualified floating rate or qualified inverse floating rate in the
case of a REMIC Regular Certificate providing for either such rate, or equal to
the fixed rate that reflects the reasonably expected yield on the Certificate in
the case of a REMIC Regular Certificate providing for an objective rate other
than a qualified inverse floating rate, in each case as of the issue date.
Holders of REMIC Regular Certificates bearing interest at a Multiple Variable
Rate generally will take into account interest and original issue discount under
a similar methodology, except that the amounts of qualified stated interest and
original issue discount attributable to such a Certificate first will be
determined for an "equivalent" debt instrument bearing fixed rates, the assumed
fixed rates for which are (a) for a qualified floating rate or qualified inverse
floating rate, such rate as of the Closing Date (with appropriate adjustment for
any differences in intervals between interest adjustment dates), and (b) for any
other objective rate, the fixed rate that reflects the yield that is reasonably
expected for the REMIC Regular Certificate. If the interest paid or accrued with
respect to a Multiple Variable Rate Certificate during an accrual period differs
from the assumed fixed interest rate, such difference will be an adjustment (to
interest or original issue discount, as applicable) to the Certificateholder's
taxable income for the taxable period or periods to which such difference
relates.
In the case of a REMIC Regular Certificate that provides for stated
interest at a fixed rate in one or more accrual periods and either one or more
qualified floating rates or a qualified inverse floating rate in other accrual
periods, the fixed rate is first converted into an assumed variable rate. The
assumed variable rate will be a qualified floating rate or a qualified inverse
floating rate according to the type of actual variable rate provided by the
Certificate and must be such that the fair market value of the REMIC Regular
Certificate as of issuance is approximately the same as the fair market value of
an otherwise identical debt instrument that provides for the assumed variable
rate in lieu of the fixed rate. The Certificate is then subject to the
determination of the amount and accrual of original issue discount as described
above, by reference to the hypothetical variable rate instrument.
The provisions of the OID Regulations applicable to variable rate debt
instruments may not apply to some REMIC Regular Certificates having variable
rates. If such a Certificate is not governed by the provisions of the OID
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Regulations applicable to variable rate debt instruments, it may be subject to
the 1996 Contingent Debt Regulations. The application of the 1996 Contingent
Payment Regulations to instruments such as variable rate REMIC Regular
Certificates is subject to differing interpretations. If Certificates with
variable rates are subject to the 1996 Contingent Payment Regulations, the
related Prospectus Supplement will include additional information about their
application.
Market Discount. The purchaser of a REMIC Regular Certificate at a
market discount, that is at a purchase price less than the stated redemption
price at maturity (or, in the case of a REMIC Regular Certificate issued with
original issue discount, the REMIC Regular Certificate's adjusted issue price
(as defined under "Taxation of REMIC Regular Certificates -- Original Issue
Discount")), will recognize market discount upon receipt of each payment of
principal. In particular, such a holder will generally be required to allocate
each payment of principal on a REMIC Regular Certificate first to accrued market
discount and to recognize ordinary income to the extent such principal payment
does not exceed the aggregate amount of accrued market discount on such REMIC
Regular Certificate not previously included in income. Such market discount must
be included in income in addition to any original issue discount includible in
income.
A Certificateholder may elect to include market discount in income
currently as it accrues rather than including it on a deferred basis in
accordance with the foregoing. Such election, if made, will apply to all market
discount bonds acquired by such Certificateholder on or after the first day of
the first taxable year to which such election applies. In addition, the OID
Regulations permit a Certificateholder to elect to accrue all interest and
discount, including de minimis market or original issue discount, reduced by any
premium, in income as interest, based on a constant yield method. If such an
election is made, the Certificateholder is deemed to have made an election to
include on a current basis market discount in income with respect to all other
debt instruments having market discount that such Certificateholder acquires
during the year of the election or thereafter. Similarly, a Certificateholder
that makes this election for a Certificate that is acquired at a premium is
deemed to have made an election to amortize bond premium, as described below,
with respect to all debt instruments having amortizable bond premium that such
Certificateholder owns or acquires. A taxpayer may not revoke an election to
accrue interest, discount and premium on a constant yield method without the
consent of the IRS.
Under a statutory de minimis exception, market discount with respect to
a REMIC Regular Certificate will be considered to be zero for purposes of Code
Sections 1276 through 1278 if it is less than 0.25% of the stated redemption
price at maturity of such REMIC Regular Certificate multiplied by the number of
complete years to maturity remaining after the date of its purchase. In
interpreting the de minimis rule with respect to original issue discount, the
OID Regulations refer to the weighted average maturity of obligations, and it is
likely that the same principle will be applied in determining whether market
discount is de minimis. It appears that de minimis market discount on a REMIC
Regular Certificate would be treated in a manner similar to de minimis original
issue discount. See "Taxation of REMIC Regular Certificates -- Original Issue
Discount." Such treatment would result in de minimis market discount being
included in income at a slower rate than market discount would be required to be
included using the method described in the preceding paragraph.
The Treasury Department is authorized to issue regulations providing
for the method for accruing market discount of more than a de minimis amount on
debt instruments the principal of which is payable in more than one installment.
Nevertheless, no such regulations have been issued. Until regulations are
issued, certain rules described in the Committee Report might apply. Under those
rules, the holder of a bond purchased with more than de minimis market discount
may elect to accrue such market discount either on the basis of a constant yield
method or on the basis of the appropriate proportionate method described below.
Under the proportionate method for obligations issued with original issue
discount, the amount of market discount that accrues during a period is equal to
the product of (i) the total remaining market discount multiplied by (ii) a
fraction the numerator of which is the original issue discount accruing during
the period and the denominator of which is the total remaining original issue
discount at the beginning of the period. The Prepayment Assumption, if any, used
in calculating the accrual of original issue discount should be used in
calculating the accrual of market discount. Under the proportionate method for
obligations issued without original issue discount, the amount of market
discount that accrues during a period is equal to the product of (i) the total
remaining market discount multiplied by (ii) a fraction the numerator of which
is the amount of stated interest paid during the accrual period and the
denominator of which is the total amount of stated interest remaining to be paid
at the
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beginning of the period. Because regulations have not been issued, it is not
possible to predict what effect such regulations might have on the tax treatment
of a REMIC Regular Certificate purchased at a discount in the secondary market.
A Certificateholder generally will be required to treat a portion of
any gain on sale or exchange of a REMIC Regular Certificate as ordinary income
to the extent of the market discount accrued to the date of disposition under
one of the foregoing methods less market discount previously reported as
ordinary income as distributions in reduction of the stated redemption price at
maturity were received. See further "Sales of REMIC Certificates" below. A
Certificateholder may be required to defer a portion of its interest deductions
for the taxable year attributable to any indebtedness incurred or continued to
purchase or carry such REMIC Regular Certificate. Any such deferred interest
expense, in general, is allowed as a deduction not later than the year in which
the related market discount income is recognized. If such holder elects to
include market discount in income currently as it accrues on all market discount
instruments acquired by such holder in that taxable year or thereafter, the
interest expense deferral rule described above will not apply.
Premium. A REMIC Regular Certificate purchased at a cost (not including
payment for accrued qualified stated interest) greater than its remaining stated
redemption price at maturity will be considered to be purchased at a premium.
The holder of such a REMIC Regular Certificate may elect to amortize such
premium under the constant yield method. The OID Regulations also permit
Certificateholders to elect to include all interest, discount and premium in
income based on a constant yield method, further treating the Certificateholder
as having made the election to amortize premium generally, as described above.
The Committee Report indicates a Congressional intent that the same rules that
apply to accrual of market discount on installment obligations also apply in
amortizing premium under Code Section 171 on installment obligations such as the
REMIC Regular Certificates.
The Proposed Premium Regulations describe the constant yield method
under which premium is amortized and provide that the resulting offset to
interest income may be taken into account only as a Certificateholder takes the
corresponding interest income into account under such holder's regular
accounting method. In the case of instruments that may be called or repaid prior
to maturity, the Proposed Premium Regulations provide that the premium is
calculated by assuming that the issuer will exercise its redemption rights in
the manner that maximizes the Certificateholder's yield and the
Certificateholder will exercise its option in a manner that maximizes the
Certificateholder's yield. The Proposed Premium Regulations are proposed to be
effective for debt instruments acquired on or after the date 60 days after
publication of final regulations. The Proposed Premium Regulations do not apply
to debt instruments subject to Code Section 1272(a)(b). Nevertheless, if a
Certificateholder elects to amortize premium for the taxable year containing
such effective date, the Proposed Premium Regulations will apply to all the
Certificateholder's debt instruments held on or after the first day of that
taxable year. It cannot be predicted at this time whether the Proposed Premium
Regulations will become effective or what, if any, modifications will be made to
them prior to their becoming effective.
Treatment of Subordinated Certificates. REMIC Regular Certificates may
include one or more Classes of Subordinated Certificates. Holders of
Subordinated Certificates will be required to report income with respect to such
Certificates on the accrual method without giving effect to delays and
reductions in distributions attributable to defaults or delinquencies on any
Mortgage Loans, except possibly, in the case of income that constitutes
qualified stated interest, to the extent that it can be established that such
amounts are uncollectible. As a result, the amount of income reported by a
Certificateholder of a Subordinated Certificate in any period could exceed the
amount of cash distributed to such Certificateholder in that period.
Although not entirely clear, it appears that: (a) a holder who holds a
Subordinated Regular REMIC Certificate in the course of a trade or business or a
corporate holder generally should be allowed to deduct as an ordinary loss any
loss sustained on account of its partial or complete worthlessness and (b) a
noncorporate holder who does not hold a Subordinated Regular REMIC Certificate
in the course of a trade or business generally should be allowed to deduct as a
short-term capital loss any loss sustained on account of its complete
worthlessness. Special rules are applicable to banks and thrift institutions.
Holders of Subordinated Certificates should consult their own tax advisers
regarding the appropriate timing, character and amount of any loss sustained
with respect to Subordinated Certificates.
Status of REMIC Certificates. REMIC Certificates held by a domestic
building and loan association will constitute a "regular or residual . . .
interest in a REMIC" within the meaning of Code Section 7701(a)(19)(C)(xi) in
the same proportion that the assets of the REMIC Mortgage Pool underlying such
Certificates would be treated as "loans secured by an interest in real
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property" within the meaning of Code Section 7701(a)( 19)(C)(v) or as other
assets described in Code Section 7701 (a)(19)(C)(i) through (x). REMIC
Certificates held by a real estate investment trust will constitute "real estate
assets" within the meaning of Code Section 856(c)(5)(A), and any amount
includible in gross income with respect to the REMIC Certificates will be
considered "interest on obligations secured by mortgages on real property or on
interests in real property" within the meaning of Code Section 856(c)(3)(B) in
the same proportion that, for both purposes, the assets and income of the REMIC
would be treated as "interests in real property" as defined in Code Section
856(c)(6)(C) or, as provided in the Committee Report, as "real estate assets" as
defined in Code Section 856(c)(6)(B)) and as "interest on obligations secured by
mortgages on real property or on interests in real property", respectively. See,
in this regard, "Characterization of Investments in Trust Certificates --
Buydown Mortgage Loans," below. Moreover, if 95% or more of the assets qualify
for any of the foregoing treatments, the REMIC Certificates (and income thereon)
will qualify for the corresponding status in their entirety. The investment of
amounts in any reserve fund in non-qualifying assets would, and, holding
property acquired by foreclosure pending sale might, reduce the amount of the
REMIC Certificates that would qualify for the foregoing treatment. The REMIC
Regulations provide that payments on Qualified Mortgages held pending
distribution are considered part of the Qualified Mortgages for purposes of Code
Section 856(c)(5)(A); it is unclear whether such collected payments would be so
treated for purposes of Code Section 7701(a)(19)(C)(v), but there appears to be
no reason why analogous treatment should be denied. The determination as to the
percentage of the REMIC's assets (or income) that will constitute assets (or
income) described in the foregoing sections of the Code will be made with
respect to each calendar quarter based on the average adjusted basis (or average
amount of income) of each category of the assets held (or income accrued) by the
REMIC during such calendar quarter. The REMIC will report those determinations
to Certificateholders in the manner and at the times required by applicable
Treasury regulations. The Prospectus Supplement or the related Current Report on
Form 8-K for each Series of REMIC Certificates will describe the assets as of
the Cut-off Date. REMIC Certificates held by certain financial institutions will
constitute an "evidence of indebtedness" within the meaning of Code Section
582(c)(1).
For purposes of characterizing an investment in REMIC Certificates, a
contract secured by a Manufactured Home qualifying as a "single family
residence" under Code Section 25(e)(10) will constitute (i) a "real estate
asset" within the meaning of Code Section 856 and (ii) an asset described in
Code Section 7701(a)(19)(C).
Tiered REMIC Structures. For certain series of Certificates, two or
more separate elections may be made to treat designated portions of the related
Trust Fund as REMICs ("Tiered REMICs") for federal income tax purposes. Upon the
issuance of any such series of Certificates, Arter & Hadden, special counsel to
the Depositor, will deliver its opinion generally to the effect that, assuming
compliance with all provisions of the related Agreement, the Tiered REMICs will
each qualify as a REMIC and the REMIC Certificates issued by the Tiered REMICs
will be considered to evidence ownership of REMIC Regular Certificates or REMIC
Residual Certificates in the related REMIC within the meaning of the REMIC
Provisions. Solely for purposes of determining whether the REMIC Certificates
will be "real estate assets" within the meaning of Code Section 856(c)(5)(A),
and assets described in Code Section 7701(a)(19)(C), and whether the income on
such Certificates is "interest" described in Code Section 856(c)(3)(B), the
Tiered REMICs will be treated as one REMIC.
Taxation of REMlC Residual Certificates. An owner of a REMIC Residual
Certificate ("Residual Owner") generally will be required to report its daily
portion of the taxable income or, subject to the limitation described below in
"Basis Rules and Distributions", the net loss of the REMIC Mortgage Pool for
each day during a calendar quarter that the Residual Owner owned such REMIC
Residual Certificate. For this purpose, the daily portion will be determined by
allocating to each day in the calendar quarter, using a 30 days per month/90
days per quarter/360 days per year counting convention, its ratable portion of
the taxable income or net loss of the REMIC Mortgage Pool for such quarter, and
by allocating the daily portions among the Residual Owners (on such day) in
accordance with their percentage of ownership interests on such day. Any amount
included in the gross income of, or allowed as a loss to, any Residual Owner by
virtue of the rule referred to in this paragraph will be treated as ordinary
income or loss. Taxable income from Residual Certificates may exceed cash
distributions with respect thereto in any taxable year. For example, if
Qualified Mortgages are acquired by a
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REMIC at a discount, then the Residual Owner may recognize original issue
discount as income without corresponding cash distributions. This result could
occur because a payment produces recognition by the REMIC of discount on the
Qualified Mortgages while all or a portion of such payment could be used in
whole or in part to make principal payments on REMIC Regular Certificates issued
without substantial discount.
The tax treatment of any payments received by a Residual Owner in
connection with the acquisition of such Certificate is unclear. Such payments
may be taken into account in determining the income of such holder.
Alternatively, a holder may take another position. Because of the uncertainty
concerning the treatment of such payments, Residual Owners should consult their
tax advisers concerning the treatment of such payments for income tax purposes.
Taxable Income or Net Loss of the REMIC Trust Fund. The taxable income
or net loss of the REMIC Mortgage Pool reflects a netting of income from the
Qualified Mortgages, any cancellation of indebtedness income due to the
allocation of realized losses to REMIC Regular Certificates and the deductions
and losses allowed to the REMIC Mortgage Pool. Such taxable income or net loss
for a given calendar quarter is determined in the same manner as for an
individual having the calendar year as his taxable year and using the accrual
method of accounting, with certain modifications. First, a deduction is allowed
for accruals of interest (including original issue discount) on the REMIC
Regular Certificates. Second, market discount equal to the excess of any
Qualified Mortgage's adjusted issue price (as determined under "Taxation of
REMIC Regular Certificates -- Market Discount and Premium") over its fair market
value at the time of its transfer to the REMIC Mortgage Pool generally will be
included in income as it accrues, based on a constant yield method and on the
Prepayment Assumption. For this purpose, the fair market value of the Mortgage
Loans will be treated as being equal to the aggregate issue prices of the REMIC
Regular Certificates and REMIC Residual Certificates; if one or more classes of
REMIC Regular Certificates or REMIC Residual Certificates are retained by the
Depositor, the value of such retained interests will be estimated in order to
determine the fair market value of the Qualified Mortgages for this purpose.
Third, no item of income, gain, loss or deduction allocable to a prohibited
transaction (see "Prohibited Transactions and Other Possible REMIC Taxes") is
taken into account. Fourth, the REMIC Mortgage Pool generally may deduct only
items that would be allowed in calculating the taxable income of a partnership
by virtue of Code Section 703(a)(2). Fifth, the limitation on miscellaneous
itemized deductions imposed on individuals by Code Section 67 does not apply at
the REMIC Mortgage Pool level to investment expenses such as trustee fees or the
servicing fees paid to the Master Servicer or sub-servicers, if any. See,
however, "Pass-Through of Servicing Fees". If the deductions allowed to the
REMIC Mortgage Pool exceed its gross income for a calendar quarter, such excess
will be the net loss for the REMIC Mortgage Pool for that calendar quarter.
Basis Rules and Distributions. A Residual Owner will not include any
distribution by a REMIC Mortgage Pool in gross income to the extent it is less
than the adjusted basis of such Residual Owner's interest in a REMIC Residual
Certificate. Such distribution will reduce the adjusted basis of such interest,
but not below zero. To the extent a distribution exceeds the adjusted basis of
the REMIC Residual Certificate, it will be treated as gain from the sale of the
REMIC Residual Certificate. See "Sales of REMIC Certificates". The adjusted
basis of a REMIC Residual Certificate is equal to the amount paid for such REMIC
Residual Certificate, increased by amounts included in the income of the
Residual Owner and decreased by distributions and by net losses taken into
account with respect to such interest. See "Taxation of REMIC Residual
Certificates -- Daily Portions".
A Residual Owner is not allowed to take into account any net loss for
any calendar quarter to the extent such net loss exceeds such Residual Owner's
adjusted basis in its REMIC Residual Certificate as of the close of such
calendar quarter (determined without regard to such net loss). Any loss
disallowed by reason of this limitation may be carried forward indefinitely to
future calendar quarters and, subject to the same limitation, may be used to
offset income from the REMIC Residual Certificate.
The effect of these basis and distribution rules is that a Residual
Owner may not amortize its basis in a REMIC Residual Certificate but may only
recover its basis through distributions, through the deduction of any net losses
of the REMIC Mortgage Pool or upon the sale of its REMIC Residual Certificate.
See "Sales of REMIC Certificates". The Residual Owner does, however, receive
reduced taxable income over the life of the REMIC because the REMIC's basis in
the underlying REMIC Mortgage Pool used to determine taxable income or net loss
includes the fair market value of the REMIC Regular Certificates and REMIC
Residual Certificates at the Closing Date, not the unpaid principal balances of
the REMIC Mortgage Pool.
Excess Inclusions. "Excess inclusions" with respect to a REMIC
Residual Certificate are subject to special tax rules. With respect to a
Residual Owner, the excess inclusion for any calendar quarter is defined as the
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excess, if any, of the daily portions of taxable income over the sum of the
"daily accruals" for each day during such quarter that the Residual Owner held
such REMIC Residual Certificate. The daily accruals are determined by allocating
to each day during a calendar quarter its ratable portion of the product of the
"adjusted issue price" of the REMIC Residual Certificate at the beginning of the
calendar quarter and 120 percent of the long-term "applicable federal rate"
(generally, an average of current yields on Treasury securities of comparable
maturity, and hereafter the "AFR") in effect at the time of issuance of the
REMIC Residual Certificate. For this purpose, the adjusted issue price of a
REMIC Residual Certificate as of the beginning of any calendar quarter is the
issue price of the REMIC Residual Certificate, increased by the amount of daily
accruals for all prior quarters and decreased by any distributions made with
respect to such REMIC Residual Certificate before the beginning of such quarter.
The issue price of a REMIC Residual Certificate (a) if it is publicly offered is
the initial offering price to the public (excluding bond houses and brokers) at
which a substantial amount of the REMIC Residual Certificates were sold, or (b)
if it is not public offered, is its fair market value on the pricing date when
the prices of the REMIC Regular Certificates are fixed.
For Residual Owners, an excess inclusion may not be offset by
deductions, losses or loss carryovers from other activities. For Residual Owners
that are subject to tax on unrelated business taxable income (as defined in Code
Section 511), an excess inclusion is treated as unrelated business taxable
income. For Residual Owners that are nonresident alien individuals or foreign
corporations generally subject to United States withholding tax, even if
interest paid to such Residual Owners is generally eligible for exemptions from
such tax, an excess inclusion will be subject to such tax and no tax treaty rate
reduction or exemption may be claimed with respect thereto. See "Foreign
Investors in REMIC Certificates."
Alternative minimum taxable income for a Residual Owner is determined
without regard to the special rule that taxable income may not be less than
excess inclusions and may not be less than the excess inclusions for the year.
The amount of any alternative minimum tax net operating loss deductions must be
computed without regard to any excess inclusions.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Code Section 857(b)(2),
excluding any net capital gain), will be allocated among the shareholders of
such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by such
shareholder.
Noneconomic REMIC Residual Certificates. Under the REMIC Regulations,
transfers of "noneconomic" REMIC Residual Certificates are disregarded for all
federal income tax purposes if "a significant purpose of the transfer was to
enable the transferor to impede the assessment or collection of tax". If such
transfer is disregarded, the purported transferor will continue to remain liable
for any taxes due with respect to the income on such "noneconomic" REMIC
Residual Certificate. The REMIC Regulations provide that a REMIC Residual
Certificate is noneconomic unless, at the time of its transfer and based on the
Prepayment Assumption and any required or permitted clean up calls or required
liquidation provided for in the REMIC's organizational documents: (1) the
present value of the expected future distributions (discounted using the AFR) on
the REMIC Residual Certificate equals at least the product of the present value
of the anticipated excess inclusions and the highest tax rate applicable to
corporations for the year of the transfer and (2) the transferor reasonably
expects that the transferee will receive distributions with respect to the REMIC
Residual Certificate at or after the time the taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes.
Accordingly, all transfers of REMIC Residual Certificates will be subject to
certain restrictions under the terms of the related. Agreement that are intended
to reduce the possibility of any such transfer being disregarded. Such
restrictions will require each party to a transfer to provide an affidavit that
no purpose of such transfer is to impede the assessment or collection of tax,
including certain representations as to the financial condition of the
prospective transferee. Prior to purchasing a REMIC Residual Certificate,
prospective purchasers should consider the possibility that a purported transfer
of such REMIC Residual Certificate by such a purchaser to another purchaser at
some future date may be disregarded in accordance with the above-described
rules, which would result in the retention of tax liability by such purchaser.
The applicable Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations; provided, however, that any disclosure that a REMIC
Residual Certificate will or will not be considered "noneconomic" will be based
upon certain assumptions, and the
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Depositor will make no representation that a REMIC Residual Certificate will not
be considered "noneconomic" for purposes of the above-described rules or that a
Residual Owner will receive distributions calculated pursuant to such
assumptions. See "Foreign Investors in REMIC Certificates" below for additional
restrictions applicable to transfers of certain REMIC Residual Certificates to
foreign persons.
Tax-Exempt Investors. Tax-exempt organizations (including employee
benefit plans) that are subject to tax on unrelated business taxable income (as
defined in Code Section 511) will be subject to tax on any excess inclusions
attributed to them as owners of Residual Certificates. Excess inclusion income
associated with a Residual Certificate may significantly exceed cash
distributions with respect thereto. See "Excess Inclusions".
Generally, tax-exempt organizations that are not subject to federal
income taxation on "unrelated business taxable income" pursuant to Code Section
511 are treated as "disqualified organizations". Under provisions of the
Agreement, such organizations generally are prohibited from owning Residual
Certificates. See "Sales of REMIC Certificates".
Real Estate Investment Trusts. If the applicable Prospectus Supplement
so provides, a REMIC Mortgage Pool may hold Qualified Mortgages bearing interest
based wholly or partially on mortgagor profits, mortgaged property appreciation,
or similar contingencies. Such interest, if earned directly by a real estate
investment trust ("REIT"), would be subject to the limitations of Code Sections
856(f) and 856(j). Treasury Regulations treat a REIT holding a REMIC Residual
Certificate for a principal purpose of avoiding such Code provisions as
receiving directly the income of the REMIC Mortgage Pool, hence potentially
jeopardizing its qualification for taxation as a REIT and exposing such income
to taxation as a prohibited transaction at a 100 percent rate.
Mark-to-Market Rules. Code Section 475 generally requires that
securities dealers include securities in inventory at their fair market value,
recognizing gain or loss as if the securities were sold at the end of each tax
year. The Mark-to-Market Regulations provide that a REMIC Residual Certificate
is not treated as a security and thus may not be marked to market.
Sales of REMIC Certificates. If a REMIC Certificate is sold, the seller
will recognize gain or loss equal to the difference between the amount realized
on the sale and its adjusted basis in the REMIC Certificate. The adjusted basis
of a REMIC Regular Certificate generally will equal the cost of such REMIC
Regular Certificate to the seller, increased by any original issue discount or
market discount included in the seller's gross income with respect to such REMIC
Regular Certificate and reduced by premium amortization deductions and
distributions previously received by the seller of amounts included in the
stated redemption price at maturity of such REMIC Regular Certificate. The
adjusted basis of a REMIC Residual Certificate will be determined as described
under "Taxation of REMIC Residual Certificates -- Basis Rules and
Distributions." Gain from the disposition of a REMIC Regular Certificate that
might otherwise be treated as a capital gain will be treated as ordinary income
to the extent that such gain does not exceed the excess, if any, of (i) the
amount that would have been includible in such holder's income had income
accrued at a rate equal to 110% of the AFR as of the date of purchase over (ii)
the amount actually includible in such holder's income. Except as otherwise
provided under "Taxation of REMIC Regular Certificates - -- Market Discount and
Premium" and under Code Section 582(c), any additional gain or any loss on the
sale or exchange of a REMIC Certificate will be capital gain or loss, provided
such REMIC Certificate is held as a capital asset (generally, property held for
investment) within the meaning of Code Section 1221. The Code currently provides
for a top marginal tax rate of 39.6% for individuals while maintaining a maximum
marginal rate for the long-term capital gains of individuals at 28%. There is no
such rate differential for corporations. In addition, the distinction between a
capital gain or loss and ordinary income or loss remains relevant for other
purposes, including limitations on the use of capital losses to offset ordinary
income.
All or a portion of any gain from the sale of a REMIC Certificate that
might otherwise be capital gain may be treated as ordinary income (i) if such
Certificate is held as part of a "conversion transaction" as defined in Code
Section 1258(c), up to the amount of interest that would have accrued on the
holder's net investment in the conversion transaction at 120% of the appropriate
AFR in effect at the time the taxpayer entered into the transaction reduced by
any amount treated as ordinary income with respect to any prior disposition or
other termination of a position that was held as part of such transaction or
(ii) in the case of a noncorporate taxpayer that has made an election under Code
Section 163(d)(4) to have net capital gains taxed as investment income at
ordinary income rates.
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If a Residual Owner sells a REMIC Residual Certificate at a loss, the
loss will not be recognized if, within six months before or after the sale of
the REMIC Residual Certificate, such Residual Owner purchases another residual
interest in any REMIC or any interest in a taxable mortgage pool (as defined in
Code Section 7701 (i)) comparable to a residual interest in a REMIC. Such
disallowed loss will be allowed upon the sale of the other residual interest (or
comparable interest) if the rule referred to in the preceding sentence does not
apply to that sale. While the Committee Report states that this rule may be
modified by Treasury regulations, the REMIC Regulations do not address this
issue and it is not clear whether any such modification will in fact be
implemented or, if implemented, what its precise nature or effective date would
be.
Transfers of a REMIC Residual Certificate to certain "disqualified
organizations" are subject to an additional tax on the transferor in an amount
equal to the maximum corporate tax rate applied to the present value (using a
discount rate equal to the AFR) of the total anticipated excess inclusions with
respect to such residual interest for the periods after the transfer. For this
purpose, "disqualified organizations" includes the United States, any state or
political subdivision of a state, any foreign government or international
organization or any agency or instrumentality of any of the foregoing; any tax-
exempt entity (other than a Code Section 521 cooperative) which is not subject
to the tax on unrelated business income; and any rural electrical or telephone
cooperative. The anticipated excess inclusions must be determined as of the date
that the REMIC Residual Certificate is transferred and must be based on events
that have occurred up to the time of such transfer, the Prepayment Assumption,
and any required or permitted clean up calls or required liquidation provided
for in the REMIC's organizational documents. The tax generally is imposed on the
transferor of the REMIC Residual Certificate, except that it is imposed on an
agent for a disqualified organization if the transfer occurs through such agent.
The Agreement requires, as a prerequisite to any transfer of a Residual
Certificate, the delivery to the Trustee of an affidavit of the transferee to
the effect that it is not a disqualified organization and contains other
provisions designed to render any attempted transfer of a Residual Certificate
to a disqualified organization void.
In addition, if a "pass-through entity" includes in income excess
inclusions with respect to a REMIC Residual Certificate, and a disqualified
organization is the record holder of an interest in such entity at any time
during any taxable year of such entity, then a tax will be imposed on such
entity equal to the product of (i) the amount of excess inclusions on the REMIC
Residual Certificate for such taxable year that are allocable to the interest in
the pass-through entity held by such disqualified organization and (ii) the
highest marginal federal income tax rate imposed on corporations. A pass-through
entity will not be subject to this tax for any period, however, if the record
holder of an interest in such entity furnishes to such entity (i) such holder's
social security number and a statement under penalties of perjury that such
social security number is that of the record holder or (ii) a statement under
penalties of perjury that such record holder is not a disqualified organization.
For these purposes, a "pass-through entity" means any regulated investment
company, real estate investment trust, trust, partnership or certain other
entities described in Code Section 860E(e)(6). In addition, a person holding an
interest in a pass-through entity as a nominee for another person shall, with
respect to such interest, be treated as a pass-through entity.
Pass-Through of Servicing Fees. In general, Residual Owners take into
account taxable income or net loss of the related REMIC Mortgage Pool.
Consequently, expenses of the REMIC Mortgage Pool to serice providers, such as
servicing compensation of the Master Servicer and the subservicers (if any),
will be allocated to the holders of the REMIC Residual Certificates, and
therefore will not affect the income or deductions of holders of REMIC Regular
Certificates. In the case of a "single-class REMIC" (as described below),
however, such expenses and an equivalent amount of additional gross income will
be allocated among all holders of REMIC Regular Certificates and REMIC Residual
Certificates for purposes of the limitations on the deductibility of certain
miscellaneous itemized deductions by individuals contained in Code Sections
56(b)(1) and 67. Generally, any holder of a REMIC Residual Certificate and any
holder of a REMIC Regular Certificate issued by a "single-class REMIC" who is an
individual, estate or trust (including such a person that holds an interest in a
pass-through entity holding such a REMIC Certificate) are permitted to deduct
such expenses in determining regular taxable income only to the extent that such
expenses together with certain other miscellaneous itemized deductions of such
individual, estate or trust exceed 2% of adjusted gross income; such a holder
may not deduct such expenses to any extent in determining liability for
alternative minimum tax. Accordingly, REMIC Residual Certificates, and REMIC
Regular Certificates receiving an allocation of servicing compensation, may not
be appropriate investments for individuals, estates or trusts.
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A "single-class REMIC" is a REMIC that either (i) would be treated as
an investment trust under the provisions of Treasury Regulation Section
301.7701-4(c) in the absence of a REMIC election or (ii) is substantially
similar to such an investment trust and is structured with the principal purpose
of avoiding the allocation of investment expenses to holders of REMIC Regular
Certificates. The Master Servicer intends (subject to certain exceptions which,
if applicable, will be stated in the applicable Prospectus Supplement) to treat
each REMIC Mortgage Pool as other than a "single-class REMIC," consequently
allocating servicing compensation expenses and related income amounts entirely
to REMIC Residual Certificates.
Prohibited Transactions and Other Possible REMIC Taxes. The Code
imposes a tax on REMIC Mortgage Pools equal to 100% of the net income derived
from "prohibited transactions." In general, a prohibited transaction means the
disposition of a Qualified Mortgage other than pursuant to certain specified
exceptions, the receipt of income from a source other than a Qualified Mortgage
or certain other permitted investments, the receipt of compensation for
services, or gain from the disposition of an asset purchased with the payments
on the Qualified Mortgages for temporary investment pending distribution on the
REMIC Certificates. The Code also imposes a 100% tax on the value of any
contribution of assets to the REMIC after the Closing Date other than pursuant
to specified exceptions, and subjects "net income from foreclosure property" to
tax at the highest corporate rate. It is not anticipated that a REMIC Mortgage
Pool will engage in any such transactions or receive any such income.
Termination of a REMIC Mortgage Pool. In general, no special tax
consequences will apply to a holder of a REMIC Regular Certificate upon the
termination of the REMIC Mortgage Pool by virtue of the final payment or
liquidation of the last Mortgage Loan remaining in the REMIC Mortgage Pool. If a
Residual Owner's adjusted basis in its REMIC Residual Certificate at the time
such termination occurs exceeds the amount of cash distributed to such Residual
Owner in liquidation of its interest, then, although the matter is not entirely
free from doubt, it appears that the Residual Owner would be entitled to a loss
(which could be a capital loss) equal to the amount of such excess.
Reporting and Other Administrative Matters of REMIC. Reporting of
interest income, including any original issue discount, with respect to REMIC
Regular Certificates is required annually, and may be required more frequently
under Treasury regulations. Certain holders of REMIC Regular Certificates which
are generally exempt from information reporting on debt instruments, such as
corporations, banks, registered securities or commodities brokers, real estate
investment trusts, registered investment companies, common trust funds,
charitable remainder annuity trusts and unitrusts, will be provided interest and
original issue discount income information and the information set forth in the
following paragraph upon request in accordance with the requirements of the
Treasury regulations. The information must be provided by the later of 30 days
after the end of the quarter for which the information was requested, or two
weeks after the receipt of the request. The REMIC Mortgage Pool must also comply
with rules requiring the face of a REMIC Certificate issued at more than a de
minimis discount to disclose the amount of original issue discount and the issue
date and requiring such information to be reported to the Treasury Department.
The REMIC Regular Certificate information reports must include a
statement of the "adjusted issue price" of the REMIC Regular Certificate at the
beginning of each accrual period. In addition, the reports must include
information necessary to compute the accrual of any market discount that may
arise upon secondary trading of REMIC Regular Certificates. Because exact
computation of the accrual of market discount on a constant yield method would
require information relating to the holder's purchase price which the REMIC
Mortgage Pool may not have, it appears that this provision will only require
information pertaining to the appropriate proportionate method of accruing
market discount.
For purposes of the administrative provisions of the Code, REMIC
Mortgage Pools are treated as partnerships and the holders of Residual
Certificates are treated as partners. On of the Holders of the Residual Interest
will be the "tax matters person" with respect to the REMIC Mortgage Pool in all
respects, and will file federal income tax information returns on behalf of the
related REMIC Mortgage Pool.
As the tax matters person will, subject to certain notice requirements
and various restrictions and limitations, generally have the authority to act on
behalf of the REMIC Mortgage Pool and the Residual Owners in connection with the
administrative and judicial review of items of income, deduction, gain or loss
of the REMIC Mortgage Pool, as well as the REMIC Mortgage Pool's classification.
Residual Owners will generally be required to report such REMIC Mortgage Pool
items consistently with their treatment on the REMIC Mortgage Pool's federal
income tax information
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return and may in some circumstances be bound by a settlement agreement between
the person serving as the tax matters person, and the IRS concerning any such
REMIC Mortgage Pool item. Adjustments made to the REMIC Mortgage Pool tax return
may require a Residual Owner to make corresponding adjustments on its return,
and an audit of the REMIC Mortgage Pool's tax return, or the adjustments
resulting from such an audit, could result in an audit of a Residual Owner's
return.
Backup Withholding with Respect to REMIC Certificates. Distribution of
interest and principal on REMIC Regular Certificates, as well as payment of
proceeds from the sale of REMIC Certificates, may be subject to the "backup
withholding tax" under Code Section 3406 at a rate of 31 percent if recipients
fail to furnish certain information, including their taxpayer identification
numbers, or otherwise fail to establish an exemption from such tax. Any amounts
deducted and withheld from a recipient would be allowed as a credit against such
recipient's federal income tax. Furthermore, certain penalties may be imposed by
the IRS on a recipient that is required to supply information but that does not
do so in the manner required.
Foreign Investors in REMIC Certificates. Except as qualified below,
payments made on a REMIC Regular Certificate to a REMIC Regular
Certificateholder that is not a U.S. Person, as hereinafter defined (a "Non-U.S.
Person"), or to a person acting on behalf of such a Certificateholder, generally
will be exempt from U.S. federal income and withholding taxes, provided that (a)
the holder of the Certificate is not subject to U.S. tax as a result of a
connection to the United States other than ownership of such Certificate, (b)
the holder of such Certificate signs a statement under penalties of perjury that
certifies that such holder is a Non-U.S. Person, and provides the name and
address of such holder, and (c) the last U.S. Person in the chain of payment to
the holder receives such statement from such holder or a financial institution
holding on its behalf and does not have actual knowledge that such statement is
false. If the holder does not qualify for exemption, distributions of interest,
including distributions in respect of accrued original issue discount, to such
holder may be subject to a withholding tax rate of 30 percent, subject to
reduction under an applicable tax treaty.
"U.S. Person" means a citizen or resident of the United States, a
corporation, partnership or other entity treated as a corporation or partnership
for United States federal income tax purposes, created or organized in or under
the laws of the United States or any political subdivision thereof, an estate
that is subject to U.S. federal income tax regardless of the source of its
income or a trust if (i) a court within the United States is able to exercise
primary supervision over the administration of the trust and (ii) one or more
United States trustees have authority to control all substantial decisions of
the trust.
Holders of REMIC Regular Certificates should be aware that the IRS may
take the position that exemption from U.S. withholding taxes does not apply to
such a holder that also directly or indirectly owns 10 percent or more of the
REMIC Residual Certificates. Further, the foregoing rules will not apply to
exempt a "United States shareholder" (as such term is defined in Code Section
951) of a controlled foreign corporation from taxation on such United States
shareholder's allocable portion of the interest or original issue discount
income earned by such controlled foreign corporation.
Amounts paid to a Residual Owner that is a Non-U.S. Person generally
will be treated as interest for purposes of applying the withholding tax on
Non-U.S. Persons with respect to income on its REMIC Residual Certificate. It is
unclear, however, whether distributions on REMIC Residual Certificates will be
eligible for the general exemption from withholding tax that applies to REMIC
Regular Certificates as described above. Treasury Regulations provide that, for
purposes of the portfolio interest exception, payments to the foreign owner of a
REMIC Residual Certificate are to be considered paid on the obligations held by
the REMIC Mortgage Pool, rather than on the Certificate itself. Such payments
will thus only qualify for the portfolio interest exception if the underlying
obligations held by the REMIC Mortgage Pool would so qualify. Such withholding
tax generally is imposed at a rate of 30 percent but is subject to reduction
under any tax treaty applicable to the Residual Owner. Nevertheless, there is no
exemption from withholding tax nor may the rate of such tax be reduced, under a
tax treaty or otherwise, with respect to any distribution of income that is an
excess inclusion. Although no regulations have been proposed or adopted
addressing withholding on residual interests held by Non-U.S. Persons, the
provisions of the REMIC Regulations, relating to the transfer of residual
interests to Non-U.S. Persons may be read to imply that withholding with respect
to excess inclusion income is to be determined by reference to the amount of the
excess inclusion income rather than to the amount of cash distributions. If the
IRS were successfully to assert such a position, cash distributions on Residual
Certificates held by Non-U.S. Persons could be
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subject to withholding at rates as high as 100%, depending on the relationship
of accrued excess inclusion income to cash distributions with respect to such
Residual Certificates. See "Taxation of REMIC Residual Certificates -- Excess
Inclusions."
Certain restrictions relating to transfers of REMIC Residual
Certificates to and by investors who are Non U.S. Persons are also imposed by
the REMIC Regulations. First, transfers of REMIC Residual Certificates to a
Non-U.S. Person that have "tax avoidance potential" are disregarded for all
federal income tax purposes. If such transfer is disregarded, the purported
transferor of such a REMIC Residual Certificate to a Non-U.S. Person continues
to remain liable for any taxes due with respect to the income on such REMIC
Residual Certificate. A transfer of a REMIC Residual Certificate has tax
avoidance potential unless, at the time of the transfer, the transferor
reasonably expects (1) that the REMIC will distribute to the transferee Residual
Certificateholder amounts that will equal at least 30 percent of each excess
inclusion and (2) that such amounts will be distributed at or after the time at
which the excess inclusion accrues and not later than the close of the calendar
year following the calendar year of accrual. This rule does not apply to
transfers if the income from the REMIC Residual Certificate is taxed in the
hands of the transferee as income effectively connected with the conduct of a
U.S. trade or business. Second, if a Non-U.S. Person transfers a REMIC Residual
Certificate to a U.S. Person (or to a Non-U.S. Person in whose hands income from
the REMIC Residual Certificate would be effectively connected) and the transfer
has the effect of allowing the transferor to avoid tax on accrued excess
inclusions, that transfer is disregarded for all federal income tax purposes and
the purported Non-U.S. Person transferor continues to be treated as the owner of
the REMIC Residual Certificate. Thus, the REMIC's liability to withhold 30
percent of the excess inclusions is not terminated even though the REMIC
Residual Certificate is no longer held by a Non-U.S. Person.
The Proposed Withholding Regulations, if adopted in final form, could
affect the United States taxation of foreign investors in REMIC Certificates.
The Proposed Withholding Regulations are generally proposed to be effective for
payments after December 31, 1997, regardless of the issue date of the REMIC
Certificate with respect to which such payments are made, subject to certain
transition rules. The Proposed Withholding Regulations would provide certain
presumptions with respect to withholding for holders not providing the required
certifications to qualify for the withholding exemption described above and
would replace a number of current tax certification forms with a single,
restated form and standardize the period of time for which withholding agents
could rely on such certifications. The Proposed Withholding Regulations would
also provide rules to determine whether, for purposes of United States federal
withholding tax, interest paid to a Non-U.S. Person that is an entity should be
treated as paid to the entity or those holding an interest in that entity.
Non-REMlC Trust Funds
Classification of Trust Funds. With respect to each series of Trust
Certificates for which no REMIC election is made and are not subject to
partnership treatment, Arter & Hadden, special counsel to the Depositor, will
deliver their opinion generally to the effect that the arrangements pursuant to
which such Trust Fund will be administered and such Trust Certificates will be
issued will not be classified as an association taxable as a corporation and
that each such Trust Fund will be classified as a trust whose taxation will be
governed by the provisions of subpart E, Part I, of subchapter J of the Code.
A Trust Certificate representing an undivided equitable ownership
interest in the principal of the Mortgage Loans constituting the related Trust
Fund, together with interest thereon at a remittance rate (which may be less
than, greater than, or equal to the net rate on the related Mortgage Assets) is
referred to as a "Trust Fractional Certificate" and a Trust Certificate
representing an equitable ownership of all or a portion of the interest paid on
each Mortgage Loan constituting the related Trust Fund (net of normal servicing
fees) is referred to as a "Trust Interest Certificate."
Characterization of Investments in Trust Certificates.
Trust Fractional Certificates. In the case of Trust Fractional
Certificates, Arter & Hadden, special counsel to the Depositor, will deliver
their opinion that, in general (and subject to the discussion below under
"Buydown Mortgage Loans"), (i) Trust Fractional Certificates held by a thrift
institution taxed as a "domestic building and loan association" will
represent "loans . . . secured by an interest in real property" within the
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meaning of Code Section 7701(a)(19)(C)(v); (ii) Trust Fractional Certificates
held by a real estate investment trust will represent "real estate assets"
within the meaning of Code Section 856(c)(5)(A) and interest on Trust Fractional
Certificates will be considered "interest on obligations secured by mortgages on
real property or on interests in real property" within the meaning of Code
Section 856(c)(5)(B); and (iii) Trust Fractional Certificates acquired by a
REMIC in accordance with the requirements of Code Section 860G (a)(3)(A)(i) and
(ii) or Section 860G(a)(4)(B) will be treated as "qualified mortgages" within
the meaning of Code Section 860D(a)(4).
Trust Interest Certificates. Although there appears to be no policy
reason not to accord to Trust Interest Certificates the treatment described
above for Trust Fractional Certificates to Trust Interest Certificates, there is
no authority addressing such characterization for instruments similar to Trust
Interest Certificates. Consequently, it is unclear to what extent, if any, (1) a
Trust Interest Certificate owned by a "domestic building and loan association"
within the meaning of Code Section 7701 (a) (19) will be considered to represent
"loans . . . secured by an interest in real property" within the meaning of Code
Section 7701(a)(19)(C)(v); and (2) a real estate investment trust which owns a
Trust Interest Certificate will be considered to own "real estate assets" within
the meaning of Code Section 856(c)(5)(A), and interest income thereon will be
considered "interest on obligations secured by mortgages on real property"
within the meaning of Code Section 856(c)(3)(B). . Prospective purchasers to
which such characterization of an investment in Trust Interest Certificates is
material should consult their own tax advisers regarding whether the Trust
Interest Certificates, and the income therefrom, will be so characterized.
Buydown Mortgage Loans. It is contemplated that the assets of certain
Trust Funds may include Buydown Mortgage Loans. The characterization of an
investment in Buydown Mortgage Loans will depend upon the precise terms of the
related Buydown Agreement. There are no directly applicable precedents with
respect to the federal income tax treatment or the characterization of
investments in Buydown Mortgage Loans. Accordingly, holders of Trust
Certificates should consult their own tax advisers with respect to
characterization of investments in Trust Funds that include Buydown Mortgage
Loans.
Although the matter is not entirely free from doubt, the portion of a
Trust Certificate representing an interest in Buydown Mortgage Loans may be
considered to represent an investment in "loans . . . secured by an interest in
real property" within the meaning of Code Section 7701(a)(19)(C)(v) to the
extent the outstanding principal balance of the Buydown Mortgage Loans exceeds
the amount held from time to time in the Buydown Fund. It is also possible that
the entire interest in Buydown Mortgage Loans may be so considered, because the
fair market value of the real property securing each Buydown Mortgage Loan will
exceed the amount of such loan at the time it is made. Section 1.593-11(d)(2) of
the Treasury Regulations suggests that this latter treatment may be available,
and Revenue Ruling 81-203, 1981-2 C.B. 137 may be read to imply that
apportionment is generally required whenever more than a minimal amount of
assets other than real property may be available to satisfy purchasers' claims.
For similar reasons, the portion of such Trust Certificate representing
an interest in Buydown Mortgage Loans may be considered to represent "real
estate assets" within the meaning of Code Section 856(c)(5)(A). Section 1.856-5
(c)(1)(i) of the Treasury Regulations specifies that, if a mortgage loan is
secured by both real property and by other property and the value of the real
property alone equals or exceeds the amount of the loan, then all interest
income will be treated as "interest on obligations secured by mortgages on real
property" within the meaning of Code Section 856(c)(3)(B).
Taxation of Trust Fractional Certificates. Each holder of a Trust
Fractional Certificate (a "Trust Fractional Certificateholder") will be treated
as the owner of an undivided percentage interest in the principal of, and
possibly a different undivided percentage interest in the interest portion of,
each of the assets in a Trust. Accordingly, each Trust Fractional
Certificateholder must report on its federal income tax return its allocable
share of income from its interests, as described below, at the same time and in
the same manner as if it had held directly interests in the Mortgage Assets and
received directly its share of the payments on such Mortgage Assets. Because
those interests may represent interests in "stripped bonds" or "stripped
coupons" within the meaning of Code Section 1286, such interests would be
considered to be newly issued debt instruments, and thus to have no market
discount or premium, and the amount of original issue discount may differ from
the amount of original issue discount on the Mortgage Assets and the amount
includible in income on account of a Trust Fractional Certificate may differ
significantly from the amount payable thereon from payments of interest on the
Mortgage Assets. Each Trust Fractional Certificateholder may report and deduct
its allocable share of the servicing and related fees and expenses at the same
time, to the same extent, and in the same manner as such items would have been
reported and deducted had it held directly interests in the Mortgage Assets and
paid directly its share of the servicing and related fees and expenses. A holder
of a Trust Fractional Certificate who is an individual, estate or trust will be
allowed a deduction
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for servicing fees in determining its regular tax liability only to the extent
that the aggregate of such holder's miscellaneous itemized deductions exceeds 2
percent of such holder's adjusted gross income and will be allowed no deduction
for such fees in determining its liability for alternative minimum tax. Amounts
received by Trust Fractional Certificateholders in lieu of amounts due with
respect to any Mortgage Assets but not received from the mortgagor will be
treated for federal income tax purposes as having the same character as the
payments which they replace.
Purchasers of Trust Fractional Certificates identified in the
applicable Prospectus Supplement as representing interests in Stripped Mortgage
Assets should read the material under the headings "Application of Stripped Bond
Rules," "Market Discount and Premium" and "Allocation of Purchase Price" for a
discussion of particular rules applicable to their Certificates. A "Stripped
Mortgage Asset" means a Mortgage Asset having a Retained Yield (as that term is
defined below) or a Mortgage Asset included in a Trust having either Trust
Interest Certificates or more than one class of Trust Fractional Certificates or
identified in the Prospectus Supplement as related to a Class of Trust
Certificates identified as representing interests in Stripped Mortgage Assets.
Purchasers of Trust Fractional Certificates identified in the
applicable Prospectus Supplement as representing interests in Unstripped
Mortgage Assets should read the material under the headings "Treatment of
Unstripped Certificates", "Market Discount and Premium", and "Allocation of
Purchase Price" for a discussion of particular rules applicable to their
Certificates. Nevertheless, the IRS has indicated that under some circumstances
it will view a portion of servicing and related fees and expenses paid to or
retained by the Master Servicer or sub-servicers as an interest in the Mortgage
Assets, essentially equivalent to that portion of interest payable with respect
to each Mortgage Asset that is retained ("Retained Yield"). If such a view were
sustained with respect to a particular Trust, such purchasers would be subject
to the rules set forth under "Application of Stripped Bond Rules" rather than
those under "Treatment of Unstripped Certificates". The Depositor does not
expect any Servicing Fee or Master Servicing Fee to constitute a retained
interest in the Mortgage Assets; nevertheless, prospective purchasers are
advised to consult their own tax advisers with respect to the existence of a
retained interest and any effects on investment in Trust Fractional
Certificates.
Application of Stripped Bond Rules. Each Trust will consist of an
interest in each of the Mortgage Assets relating thereto, exclusive of the
Retained Yield, if any. With respect to each Series of Certificates Arter &
Hadden, special counsel to the Depositor, will deliver their opinion that any
Retained Yield will be treated for federal income tax purposes as an ownership
interest retained by the owner thereof in a portion of each interest payment on
the underlying Mortgage Assets. The sale of the Trust Certificates associated
with any Trust for which there is a class of Trust Interest Certificates or two
or more Classes of Trust Fractional Certificates bearing different interest
rates or of Trust Certificates identified in the Prospectus Supplement as
representing interests in Stripped Mortgage Loans (subject to certain exceptions
which, if applicable, will be stated in the applicable Prospectus Supplement)
will be treated for federal income tax purposes as having effected a separation
in ownership between the principal of each Mortgage Asset and some or all of the
interest payable thereon. As a consequence, each Stripped Mortgage Asset will
become subject to the "stripped bond" rules of the Code (the "Stripped Bond
Rules"). The effect of applying those rules will generally be to require each
Trust Fractional Certificateholder to accrue and report income attributable to
its share of the principal and interest on each of the Stripped Mortgage Assets
as original issue discount on the basis of the yield to maturity of such
Stripped Mortgage Assets, as determined in accordance with the provisions of the
Code dealing with original issue discount. For a description of the general
method of calculating original issue discount, see "REMIC Trust Funds --
Taxation of Owners of REMIC Regular Certificates -- Original Issue Discount".
The yield to maturity of a Trust Fractional Certificateholder's interest in the
Stripped Mortgage Loans will be calculated taking account of the price at which
the holder purchased the Certificate and the holder's share of the payments of
principal and interest to be made thereon. Although the provisions of the Code
and the OID Regulations do not directly address the treatment of instruments
similar to Trust Fractional Certificates, in reporting to Trust Fractional
Certificateholders such Certificates will be treated as a single obligation with
payments corresponding to the aggregate of the payments allocable thereto from
each of the Mortgage Assets and the amount of original issue discount on such
Certificates will be determined accordingly. See "Aggregate Reporting".
Under Treasury regulations, original issue discount determined with
respect to a particular Stripped Mortgage Loan may be considered to be zero
under the de minimis rule described above, in which case it is treated as market
discount. See "REMIC Trust Funds -- Taxation of REMIC Regular Certificates
Original -- Issue Discount". Those regulations also provide that
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original issue discount so determined with respect to a particular Stripped
Mortgage Asset will be treated as market discount if the rate of interest on the
Stripped Mortgage Asset, including a reasonable servicing fee, is no more than
one percentage point less than the unstripped rate of interest. See "Market
Discount and Premium". The foregoing de minimis and market discount rules will
be applied on an aggregate poolwide basis, although it is possible that
investors may be required to apply them on a loan-by-loan basis. The
loan-by-loan information required for such application of those rules may not be
available. See "Aggregate Reporting".
Subsequent purchasers of the Certificates may be required to include
"original issue discount" in an amount computed using the price at which such
subsequent purchaser purchased the Certificates. Further, such purchasers may be
required to determine if the above described de minimis and market discount
rules apply at the time a Trust Fractional Certificate is acquired, based on the
characteristics of the Mortgage Assets at that time.
Variable Rate Certificates. There is considerable uncertainty
concerning the application of the OID Regulations to Mortgage Assets bearing a
variable rate of interest. Although such regulations are subject to a different
interpretation, as discussed below, in the absence of other contrary authority
in preparing reports furnished to Certificateholders Stripped Mortgage Assets
bearing a variable rate of interest (other than those treated as having market
discount pursuant to the regulations described above) will be treated as subject
to the provisions of the OID Regulation governing variable rate debt
instruments. The effect of the application of such provisions generally will be
to cause Certificateholders holding Trust Fractional Certificates bearing
interest at a Single Variable Rate or at a Multiple Variable Rate (as defined
above under "REMIC Trust Funds -- Taxation of REMIC Regular -- Certificates --
Original Issue Discount") to accrue original issue discount and interest as
though the value of each variable rate were a fixed rate, which is (a) for each
qualified floating rate, such rate as of the Closing Date (with appropriate
adjustment for any differences in intervals between interest adjustment dates),
(b) for a qualified inverse floating rate, such rate as of Closing Date, and (c)
for any other objective rate, the fixed rate that reflects the yield that is
reasonably expected for the Trust Fractional Certificate. If the interest paid
or accrued with respect to a variable rate Trust Fractional Certificate during
an accrual period differs from the assumed fixed interest rate, such difference
will be an adjustment (to interest or original issue discount, as applicable) to
the Certificateholder's taxable income for the taxable period or periods to
which such difference relates.
The provisions in the OID Regulations applicable to variable rate debt
instruments may not apply to certain adjustable and variable rate mortgage
loans, possibly including the Mortgage Assets, or to Stripped Certificates
representing interests in such Mortgage Assets. If variable rate Trust
Fractional Certificates are not governed by the provisions of the OID
Regulations applicable to variable rate debt instruments, such Certificates may
be subject to the provisions of the Contingent Debt Regulations. The application
of those provisions to instruments such as the Trust Fractional Certificates is
subject to differing interpretations. Prospective purchasers of variable rate
Trust Fractional Certificates are advised to consult their tax advisers
concerning the tax treatment of such Certificates.
Aggregate Reporting. The Trustee intends in reporting information
relating to original issue discount to Certificateholders to provide such
information on an aggregate poolwide basis. Applicable law is unclear, however,
and it is possible that investors may be required to compute original issue
discount on a loan-by-loan basis (or on the basis of the rights to individual
payments) taking account of an allocation of the investor's basis in the
Certificates among the interests in the various Mortgage Assets represented by
such Certificates according to their respective fair market values. Investors
should be aware that it may not be possible to reconstruct after the fact
sufficient loan-by-loan information should the IRS require a computation on that
basis.
Because the treatment of the Certificates under the OID Regulations is
both complicated and uncertain, Certificateholders should consult their tax
advisers to determine the proper method of reporting amounts received or accrued
on Certificates.
Treatment of Unstripped Certificates. Mortgage Assets in a Fund for
which there is neither any Class of Trust Interest Certificates, nor more than
one Class of Trust Fractional Certificates, nor any Retained Yield otherwise
identified in the Prospectus Supplement as being unstripped mortgage assets
("Unstripped Mortgage Assets") will be treated as wholly owned by the Trust
Fractional Certificateholders of the stated Trust. Trust Fractional
Certificateholders using the cash method of accounting must take into account
their pro rata shares of original issue discount as it accrues and qualified
stated interest (as described in "REMIC Trust Funds -- Taxation of REMIC Regular
Certificates -- Original Issue Discount") from Unstripped Mortgage Assets as and
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when collected by the Trustee. Trust Fractional Certificateholders using an
accrual method of accounting must take into account their pro rata shares of
qualified stated interest from Unstripped Mortgage Assets as it accrues or is
received by the Trustee, whichever is earlier.
Code Sections 1272 through 1275 provide generally for the inclusion of
original issue discount in income on the basis of a constant yield to maturity.
Nevertheless, the application of the OID Regulations to mortgage loans is
unclear in certain respects. The OID Regulations provide a de minimis rule for
determining whether certain self-amortizing installment obligations are to be
treated as having original issue discount. Such obligations have original issue
discount if the points charged at origination (or other loan discount) exceed
the greater of one-sixth of one percent times the number of full years to final
maturity or one-fourth of one percent times weighted average maturity. The OID
Regulations treat certain variable rate mortgage loans as having original issue
discount because of an initial rate of interest that differs from that
determined by the mechanism for setting the interest rate during the remainder
of the term of the mortgage loan, or because of the use of an index that does
not vary in a manner approved in the OID Regulations. For a description of the
general method of calculating the amount of original issue discount see "REMIC
Trust Funds -- Taxation of REMIC Regular Certificates -- Original Issue
Discount" and "Application of Stripped Bond Rules -- Variable Rate
Certificates."
A subsequent purchaser of a Trust Fractional Certificate that purchases
such Certificate at a cost (not including payment for accrued qualified stated
interest) less than its allocable portion of the aggregate of the remaining
stated redemption prices at maturity of the Unstripped Mortgage Assets will also
be required to include in gross income, for each day on which it holds such
Trust Fractional Certificate, its allocable share of the daily portion of
original issue discount with respect to each Unstripped Mortgage Asset. That
allocable share is reduced, if the cost of such subsequent purchaser's interest
in such Unstripped Mortgage Asset exceeds its "adjusted issue price," by an
amount equal to the product of (i) the daily portion and (ii) a constant
fraction, the numerator of which is such excess and the denominator of which is
the sum of the daily portions of original issue discount allocable to such
subsequent purchaser's interest for all days on or after the day of purchase.
The adjusted issue price of an Unstripped Mortgage Asset on any given day is
equal to the sum of the adjusted issue price (or, in the case of the first
accrual period, the issue price) of such Unstripped Mortgage Asset at the
beginning of the accrual period during which such day occurs and the daily
portions of original issue discount for all days during such accrual period
prior to such day reduced by the aggregate amount of payments made (other than
payments of qualified stated interest) during such accrual period prior to such
day.
Market Discount and Premium. In general, if the Stripped Bond Rules do
not apply to a Trust Fractional Certificate, a purchaser of a Trust Fractional
Certificate will be treated as acquiring market discount bonds to the extent
that the share of such purchaser's purchase price allocable to any Unstripped
Mortgage Asset is less than its allocable share of the "adjusted issue price" of
such Mortgage Asset. See "Treatment of Unstripped Certificates" and "Application
of Stripped Bond Rules". Thus, with respect to such Mortgage Assets, a holder
will be required, under Code Section 1276, to include as ordinary income the
previously unrecognized accrued market discount in an amount not exceeding each
principal payment on any such Mortgage Assets at the time each principal payment
is received or due, in accordance with the purchaser's method of accounting, or
upon a sale or other disposition of the Certificate. In general, the amount of
market discount that has accrued is determined on a ratable basis. A Trust
Fractional Certificateholder may, however, elect to determine the amount of
accrued market discount on a constant yield to maturity basis. This election is
made on a loan-by-loan basis and is irrevocable. In addition, the description of
the market discount rules in "Taxation of REMIC Regular -- Certificates --
Market Discount and Premium" with respect to (i) conversion to ordinary income
of a portion of any gain recognized on sale or exchange of a market discount
bond, (ii) deferral of interest expense deductions, (iii) the de minimis
exception from the market discount rules and (iv) the elections to include in
income either market discount or all interest, discount and premium as they
accrue, is also generally applicable to Trust Fractional Certificates. Treasury
regulations implementing the market discount rules have not yet been issued and
investors therefore should consult their own tax advisers regarding the
application of these rules.
If a Trust Fractional Certificate is purchased at a premium, under
existing law such premium must be allocated to each of the Mortgage Assets (on
the basis of its relative fair market value). In general, the portion of any
premium allocated to Unstripped Mortgage Assets can be amortized and deducted
under the provisions of the Code relating to amortizable bond premium.
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The application of the Stripped Bond Rules to Stripped Mortgage Assets
will generally cause any premium allocable to Stripped Mortgage Assets to be
amortized automatically by adjusting the rate of accrual of interest and
discount to take account of the allocable portion of the actual purchase price
of the Certificate. In that event, no additional deduction for the amortization
of premium would be allowed. See "REMIC Certificates -- Taxation of REMIC
Regular Certificates -- Market Discount and Premium" for a discussion of the
application of the Proposed Premium Regulations.
Allocation of Purchase Price. As noted above, a purchaser of a Trust
Fractional Certificate relating to Unstripped Mortgage Assets will be required
to allocate the purchase price therefore to the undivided interest it acquires
in each of the Mortgage Assets, in proportion to the respective fair market
values of the portions of such Mortgage Assets included in the Trust Fund at the
time the Certificate is purchased. The Depositor believes that it may be
reasonable to make such allocation in proportion to the respective principal
balances of the Mortgage Assets, where the interests in the Mortgage Assets
represented by a Trust Fractional Certificate have a common remittance rate and
other common characteristics, and otherwise so as to produce a common yield for
each interest in a Mortgage Asset, provided the Mortgage Assets are not so
diverse as to evoke differing prepayment expectations. Nevertheless, if there is
any significant variation in interest rates among the Mortgage Assets, a
disproportionate allocation of the purchase price taking account of prepayment
expectations may be required.
Taxation of Trust Interest Certificates. With respect to each Series of
Certificates Arter & Hadden, special counsel to the Depositor, will deliver
their opinion that each holder of a Trust Interest Certificate (a "Trust
Interest Certificateholder") will be treated as the owner of an undivided
interest in the interest portion ("Interest Portion") of each of the Mortgage
Assets in the related Trust. Accordingly, and subject to the discussion below,
each Trust Interest Certificateholder is treated as owning its allocable share
of the Interest Portion from the Mortgage Assets, will report income as
described below, and may deduct its allocable share of the servicing and related
fees and expenses paid to or retained by the related Trust at the same time and
in the same manner as such items would have been reported under the Trust
Interest Certificateholder's tax accounting method had it held directly an
interest in the Interest Portion from the Mortgage Assets, received directly its
share of the amounts received with respect to the Mortgage Assets and paid
directly its share of the servicing and related fees and expenses. An
individual, estate or trust holder of a Trust Interest Certificate will be
allowed a deduction for servicing fees in determining its regular tax liability
only to the extent that the aggregate of such holder's miscellaneous itemized
deductions exceeds 2 percent of such holder's adjusted gross income, and will be
allowed no deduction for such fees in determining its liability for alternative
minimum tax. Amounts, if any, received by Trust Interest Certificateholders in
lieu of amounts due with respect to any Mortgage Asset but not received from the
mortgagor will be treated for federal income tax purposes as having the same
character as the payment which they replace.
A Trust Interest Certificate will consist of an undivided interest in
the Interest Portion of each of the Mortgage Assets in the related Trust. With
respect to each Series of Certificates, a Trust Interest Certificate will be
treated for federal income tax purposes as comprised of an ownership interest in
a portion of the Interest Portion of each of the Mortgage Assets (a "Stripped
Interest") separated by the Depositor from the right to receive principal
payments and the remainder, if any, of each interest payment on the underlying
Mortgage Asset. As a consequence, the Trust Interest Certificates will become
subject to the Stripped Bond Rules. Each Trust Interest Certificateholder will
be required to apply the Stripped Bond Rules to its interest in the Interest
Portion under the method prescribed by the Code, taking account of the price at
which the holder purchased the Trust Interest Certificate. The Stripped Bond
Rules generally require a holder of stripped bonds or coupon portions to accrue
and report income therefrom daily on the basis of the yield to maturity of such
stripped bonds or coupons, as determined in accordance with the provisions of
the Code dealing with original issue discount. For a discussion of the general
method of calculating original issue discount, see "REMIC Trust Funds --
Taxation of REMIC Regular Certificates -- Original Issue Discount." The
provisions of the Code and the OID Regulations do not directly address the
treatment of instruments similar to Trust Interest Certificates. In reporting to
Trust Interest Certificateholders such Certificates will be treated as a single
obligation with payment corresponding to the aggregate of the payment allocable
thereto from each of the Mortgage Assets.
Alternatively, IRS may require Trust Interest Certificateholders to
treat each scheduled payment on each Stripped Interest (or their interests in
all scheduled payments from each of the Stripped Interests) as a separate
obligation for purposes of allocating purchase price and computing original
issue discount.
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The tax treatment of the Trust Interest Certificates with respect to
the application of the original issue discount provisions of the Code is
currently unclear. Each Trust Interest Certificate will be treated as a single
debt instrument issued on the day it is purchased for purposes of calculating
any original issue discount. Original issue discount with respect to a Trust
Interest Certificate must be included in ordinary gross income for federal
income tax purposes as it accrues in accordance with a constant yield method
that takes into account the compounding of interest and such accrual of income
may be in advance of the receipt of any cash attributable to such income. In
general, the rules for accruing original issue discount set forth above in
"REMIC Trust Funds -- Taxation of REMIC Regular Certificates -- Original Issue
Discount" apply; however, there is no authority permitting Trust Interest
Certificateholders to take into account the Prepayment Assumption in computing
original issue discount accruals. See "Prepayments" below. For purposes of
applying the original issue discount provisions of the Code, the issue price
used in reporting original issue discount with respect to a Trust Interest
Certificate will be the purchase price paid by each holder thereof and the
stated redemption price at maturity may include the aggregate amount of all
payments to be made with respect to the Trust Interest Certificate whether or
not denominated as interest. The amount of original issue discount with respect
to a Trust Interest Certificate may be treated as zero under the original issue
discount de minimis rules described above.
The Trustee intends in reporting information relating to original issue
discount to Certificateholders to provide such information on an aggregate
poolwide basis. Applicable law is however, unclear, and it is possible that
Certificateholders may be required to compute original issue discount either on
a loan-by-loan basis or on a payment-by-payment basis taking account of an
allocation of their basis in the Certificates among the interests in the various
mortgage loans represented by such Certificates according to their respective
fair market values. The effect of an aggregate computation for the inclusion of
original issue discount in income may be to defer the recognition of losses due
to early prepayments relative to a computation on a loan-by-loan basis. It may
not be possible to reconstruct after the fact sufficient loan-by-loan
information should the IRS require a computation on that basis.
Because the treatment of the Trust Interest Certificates under current
law and the potential application of the 1996 Contingent Debt Regulations are
both complicated and uncertain, Trust Interest Certificateholders should consult
their tax advisers to determine the proper method of reporting amounts received
or accrued on Trust Interest Certificates.
Prepayments. The proper treatment of interests, such as the Trust
Fractional Certificates and the Trust Interest Certificates, in debt instruments
that are subject to prepayment is unclear. The rules of Section 1272(a)(6)
described above require original issue discount to be taken into account on the
basis of a constant yield to assumed maturity and actual prepayments to any pool
of debt instruments the payments on which may be accelerated by reason of
prepayments. The manner of determining the prepayment assumption is to be
determined under Treasury regulations, but no regulations have been issued.
Trust Fractional Certificateholders and Trust Interest Certificateholders should
consult their tax advisers as to the proper reporting of income from Trust
Fractional Certificates and Trust Interest Certificates, as the case may be, in
the light of the possibility of prepayment and, with respect to the Trust
Interest Certificates, as to the possible application of the 1996 Contingent
Debt Regulations.
Sales of Trust Certificates. If a Certificate is sold, gain or loss
will be recognized by the holder thereof in an amount equal to the difference
between the amount realized on the sale and the Certificateholder's adjusted tax
basis in the Certificate. Such tax basis will equal the Certificateholder's cost
for the Certificate, increased by any original issue or market discount
previously included in income and decreased by any deduction previously allowed
for premium and by the amount of payments, other than payments of qualified
stated interest, previously received with respect to such Certificate. The
portion of any such gain attributable to accrued market discount not previously
included in income will be ordinary income, as will gain attributable to a
Certificate which is part of a "conversion transaction" or which the holder
elects to treat as ordinary. See "REMIC Trust Funds -- Sales of REMIC
Certificates" above. Any remaining gain or any loss will be capital gain or loss
if the Certificate was held as a capital asset except to the extent that Code
Section 582(c) applies to such gain or loss.
Trust Reporting. Each holder of a Trust Fractional Certificate will be
furnished with each distribution a statement setting forth the allocation of
such distribution to principal and interest. In addition, within a reasonable
time after the end of each calendar year, each holder of a Trust Certificate who
was such a holder at any time during such year, will be furnished with
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information regarding the amount of servicing compensation and such other
customary factual information necessary or desirable to enable holders of Trust
Certificates to prepare their tax returns.
Back-up Withholding. In general, the rules described in "REMIC Trust
Funds -- Back-up Withholding" will also apply to Trust Certificates.
Foreign Certificateholders. Payments in respect of interest or original
issue discount (including amounts attributable to servicing fees) to a
Certificateholder who is not a citizen or resident of the United States, a
corporation or other entity organized in or under the laws of the United States
or of any State thereof, or a United States estate or trust, will not generally
be subject to United States withholding tax, provided that such
Certificateholder (i) does not own, directly or indirectly, 10% or more of, and
is not a controlled foreign corporation (within the meaning of Code Section 957)
related to, each of the issuers of the Mortgages and (ii) provides required
certification as to its non-United States status under penalty of perjury. Any
withholding tax that does apply may be reduced or eliminated by an applicable
tax treaty. Notwithstanding the foregoing, if any such payments are effectively
connected with a United States trade or business conducted by the
Certificateholder, they will be subject to regular United States income tax and,
in the case of a corporation, to a possible branch profits tax, but will
ordinarily be exempt from United States withholding tax provided that applicable
documentation requirements are met.
See further the discussion of the Proposed Withholding Regulations,
under "REMIC Trust Funds -- Foreign Investors in REMIC Certificates".
Securities Classified as Partnership Interests
Certain Trust Funds may be treated as partnerships for federal income
tax purposes. In such event, the Trust Funds may issue Certificates
characterized as "Partnership Interests" as discussed in the related Prospectus
Supplement. With respect to such series of Partnership Interests, Arter &
Hadden, special counsel to the Depositor, will deliver their opinion (unless
otherwise limited in the related Prospectus Supplement) that the Trust Fund will
be characterized as a partnership and not as an association taxable as a
corporation for federal income tax purposes.
State and Local Taxation
In addition to the federal income tax consequences described herein,
potential investors should consider the state and local income tax consequences
of the acquisition, ownership, and disposition of the Certificates. State and
local income tax law may differ substantially from the corresponding federal
law, and this discussion does not purport to describe any aspect of the income
tax laws of any state or locality.
For example, a REMIC Mortgage Pool or Non -- REMIC Trust Fund may be
characterized as a corporation, a partnership, or some other entity for purposes
of state income tax law. Such characterization could result in entity level
income or franchise taxation of the REMIC Mortgage Pool or Trust Fund formed in,
owning mortgages or property in, or having servicing activity performed in a
state. Further, REMIC Regular Certificateholders resident in non-conforming
states may have their ownership of REMIC Regular Certificates characterized as
an interest other than debt of the REMIC such as stock or a partnership
interest. Therefore, potential investors should consult their own tax advisers
with respect to the various state and local tax consequences of an investment in
the Certificates.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described above,
potential investors should consider the state income tax consequences of the
acquisition, ownership, and disposition of the Certificates. State income tax
law may differ substantially from the corresponding federal law, and this
discussion does not purport to describe any aspect of the income tax laws of any
state. Therefore, potential investors should consult their own tax advisors with
respect to the various state tax consequences of an investment in the
Certificates.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain requirements and restrictions on employee benefit
plans within the meaning of Section 3(3) of ERISA (including collective
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investment funds, separate accounts and insurance company general accounts in
which such plans are invested). ERISA also imposes certain duties on those
persons who are fiduciaries with respect to employee benefit plans that are
subject to ERISA. Investments by employee benefit plans covered by ERISA are
subject to the general fiduciary requirements of ERISA, including the
requirement of investment prudence and diversification, and the requirement that
the employee benefit plan's investments be made in accordance with the documents
governing the employee benefit plan.
In addition, employee benefit plans subject to ERISA (including
collective investment funds, separate accounts and insurance company general
accounts in which such plans are invested), and individual retirement accounts
and annuities or certain types of Keogh plans not subject to ERISA but subject
to Section 4975 of the Code (each, a "Plan"), are prohibited from engaging in a
broad range of transactions involving Plan assets and persons having certain
specified relationships to a Plan ("parties in interest" under ERISA and
"disqualified persons" under the Code). Such transactions are treated as
"prohibited transactions" under Sections 406 and 407 of ERISA and excise taxes
are imposed upon disqualified persons by Section 4975 of the Code (or, in some
cases, a civil penalty may be assessed pursuant to Section 502(i) of ERISA). The
Depositor, the Credit Enhancer, the Underwriters and the Trustee, and certain of
their affiliates, might be considered parties in interest or disqualified
persons with respect to a Plan. If so, the acquisition or holding or transfer of
Certificates by or on behalf of such Plan could be considered to give rise to a
prohibited transaction within the meaning of ERISA and the Code unless an
exemption is available. The United States Department of Labor ("DOL") has issued
a regulation (29 C.F.R. Section 2510.3-101) concerning the definition of what
constitutes the assets of a Plan (the "Plan Asset Regulations"). Under the Plan
Asset Regulations, the underlying assets and properties of corporations,
partnerships, trusts and certain other entities in which a Plan makes an "equity
interest" investment could be deemed for purposes of ERISA to be assets of the
investing Plan unless certain exceptions apply. If an investing Plan's assets
were deemed to include an interest in the Mortgage Assets and any other assets
of a Trust and not merely an interest in the Certificates, the assets of the
Trust would become subject to the fiduciary responsibility standards of ERISA,
and transactions occurring between the Depositor, the Servicer, the Credit
Enhancer, the Underwriters and the Trustee, or any of their affiliates, might
constitute prohibited transactions, unless an administrative exemption applies.
Certain such exemptions which may be applicable to the acquisition and holding
of the Certificates or to the servicing of the Mortgage Assets are discussed
below.
DOL has issued an administrative exemption, Prohibited Transaction
Class Exemption 83-1 ("PTCE 83-1"), which, under certain conditions, exempts
from the application of the prohibited transaction rules of ERISA and the excise
tax provisions of Section 4975 of the Code transactions involving a Plan in
connection with the operation of a "mortgage pool" and the purchase, sale and
holding of "mortgage pool pass-through certificates." A "mortgage pool" is
defined as an investment pool which is held in trust and which consists solely
of interest bearing obligations secured by first or second mortgages or deeds of
trust on single-family residential property, property acquired in foreclosure
and undistributed cash. A "mortgage pool pass-through certificate" is defined as
a certificate which represents a beneficial undivided fractional interest in a
mortgage pool which entitles the holder to pass-through payments of principal
and interest from the mortgage loans, less any fees retained by the pool
sponsor.
For the exemption to apply, PTCE 83-1 requires that (i) the Depositor
and the Trustee maintain a system of insurance or other protection for the
pooled mortgage loans and the property securing such loans, and for indemnifying
holders of Certificates against reductions in pass-through payments due to
defaults in loan payments or property damage in an amount at least equal to the
greater of 1% of the aggregate principal balance of the covered pooled mortgage
loans and 1% of the principal balance of the largest covered pooled mortgage
loan; (ii) the Trustee may not be an affiliate of the Depositor; and (iii) the
payments made to and retained by the Depositor in connection with the Trust,
together with all funds inuring to its benefit for administering the Trust,
represent no more than "adequate consideration" for selling the mortgage loans,
plus reasonable compensation for services provided to the Trust.
In addition, PTCE 83-1 exempts the initial sale of Certificates to a
Plan with respect to which the Depositor, the Servicer, the Credit Enhancer or
the Trustee is a party in interest if the Plan does not pay more than fair
market value for such Certificates and the rights and interests evidenced by
such Certificates are not subordinated to the rights and interests evidenced by
other Certificates of the same pool. PTCE 83-1 also exempts from the prohibited
transaction rules transactions in connection with the servicing and operation of
the Trust, provided that any payments made to the Servicer in
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connection with the servicing of the Trust are made in accordance with a binding
agreement, copies of which must be made available to prospective investors
before they purchase Certificates.
In the case of any Plan with respect to which the Depositor, the
Servicer, the Credit Enhancer or the Trustee is a fiduciary, PTCE 83-1 will only
apply if, in addition to the other requirements: (i) the initial sale, exchange
or transfer of Certificates is expressly approved by an independent fiduciary
who has authority to manage and control those plan assets being invested in
Certificates; (ii) the Plan pays no more for the Certificates than would be paid
in an arm's length transaction; (iii) no investment management, advisory or
underwriting fee, sale commission, or similar compensation is paid to the
Depositor with regard to the sale, exchange or transfer of Certificates to the
Plan; (iv) the total value of the Certificates purchased by the Plan does not
exceed 25% of the amount issued; and (v) at least 50% of the aggregate amount of
Certificates is acquired by persons independent of the Depositor, the Servicer,
the Credit Enhancer or the Trustee.
Before purchasing Certificates, a fiduciary of a Plan should confirm
that the Trust is a "mortgage pool," that the Certificates constitute "mortgage
pool pass-through certificates," and that the conditions set forth in PTCE 83-1
would be satisfied. In addition to making its own determination as to the
availability of the exemptive relief provided in PTCE 83-1, the Plan fiduciary
should consider the availability of any other prohibited transaction exemptions.
The Plan fiduciary also should consider its general fiduciary obligations under
ERISA in determining whether to purchase any Certificates on behalf of a Plan.
In addition, DOL has granted to certain underwriters and/or placement
agents individual prohibited transaction exemptions which may be applicable to
avoid certain of the prohibited transaction rules of ERISA with respect to the
initial purchase, the holding and the subsequent resale in the secondary market
by Plans of pass-through certificates representing a beneficial undivided
ownership interest in the assets of a trust that consist of certain receivables,
loans and other obligations that meet the conditions and requirements of PTCE
83-1 which may be applicable to the Certificates.
One or more other prohibited transaction exemptions issued by the DOL
may be available to a Plan investing in Certificates, depending in part upon the
type of Plan fiduciary making the decision to acquire a Certificate and the
circumstances under which such decision is made, including, but not limited to,
PTCE 90-1, regarding investments by insurance company pooled separate accounts,
PTCE 91-38, regarding investments by bank collective investment funds and PTCE
95-60, regarding investments by insurance company general accounts.
Nevertheless, even if the conditions specified in PTCE 83-1 or one or more of
these other exemptions are met, the scope of the relief provided might not cover
all acts which might be construed as prohibited transactions.
Certain Classes of Certificates may not be offered for sale or be
transferable to Plans. The Prospectus Supplement for each Series will indicate
which Classes of Certificates are subject to restrictions on transfer to Plans.
Any Plan fiduciary considering the purchase of a Certificate should
consult with its counsel with respect to the potential applicability of ERISA
and the Code to such investment. Moreover, each Plan fiduciary should determine
whether, under the general fiduciary standards of investment prudence and
diversification, an investment in the Certificates is appropriate for the Plan,
taking into account the overall investment policy of the Plan and the
composition of the Plan s investment portfolio.
LEGAL INVESTMENT MATTERS
If so specified in the Prospectus Supplement for a Series, the
Certificates of such Series will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"), so
long as they are rated in one of the two highest rating categories by one or
more nationally recognized statistical rating organizations, and, as such, will
be legal investments for persons, trusts, corporations, partnerships,
associations, business trusts and business entities (including, but not limited
to, state-chartered savings banks, commercial banks, savings and loan
associations and insurance companies, as well as trustees and state government
employee retirement systems) created pursuant to or existing under the laws of
the United States or any state, territory or possession of the United States
(including the District of Columbia or Puerto Rico) whose authorized investments
are subject to state regulation to the same extent that, under applicable law,
obligations issued by or guaranteed as to principal and interest by the United
States or any agency or instrumentality thereof constitute legal investments for
such entities. Pursuant to SMMEA, a number of states enacted legislation, on or
before the October 3, 1991,
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cut-off for such enactments, limiting to varying extents the ability of certain
entities (in particular, insurance companies) to invest in "mortgage related
securities," in most cases by requiring the affected investors to rely solely
upon existing state law and not SMMEA. Accordingly, the investors affected by
such legislation will be authorized to invest in the Certificates only to the
extent provided in such legislation. Institutions whose investment activities
are subject to legal investment laws and regulations or to review by certain
regulatory authorities may be subject to restrictions on investment in certain
Classes of the Certificates of a Series.
SMMEA also amended the legal investment authority of federally
chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal
with mortgage related securities without limitation as to the percentage of
their assets represented thereby; federal credit unions may invest in mortgage
related securities; and national banks may purchase mortgage related securities
for their own account without regard to the limitations generally applicable to
investment securities set forth in 12 U.S.C. (section) ss. 24 (Seventh), subject
in each case to such regulations as the applicable federal regulatory authority
may prescribe. Federal credit unions should review National Credit Union
Administration (the "NCUA") Letter to Credit Unions No. 96, as modified by
Letter to Credit Unions No. 108, which includes guidelines to assist federal
credit unions in making investment decisions for mortgage related securities.
The NCUA has adopted rules, effective December 2, 1991, which prohibit federal
credit unions from investing in certain mortgage related securities, possibly
including certain series or classes of Certificates, except under limited
circumstances.
If specified in the Prospectus Supplement for a Series, one or more
Classes of Certificates of such Series will not constitute "mortgage related
securities" for purposes of SMMEA. In such event, persons whose investments are
subject to state or federal regulation may not be legally authorized to invest
in such Classes of Certificates.
All depository institutions considering an investment in the
Certificates should review the "Supervisory Policy Statement on Securities
Activities" dated January 28, 1992 (the "Policy Statement") of the Federal
Financial Institution Examination Council. The Policy Statement, which has been
adopted by the Board of Governors of the Federal Reserve System, the FDIC, the
Comptroller of the Currency and the Office of Thrift Supervision, effective
February 10, 1992, and by the NCUA (with certain modifications) effective June
26, 1992, which, among other things, prohibits depository institutions from
investing in certain "high-risk mortgage securities" (possibly including certain
Certificates), except under limited circumstances, and sets forth certain
investment practices deemed to be unsuitable for regulated institutions. In
addition, depository institutions and other financial institutions should
consult their regulators concerning the risk-based capital treatment of any
Certificates. Any financial institution that is subject to the jurisdiction of
the Comptroller of the Currency, the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation, the Office of Thrift
Supervision, the National Credit Union Administration or other federal or state
agencies with similar authority should review any applicable rules, guidelines
and regulations prior to purchasing the Certificates of a Series.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by such authorities before purchasing Certificates, as
certain Certificates may be deemed unsuitable investments, or may otherwise be
restricted, under such rules, policies or guidelines, in certain instances
irrespective of SMMEA.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits, provisions which
may restrict or prohibit investments in securities which are not
"interest-bearing" or "income-paying," and, with regard to any Book-Entry
Certificates, provisions which may restrict or prohibit investments in
securities which are issued in book-entry form.
Prospective investors should consult their own legal advisors in
determining whether and to what extent the Certificates constitute legal
investments for such investors.
PLAN OF DISTRIBUTION
The Depositor may sell the Certificates offered hereby and by the
related Prospectus Supplement either directly or through one or more
underwriters or underwriting syndicates (the "Underwriters"). The Prospectus
Supplement for each Series will set forth the terms of the offering of such
72
<PAGE>
Series and of each Class of such Series, including the name or names of the
Underwriters, the proceeds to and their use by the Depositor and either the
initial public offering price, the discounts and commissions to the Underwriters
and any discounts or concessions allowed or reallowed to certain dealers or the
method by which the price at which the Underwriters will sell the Certificates
will be determined.
The Certificates of a Series may be acquired by the Underwriters for
their own account and may be resold from time to time in one or more
transactions, including negotiated transactions, at a fixed public offering
price or at varying prices determined at the time of sale. The obligations of
the Underwriters will be subject to certain conditions precedent, and the
Underwriters will be severally obligated to purchase all the Certificates of a
Series described in the related Prospectus Supplement if any are purchased. If
Certificates of a Series are offered other than through Underwriters, the
related Prospectus Supplement will contain information regarding the nature of
such offering and any agreements to be entered into between the Depositor and
the purchasers of the Certificates of such Series.
The place and time of delivery for the Certificates of a Series in
respect of which this Prospectus is delivered will be set forth in the related
Prospectus Supplement.
AVAILABLE INFORMATION
The Depositor has filed a registration statement with the Securities
and Exchange Commission (the "Commission") with respect to the Certificates. The
registration statement and amendments thereto and the exhibits thereto as were
as reports filed with the Commission on behalf of each Trust may be inspected
and copied at the public reference facilities maintained by the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at certain of its
Regional Offices located as follows: Chicago Regional Office, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511; and New York Regional Office,
7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such
materials can also be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates
and electronically through the Electronic Data Gathering, Analysis and Retrieval
("EDGAR") system at the Commission's web site (http:\\www.sec.gov). The
Commission maintains computer terminals providing access to the EDGAR system at
each of the offices referred to above.
This Prospectus does not contain all the information set forth in the
Registration Statement of which this Prospectus is a part, or in the exhibits
relating thereto, which the Depositor has filed with the Commission in
Washington, D.C. Copies of the information and the exhibits are on file at the
offices of the Commission and may be obtained upon payment of the fee prescribed
by the Commission or may be examined without charge at the offices of the
Commission. Copies of the Agreement (as defined herein) for a Series will be
provided to each person to whom a Prospectus is delivered upon written or oral
request, provided that such request is made to Saxon Asset Securities Company,
4880 Cox Road, Glen Allen, Virginia 23060 ((804) 967- 7400).
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed with respect to each Trust pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended, after the
date of this Prospectus and prior to the termination of the offering of the
Certificates of such Trust hereunder shall be deemed to be incorporated into and
made a part of this Prospectus from the date of filing of such documents. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus. The Depositor will provide a copy of
any and all information that has been incorporated by reference into this
Prospectus (not including exhibits to the information so incorporated by
reference unless such exhibits are specifically incorporated by reference into
the information that this Prospectus incorporates) upon written or oral request
of any person, without charge to such person, provided that such request is made
to Saxon Asset Securities Company, 4880 Cox Road, Glen Allen, Virginia 23060
((804) 967-7400).
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<PAGE>
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
Page
----
1996 Contingent Payment Regulations....................................49
Adjustable Rate........................................................20
adjusted issue price...................................................53
Advance................................................................33
Advances................................................................3
AFR....................................................................58
Agreement...............................................................9
applicable federal rate................................................58
ARM Loans..............................................................21
backup withholding tax.................................................62
Balloon Loans...........................................................8
Bankruptcy Bond........................................................29
Beneficial Owner.......................................................10
Book-Entry Certificates................................................10
Buy-Down Loans.........................................................21
Certificate Guaranty Insurance Policy..................................27
Certificate Insurer....................................................27
Certificateholder......................................................15
Certificates.........................................................1, 9
Class................................................................1, 9
Closing Date...........................................................19
Code................................................................4, 49
Committee Report.......................................................49
Compound Interest Certificates.........................................16
Converted Mortgage Loan................................................23
Cooperative Loans.......................................................2
Cooperatives............................................................2
current value..........................................................51
Custodial Account......................................................33
daily accruals.........................................................58
daily portions.........................................................52
Delinquent Mortgage Loan...............................................24
Depositor...............................................................1
Depository.............................................................10
disqualified organizations.............................................60
disqualified persons...................................................71
Distribution Date...................................................2, 15
DOL.....................................................................4
DTC....................................................................10
equity interest........................................................71
ERISA...................................................................4
Excess inclusions......................................................58
FHLMC...................................................................2
Financial Intermediary.................................................10
Fixed Rate.............................................................20
FNMA....................................................................2
GNMA....................................................................2
GPM Loans..............................................................21
Gross Margin...........................................................20
HELOCs..................................................................2
Home Improvement Loans..................................................2
Index..................................................................20
Interest Adjustment Date...............................................20
Interest Portion.......................................................68
issue price............................................................51
Junior Mortgage Loans..................................................22
Lockout Periods........................................................20
market discount........................................................54
Mark-To-Market Regulations.............................................49
Master Servicer.....................................................3, 32
Master Servicer Custodial Account......................................33
Mortgage Assets.........................................................2
Mortgage Interest Rate.................................................20
Mortgage Loans..........................................................2
Mortgage Note..........................................................20
mortgage pool..........................................................71
Mortgage Pool Insurance Policy.........................................28
Mortgaged Premises.....................................................20
mortgage-related securities.............................................4
Multi-Family Loans......................................................2
Multiple Variable Rate.................................................53
non-conforming credit...................................................8
Non-U.S. Person........................................................62
objective rate.........................................................51
OID Regulations........................................................49
original issue discount................................................51
parties in interest....................................................71
pass-through entity....................................................60
Pass-Through Rate....................................................1, 9
Periodic Rate Cap......................................................20
Permitted Investments..................................................39
Plan...................................................................71
Plan Asset Regulations..................................................4
Pool Insurer...........................................................28
Pre-Funding Account.....................................................2
Pre-Funding Agreement...................................................2
Prepayment Assumption..................................................50
Primary Mortgage Insurance Policies....................................20
prohibited transactions................................................61
Proposed Premium Regulations...........................................49
Proposed Withholding Regulations.......................................49
PTCE 83-1..............................................................71
qualified floating rate................................................51
qualified mortgages....................................................50
qualified stated interest..............................................51
Rating Agency...........................................................4
Realized Loss..........................................................16
regular interests......................................................50
REMIC...................................................................4
REMIC Certificates.....................................................49
REMIC Mortgage Pool....................................................49
REMIC Provisions.......................................................49
REMIC Regular Certificate..............................................50
REMIC Regulations......................................................49
REMIC Residual Certificate.............................................50
Remittance Date........................................................33
REO Properties..........................................................3
Reserve Fund...........................................................30
residual interests.....................................................50
Residual Owner.........................................................56
Retained Yield.........................................................65
Security Instrument....................................................19
Seller..................................................................1
Series..................................................................1
Servicer................................................................3
Servicer Custodial Account.............................................33
Servicing Agreement....................................................32
Servicing of Mortgage Loans.............................................3
Single Family Loans.....................................................2
Single Variable Rate...................................................51
single-class REMIC.....................................................61
SMI.....................................................................1
SMMEA...................................................................4
Special Hazard Insurance Policy........................................28
Special Hazard Insurer.................................................28
Special Servicer....................................................3, 32
Standard Hazard Insurance Policies.....................................35
stated redemption price at maturity....................................51
Stripped Interest......................................................68
Stripped Mortgage Asset................................................65
tax matters person.....................................................62
Tiered REMICs..........................................................56
Trust...................................................................1
Trust Certificates.....................................................49
Trust Fractional Certificate...........................................63
Trust Fractional Certificateholder.....................................64
Trust Interest Certificate.............................................64
Trust Interest Certificateholder.......................................68
Trustee.................................................................2
U.S. Person............................................................62
United States shareholder..............................................62
Unstripped Mortgage Assets.............................................67
74
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
DEPOSITOR OR BY THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
DO NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
CERTIFICATES OFFERED HEREBY TO ANYONE IN ANY JURISDICTION IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM
IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS SUPPLEMENT NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT INFORMATION HEREIN OR THEREIN IS
CORRECT AS OF ANY TIME SINCE THE DATE OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Summary....................................................S-1
Risk Factors...............................................S-9
The Mortgage Loan Pool....................................S-12
Use of Proceeds...........................................S-20
Prepayment and Yield Considerations.......................S-20
Description of the Offered Certificates...................S-27
The Agreement.............................................S-34
Certain Federal Income Tax Consequences...................S-37
ERISA Considerations......................................S-37
Underwriting..............................................S-39
Ratings...................................................S-40
Legal Investment Considerations...........................S-41
Certain Legal Matters.....................................S-41
Index to Location of Principal Defined Terms...............A-1
PROSPECTUS
Prospectus Summary...........................................1
Risk Factors.................................................5
Description of the Certificates..............................8
Maturity, Prepayment and Yield Considerations...............16
The Trusts..................................................18
Credit Enhancement..........................................25
Origination of Mortgage Loans...............................29
Servicing of Mortgage Loans.................................31
The Agreement...............................................37
Certain Legal Aspects of Mortgage Loans.....................40
The Depositor...............................................47
Use of Proceeds.............................................48
Certain Federal Income Tax Consequences.....................48
State Tax Considerations....................................69
ERISA Considerations........................................69
Legal Investment Matters....................................71
Plan of Distribution........................................72
Available Information.......................................73
Incorporation of Certain Terms by Reference.................73
Index to Location of Principal Defined Terms................74
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE RELATED CERTIFICATES, WHETHER OR NOT PARTICIPATING
IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO DELIVER THIS PROSPECTUS
SUPPLEMENT AND THE RELATED PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION
TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
[SAXON MORTGAGE, INC. LOGO]
$446,404,000
SAXON ASSET SECURITIES TRUST 1998-2
SAXON ASSET SECURITIES COMPANY,
AS DEPOSITOR
$65,000,000 CLASS AF-1 CERTIFICATES
$50,000,000 CLASS AF-2 CERTIFICATES
$19,000,000 CLASS AF-3 CERTIFICATES
$34,000,000 CLASS AF-4 CERTIFICATES
$10,873,000 CLASS AF-5 CERTIFICATES
$23,382,000 CLASS AF-6 CERTIFICATES
$11,691,000 CLASS MF-1 CERTIFICATES
$8,184,000 CLASS MF-2 CERTIFICATES
$6,430,000 CLASS BF-1 CERTIFICATES
$125,442,000 CLASS AV-1 CERTIFICATES
$56,001,000 CLASS AV-2 CERTIFICATES
$16,801,000 CLASS MV-1 CERTIFICATES
$12,880,000 CLASS MV-2 CERTIFICATES
$6,720,000 CLASS BV-1 CERTIFICATES
MORTGAGE LOAN ASSET BACKED CERTIFICATES
SERIES 1998-2
PROSPECTUS SUPPLEMENT
MORGAN STANLEY DEAN WITTER
MERRILL LYNCH & CO.
J. P. MORGAN & CO.
PRUDENTIAL SECURITIES INCORPORATED
JUNE 18, 1998
