<PAGE>
Registration No. 333-_______
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SAXON ASSET SECURITIES COMPANY
(DEPOSITOR)
(Exact Name of Registrant as specified in its Charter)
Virginia 52-1865887
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
4480 Cox Road
Glen Allen, Virginia 23060
(804) 967-7400
(Address, including zip code, and telephone number, including area
code, of Registrant's principal executive offices)
Joseph C. Carter, III, Esq.
McGuire, Woods, Battle & Boothe LLP
One James Center
901 East Cary Street
Richmond, Virginia 23219
(804) 775-4307
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
Copy to:
Hayden D. McMillian
Saxon Asset Securities Company
4880 Cox Road
Glen Allen, Virginia 23060
(804) 967-7400
Approximate date of commencement of proposed sale to the public: As soon as
practicable on or after the effective date of this registration statement.
If the only securities registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box: [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of this prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
Pursuant to Rule 429 under the Securities Act of 1933, the Prospectus filed
as part of this Registration Statement may be used in connection with the
securities covered by Registration Statement No. 333-59479.
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
PROPOSED
TITLE OF MAXIMUM PROPOSED
SECURITIES OFERING PRICE MAXIMUM AMOUNT OF
BEING AMOUNT TO BE PER AGGREGATE REGISTRATION
REGISTERED REGISTERED CERTIFICATE* OFFERING PRICE* FEE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset Backed $1,000,000** 100% $1,000,000 $278***
Certificates
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
*Estimated solely for the purpose of calculating the registration fee.
**In addition to $1,000,000 being registered hereby, pursuant to Rule 429
under the Securities Act of 1933, $35,762,650 principal amount of Asset Backed
Certificates registered under Registration Statement No. 333-59479 is being
carried forward; the filing fee of $9,942.02 associated with such certificates
was previously paid with Registration Statement No. 333-59479.
***A registration fee of $278 has been wired in connection with the
$1,000,000 of Asset Backed Certificates being registered hereby; in addition,
$9,942.02 was previously paid in connection with Registration Statement No. 333-
59479.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
DRAFT: 9/16/99
SUBJECT TO COMPLETION, DATED ______________, 1999
Prospectus Supplement dated __________, _____ (To Prospectus Dated ___________,
1999)
[LOGO OF SAXON APPEARS HERE]
Mortgage Loan Asset Backed Certificates, Series ____ - _
Saxon Asset Securities Trust ____-_
Principal and interest payable monthly, beginning _____, ____
Saxon Mortgage, Inc. Saxon Asset Securities Company
Seller and Master Servicer Depositor
The trust will issue:
. [eight] classes of senior certificates; and
. [ten] classes of subordinated certificates.
For a description of the classes of certificates offered by this
prospectus supplement, see "Offered Certificates" on page S-___.
______________
The assets of the trust will include two groups of mortgage loans
secured by one-to-four family residential properties. One group will consist of
fixed-rate, first or second mortgage loans. The other group will consist of
adjustable rate, first mortgage loans. The trust will also hold cash for the
purchase of additional mortgage loans on or before _____, ____.
The mortgage loans were or will be originated or acquired in accordance
with underwriting guidelines that are not as restrictive as federal agency
guidelines. As a result, the mortgage loans may experience higher rates of
delinquency, foreclosure and bankruptcy than if they had been underwritten in
accordance with more restrictive standards.
_______________
You should carefully consider the risk factors beginning on page S-___
of this prospectus supplement and page __ of the prospectus.
_______________
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or passed upon the
accuracy or adequacy of this prospectus supplement or prospectus. Any
representation to the contrary is a criminal offense.
The underwriters will offer the offered certificates from time to time
at varying prices to be determined at the time of sale. The offered certificates
will be available for delivery to investors in book-entry form through the
facilities of the Depository Trust Company, Cedelbank and the Euroclear System
on or about ______, ____.
[NAMES OF UNDERWRITERS]
<PAGE>
Important Notice About Information Presented
in this Prospectus Supplement and the Prospectus
The offered certificates are described in two separate documents that
progressively provide more detail: (1) the accompanying prospectus, which
provides general information, some of which may not apply to a particular series
of certificates and (2) this prospectus supplement, which describes the specific
terms of your certificates and may differ from information in the prospectus.
This prospectus supplement does not contain complete information about
the offering of these securities. We suggest that you read both this prospectus
supplement and the prospectus in full. We cannot sell these securities to you
unless you have received both this prospectus supplement and the prospectus.
If the description of the terms of your certificates varies between
this prospectus supplement and the prospectus, you should rely on the
information in this prospectus supplement.
Investors can find a glossary of defined terms used in this prospectus
supplement beginning on page S-___.
Saxon Asset Securities Company's principal offices are located at 4880
Cox Road, Glen Allen, Virginia 23060 and its phone number is (804) 967-7400.
________________
This prospectus supplement and the accompanying prospectus contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933. Specifically, forward-looking statements, together with related
qualifying language and assumptions, are found in the material (including
tables) under the headings "Risk Factors" and "Prepayment and Yield
Considerations." Forward-looking statements are also found in other places
throughout this prospectus supplement and the prospectus, and may be identified
by, among other things, accompanying language such as "expects," "intends,"
"anticipates," "estimates" or analogous expressions, or by qualifying language
or assumptions. These statements involve known and unknown risks, uncertainties
and other important factors that could cause the actual results or performance
to differ materially from the forward-looking statements. These risks,
uncertainties and other factors include, among others, general economic and
business conditions, competition, changes in political, social and economic
conditions, regulatory initiatives and compliance with governmental regulations,
customer preference and various other matters, many of which are beyond the
depositor's control. These forward-looking statements speak only as of the date
of this prospectus supplement. The depositor expressly disclaims any obligation
or undertaking to distribute any updates or revisions to any forward-looking
statements to reflect changes in the depositor's expectations with regard to
those statements or any change in events, conditions or circumstances on which
any forward-looking statement is based.
<PAGE>
Offered Certificates
The trust will issue the following classes of certificates that are
being offered by this prospectus supplement and the accompanying prospectus.
<TABLE>
<CAPTION>
Initial Annual Last
Certificate Pass Weighted Scheduled
Principal Through Ratings Average Distribution Principal
Class Balance Rates Moody's/Fitch Life/(5)/ Date/(5)/ Type
----- ------- ----- ------------- -------- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Group I - Fixed Rate Mortgage Loans
AF-1/(1)/ $ [Variable]/(3)/ Senior
AF-2/(1)/ % Senior
AF-3/(1)/ % Senior
AF-4/(1)/ % Senior
AF-5/(1))2)/ % Senior
AF-6/(1)(2)/ % Senior
MF-1/(2)/ % Subordinated
MF-2/(2)/ % Subordinated
BF-1/(2)/ % Subordinated
BF-1A/(2)/ % Subordinated
Spreads over
One Month
LIBOR
-----
Group II - Adjustable Rate Mortgage Loans
AV-1/(1)(2)(4)/ $ % Senior
AV-2/(1)(2)(4)/ % Senior
MV-1/(2)(4)/ % Subordinated
MV-2/(2)/ % Subordinated
BV-1/(2)/ % Subordinated
BV-1A/(2)/ [Fixed]/(6)/ Subordinated
</TABLE>
_________________________________________________________
(1) ERISA eligible.
(2) The pass-through rates are subject to a cap. After the clean-up call
date, the pass-through rates on the class AF-5, class MF-1 and class
MF-2 certificates step up by ___% and the initial spread over one month
LIBOR for the class AV-1, class AV-2, class MV-1, class MV-2 and class
BV-1 certificates steps up by __%, __%, __% , _____% and ___%,
respectively.
(3) [Interest will accrue on the class AF-1 certificates at a per annum
rate equal to one month LIBOR + ____%, subject to a cap.]
(4) "Mortgage related security" for SMMEA purposes upon termination of the
funding period relating to the pre-funding account.
(5) At the pricing speed to maturity/clean-up call date.
(6) [Interest will accrue on the class BV-1A certificates at a fixed rate
of ____% per annum, subject to a cap.]
<PAGE>
Summary of Terms
This summary highlights selected information from this document. It does
not contain all the information that you need to consider in making your
investment decision. To understand the terms of the offered certificates and the
characteristics of the mortgage loans, read carefully the entire prospectus
supplement and the accompanying prospectus.
. This summary provides an overview of structural provisions,
calculations, cash flows and other information to aid your
understanding and is qualified by the full description of the
structural provisions, calculations, cash flows and other information
in this prospectus supplement and the accompanying prospectus.
The Trust
The issuer of the certificates is Saxon Asset Securities Trust ____-__. The
trust was created for the sole purpose of issuing the certificates. The
certificates represent individual ownership interests in the trust and are not
the obligation of any other entity. Neither the certificates nor the mortgage
loans will be insured by any governmental agency or instrumentality.
Seller
Saxon Mortgage, Inc., the parent of the depositor.
Depositor
Saxon Asset Securities Company
Master Servicer
Saxon Mortgage, Inc.
Servicer
Meritech Mortgage Services, Inc., an affiliate of the seller and the depositor.
Trustee
Chase Bank of Texas, National Association
Cut-Off Date
As of the close of business on ______, ___ for the mortgage loans to be sold to
the trust on the closing date.
Closing Date
On or about _________, ____.
Offered Certificates
The offered certificates are separated into two groups. In general, the trust
will distribute collections on group I to the group I certificates and
collections on group II to the group II certificates. In limited circumstances
relating to a cross-collateralization feature, however, collections on the
mortgage loans in one group will be applied to the payment of certificates of
the other group.
Distribution Date
The trust will make distributions on the 25th day of each month, or if that day
is not a business day, the next business day. The first distribution date will
be __________, ___.
Pass Through Rates
. Pass through rates on the group I certificates [(other than the class AF-1
certificates)] [and on the class BV-1A certificates of group II] are fixed
and are shown on page S-___. The pass through rates for the class AF-5,
class AF-6, class MF-1, class MF-2, class BF-1 and class BF-1A certificates
of group I will be capped at the weighted average of the
S-1
<PAGE>
net mortgage interest rates for group I, which may be less than the pass
through rates so shown. The pass through rate on the class BV-1A
certificates will be similarly subject to a cap calculated in respect of
group II.
. For the group I certificates [,with the exception of the class AF-1
certificates,] and the class BV-1A certificates of group II, the interest
distributable on each distribution date is the interest accrued during the
month immediately preceding the month in which such distribution date
occurs. All calculations are made on the basis of a 360-day year consisting
of twelve 30 day months (30/360).
. Pass through rates on the class AF-1 certificates and the group II
certificates other than the class BV-1A certificates adjust on each
distribution date, generally to one month LIBOR plus the spread shown on
page S-__ for each class.
. Pass through rates on any distribution date for the group II certificates
will be subject to a cap equal to the weighted average of the net mortgage
interest rates of group II. The pass through rate for the class AF-1
certificates is similarly limited by such a cap calculated in respect of
group I.
. Whenever a pass through rate for a group II certificate is capped, any
shortfall in interest on that certificate will be carried over to
subsequent distribution dates.
. The trust will keep track of carry over amounts on the group II
certificates. If, before a class is retired, funds are available for that
purpose, the trust will distribute an amount equal to the carry over amount
for that class. The class AF-1 certificates will not be entitled to any
compensatory amounts on future distribution dates if the pass through rate
of such certificates is limited by the related cap.
. For the class AF-1 certificates and the group II certificates, other than
the class BV-1A certificates, interest accrues on each distribution date
from and including the prior distribution date (or from _______, ____, the
closing date, in the case of the first distribution date) to and excluding
that distribution date. All calculations are made on the basis of an actual
number of days and a year of 360 days (actual/360).
Interest Distributions
On each distribution date, the trust will apply interest collected from a group
to make distributions in the following order:
. all interest due to the related class A certificates, pro rata if funds are
not sufficient to distribute all interest due, at the applicable pass
through rates;
. in order of seniority, all interest due to the other related classes
(except the class B-1 and class B-1A certificates) at the applicable pass
through rates;
. all interest due to the related class B-1 and class B-1A certificates, pro
rata if funds are not sufficient to distribute all interest due, at the
applicable pass through rates; and
. any remaining interest as described under "Excess Interest" below.
S-2
<PAGE>
Excess Interest
On each distribution date, the trust will apply any excess interest from a group
in the following order:
. to distribute an extra principal distribution amount on the related
certificates, but only to the limited extent described herein;
. to distribute to the related subordinated certificates, in order of
seniority, the amount of unpaid interest for prior distribution dates
(excluding any carry over amount for group II) on the related certificates;
. to make similar distributions to the other group of certificates;
. in the case of group II, in order of seniority, to distribute any carry
over amount;
. up to the amount described in this prospectus supplement as a principal
distribution on the class B-1A certificates of the related group; and
. to distribute any remainder to the class C and class R certificates.
Principal Distributions
On each distribution date, the trust will apply principal collected for a group
to make distributions on the related certificates as described under
"Description of the Offered Certificates -- Distributions" on page S-__.
Initially, principal in respect of mortgage loans in a group will be distributed
exclusively to the class A certificates of the group until their principal
balances have been reduced to specified levels. At that time, principal
distributions not required to maintain the principal balances of the class A
certificates at the required levels will be distributed to the subordinated
classes.
Credit Enhancement
Credit enhancement refers to a mechanism that is intended to protect owners of
various classes of certificates against losses due to defaults on the mortgage
loans.
The certificates have the benefit of the following types of credit enhancement:
. the use of excess interest from a group to cover losses, to pay in limited
circumstances shortfalls in payments due to certificates of the other group
and to distribute principal to a limited extent to create over
collateralization;
. the subordination of distributions on the subordinated certificates to the
required distributions on the more senior certificates; and
. the allocation of realized losses on the mortgage loans first to the
subordinated certificates.
The Mortgage Loans
The mortgage loans in the trust were originated or acquired or will be
originated or acquired in accordance with the seller's program for non-
conforming credits. We refer you to "Risk Factors - Non-Conforming Underwriting
Standards" in this prospectus supplement at page S-__ for additional
information.
The mortgage loans in the trust are separated into two groups, each containing
mortgage loans secured by one-to-four family residential properties:
. Group I consists of fixed-rate, first or second mortgage loans.
S-3
<PAGE>
. Group II consists of adjustable rate, first mortgage loans.
Pre-Funding Feature
The trust may purchase additional mortgage loans on or before ______, ____ for
inclusion in either group of loans. At the closing, the trustee will hold in
trust, from the proceeds of the sale of the offered certificates, approximately
$______, which may be applied to the purchase of additional fixed rate mortgage
loans for inclusion in group I, and approximately $_____, which may be applied
to the purchase of additional adjustable rate mortgage loans for inclusion in
group II. Pre-funding account funds allocated to one group may not be used to
purchase mortgage loans in another group. If those funds are not completely used
by _________, ____, any remaining pre-funding amounts will be distributed as
principal prepayments on the group I certificates, to the extent the remaining
funds had been allocated for the purchase of fixed rate mortgage loans, and on
the group II certificates, to the extent the remaining funds had been allocated
to the purchase of adjustable rate mortgage loans. This distribution will be
made on the ___________, ____ distribution date.
At the closing date, funds will also be deposited in a capitalized interest
account for use as needed during the pre-funding period to ensure that all
required interest distributions are made on the offered certificates.
Optional Termination
The master servicer has the right to exercise a clean-up call on any
distribution date that the outstanding principal balances of the mortgage loans
is less than or equal to 10% of the outstanding principal balances of all of the
mortgage loans acquired by the trust before the end of the pre-funding period,
calculated as of the date the trust acquired the mortgage loan, plus certain
proceeds in the pre-funding account. Exercise of this clean-up call will result
in the early retirement of your certificates.
Realized Losses
If the trust disposes of a mortgage loan for less than its scheduled principal
balance plus accrued interest, reimbursement of liquidation expenses, and
servicing advances, the trust will incur a realized loss.
To the extent the total principal balance of the certificates of a group exceeds
the total principal balance of the related mortgage loans as described in this
prospectus supplement, the trust will generally reduce the certificate principal
balances of the subordinate certificates of the related group in reverse order
of seniority, beginning with the class B-1A certificates of the group, then the
class B-1 certificates of the group, and then the remaining classes of the group
in reverse order of seniority. After a reduction, the holders of any these
certificates will generally only be entitled to distributions of both principal
and interest on the reduced certificate principal balance of their certificates.
If, however, excess interest is subsequently available and the certificate
principal balance is subsequently increased, the holder of any previously
reduced certificate will be entitled to distributions of principal and interest
based on such increased balance.
Private Certificates
The class C and class R certificates, which are not being offered by this
prospectus supplement or the accompanying prospectus, represent the most junior
ownership interests in the assets of the trust.
S-4
<PAGE>
Denominations
The trust will issue the offered certificates in book-entry form in minimum
denominations of $1,000 in original principal amount and integral multiples.
Statistical Mortgage Loan Data
As of the date of this prospectus supplement, information relating to only a
portion of the mortgage loans to be included in the trust was available.
Accordingly, information presented with respect to the mortgage loans in this
prospectus supplement is derived solely from those identified mortgage loans.
Additional mortgage loans will be included in the pool of mortgage loans to be
conveyed to the trust on the closing date. In addition, after the closing date
additional mortgage loans may, because of the application of funds in the pre-
funding account, be conveyed to the trust until ________,____. The
characteristics of the mortgage loans to be conveyed to the trust on the closing
date and the additional mortgage loans to be conveyed to the trust after that
date will vary from the characteristics of the identified mortgage loans.
At _________, ____ (the statistical cut off date), there were _____ mortgage
loans secured by mortgages on residential properties.
Group I Mortgage Loans
Aggregate Scheduled Principal Balances $__________
Average Scheduled Principal Balance $__________
Range of Scheduled Principal
Balances $_____ to _____
Range of Mortgage Interest Rates $_____ to _____
Weighted Average Mortgage Interest Rate ______%
Weighted Average Original Loan-to-Value Ratio ______%
Weighted Average Combined Original
Loan-to-Value Ratio ______%
Weighted Average Remaining
Amortization Term ___ Months
Range of Remaining Amortization Terms ___ to ___ Months
Second Liens ______%
Balloon Mortgage Loans ______%
Mortgaged Premises
Single-family detached dwellings ______%
Single-family attached dwellings ______%
Planned unit developments ______%
Condominiums ______%
2-4 Family ______%
Townhouse ______%
Manufactured Home ______%
Weighted Average Servicing Fee Rate ______%
Master Servicing Fee Rate ______%
Group II Mortgage Loans
Aggregate Scheduled Principal Balances $__________
Average Scheduled Principal Balance $__________
Range of Scheduled Principal
Balances $_____ to $ _____
Mortgage Interest Rates
Weighted Average By Loan Type:
One Year CMT ______%
2/28 LIBOR ______%
3/12 LIBOR ______%
3/17 LIBOR ______%
3/27 LIBOR ______%
Six Month LIBOR ______%
Weighted Average Gross Margin:
One Year CMT ______%
2/28 LIBOR ______%
3/12 LIBOR ______%
3/17 LIBOR ______%
3/27 LIBOR ______%
Six Month LIBOR ______%
Current Weighted Average Mortgage
Interest Rate ______%
Range of Current Mortgage Interest
Rates _____% to _____%
Weighted Average Maximum Lifetime
Mortgage Interest Rate ______%
Range of Maximum Lifetime
Mortgage Interest Rates _____% to _____%
Weighted Average Lifetime Minimum
Mortgage Interest Rate ______%
Range of Minimum Lifetime
Mortgage Interest Rates _____% to _____%
Weighted Average Original Loan-to-Value Ratio _____%
Weighted Average Remaining
Amortization Term ___ Months
Range of Remaining Amortization Term ___ to ___ Months
Second Lien Mortgage Loans ______%
Mortgaged Premises
Single-family detached dwelling ______%
Single-family attached dwelling ______%
Planned unit developments ______%
Condominiums ______%
2-4 Family ______%
Townhouse ______%
Manufactured Home ______%
Weighted Average Servicing Fee Rate ______%
Master Servicing Fee Rate ______%
S-5
<PAGE>
Risk Factors
You should consider the following risk factors and the information set
forth under "Risk Factors" in the accompanying prospectus before you purchase
any of the offered certificates.
The class Generally, the class AF-1 certificates pass through rate
AF-1 certificates adjusts monthly based upon one month LIBOR. The pass
are not entitled through rate for the class AF-1 certificates is subject
to an interest to an available funds cap equal to the weighted average
carryover amount of the net mortgage interest rates for group I. This
means that the interest payable to investors in the class
AF-1 certificates may be limited to the interest the trust
receives on the mortgage loans in group I. The cap may
limit the class AF-1 certificates pass through rate on any
distribution date. If, on any distribution date, the pass
through rate on the class AF-1 certificates is limited by
the cap, holders of the class AF-1 certificates will not
be entitled to any additional or carry over amounts in
respect of reduced interest distributions on future
distribution dates.
Mortgage interest Generally, the group II certificates pass through rates
rates may limit (other than the class BV-1A certificates pass through
pass through rates rate) adjust monthly based upon one month LIBOR. The group
of certain other II mortgage interest rates adjust semi-annually based
classes upon six month LIBOR, annually based upon one year CMT or
semi-annually based upon six month LIBOR beginning a
specified period after origination.
. In a rising interest rate environment, the group II
certificates pass through rates (other than the class
BV-1A certificates pass through rate) may rise before
the group II mortgage interest rates.
. One month LIBOR may respond to different economic and
market factors than the other indices. It could rise
while the other indices are stable or are falling. Even
if they move in the same direction, one month LIBOR may
rise more rapidly than the other indices in a rising
interest environment or fall less rapidly in a
declining interest rate environment.
In any of these interest rate environments, the pass
through rates on the group II certificates may be limited
by application of an available funds cap, which equals the
weighted average of the net mortgage interest rates for
group II. If, on any distribution date, the pass through
rates on the group II certificates are so limited, a group
II carry over amount will result. This amount will
generally equal the excess of interest that would have
been distributable absent application of the cap over
interest at the capped rate. On any subsequent
distribution date, the trust will distribute any carry
over amounts to the extent of available funds. The ratings
on the group II certificates do not represent an
assessment of the likelihood of the distribution of any
amounts that might be carried over.
S-6
<PAGE>
The otherwise fixed pass through rates of the class AF-5,
class AF-6, class MF-1, class MF-2, class BF-1, class
BF-1A and class BV-1A certificates are similarly capped at
the weighted average of the net mortgage interest rates
for the related mortgage loans. To the extent mortgage
loans in the related group bearing net interest rates
above the pass through rates of such classes prepay, the
weighted average net rate of a group will be reduced and
the pass through rates of those classes of certificates
may be capped. To the extent the pass through rate on the
class BV-1A certificates is capped on a distribution date,
a carry over amount will result. However, if the pass
through rates of any of the class AF-5, class AF-6, class
MF-1, class MF-2, class BF-1 or class BF-1A certificates
are capped on any distribution date, holders of those
certificates will not be entitled to any additional amount
in respect of resulting reduced interest distributions on
future distribution dates.
Mechanics of the Under the interest distribution mechanics of the trust:
trust place risk of
loss principally on . Class M-1 certificates receive distributions only
the subordinate after required distributions to the related class A
certificates certificates;
. Class M-2 certificates receive distributions only after
required distributions to the related class A and the
class M-1 certificates; and
. Class B-1 and class B-1A certificates receive
distributions only after required distributions to the
related class A, class M-1 and class M-2 certificates.
If the trust does not have sufficient funds to distribute
interest to all classes of certificates, the shortfall
will be borne by the certificates in reverse order of
seniority.
If the trust disposes of a mortgage loan at a loss, the
aggregate certificate principal balances of the related
certificates may exceed the scheduled principal balances
of the group. In that event, to the extent that excess
interest is not available, the trust will generally reduce
the certificate principal balances of the related class
B-1A certificates of the group, then the class B-1
certificates of that group, and then the remaining classes
of the group in reverse order of seniority.
You should fully consider the subordination risks
associated with an investment in the class M-1, class M-2,
class B-1 or class B-1A certificates. These include the
possibility that you may not fully recover your initial
investment as a result of losses on the mortgage loans.
S-7
<PAGE>
Although assigned As described more fully in this prospectus supplement, the
the same rating, the class B-1A and class B-1 certificates have been assigned
class B-1A ratings in the same category and rank on an equal basis
certificates take for purposes of distributions of interest. However, losses
losses before the in each group will be allocated to the class B-1A
class B-1 certificates of the group before losses will be allocated
certificates to the class B-1 certificates of the group.
Loan characteristics This prospectus supplement describes only a portion of
of the mortgage pool the mortgage loans to be sold to the trust on the closing
may vary from the date. The additional mortgage loans to be delivered on
characteristics of the closing date and subsequent mortgage loans to be
the mortgage loans delivered after the closing date as a result of purchases
disclosed in this from the pre-funding account may have characteristics
prospectus that differ somewhat from the identified mortgage loans
supplement described in this prospectus supplement. However, each of
the additional mortgage loans and subsequent mortgage
loans must satisfy the criteria described under "The
Mortgage Loan Pool - Conveyance of Subsequent Mortgage
Loans" on page S-__. The trust will file current reports
on Form 8-K following the purchase of additional mortgage
loans and subsequent mortgage loans by the trust as of the
closing date and following the termination of the pre-
funding period. The current reports on Form 8-K will
include the same type of information regarding the
subsequent mortgage loans that is included in this
prospectus supplement with respect to the identified
mortgage loans.
There is a risk of The seller intends to use substantially all of the funds
early prepayment of in the pre-funding account to purchase subsequent mortgage
principal associated loans for the trust. However, if the principal amount of
with the pre-funding eligible subsequent mortgage loans available during the
account funding period is less than the full pre-funded amount,
the seller will not have sufficient subsequent mortgage
loans to sell to the trust. This could result in a
prepayment of principal to holders of certificates as
described in this prospectus supplement, which could
adversely affect the yield of such certificates to the
extent they were purchased at a premium. The seller does
not expect that a material amount of principal prepayment
will occur due to insufficient amounts of subsequent
mortgage loans.
S-8
<PAGE>
The following characteristics of the
mortgage loans may increase risk of
loss:
Non-conforming As a general matter, the seller originated or purchased
underwriting or will originate or purchase the mortgage loans in
standards accordance with its mortgage loan program for
non-conforming credits -- a mortgage loan which is
ineligible for purchase by Fannie Mae or Freddie Mac due
to credit characteristics that do not meet Fannie Mae or
Freddie Mac guidelines.
The mortgage loans may experience rates of delinquency,
bankruptcy and loss that are higher, perhaps
significantly, than mortgage loans originated under Fannie
Mae or Freddie Mac guidelines.
At ______, ____, the statistical cut-off date less than
____% of the mortgage loans already identified for
inclusion in the pool will be delinquent. ____% of group I
and ___% of group II mortgage loans already identified for
inclusion in the pool had first monthly payments due on or
before ______, ____. Because only those identified
mortgage loans could have a monthly payment delinquent 30
days or more, current information about delinquencies may
not be representative of future experience.
Geographic The mortgaged premises for ____% of the group I mortgage
concentration loans already identified for inclusion in the pool and
____% of the group II mortgage loans already identified
for inclusion in the pool are located in California. An
overall decline in the residential real estate market, or
the occurrence of a natural disaster such as an
earthquake, in California, could adversely affect the
values of the mortgaged premises located in California and
increase the risk of loss on the related mortgage loans.
Second liens ____% of the aggregate scheduled principal balance of
group I mortgage loans already identified for inclusion in
the pool are secured by second liens subordinate to the
rights of the mortgagee under the related first mortgage.
The trust will have no source of funds to satisfy the
first mortgage or make payments due to the first mortgagee
and, accordingly, its ability to realize on its second
lien may be limited.
Balloon loans ____% of the aggregate scheduled principal balances of
group I mortgage loans already identified for inclusion in
the pool are "balloon loans" that provide for the payment
of the unamortized principal balance in a single payment
at maturity.
High balance Certain of the mortgage loans are expected to have high
loans principal balances. One identified mortgage loan had a
principal balance of $_____ as of _____, ____. The payment
experience on high balance mortgage loans may have a
disproportionate effect on the related certificates.
S-9
<PAGE>
Other legal Federal and state laws, public policy and general
considerations principles of equity relating to the protection of
consumers, unfair and deceptive practices and debt
collection practices:
. regulate interest rates and other charges on mortgage
loans;
. require certain disclosures to borrowers;
. require licensing of the seller and the other
originators; and
. regulate generally the origination, servicing and
collection process for the mortgage loans.
Violations of these laws:
. may limit the ability of the trust to collect on the
mortgage loans;
. may entitle a borrower to a refund of amounts previously
paid; and
. could result in liability for damages and administrative
enforcement against the originator or the servicer of
the mortgage loans.
The seller has represented that all applicable federal and
state laws were or will be complied with in connection with
the origination of the mortgage loans that are or will be
part of the trust. If there is a material and adverse breach
of this representation, the seller must repurchase any
affected mortgage loan or substitute a new complying
mortgage loan.
Limitations on Standard hazard insurance policies do not insure against
hazard physical damage arising from earth movement (including
insurance earthquakes, landslides and mudflows).
Insolvency of The seller believes that the transfers of the mortgage
seller could loans by the seller to the depositor and by the depositor to
cause payment the trust constitute sales by the seller to the depositor
delays and by the depositor to the trust and that, accordingly, the
mortgage loans will not be part of the assets of the seller
or the depositor in the event of an insolvency proceeding.
Nevertheless, a bankruptcy trustee or a creditor may argue
that the transfers were pledges in connection with a
borrowing rather than true sales. Even if this argument
proves unsuccessful, delays in distributions could result.
The trustee, the depositor and the rating agencies rating
the offered certificates will receive an opinion of McGuire,
Woods, Battle & Boothe LLP, counsel to the depositor, with
respect to the true sale of the mortgage loans, in form and
substance satisfactory to the rating agencies.
S-10
<PAGE>
Computer The servicer, the master servicer, the trustee and DTC are
risks aware of the potential problems associated with computer
associated code in which years are identified by two digit values from
with year 2000 00 to 99 and are taking action intended to assure that their
computer systems are "year 2000 ready." See "The Mortgage
Loan Pool - Year 2000 Compliance" on page S-__. If that
action is not timely or properly completed, or if the
computer systems of other financial intermediaries with
which the computer systems of the servicer, the master
servicer, the trustee or DTC interact are not "year 2000
ready" on a timely basis, the trust could experience
disruptions in collecting payments on the mortgage loans and
in making distributions with respect to the certificates.
For a discussion of the potential effect of year 2000
legislation on the ability of the servicer or the master
servicer to foreclose on mortgage loans, see "Recent
Developments - Year 2000 Legislation" on page S-__.
S-11
<PAGE>
Recent Developments
Pending Merger Of Dominion Resources, Inc.
On February 22, 1999, Dominion Resources, Inc., the indirect parent of the
seller, the master servicer and the servicer, announced the execution of an
agreement pursuant to which it would merge with Consolidated Natural Gas
Company. Dominion Resources and CNG entered into an amended and restated merger
agreement as of May 11, 1999. Stockholder approvals have been obtained, but the
transaction remains subject to a number of regulatory approvals. In connection
with the amended and restated merger agreement, Dominion Resources announced its
intention to divest its financial services subsidiary, Dominion Capital, Inc.,
the indirect parent of the seller, the master servicer and the servicer.
Dominion Resources is a holding company exempt from most provisions of the
Public Utility Holding Company Act of 1935. CNG is a registered holding company
subject to the provisions of the 1935 Act.
In connection with the transaction, Dominion Resources is required to
obtain Securities and Exchange Commission approval under the 1935 Act to acquire
the four public utilities owned by CNG. Dominion Resources and CNG will file an
application with the Commission seeking the necessary approvals under the 1935
Act.
In addition, Dominion Resources will become a public utility holding
company that will register under the 1935 Act because of its acquisition of the
four CNG public utility companies. Although CNG and Dominion Resources believe
that Commission approval of the transaction under the 1935 Act on terms
acceptable to both parties will be obtained, it is not possible to predict with
certainty the timing of such approval and whether the approval will be on terms
acceptable to them.
Under the standards that apply to transactions subject to approval pursuant
to Sections 9(a) and 10 of the 1935 Act, the Commission is directed to approve
the transaction unless it finds that (1) the transaction would tend towards
detrimental interlocking relations or a detrimental concentration of control,
(2) the consideration to be paid in connection with the transaction is not
reasonable or (3) the transaction would unduly complicate the capital structure
of the holding company system or would be detrimental to the proper functioning
of the applicant's holding company system. To approve the proposed transaction,
the Commission also must find that the transaction would comply with applicable
state law, tend towards the development of an integrated public utility system
and would otherwise conform to the 1935 Act's integration and corporate
simplification standards.
The 1935 Act imposes a number of restrictions on the operations of
registered holding company systems. Among these restrictions are requirements
that certain securities issuances as well as sales and acquisitions of assets or
securities of utility companies or acquisitions of interests in any other
business must be approved by the Commission. The 1935 Act also limits the
ability of registered holding companies to engage in activities unrelated to
their utility
S-12
<PAGE>
operations and regulates holding company system service companies and the
rendering of services by holding company affiliates to other companies in their
system. Dominion Resources and CNG believe they will be able to satisfy the
Commission's requirements for a registered holding company system.
The Commission may require as a condition to its approval of the
transaction under the 1935 Act that Dominion Resources divest certain of its
activities which are unrelated to the utility or energy operations of the
combined companies after the transaction within a reasonable time after the
transaction. In several cases, the Commission has allowed the retention of non-
utility related activities or deferred the question of divestiture for a
substantial period of time. In those cases in which divestiture has taken place,
the Commission has usually allowed enough time to complete the divestiture to
allow the applicant to avoid an untimely or premature sale of the divested
assets. Dominion Resources believes strong policy reasons and prior Commission
decisions and policy statements support the retention of its non-utility related
investments or, alternatively, support deferring the question of divestiture for
a substantial period of time. Accordingly, Dominion Resources requested in the
1935 Act application that it be allowed to retain its non-utility related
investments or, in the alternative, that the question of divestiture be
deferred. However, Dominion Resources has amended its application to reflect its
intended divestiture of Dominion Capital.
While Dominion Resources and CNG expect to obtain all necessary regulatory
approvals in a timely manner, there can be no assurance as to whether:
. necessary regulatory approvals for the Dominion Resources/CNG
transaction will be obtained;
. when or if the transaction will be completed;
. the timing or the form of the intended divestiture of Dominion Capital
or its effect on the seller, the master servicer or the servicer; or
. whether any direct or indirect acquiror of Dominion Capital, the
seller, the master servicer or the servicer will be of the same credit
quality or have the same financial resources as Dominion Resources.
Year 2000 Legislation
In July 1999, Congress approved and the President signed legislation that
would limit legal liability for losses due to year 2000 computer-related errors.
This legislation, among other things, protects borrowers from foreclosure if
their residential mortgage loans become delinquent because an actual year 2000
failure results in the inability to accurately or timely process their mortgage
payments.
The legislation is not intended to extinguish or otherwise affect a
borrower's payment obligations but instead delays the enforcement of obligations
on an otherwise defaulted mortgage loan. Borrowers seeking foreclosure
protection under this legislation must provide timely written notice and
documentation of that failure to the servicer. Borrowers will then have four
weeks to make up late payments on their loans unless the lender grants an
extension. This
S-13
<PAGE>
legislation does not apply to mortgage loans for which a default occurs before
December 15, 1999, or for which an imminent default is foreseeable before that
date. Moreover, this legislation does not protect borrowers who deliver notice
of a year 2000 failure after March 15, 2000. Mortgage loans that remain in
default after the applicable grace period will be subject to foreclosure or
other enforcement.
This legislation could delay the ability of the master servicer or the
servicer to foreclose on some mortgages loans during the first quarter of the
year 2000. These delays could consequently affect distributions on the
certificates of the trust.
S-14
<PAGE>
The Mortgage Loan Pool
General
The seller originated or acquired or will originate or acquire all the
mortgage loans to be included in the trust in accordance with its mortgage loan
program as described in this prospectus supplement or in the accompanying
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 is a mortgage loan which is
ineligible for purchase by Fannie Mae or Freddie Mac due to credit
characteristics that do not meet Fannie Mae or Freddie Mac 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
than mortgage loans originated under Fannie Mae or Freddie Mac guidelines.
Characteristics of the Mortgage Loans
The mortgaged premises consist of residential properties which may be
detached or attached:
. one-to-four family dwellings;
. condominium units;
. townhouses;
. manufactured housing; and
. units in a planned unit development.
The mortgaged premises may be owner-occupied or non-owner-occupied
investment properties. Owner-occupied properties include second and vacation
homes. The mortgage loans are or will be secured by first and second mortgages
on the mortgaged premises.
This prospectus supplement contains statistical information with respect to
only an identified portion of the initial mortgage loans to be sold to the trust
on the closing date. Accordingly, statistical information presented with respect
to the initial mortgage loans included in this prospectus supplement is derived
solely from the identified mortgage loans as of______, ____, the statistical
cut-off date. Whenever reference is made to the characteristics of the
identified mortgage loans or to a percentage of those loans, the reference is
based on the scheduled principal balances of the identified mortgage loans. The
characteristics of the initial mortgage loans as of their cut off date will vary
from the characteristics of the identified mortgage loans as of the statistical
cut off date. In addition, the trust may purchase subsequent mortgage loans
after the closing date until______, ____. See " - Conveyance of Subsequent
Mortgage Loans" on page S-___. The characteristics of the mortgage loans as a
whole will change upon the acquisition of subsequent mortgage loans. See
"- Additional Information" on page S-___.
S-15
<PAGE>
The identified mortgage loans satisfy certain criteria including:
. a remaining term to stated maturity of no more than ___ months;
. a mortgage interest rate of at least ____% with respect to group I;
and
. a mortgage interest rate of at least ___% with respect to group II.
Substantially all the identified mortgage loans had a loan-to-value ratio
not in excess of ___% and were originated less than six months prior to the
statistical cut off date. Each mortgage loan in the trust will be assigned to
one of the two 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. Additional mortgage loans included
in the initial mortgage loans to be delivered on the closing date and subsequent
mortgage loans to be purchased from pre-funding amounts will be included in
group I and group II and will be selected using generally the same criteria used
to select the identified mortgage loans. In addition, generally the same
representations and warranties will be made with respect to those additional and
subsequent mortgage loans. The group I certificates generally represent
undivided ownership interests in all mortgage loans contained in group I. The
group II certificates generally represent undivided ownership interests in all
mortgage loans contained in group II. Certain amounts of excess interest from
one group may be applied to payments for the other group as a result of cross
collateralization arrangements described under the heading "Description of the
Offered Certificates -- Cross Collateralization Provisions" beginning on page
S-__ of this prospectus supplement.
All the identified mortgage loans in group II as of the statistical cut-off
date are subject to
. periodic interest rate adjustment caps;
. lifetime interest rate ceilings; and
. lifetime interest rate floors.
Substantially all of the identified mortgage loans had interest rates which
were not fully indexed as of the statistical cut-off date. This means the
mortgage interest rates did not equal the sum of the gross margin and the
applicable index as of that date. Group II mortgage loans have interest rate
factors that fall into the following categories:
. 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;
. 3/12 LIBOR mortgage loans, 3/17 LIBOR mortgage loans, 3/27 LIBOR
mortgage loans and 2/28 LIBOR mortgage loans bear interest initially
at a rate fixed at origination for three or two years and thereafter
at a rate that adjusts semiannually based on six month LIBOR; and
S-16
<PAGE>
. 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.
It is expected that additional mortgage loans included in group II will not have
materially different interest rate features.
The information in the following tables, including the textual information
beneath each table and elsewhere in this prospectus supplement, is approximate
and is based solely on the scheduled principal balances of the identified
mortgage loans as of the statistical cut off date. This information does not
include information about additional initial mortgage loans that are expected to
be delivered at the closing date or the subsequent mortgage loans to be
purchased with pre-funding amounts. Totals may not add completely to 100%
because of rounding. All the calculations are a percent of the given group.
S-17
<PAGE>
1) Current Scheduled Principal Balance
<TABLE>
<CAPTION>
Group I Group II
No. of Scheduled No. of Scheduled
Current Scheduled Mortgage Principal Mortgage Principal
Principal Balance($) Loans(%) Balance(%) Loans(%) Balance(%)
-------------------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C>
0.00 - 25,000.00
25,000.01 - 50,000.00
50,000.01 - 75,000.00
75,000.01 - 100,000.00
100,000.01 - 150,000.00
150,000.01 - 200,000.00
200,000.01 - 250,000.00
250,000.01 - 300,000.00
300,000.01 - 350,000.00
350,000.01 - 400,000.00
400,000.01 - 450,000.00
450,000.01 - 500,000.00
500,000.01 - 550,000.00
550,000.01 - 600,000.00
600,000.01 - 650,000.00
650,000.01 - 700,000.00
700,000.01 - 750,000.00
Totals: 100.00 100.00 100.00 100.00
====== ====== ====== ======
</TABLE>
The average scheduled principal balance is (a) $____ for the mortgage loans, (b)
$____ for group I and (c) $____ for group II. The minimum and maximum scheduled
principal balances of the mortgage loans are $____ and $____, respectively.
2) Maximum Lifetime Mortgage Interest Rates on
Group II
<TABLE>
<CAPTION>
Maximum Lifetime No. of
Mortgage Interest Mortgage Scheduled
Rates(%) Loans(%) Principal Balance(%)
----------------- -------- --------------------
<S> <C> <C>
12.500 - 12.999
13.000 - 13.499
13.500 - 13.999
14.000 - 14.499
14.500 - 14.999
15.000 - 15.499
15.500 - 15.999
16.000 - 16.499
16.500 - 16.999
17.000 - 17.499
17.500 - 17.999
18.000 - 18.499
18.500 - 18.999
19.000 - 19.499
19.500 - 19.999
20.000 - 20.499
20.500 - 20.999
Totals 100.00 100.00
====== ======
</TABLE>
The weighted average maximum lifetime mortgage interest rate for group II is
____%.
3) Current Mortgage Interest Rates
<TABLE>
<CAPTION>
Group I Group II
------- --------
Current No. of Scheduled No. of Scheduled
Mortgage Interest Mortgage Principal Mortgage Principal
Rate(%) Loans(%) Balance(%) Loans(%) Balance(%)
----------------- -------- --------- -------- ---------
<S> <C> <C> <C> <C>
5.51 - 6.00
6.51 - 7.00
7.01 - 7.50
7.51 - 7.75
7.76 - 8.00
8.01 - 8.25
8.26 - 8.50
8.51 - 8.75
8.76 - 9.00
9.01 - 9.25
9.26 - 9.50
9.51 - 9.75
9.76 - 10.00
10.01 - 10.25
10.26 - 10.50
10.51 - 10.75
10.76 - 11.00
11.01 - 11.25
11.26 - 11.50
11.51 - 11.75
11.76 - 12.00
12.01 - 12.25
12.26 - 12.50
12.51 - 12.75
12.76 - 13.00
13.01 - 13.25
13.26 - 13.50
13.51 - 13.75
13.76 - 14.00
14.01 - 14.25
14.26 - 14.50
14.51 - 14.75
14.76 - 15.00
Totals: 100.00 100.00 100.00 100.00
====== ====== ====== ======
</TABLE>
The weighted average current mortgage interest rate is (a) ____% per annum for
the mortgage loans, (b) ____% per annum for group I and (c) ____ per annum for
group II.
S-18
<PAGE>
4) Minimum Lifetime Mortgage Interest Rates on
Group II
<TABLE>
<CAPTION>
Minimum Lifetime No. of Scheduled
Mortgage Interest Mortgage Principal
Rates(%) Loans(%) Balance(%)
---------------- --------- ----------
<S> <C> <C>
3.500 - 3.999
4.000 - 4.499
4.500 - 4.999
5.000 - 5.499
5.500 - 5.999
6.000 - 6.499
6.500 - 6.999
7.000 - 7.499
7.500 - 7.999
8.000 - 8.499
8.500 - 8.999
9.000 - 9.499
9.500 - 9.999
10.000 - 10.499
10.500 - 10.999
11.000 - 11.499
11.500 - 11.999
12.000 - 12.499
12.500 - 12.999
13.000 - 13.499
13.500 - 13.999
14.000 - 14.499
14.500 - 15.000
Totals: 100.00 100.00
====== ======
</TABLE>
The weighted average minimum lifetime mortgage interest rate for group II is
____% per annum. ____% of the group II mortgage loans have a minimum lifetime
mortgage interest rate greater than the applicable gross margin.
5) Gross Margins on Group II
<TABLE>
<CAPTION>
No. of Scheduled
Gross Margin (%) Mortgage Loans(%) Principal Balance(%)
--------------- ----------------- --------------------
<S> <C> <C>
2.000 - 2.999
3.000 - 3.999
4.000 - 4.999
5.000 - 5.999
6.000 - 6.999
7.000 - 7.999
8.000 - 8.999
9.000 - 9.999
10.000 - 10.999
11.000 - 11.999
Totals: 100.00 100.00
====== ======
</TABLE>
The weighted average gross margin for group II is ____%.
6) Next Interest Adjustment Dates On Group II
<TABLE>
<CAPTION>
Interest No. of Scheduled
Adjustment Date Mortgage Loans(%) Principal Balance(%)
--------------- ----------------- --------------------
<S> <C> <C>
September 1999
October 1999
November 1999
December 1999
January 2000
February 2000
March 2000
April 2000
May 2000
June 2000
July 2000
August 2000
September 2000
October 2000
November 2000
December 2000
January 2001
February 2001
March 2001
April 2001
May 2001
June 2001
July 2001
August 2001
September 2001
October 2001
November 2001
December 2001
January 2002
February 2002
March 2002
April 2002
May 2002
June 2002
July 2002
August 2002
September 2002
Totals: 100.00 100.00
====== ======
</TABLE>
The weighted average next interest adjustment date for group II is ______,
____.
S-19
<PAGE>
7) Original Combined Loan-to-Value Ratios/(1)/
Group I Group II
------- --------
Original Combined No. of Scheduled No. of Scheduled
Loan-to- Mortgage Principal Mortgage Principal
Value Ratio(%) Loans(%) Balance(%) Loans(%) Balance(%)
------------- ------- --------- ------- ---------
10.001 - 15.000
15.001 - 20.000
20.001 - 25.000
25.001 - 30.000
30.001 - 35.000
35.001 - 40.000
40.001 - 45.000
45.001 - 50.000
50.001 - 55.000
55.001 - 60.000
60.001 - 65.000
65.001 - 70.000
70.001 - 75.000
75.001 - 80.000
80.001 - 85.000
85.001 - 90.000
90.001 - 95.000
95.001 -100.000
Totals: 100.00 100.00 100.00 100.00
====== ====== ====== ======
/(1)/ The combined 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 plus any senior lien balances
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 combined original loan-to-value ratio is ____% for
group I and the weighted average combined original loan-to-value ratio is ____%
for group II.
8) Remaining Amortization Term
Group I Group II
------- --------
No. of Scheduled No. of Scheduled
Remaining Mortgage Principal Mortgage Principal
Term (Months) Loans(%) Balance(%) Loans(%) Balance(%)
------------ ------- --------- ------- ---------
49 - 59
109 - 120
133 - 144
157 - 168
169 - 180
229 - 240
289 - 300
337 - 348
349 - 360
Totals: 100.00 100.00 100.00 100.00
====== ====== ====== ======
The weighted average remaining amortization term is ___ months for group I and
___ months for group II.
9) Occupancy Type of Mortgaged Premises
Group I Group II
------- --------
No. of Scheduled No. of Scheduled
Mortgage Principal Mortgage Principal
Occupancy Type/(1)/ Loans(%) Balance(%) Loans(%) Balance(%)
- ---------------- ------- --------- ------- ---------
Primary Home
Second Home
Investor
Totals: 100.00 100.00 100.00 100.00
====== ====== ====== ======
/(1)/ As represented by the borrowers on their mortgage loan applications.
10) Origination Program
Group I Group II
------- --------
No. of Scheduled No. of Scheduled
Mortgage Principal Mortgage Principal
Origination Program/(1)/ Loans(%) Balance(%) Loans(%) Balance(%)
- --------------------- ------- --------- ------- ---------
Full Documentation
Limited Documentation
Stated Documentation
No Ratio
Totals: 100.00 100.00 100.00 100.00
====== ====== ====== ======
/(1)/ See "The Mortgage Loan Pool -- Underwriting Standards" on page S-__.
11) Mortgage Loan Purpose
Group I Group II
------- --------
No. of Scheduled No. of Scheduled
Mortgage Principal Mortgage Principal
Loan Purpose Loans(%) Balance(%) Loans(%) Balance(%)
------------ ------- --------- ------- ---------
Purchase
Refinance (cash out)
Refinance (no cash-out)
Totals: 100.00 100.00 100.00 100.00
====== ====== ====== ======
S-20
<PAGE>
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(%)
------------- ------- --------- ------- ---------
DeMinimis PUD
Manufactured Housing
PUD
Townhouses
2-4 Family
High-Rise Condo
Low-Rise Condo
Single Family Detached
Single Family Attached
Totals: 100.00 100.00 100.00 100.00
====== ====== ====== ======
13) Loan Types in Group II
No. of Scheduled
Loan Type Mortgage Loans(%) Principal Balance(%)
--------- ---------------- -------------------
One Year CMT
2/28 LIBOR
3/12 LIBOR
3/17 LIBOR
3/27 LIBOR
Six Month LIBOR
Totals: 100.00 100.00
====== ======
S-21
<PAGE>
14) State Distribution of Mortgaged Premises
<TABLE>
<CAPTION>
Group I Group II
------- --------
No. of Mortgage Scheduled Principal No. of Mortgage Scheduled Principal
State Loans(%) Balance(%) Loans(%) Balance(%)
----- ------- --------- ------- ---------
<S> <C> <C> <C> <C>
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
District of Columbia
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
Totals: 100.00 100.00 100.00 100.00
====== ====== ====== ======
</TABLE>
S-22
<PAGE>
Conveyance of Subsequent Mortgage Loans
The trust may acquire from the pre-funding account after the closing
date approximately $______ in aggregate scheduled principal balances of mortgage
loans for addition to group I and $______ in aggregate scheduled principal
balances for addition to group II. Accordingly, the statistical characteristics
of the mortgage loan pool as a whole and of group I and group II will change
after the acquisition by the trust of these additional mortgage loans. The
depositor has agreed to deliver subsequent mortgage loans for inclusion in the
trust that will not materially change the statistical characteristics of group I
or group II.
The inclusion of subsequent mortgage loans will be subject to the
following requirements:
. no subsequent mortgage loan will be selected in a manner adverse
to the interests of certificateholders;
. the addition of subsequent mortgage loans will not result in the
reduction, qualification or withdrawal of the then current
ratings of the certificates;
. each subsequent mortgage loan will be underwritten in accordance
with the seller's underwriting guidelines;
. no subsequent mortgage loan may be more than 30 days delinquent
as of the related cut-off date;
. no subsequent mortgage loan may have a remaining term to maturity
exceeding 360 months; and
. no subsequent mortgage loan may have a loan-to-value ratio
greater than ____%.
Following the purchase of the subsequent mortgage loans by the trust,
the pool of mortgage loans in the trust will have the following characteristics:
. a weighted average mortgage interest rate of at least ___% for
group I and ____% for group II, and, with respect to group II, a
weighted average margin of at least ____%;
. a weighted average remaining amortization term of not less than
____ months for group I and not less than ___ months for group
II;
. a weighted average loan-to-value ratio of not more than ____% for
group I and ____% for group II;
. with respect to group I, no more than ____% of the mortgage loans
will be secured by second liens and no more than ____% of the
mortgage loans will be balloon loans;
S-23
<PAGE>
. at least ____% of the mortgage loans for group I and ____% of the
mortgage loans for group II will be secured by single-family,
detached and attached, dwellings;
. no more than ____% of the mortgage loans for group I and ____% of
the mortgage loans for group II will be secured by investment
properties;
. no more than ___% of the mortgage loans for group I will have
balances greater than $______ and no more than ____% of the
mortgage loans for group II will have balances greater than
$______;
. at least ____% of the mortgage loans for group I and ____% of the
mortgage loans for group II will be secured by owner occupied
dwellings;
. no more than ____% of the mortgage loans for group I and ____% of
the mortgage loans for group II will have a combined loan-to-
value ratio in excess of ____%; and
. in the case of group I, not more than ____%, ____% and ____% of
the mortgage loans will have credit grades of B, C and D,
respectively, and, in the case of group II, not more than ___%,
____% and ____% of the mortgage loans will have credit grades of
B, C and D, respectively.
Additional Information
The description in this prospectus supplement of the mortgage loans and
the mortgaged premises is based upon the pool of identified mortgage loans, as
constituted at the close of business on the statistical cut off date. The pool
of mortgage loans will include additional mortgage loans. In addition, the
depositor may remove mortgage loans prior to closing
. as a result of incomplete documentation or non-compliance with
representations and warranties or
. if the depositor believes that removal is necessary or
appropriate.
The depositor may substitute other mortgage loans subject to certain terms and
conditions set forth in the Trust Agreement creating the trust. The seller
believes that the information set forth in this prospectus supplement with
respect to group I and group II is representative of the characteristics of the
respective group as it will be constituted at the closing date, although as
described above under the heading "--Conveyance of Subsequent Mortgage Loans,"
certain characteristics of the mortgage loans in a group may vary.
The depositor will file a current report on Form 8-K with the
Commission, together with the Trust Agreement, within fifteen days after the
initial issuance of the offered certificates. The depositor will note the effect
of any changes in the pool in the current report on Form 8-K as a result of
adding or removing any mortgage loans. A current report on Form 8-K will also be
filed within 15 days of the end of the pre-funding period reflecting subsequent
mortgage loans added to the trust. The depositor also intends to file additional
yield tables and other computational materials with the Commission in a current
report on Form 8-K. The underwriters of the offered
S-24
<PAGE>
certificates prepared the yield tables and computational materials at the
request of prospective investors, based on assumptions provided by, and
satisfying the special requirements of, such prospective investors. Those tables
and assumptions may be based on assumptions that differ from the modeling
assumptions used in preparing tables set forth under the heading "Prepayment and
Yield Considerations" on page S-__. Accordingly, those tables and other
materials may not be relevant to or appropriate for investors other than those
specifically requesting them.
Underwriting Standards
The seller's underwriting philosophy is to analyze the overall
situation of the borrower and to take into account compensating factors which
may be used to offset certain areas of weakness. Specific compensating factors
include:
. loan-to-value;
. mortgage payment history;
. employment stability; and
. years at residence.
The seller underwrites each loan individually. The seller bases its
underwriting decision on the risk profile of the loan, even in instances where
the seller purchases a group of mortgage loans in bulk. In some of these 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 customarily employs underwriting guidelines to aid in
assessing:
. the borrower's ability and willingness to repay a loan according
to its terms and
. whether the value of the property securing the loan will allow
the lender to recover its investment if a loan default occurs.
The seller has established classifications with respect to the credit
profile of the borrower. The terms of the loans and the maximum loan-to-value
ratios and debt-to-income ratios vary based on the classification of the
borrower. The seller generally offers borrowers with less favorable credit
ratings loans with higher interest rates and lower loan-to-value ratios than
borrowers with more favorable credit ratings.
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 Fannie Mae and Freddie Mac
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 building 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.
S-25
<PAGE>
The seller has four loan documentation programs:
. Full Documentation -- underwriter review of the borrower's
credit report, handwritten loan application, property
appraisal, and the documents that are provided to verify
employment and bank deposits, such as W-2's and pay stubs, 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 -- the borrower's income as stated on the loan
application must be reasonable for the related occupation
because the income is not independently verified. The seller
does, however, verify the existence of the business and
employment; and the business must have been in existence for
at least two years; and
. 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 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.
Effective July 12, 1999, the seller revised certain aspects of its
general guidelines for its A+ and A credit borrowers. The seller's revised
general guidelines are set forth below:
S-26
<PAGE>
<TABLE>
<CAPTION>
A+ A A- B C D
<S> <C> <C> <C> <C> <C>
Mortgage History
No late payments Maximum of one Maximum of two Maximum of four Maximum of five Maximum of six
30-day late payment 30-day late 30-day late 30-day and one 30-day, two
payments in last payments or two 60-day late 60-day and one
12 months 30-day and one payments or four 90-day late
(maximum of one 60-day late 30-day and one payments
30-day late payments in last 90-day late
payment if LTV 12 months payments in last
is greater than 12 months
85%)
Secondary Credit
Maximum of three Maximum of three Maximum of three Maximum of four Discretionary Discretionary
30-day late 30-day late 30-day late 30-day and one
payments on payments on payments on 60-day late
revolving credit; revolving credit; revolving payments on
two 30-day late three 30-day late credit; three revolving credit;
payment on payments on 30-day late three 30-day and
installment credit installment credit payments on one 60-day late
installment payments on
credit (isolated installment
60-day late credit (isolated
payments 90-day late
acceptable) payments
acceptable)
Bankruptcy Filings
Chapters 7 & 13 - Chapter 7 - Chapter 7 - Chapter 7 - Chapter 7 - Chapter 7 & 13 -
Discharged 2 years Discharged 2 years Discharged 2 years Discharged 2 years Discharged 1 year 1 day from
(re-established Chapter 13 - Chapter 13 -1 Chapter 13 -1 Chapter 13 -1 day discharge
credit since the Discharged 1 year year from date of year from date of after discharge
discharge) (re-established filing with proof filing with proof with proof paid
credit since paid as agreed paid as agreed as agreed
discharge) (must be (must be
discharged) discharged)
Debt-To-Income Ratio
32%/42% 45% 50% 50% 55% 60%
Maximum Combined Loan-To-Value
95% to $400,000 95% to $400,000 100% - Owner 100% - Owner 100% - Owner 100% - Owner
90% to $1 million 90% to $1 million Occupied Occupied Occupied Occupied
90% - Non Owner 90% - Non Owner 90% - Non Owner 90% - Non Owner
Occupied Occupied Occupied Occupied
Maximum Loan-To-Value
95% 90% 90% 85% 80% 65%
</TABLE>
The following table shows the distribution of the identified mortgage
loans as of the statistical cut-off date in relation to the classifications
described above:
<TABLE>
<CAPTION>
Group I Group II
Saxon ---------------------------------------------------- ------------------------------------------------------
Credit Number of Number of Current Current Number of Number of Current Current
Grade Loans Loans(%) Balance($) Balance(%) Loans Loans(%) Balance($) Balance(%)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
A+
A
A-
B
C
D
Totals 100.00 100.00 100.00 100.00
====== ====== ====== ======
</TABLE>
Servicing of the Mortgage Loans
General. Meritech Mortgage Services, Inc., an affiliate of the
depositor, will service the mortgage loans. The servicer began its servicing
operations in 1960 and operated under the name Cram Mortgage Service, Inc.,
before September 1994. The principal offices of the servicer are located in Fort
Worth, Texas. The servicer is a HUD-approved originator and is approved by and
in good standing with Fannie Mae and Freddie Mac. The servicer will provide
customary servicing functions with respect to the mortgage loans. Among other
things, the servicer is obligated under certain circumstances to advance
delinquent payments of principal and interest with respect to the mortgage loans
and to pay month end interest with respect to mortgage loans serviced by it. The
servicer must obtain approval of the master servicer with respect to certain
servicing activities. See "Servicing of Mortgage Loans" in the prospectus
beginning on page ____.
<PAGE>
As of ______, ____, the servicer serviced a portfolio of approximately
______one-to-four family conventional residential mortgage loans totaling
approximately $_____ million. The following table sets forth certain unaudited
information concerning the delinquency experience, including loans in
foreclosure, and mortgage loans foreclosed with respect to the servicer's
conventional loan servicing portfolio as of the end of the indicated periods.
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 it is 31 days past due on a contractual basis.
<TABLE>
<CAPTION>
Percentage of Total Portfolio
------------------------------------------------------------------------------------------------------
[June 30, 1999] December 31, 1998 December 31, 1997 December 31, 1996
------------- ----------------- ----------------- -----------------
By No. of By Dollar By No. of By Dollar By No. of By Dollar By No. of By Dollar
Loans Amount Loans Amount Loans Amount Loans Amount
----- ------ ----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Period of delinquency
(including foreclosure)
31 to 60 days
61 to 90 days
91 days or more
Percentage of Total Portfolio
Delinquent
Foreclosed
</TABLE>
________________________________________
/(1)/Totals may not sum due to rounding.
These statistics represent the recent experience of the servicer. There can
be no assurance that the delinquency and foreclosure experience of the mortgage
loans in the trust will be comparable. In addition, these statistics are based
on all the one-to-four family residential 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 trust's 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 the 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 the
mortgage loan on the first day of the due period with respect to each
distribution date. A due period is the period from and including the second day
of a month to an including the first day of the following month. 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 the 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.
S-28
<PAGE>
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
Before 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 believes
that the advance is "non-recoverable." Advances of principal and interest will
be considered non-recoverable only to the extent those 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 required advance will constitute an
event of default under the servicing agreement. If the servicer fails to make a
required advance of principal and interest, the master servicer will be
obligated to make such advance. The total advance obligations of the master
servicer may be subject to a dollar limitation that is acceptable to the rating
agencies as set forth in the Trust 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 the 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 the mortgage loan through the last day of the month
in which liquidation or prepayment occurred and interest actually received by
the servicer with respect to the 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 the month. If the
servicer fails to deposit month end interest as required, the master servicer
will be obligated to do so.
The Master Servicer
Saxon Mortgage, Inc., will act as master servicer of the mortgage loans.
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;
S-29
<PAGE>
. make advances to the extent described in this prospectus supplement
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.
Year 2000 Compliance
Servicer and Master Servicer. The servicer and the master servicer are
preparing their computer systems and computer-driven equipment and devices for
the year 2000. Virtually every computer operation could be affected in some way
by the rollover of the two-digit year value from 99 to 00. Systems that do not
properly recognize date-sensitive information when the year changes to 2000
could fail or generate erroneous data. The year 2000 problem could affect
traditional information systems and embedded systems. It could also affect
software or computer applications that use, store, transmit or receive
information involving dates.
The servicer's and the master servicer's objective is to be year 2000
ready. "Year 2000 ready" means that critical systems, devices, applications and
business relationships have been evaluated and are expected to be suitable for
continued use into and beyond the year 2000. To that end, the master servicer
has evaluated its critical systems, devices, applications and business
relationships to determine the extent to which they are in fact "year 2000
ready." [The master servicer has determined that it has only one item that is
not yet "year 2000 ready," and expects to complete the adjustments that have
been represented by the vendor of that item as being required to render that
item "year 2000 compliant" by October 1, 1999.] The servicer has studied the
operation of its servicing system that has been warranted by the vendor to be
"year 2000 compliant." The servicer has found that system to be "year 2000
ready." The trustee has represented to the master servicer that it intends to
have its systems and applications capable of processing, on and after January 1,
2000, date and date related data consistent with the functionality of such
systems and applications and without a material adverse effect upon its
performance of services as trustee. For a description of recent year 2000
legislation, see "Recent Developments - Year 2000 Legislation."
DTC. DTC management has advised the depositor that it is aware that some
computer applications and systems used for processing were written using two
digits rather than four to define the applicable year, and therefore may not
recognize a date using "00" as the year 2000. This could result in the inability
of these systems to properly process transactions with dates in the year 2000
and thereafter. DTC has informed its participants and other members of the
financial community that it has developed and is implementing a program to
address this problem so that its applications and systems, as they relate to the
timely payment of distributions, including principal and interest payments to
securityholders, book-entry deliveries and settlement of trades within DTC
continue to function properly. This program includes a technical assessment and
remediation plan, each of which is complete. Additionally, DTC plans to
implement a testing phase of this program which is expected to be completed
within appropriate timeframes.
S-30
<PAGE>
DTC's ability to perform its services properly also depends upon other
parties, such as issuers and their agents, as well as third party vendors from
whom DTC licenses software and hardware. DTC relies on these third parties for
information or the provision of telecommunication, electric utility and other
services. DTC is contacting (and will continue to contact) third party vendors
that provide services to DTC to determine the extent of their year 2000
compliance, and DTC will develop contingency plans as it deems appropriate to
address failures in year 2000 compliance on the part of third party vendors.
However, there can be no assurance that the systems of third party vendors will
be timely converted and will not adversely affect the proper functioning of
DTC's services.
The information set forth in the preceding two paragraphs has been provided
by DTC for informational purposes only and is not intended to serve as a
representation, warranty or contract modification of any kind. Neither the
seller, the master servicer nor the servicer makes any representation or
warranty as to the accuracy or completeness of such information.
S-31
<PAGE>
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
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 principal payments on the mortgage loans in a group
is slower than the rate anticipated by an investor who purchases an offered
certificate at a discount, the actual yield to the investor will be lower than
that investor's anticipated yield. If the actual rate of principal payments on
the mortgage loans in a group is faster than the rate anticipated by an investor
who purchases an offered certificate at a premium, the actual yield to that
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 the properties; and
. changes in the mortgagors' housing needs, job transfers and employment
status.
Notwithstanding these considerations, a faster rate of prepayment on the related
mortgage loans may extend the weighted average lives of the class BF-1A and
class BV-1A certificates, as applicable.
The timing of changes in the rate of prepayments may significantly affect
the actual yield to investors who purchase the offered certificates at prices
other than par, even if the average rate of principal prepayments is consistent
with the expectations of investors. In general, the earlier the payment of
principal of the mortgage loans the greater the effect on an investor's yield to
maturity. As a result, the effect on an investor's yield of principal
prepayments occurring at a rate higher or lower than the rate anticipated by the
investor during the period immediately following the issuance of the offered
certificates may not be offset by a subsequent like reduction or increase in the
rate of principal prepayments. Investors must make their own decisions as to the
appropriate prepayment assumptions to be used in deciding whether to purchase
any of the offered certificates. The depositor does not make any representations
or warranties as to the rate of prepayment or the factors to be considered in
connection with an investor's determination.
S-32
<PAGE>
The term "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 that certificate will be distributed to the investor. 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 group are paid. These
payments may be in the form of scheduled amortization or prepayments which
include prepayments, liquidations due to default or early termination of the
trust. The weighted average life and yield of a certificate may also be affected
by a distribution of the related Extra Principal Distribution Amount on one or
more distribution dates. Any Extra Principal Distribution Amounts will be
distributed from available excess interest as described in this prospectus
supplement and will reflect the realized loss experience of the related mortgage
loans. See "Description of the Offered Certificates - Crosscollateralization
Provisions" on page S-__.
The class AF-6 certificates will not be entitled to distributions of
principal, either scheduled or unscheduled, until ______, ____, except as
otherwise described in this prospectus supplement. After that date, the relative
entitlement of the class AF-6 certificates to payments in respect of principal
is subject to increase in accordance with the calculation of the Class AF-6
Distribution Amount. See "Description of the Offered Certificates -
Distributions" on page S-__.
In addition to the factors described above, the weighted average life and
yield to maturity of the class B-1A certificates of each group will be directly
related to the timing and amount of excess interest available for distribution
in reduction of the certificate principal balances of those certificates. The
level of excess interest available on any distribution date will be influenced
by, among other things:
. The overcollateralization level of the related mortgage loans. This
means the extent to which interest on the mortgage loans is accruing
on a higher principal balance than the certificate principal balances
of the related certificates;
. The delinquency and default experience of the mortgage loans. For
example, excess interest will be applied to interest shortfalls on the
certificates before it is distributed in reduction of the certificate
principal balances of the class B-1A certificates;
. In the case of group II, the level of one month LIBOR and the indices
for the adjustable rate mortgage loans. For example, for the mortgage
loans in group II excess interest is largely a function of the extent
to which the values of the indices applicable to those mortgage loans
plus the applicable gross margin exceed the applicable pass through
rates; and
. In the case of group I, to the extent the weighted average net rate of
the fixed rate loans in the group exceeds the weighted average of the
pass through rates of the group I certificates.
No assurances can be given as to the amount of excess interest distributable at
any time or in the aggregate. Additionally, the Applicable Percentage for each
group, which varies from time to
S-33
<PAGE>
time, and regulates the portion of excess interest to the applied to
distribution of the class B-1A certificates, will also affect the weighted
average lives of the class B-1A certificates.
Mandatory Prepayment
Amounts, other than interest or investment earnings, remaining in the pre-
funding account on the first distribution date after the end of the pre-funding
period will be applied as a prepayment of principal on the certificates as
described in this prospectus supplement under the heading "Description of the
Offered Certificates - Distributions" beginning on page S-__. The seller
believes that almost all of the original pre-funded amount will be used by the
trust to purchase subsequent mortgage loans. It is unlikely, however, that the
aggregate amount of subsequent mortgage loans purchased will be identical to the
original pre-funded amount. Consequently, certificateholders will receive some
prepayment of principal. See "Description of the Offered Certificates - Pre-
Funding Account and Capitalized Interest Account" on page S-__.
Prepayments and Yields for Offered Certificates
All the mortgage loans in group I are or will be 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,
those mortgage loans are likely to be subject to higher prepayment rates than if
prevailing rates remain at or above the interest rates on the mortgage loans.
Conversely, if prevailing interest rates rise appreciably above the interest
rates on fixed rate mortgage loans, those 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, class BF-1 and class BF-1A certificates on any distribution date will equal
the lesser of:
. a fixed rate as set forth on page S-___, and
. the weighted average mortgage interest rate of the mortgage loans in
group I, net of servicing fees and master servicing fees, for that
distribution date. This is known as the "weighted average net rate."
The pass through rate applicable to the class AF-1 certificates on any
distribution date will equal the lesser of:
. the floating rate described on page S-___, and
. the weighted average net rate for group I.
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 the related certificates. The mortgage
interest rates of the identified mortgage loans in group I as of the statistical
cut-off date are expected to range from ____% to ____% per annum. 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 those certificates. The weighted average net rate of
identified mortgage loans in group I as of the
S-34
<PAGE>
statistical cut-off date is expected to be ____% per annum. The pass through
rate applicable to the class BV-1A certificates on any distribution date will
equal the lesser of:
. the fixed rate set forth on page S-___, and
. the weighted average net rate of the [identified] mortgage loans in
group II.
The weighted average net rate of the identified mortgage loans in group II as of
the statistical cut-off date is expected to be ____% per annum.
All the mortgage loans in group II are or will be 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 the class AF-1, class AF-2, class
AF-3, class AF-4, class AF-5, class AF-6, class AV-1 and class AV-2 certificates
is the date on which the certificate principal balance of the class 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 those mortgage loans are timely
received.
The last scheduled distribution date for the class MF-1, class MF-2, class
BF-1, class MV-1, class MV-2 and class BV-1 certificates is the first
distribution date following the month of maturity of the latest possible
maturing mortgage loan.
The last scheduled distribution date for the class BF-1A and class BV-1A
certificates is the date on which the certificate principal balance of the class
would be reduced to zero assuming, among other things, that prepayments on the
mortgage loans in the related group occur at ____% of the related prepayment
assumption for such group and that scheduled monthly payments of principal of
and interest on each of those mortgage loans are timely received.
The actual final distribution date with respect to each class of offered
certificates could occur significantly earlier than its last scheduled
distribution date because:
. prepayments are likely to occur which will be distributed in reduction
of the related certificate principal balances, and
. the master servicer will have the right to purchase all of 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 sum of:
. the aggregate scheduled principal balances of the mortgage loans
as of the cut off date, in the case of the initial mortgage
loans, and as of their related cut-off date or dates, in the case
of subsequent mortgage loans, and
S-35
<PAGE>
. any amounts on deposit in the pre-funding account, excluding
interest or other investment earnings.
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.
On each distribution date, the class B-1A certificates of each group are
entitled to a portion of interest payments on the related mortgage loans after
required distributions of principal and interest on the certificates and payment
of trust expenses. This excess interest will be applied to reduce the
certificate principal balance of the related class B-1A certificates. See
"Description of the Offered Certificates - Crosscollateralization Provisions"
beginning on page S-__. Based on the modeling assumptions described below and
___% of the applicable prepayment assumption, the weighted average lives of the
class BF-1A and class BV-1A certificates would be ____ and ____ years,
respectively. No assurance can be given as to the actual rate of principal
prepayments on the related mortgage loans. Actual rates of prepayments that
differ from those anticipated could have a significant effect on the actual
weighted average lives of those certificates and could adversely affect their
yield to maturity.
Prepayments on mortgage loans are commonly measured relative to a
prepayment model or standard, called the prepayment assumption. A separate
prepayment assumption has been calculated for each group and represents an
assumed rate of constant prepayment relative to the then outstanding principal
balance of a pool of mortgage loans for a specified period. ___% of the
prepayment assumption for group I (Scenario IV for group I) assumes prepayment
rates of ___% per annum of the then outstanding principal balance of the related
mortgage loans in the first month of the life of those mortgage loans and an
additional ___% per annum in each month thereafter up to and including the tenth
month. Beginning in the eleventh month and in each month thereafter during the
life of those mortgage loans, ___% of the prepayment assumption for group I
assumes a constant prepayment rate of ___% per annum. ____% of the prepayment
assumption for group II (Scenario IV for group II) assumes prepayment rates of
____% per annum of the then outstanding principal balance of the related
mortgage loans in the first month of life of those mortgage loans and an
additional ____% per annum in each month thereafter up to and including the
22/nd/ month. Beginning in the 23/rd/ month and in each month thereafter during
the life of those mortgage loans, ____% of the prepayment assumption for group
II assumes a constant prepayment rate of ____% per annum. As used in the tables
below, 0% prepayment assumption (Scenario I for each group below) assumes
prepayment rates equal to 0% of the prepayment assumption. This means that no
prepayments on the mortgage loans have the characteristics described below. No
prepayment assumption purports to be a historical description of prepayment
experience or a prediction of the anticipated rate of prepayment of any pool of
mortgage loans, including the related mortgage loans.
The following tables have been prepared on the basis of the following
assumptions known as modeling assumptions:
. the mortgage loans of the related groups prepay at the indicated
percentage of the related prepayment assumption;
S-36
<PAGE>
. distributions on the offered certificates are received, in cash, on
the 25th day of each month, commencing ______, ____, in accordance
with the payment priorities set forth in this prospectus supplement;
. 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;
. scheduled payments on the mortgage loans are assumed to be received on
the first day of each due period commencing _____, ____, 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 ______, ____, and include 30 days' interest thereon;
. the level of six month LIBOR remains constant at _____%;
. the level of one year CMT remains constant at ____%;
. the pass through rates for the class AF-1 certificates and group II
certificates, other than the class BV-1A certificates, are based on
constant one month LIBOR of ____%;
. the available funds cap with respect to the class AF-1 certificates
and the group II certificates, other than the class BV-1A
certificates, is calculated on the basis of the actual number of days
elapsed in the relevant period and a year of 360 days (actual/360);
. the available funds cap with respect to the group I certificates,
other than the class AF-1 certificates, and the class BV-1A
certificates of group II is calculated on the basis of a 360-day year
consisting of twelve 30-day months (30/360);
. the closing date for the offered certificates is ______, ____;
. all of the original pre-funded amount is applied to acquire subsequent
mortgage loans by ______, ____;
. 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, subject to the applicable periodic adjustment caps and
floors, of:
. the assumed level of the applicable index and
. the respective gross margin;
. for purposes of the "Weighted Average Life -- Optional Termination" in
the tables, the offered certificates are redeemed on the clean-up call
date;
S-37
<PAGE>
. credit enhancement percentages for each group were derived from the
certificate principal balances of the certificates set forth in this
prospectus supplement;
. [amounts on deposit in the pre-funding account earn interest at a rate
equal to the net weighted average mortgage interest rate of the
mortgage loans in the related group;] and
. each group consists of mortgage loans having the approximate
characteristics set forth in the following tables.
<TABLE>
<CAPTION>
Initial Group I Loans
Original Remaining Original
Amortization Current Gross Net Amortization Amortization Term to
Methodology Balance ($) WAC (%) Servicing (%) WAC (%) Term Term Balloon
<S> <C> <C> <C> <C> <C> <C> <C>
Level
Level
Level
Balloon
Subsequent Group I Loans as of __________
Level
Level
Level
Balloon
Subsequent Group I Loans as of __________
Level
Level
Level
Balloon
</TABLE>
<TABLE>
<CAPTION>
PREPAYMENT SCENARIOS
Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI Scenario VII
<S> <C> <C> <C> <C> <C> <C> <C>
Group I Prepayment
Assumption: 0% 75% 90% 100% 125% 150% 175%
Group II
Prepayment
Assumption: 0% 75% 90% 100% 125% 150% 175%
</TABLE>
The following tables set forth the approximate percentages of the initial
principal amount of the offered certificates that would be outstanding after
each of the dates shown, and the approximate weighted average life years of the
offered certificates, based on prepayment scenarios described in the table
entitled "Prepayment Scenarios." The percentages have been rounded to the
nearest 1%.
S-38
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
Class AF-1 Scenario Class AF-2 Scenario
----------------------------------------- ----------------------------------------------
I II III IV V VI VII I II III IV V VI VII
- -- --- -- - -- --- - -- --- -- - -- ---
<S> <C>
Initial Percent Initial Percent
08/25/00 08/25/00
08/25/01 08/25/01
08/25/02 08/25/02
08/25/03 08/25/03
08/25/04 08/25/04
08/25/05 08/25/05
08/25/06 08/25/06
08/25/07 08/25/07
08/25/08 08/25/08
08/25/09 08/25/09
08/25/10 08/25/10
08/25/11 08/25/11
08/25/12 08/25/12
08/25/13 08/25/13
08/25/14 08/25/14
08/25/15 08/25/15
08/25/16 08/25/16
08/25/17 08/25/17
08/25/18 08/25/18
08/25/19 08/25/19
08/25/20 08/25/20
08/25/21 08/25/21
08/25/22 08/25/22
08/25/23 08/25/23
08/25/24 08/25/24
08/25/25 08/25/25
08/25/26 08/25/26
08/25/27 08/25/27
08/25/28 08/25/28
08/25/29 08/25/29
Weighted Average Life/(1)/ Weighted Average Life/(1)/
Maturity Maturity
Optional Termination Optional Termination
Class AF-3 Scenario Class AF-4 Scenario
----------------------------------------- ----------------------------------------------
I II III IV V VI VII I II III IV V VI VII
- -- --- -- - -- --- - -- --- -- - -- ---
Initial Percent Initial Percent
08/25/00 08/25/00
08/25/01 08/25/01
08/25/02 08/25/02
08/25/03 08/25/03
08/25/04 08/25/04
08/25/05 08/25/05
08/25/06 08/25/06
08/25/07 08/25/07
08/25/08 08/25/08
08/25/09 08/25/09
08/25/10 08/25/10
08/25/11 08/25/11
08/25/12 08/25/12
08/25/13 08/25/13
08/25/14 08/25/14
08/25/15 08/25/15
08/25/16 08/25/16
08/25/17 08/25/17
08/25/18 08/25/18
08/25/19 08/25/19
08/25/20 08/25/20
08/25/21 08/25/21
08/25/22 08/25/22
08/25/23 08/25/23
08/25/24 08/25/24
08/25/25 08/25/25
08/25/26 08/25/26
08/25/27 08/25/27
08/25/28 08/25/28
08/25/29 08/25/29
Weighted Average Life/(1)/ Weighted Average Life/(1)/
Maturity Maturity
Optional Termination Optional Termination
</TABLE>
/(1)/ The weighted average life 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 certificate principal balance for the applicable class.
S-39
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
<TABLE>
<CAPTION>
Class AF-1 Scenario Class AF-2 Scenario
-------------------------------------- ----------------------------------------
I II III IV V VI VII I II III IV V VI VII
- -- --- -- - -- --- - -- --- -- - -- ---
<S> <C>
Initial Percent Initial Percent
08/25/00 08/25/00
08/25/01 08/25/01
08/25/02 08/25/02
08/25/03 08/25/03
08/25/04 08/25/04
08/25/05 08/25/05
08/25/06 08/25/06
08/25/07 08/25/07
08/25/08 08/25/08
08/25/09 08/25/09
08/25/10 08/25/10
08/25/11 08/25/11
08/25/12 08/25/12
08/25/13 08/25/13
08/25/14 08/25/14
08/25/15 08/25/15
08/25/16 08/25/16
08/25/17 08/25/17
08/25/18 08/25/18
08/25/19 08/25/19
08/25/20 08/25/20
08/25/21 08/25/21
08/25/22 08/25/22
08/25/23 08/25/23
08/25/24 08/25/24
08/25/25 08/25/25
08/25/26 08/25/26
08/25/27 08/25/27
08/25/28 08/25/28
08/25/29 08/25/29
Weighted Average Life/(1)/ Weighted Average Life/(1)/
Maturity Maturity
Optional Termination Optional Termination
<CAPTION>
Class AF-3 Scenario Class AF-4 Scenario
-------------------------------------- ----------------------------------------
I II III IV V VI VII I II III IV V VI VII
- -- --- -- - -- --- - -- --- -- - -- ---
<S> <C>
Initial Percent Initial Percent
08/25/00 08/25/00
08/25/01 08/25/01
08/25/02 08/25/02
08/25/03 08/25/03
08/25/04 08/25/04
08/25/05 08/25/05
08/25/06 08/25/06
08/25/07 08/25/07
08/25/08 08/25/08
08/25/09 08/25/09
08/25/10 08/25/10
08/25/11 08/25/11
08/25/12 08/25/12
08/25/13 08/25/13
08/25/14 08/25/14
08/25/15 08/25/15
08/25/16 08/25/16
08/25/17 08/25/17
08/25/18 08/25/18
08/25/19 08/25/19
08/25/20 08/25/20
08/25/21 08/25/21
08/25/22 08/25/22
08/25/23 08/25/23
08/25/24 08/25/24
08/25/25 08/25/25
08/25/26 08/25/26
08/25/27 08/25/27
08/25/28 08/25/28
08/25/29 08/25/29
Weighted Average Life/(1)/ Weighted Average Life/(1)/
Maturity Maturity
Optional Termination Optional Termination
</TABLE>
/(1)/ The weighted average life 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 certificate principal balance for the applicable class.
S-40
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
<TABLE>
<CAPTION>
Class BF-1 Scenario Class BF-1A Scenario
-------------------------------------- ----------------------------------------
I II III IV V VI VII I II III IV V VI VII
- -- --- -- - -- --- - -- --- -- - -- ---
<S> <C>
Initial Percent Initial Percent 100 100 100 100 100 100 100
08/25/00 08/25/00
08/25/01 08/25/01
08/25/02 08/25/02
08/25/03 08/25/03
08/25/04 08/25/04
08/25/05 08/25/05
08/25/06 08/25/06
08/25/07 08/25/07
08/25/08 08/25/08
08/25/09 08/25/09
08/25/10 08/25/10
08/25/11 08/25/11
08/25/12 08/25/12
08/25/13 08/25/13
08/25/14 08/25/14
08/25/15 08/25/15
08/25/16 08/25/16
08/25/17 08/25/17
08/25/18 08/25/18
08/25/19 08/25/19
08/25/20 08/25/20
08/25/21 08/25/21
08/25/22 08/25/22
08/25/23 08/25/23
08/25/24 08/25/24
08/25/25 08/25/25
08/25/26 08/25/26
08/25/27 08/25/27
08/25/28 08/25/28
08/25/29 08/25/29
Weighted Average Life/(1)/ Weighted Average Life/(1)/
Maturity Maturity
Optional Termination Optional Termination
<CAPTION>
Class AV-1 Scenario Class AV-2 Scenario
--------------------------------------- -------------------------------------
I II III IV V VI VII I II III IV V VI VII
- -- --- -- - -- --- - -- --- -- - -- ---
<S> <C>
Initial Percent Initial Percent
08/25/00 08/25/00
08/25/01 08/25/01
08/25/02 08/25/02
08/25/03 08/25/03
08/25/04 08/25/04
08/25/05 08/25/05
08/25/06 08/25/06
08/25/07 08/25/07
08/25/08 08/25/08
08/25/09 08/25/09
08/25/10 08/25/10
08/25/11 08/25/11
08/25/12 08/25/12
08/25/13 08/25/13
08/25/14 08/25/14
08/25/15 08/25/15
08/25/16 08/25/16
08/25/17 08/25/17
08/25/18 08/25/18
08/25/19 08/25/19
08/25/20 08/25/20
08/25/21 08/25/21
08/25/22 08/25/22
08/25/23 08/25/23
08/25/24 08/25/24
08/25/25 08/25/25
08/25/26 08/25/26
08/25/27 08/25/27
08/25/28 08/25/28
08/25/29 08/25/29
Weighted Average Life/(1)/ Weighted Average Life/(1)/
Maturity Maturity
Optional Termination Optional Termination
</TABLE>
/(1)/ The weighted average life 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 certificate principal balance for the applicable class.
S-41
<PAGE>
PERCENTAGE OF INITITAL CERTIFICATE PRINCIPAL BALANCE
<TABLE>
<CAPTION>
Class MV-1 Scenario Class MV-2 Scenario
--------------------------------------- -------------------------------------
I II III IV V VI VII I II III IV V VI VII
- -- --- -- - -- --- - -- --- -- - -- ---
<S> <C>
Initial Percent Initial Percent
08/25/00 08/25/00
08/25/01 08/25/01
08/25/02 08/25/02
08/25/03 08/25/03
08/25/04 08/25/04
08/25/05 08/25/05
08/25/06 08/25/06
08/25/07 08/25/07
08/25/08 08/25/08
08/25/09 08/25/09
08/25/10 08/25/10
08/25/11 08/25/11
08/25/12 08/25/12
08/25/13 08/25/13
08/25/14 08/25/14
08/25/15 08/25/15
08/25/16 08/25/16
08/25/17 08/25/17
08/25/18 08/25/18
08/25/19 08/25/19
08/25/20 08/25/20
08/25/21 08/25/21
08/25/22 08/25/22
08/25/23 08/25/23
08/25/24 08/25/24
08/25/25 08/25/25
08/25/26 08/25/26
08/25/27 08/25/27
08/25/28 08/25/28
08/25/29 08/25/29
Weighted Average Life/(1)/ Weighted Average Life/(1)/
Maturity Maturity
Optional Termination Optional Termination
<CAPTION>
Class BV-1 Scenario Class BV-1A Scenario
--------------------------------------- -------------------------------------
I II III IV V VI VII I II III IV V VI VII
- -- --- -- - -- --- - -- --- -- - -- ---
<S> <C>
Initial Percent Initial Percent
08/25/00 08/25/00
08/25/01 08/25/01
08/25/02 08/25/02
08/25/03 08/25/03
08/25/04 08/25/04
08/25/05 08/25/05
08/25/06 08/25/06
08/25/07 08/25/07
08/25/08 08/25/08
08/25/09 08/25/09
08/25/10 08/25/10
08/25/11 08/25/11
08/25/12 08/25/12
08/25/13 08/25/13
08/25/14 08/25/14
08/25/15 08/25/15
08/25/16 08/25/16
08/25/17 08/25/17
08/25/18 08/25/18
08/25/19 08/25/19
08/25/20 08/25/20
08/25/21 08/25/21
08/25/22 08/25/22
08/25/23 08/25/23
08/25/24 08/25/24
08/25/25 08/25/25
08/25/26 08/25/26
08/25/27 08/25/27
08/25/28 08/25/28
08/25/29 08/25/29
Weighted Average Life/(1)/ Weighted Average Life/(1)/
Maturity Maturity
Optional Termination Optional Termination
</TABLE>
/(1)/ The weighted average life 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 certificate principal balance for the applicable class.
S-42
<PAGE>
There is no assurance that prepayments will occur at any constant
percentage or in accordance with any of the prepayment assumptions.
Payment Delay Feature of Certain Group I Certificates
The effective yield to the holders of certain group I certificates, except
the class AF-1 certificates, and the class BV-1A certificates of group II will
be lower than the yield otherwise produced by the related pass through rate and
the purchase price of those certificates because principal and interest
distributions will not be payable to 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).
S-43
<PAGE>
Description of the Offered Certificates
General
The certificates to be issued by the trust will consist of:
. the following group I certificates, all of which are offered
certificates:
. class AF-1, class AF-2, class AF-3, class AF-4, class AF-5 and
class AF-6 certificates;
. class MF-1 and class MF-2 certificates;
. class BF-1 certificates; and
. class BF-1A certificates
. the following group II certificates, all of which are offered
certificates:
. class AV-1 and class AV-2 certificates;
. class MV-1 and class MV-2 certificates;
. class BV-1 certificates; and
. class BV-1A certificates; and
. the class C and class R certificates, which are private certificates.
References to class A, class M-1, class M-2, class B-1 and class B-1A 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 class B-1A
certificates are subordinated certificates.
The sum of the initial scheduled principal balances of each group and
related amounts on hand in the pre-funding account will equal the initial
certificate principal balances of the related certificates. The private
certificates [of a group] are subordinate to the related offered certificates on
the same basis that the class B-1A, class B-1, class M-2 and class M-1
certificates are subordinate to more senior classes of certificates of a group.
Only the group I offered certificates and the group II offered certificates
are offered by this prospectus supplement and the accompanying prospectus. The
private certificates may be offered privately or will be retained initially by
the depositor or its affiliates and, in either case, are not being offered. As
of any distribution date, the certificate principal balance of each class of
offered certificates is the aggregate principal amount of the certificate that
immediately prior to the distribution date adjusted for all amounts to be
applied on that distribution date with respect to principal, including:
. reductions or increases in the certificate principal balance of the
subordinated certificates as a result of the application of increases
or reductions resulting from unpaid realized loss amounts or
S-44
<PAGE>
. reductions resulting from prepayments made from the pre-funding
account.
Persons in whose names certificates are registered in the certificate
register maintained by the trustee are the holders of the certificates. For as
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 Trust
Agreement will be Cede & Co., a nominee of DTC. No beneficial owner will be
entitled to receive a definitive certificate representing the beneficial owner's
interest in the trust, except in the event that physical certificates are issued
under limited circumstances set forth in the Trust 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. See "Description
of the Offered Certificates - Book Entry Registration of the Offered
Certificates" on page S-__.
As described under "The Mortgage Loan Pool" on page S-__, 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 Trust Agreement requires that the trustee create an asset proceeds
account and a distribution account. All funds in those account must be invested
and reinvested, as directed by the master servicer, in permitted investments.
See "The Agreement -- Administration of Accounts" in the prospectus.
One day prior to the related distribution date (or, if that day is not a
business day, the immediately preceding business day) 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 and any
amounts transferred from the capitalized interest account with respect to the
group in each case for the distribution date.
"Interest funds" with respect to each 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:
. all scheduled interest collected by the servicer during the related
due period less the related servicing fee and master servicing fee;
. all advances relating to interest;
. all month end interest; and
. liquidation proceeds, to the extent the liquidation proceeds relate to
interest, less all non-recoverable advances relating to interest and
certain expenses reimbursed during the related due period.
"Principal funds" with respect to each 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:
S-45
<PAGE>
. the scheduled principal collected by the servicer during the related
due period or advanced on or before the master servicer remittance
date;
. prepayments of principal collected by the servicer in the applicable
prepayment period;
. the scheduled principal balance of each mortgage loan that was
repurchased by the depositor;
. any substitution shortfall, which is 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;
. all liquidation proceeds collected by the servicer during the related
due period, to the extent the liquidation proceeds related to
principal, less all non-recoverable advances relating to principal
reimbursed during the related due period; and
. with respect to the distribution date immediately following the end of
the funding period, the related pre-funded amount, excluding any
interest and other investment earnings thereon.
Distributions
General. Distributions on each class of the certificates will be made on
each distribution date to holders of each class of the certificates of record as
of the last business day of the month immediately preceding the calendar month
in which the distribution date occurs, or the closing date in the case of the
first distribution date (referred to as a record date), in an amount equal to
the product of the holder's percentage interest and the amount to be distributed
to that class on the distribution date. The percentage interest represented by
any certificate will be equal to the percentage obtained by dividing the
certificate principal balance of the certificate by the certificate principal
balance of all certificates of the same class.
Distributions of Interest. On each distribution date, interest
distributable with respect to group I certificates, other than class AF-1
certificates, and the class BV-1A certificates of group II is the interest which
has accrued on those certificates at the related pass through rate during the
calendar month immediately preceding the calendar month in which the
distribution date occurs. On each distribution date, interest distributable with
respect to the class AF-1 certificates and the group II certificates, other than
the class BV-1A certificates, is the interest which has accrued on those
certificates 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, other than the
class AF-1 certificates, and on the class BV-1A certificates of group II will be
made on the basis of a 360-
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day year assumed to consist of twelve 30-day months. All calculations of
interest on the class AF-1 certificates and the group II certificates, other
than the class BV-1A 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 and any amounts transferred
from the capitalized interest account for that distribution date with respect to
each group are required to be distributed in the following order of priority
until the interest funds and any amounts transferred from the capitalized
interest account have been fully distributed:
. to each class of the class A certificates of the group, the Current
Interest and any Interest Carry Forward Amount for the class;
provided, however, if the interest funds and any amounts transferred
from the capitalized interest account for a group of mortgage loans
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 the group, the interest funds and other amounts
transferred will be distributed pro rata among each class of such
class A certificates based on the ratio of:
. the Current Interest and Interest Carry Forward Amount for that
class to
. the total amount of Current Interest and any Interest Carry
Forward Amount for the class A certificates of the group;
. to the class M-1 certificates of the group, the Current Interest for
that class;
. to the class M-2 certificates of the group, the Current Interest for
that class;
. to the class B-1 certificates and class B-1A certificates of the
group, the Current Interest for those classes; provided, however, if
the interest funds and any amounts transferred from the capitalized
interest account for a group of mortgage loans are not sufficient to
make a full distribution of the Current Interest with respect to the
class B-1 and class B-1A certificates of the group, the interest funds
and other amounts transferred will be distributed pro rata among each
of the class B-1 certificates and the class B-1A certificates based on
the ratio of:
. the Current Interest for the class to
. the total amount of Current Interest for the class B-1 and class
B-1A certificates of the group; and
. any remainder as described below under the subheading "--
Crosscollateralization Provisions" on page S-__.
The pass through rate for the class AF-1 certificates on any distribution
date is capped by the Group I Available Funds Cap for that date; similarly the
pass through rates for the group II certificates on any distribution date are
capped at the Group II Available Funds Cap for that date. If on any distribution
date the pass through rate for a class of the group II certificates is based
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upon the Group II Available Funds Cap, the excess of the amount of interest that
the class would have been entitled to receive on that distribution date based on
LIBOR plus the applicable spread, but not more than the weighted average of the
maximum lifetime net mortgage interest rates for group II, or with respect to
the class BV-1A certificates, the fixed rate shown on page S-___ over the amount
of interest the class received on that distribution date based on the Group II
Available Funds Cap, together with the unpaid portion of any excess from prior
distribution dates (and interest accrued at the then applicable pass through
rate, without giving effect to the Group II Available Funds Cap) is the "Group
II Certificates Carryover Amount" for that class. Group II Certificates
Carryover Amounts will be payable on any distribution date, to the extent there
are sufficient available funds but only on or prior to the last distribution
date with respect to a class as described in this prospectus supplement. The
rating of the group II certificates does not address the likelihood of the
payment of any Group II Certificates Carryover Amount. No similar "carry over"
mechanism is applicable to the class AF-1 certificates in the event the pass
through rate thereon is limited by the Group I Available Funds Cap.
Distributions of Principal. Initially, principal in respect of the mortgage
loans of a group will be distributed exclusively to the class A certificates of
the group in the manner described in this prospectus supplement until the excess
of the aggregate schedule principal balances of the mortgage loans of the
related group over the class A certificate principal balances of the group is
equal to or exceeds ____% for group I (____% for group II) of those scheduled
principal balances. After that time, principal is required to be distributed so
as to maintain that ratio as described in this prospectus supplement.
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 ______,
____, unless the certificate principal balances of the related class A
certificates are reduced to zero), principal will be distributed as follows:
. principal not required to be distributed with respect to the class A
certificates of that group will be distributed to the class M-1
certificates of that group until the excess of the aggregate scheduled
principal balances of the mortgage loans in the related group over the
sum of the class A and class M-1 certificate principal balances of the
related group is equal to or exceeds ____% for group I (___% for group
II) of such scheduled principal balances;
. then principal not required to be distributed with respect to the
class A and class M-1 certificates will be distributed to the class
M-2 certificates until the excess of the aggregate scheduled principal
balances of the mortgage loans in the related group over the sum of
the class A, class M-1 and class M-2 certificate principal balances of
the related group is equal to or exceeds ____% for group I (____% for
group II) of those scheduled principal balances;
. then 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 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
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certificate principal balances of the related group is equal to or
exceeds ____% for group I (____% for group II) of those scheduled
principal balances;
. then principal not required to be distributed with respect to the
class A, class M-1, class M-2 and class B-1 certificates will be
distributed to the class B-1A certificates as described below; and
. then principal not required to be distributed to the offered
certificates will be distributed to the private certificates as
described in this prospectus supplement.
Notwithstanding the foregoing, while a Trigger Event with respect to a
group exists, principal will be distributed as follows:
. exclusively to the class A certificates of the related group;
. 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;
. 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;
. 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;
. after the certificate principal balance of the related class B-1
certificates has been reduced to zero, exclusively to the class B-1A
certificates of the related group.
While a Subordinated Trigger Event with respect to a group exists, principal
otherwise distributable to the class B-1A certificates of a group will be
distributed to the remaining more senior certificates of the group, in inverse
order of seniority.
On each distribution date, the Principal Distribution Amount for that
distribution date with respect to each group is required to be distributed as
follows until the Principal Distribution Amount has been fully distributed:
. to the class A certificates of the group, the Class A Principal
Distribution Amount for the group; provided, however, the Class A
Principal Distribution Amount for group I is required to be
distributed as follows: first, the class AF-6 Distribution Amount to
the class AF-6 certificates, and then the balance of the 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 distribution will be made to any class until the
certificate principal balances of all the class A certificates with a
lower numeral 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, to the class AV-1 certificates until
the certificate principal balance of that class has been reduced to
zero, then to the class AV-2 certificates until the certificate
principal balance of that class has been reduced to
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<PAGE>
zero, and provided, further, that, on any distribution date on which
the certificate principal balance for the class A certificates with
respect to group I are equal to or greater than the scheduled
principal balances of the mortgage loans in that group, the Class A
Principal Distribution Amount for group I will be distributed pro rata
and not sequentially to those class A certificates;
. to the class M-1 certificates of the group, the Class M-1 Principal
Distribution Amount for that class;
. to the class M-2 certificates of the group, the Class M-2 Principal
Distribution Amount for that class;
. to the class B-1 certificates of the group, the Class B-1 Principal
Distribution Amount for that class;
. if a Subordinated Trigger Event exists with respect to the group on
the distribution date, sequentially to the class B-1, class M-2 and
class M-1 certificates of the group, in that order, as provided in the
Trust Agreement, an amount equal to, generally, the Class B-1A
Principal Distribution Amount for the group on that date; and
. to the class B-1A certificates of the group, the Class B-1A Principal
Distribution Amount, provided that a Subordinated Trigger event for
the group does not exist on that date.
Crosscollateralization Provisions
On each distribution date, interest funds with respect to each group not
otherwise required to be distributed as described under the heading
"--Distributions" will be required to be distributed as follows until fully
distributed:
. the Extra Principal Distribution Amount for the group;
. to the class M-1 certificates of the group, the class M-1 Interest
Carry Forward Amount for that class;
. to the class M-2 certificates of the group, the class M-2 Interest
Carry Forward Amount for that class;
. pro rata, to the class B-1 and class B-1A certificates of the group,
the class B-1 and class B-1A Interest Carry Forward Amount for that
class;
. 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 that distribution date in accordance with the
priorities set forth above;
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. in the case of group II, to the group II certificates, in the order in
which distributions of Current Interest are made, the Group II
Certificates Carryover;
. to the class B-1A certificates of the group, an amount equal to the
related Applicable Percentage for that date of the remaining amount
until the certificate principal balance of that class has been reduced
to zero; and
. to the class C and class R certificates, the remaining amount.
The application of excess interest for a group to the payment of principal
of the related class B-1A certificates as described above is designed to create
"overcollateralization" for the group. For example, each dollar of excess
interest applied to reduce the certificate principal balance of a class of class
B-1A certificates will produce an equivalent dollar of overcollateralization for
the related group. As the certificate principal balance of a class of B-1A
certificates is reduced by application of excess interest, the
Overcollateralization Amount for the related group will build and will provide
credit support to the related class B-1 [and B-1A] certificates and additional
credit support to the related senior-ranking classes. The level of
overcollateralization for a group will depend on, among other things:
. the amount and timing of excess interest for the group;
. the Applicable Percentage at the time;
. the Required Overcollateralization Amount; and
. the performance of the related mortgage loans.
No assurance can be given as to the level of overcollateralization of the trust
at any time.
Realized Losses. 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 the group, the certificate
principal balances of the subordinated certificates (but not the class A
certificates) of the group will be reduced by an amount equal to that excess,
which is an Applied Realized Loss Amount, in inverse order of seniority:
. first, to the class B-1A certificates, until the certificate principal
balance of that class has been reduced to zero;
. second, to the class B-1 certificates until the certificate principal
balance of that class has been reduced to zero;
. third, to the class M-2 certificates until the certificate principal
balance of that class has been reduced to zero; and
. fourth, to the class M-1 certificates, until the certificate principal
balance of that class has been reduced to zero.
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<PAGE>
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
so reduced. 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, if so distributed, 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
. the Extra Principal Distribution Amount net of reimbursements of
Unrealized Loss Amounts for any senior class and
. the Unpaid Realized Loss Amount applicable to that class.
After the increase, that class will thereafter be entitled to distributions of
principal and interest with respect to the certificate principal balance as so
increased. Although the certificate principal balance of class A certificates
will not be reduced on account of Realized Losses even if the certificate
principal balances of all the subordinated certificates have been reduced to
zero, the amount available to be distributed to the class A certificates as
principal may be less than the certificate principal balances of the class A
certificates.
Pre-Funding Account and Capitalized Interest Account
On the closing date, the seller will deposit approximately $________ into a
separate pre-funding account to be maintained in the name of the trustee for the
benefit of the holders of the group I certificates and group II certificates, as
applicable. Approximately $_________ of the original pre-funded amount will be
used to acquire group I subsequent mortgage loans and approximately $_______ of
the original pre-funded amount will be used to acquire group II subsequent
mortgage loans, in each case during the period beginning on the closing date and
generally terminating on the earlier to occur of:
. the date on which the amount on deposit in the pre-funding account,
excluding any interest or other investment earnings, is less than
$_______ and
. _______, ____.
The original pre-funded amount will be reduced during the pre-funding
period by the amount used to purchase subsequent mortgage loans in accordance
with the Trust Agreement. Any pre-funded amount, excluding any interest or other
investment earnings, remaining at the end of the pre-funding period will be
included as part of principal funds and will be distributed to holders of group
I certificates and group II certificates, respectively, on the first
distribution date thereafter as a prepayment of principal in reduction of the
related certificate principal balances. This will result in an unscheduled
distribution of principal in respect of the related certificates on that date.
In addition, on the closing date the seller will deposit approximately
$______ into a separate capitalized interest account to be maintained in the
name of the trustee for the benefit of holders of the group I certificates and
group II certificates, as applicable. Amounts on deposit in
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<PAGE>
the capitalized interest account will be applied during the pre-funding period
to the extent necessary to ensure that the full amount of interest required to
be distributed to holders of the related classes of offered certificates is
distributed. Amounts remaining in the capitalized interest account, excluding
interest and any other investment earnings, after the end of the pre-funding
period will be paid to the seller.
Amounts on deposit in the pre-funding account and the capitalized interest
account will be invested in permitted investments. All interest and any other
investment earnings on amounts on deposit in the pre-funding account and the
capitalized interest account will be paid to the seller. Neither the pre-funding
account nor the capitalized interest account will be assets of any REMIC
established under the Trust Agreement. For federal income tax purposes, the pre-
funding account and the capitalized interest account will be owned by, and all
interest and other investment earnings on amounts in the pre-funding account and
the capitalized interest account will be taxable to, the seller.
Calculation of One Month LIBOR
On each interest determination date, which is the second business day
preceding each distribution date (______, ____, for the first distribution
date), the master servicer will determine one month LIBOR.
"One month LIBOR" means, as of any interest determination date, the rate
for one-month U.S. dollar deposits which appears in the Telerate Page 3750, as
of 11:00 a.m., London time, on that interest determination date. If that rate
does not appear on Telerate Page 3750, the rate for that day will be determined
on the basis of the rates at which deposits in United States dollars are offered
by the reference banks at approximately 11:00 a.m., London time, on that day to
prime banks in the London interbank market for a period equal to the relevant
accrual period (commencing on the first day of that 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 that accrual period).
"Telerate Page 3750" means the display page currently so designated on the
Dow Jones Telerate Service (or another page that 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. Beneficial owners
may elect to hold their book-entry certificates directly through DTC in the
United States or Cedelbank or Euroclear in Europe if they are participants of
those systems or indirectly through organizations
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<PAGE>
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 the 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 Trust Agreement
The certificates will be issued pursuant to a Trust Agreement to be dated
as of ______, ____, among the depositor, the master servicer and the trustee. In
addition to the provisions of the Trust 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 Trust Agreement and will sell without recourse the initial
mortgage loans, excluding any prepayment penalties payable with respect thereto,
to the trust, and the trust will issue the certificates pursuant to the Trust
Agreement. During the pre-funding period, the depositor may sell without
recourse subsequent mortgage loans, excluding any prepayment penalties payable
with respect thereto. 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 of the Trust Agreement without exhibits. Requests should
be addressed to Saxon Asset Securities Company, 4880 Cox Road, Glen Allen,
Virginia 23060, Attention: Secretary.
The trust will consist of:
. the mortgage loans, excluding any prepayment penalties payable with
respect thereto;
. those assets that are held in any account held for the benefit of the
certificateholders;
. any mortgaged premises acquired on behalf of the certificateholders by
foreclosure or by deed in lieu of foreclosure;
. the rights of the trustee to receive the proceeds of applicable
insurance policies and funds, if any, required to be maintained
pursuant to the Trust Agreement;
. certain rights of the depositor to the enforcement of representations
and warranties made by the seller relating to the mortgage loans; and
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<PAGE>
. the servicing agreement.
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 will report or cause to be
reported in writing to each holder of an offered certificate:
. with respect to each class of offered certificates based on a
certificate in the original principal amount of $1,000:
. the amount of the distribution on the distribution date;
. the amount of the distribution allocable to interest;
. the amount of the 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, the distribution date;
. the principal balance after giving effect to any distribution
allocable to principal; and
. any Interest Carry Forward Amount;
. the weighted average of the mortgage interest rates on the mortgage
loans in each group less the servicing and master servicing fee rates;
. the Realized Losses for each group for the related period and
cumulatively since the cut off date;
. the largest mortgage loan balance outstanding in each group;
. the servicing fees and master servicing fees allocable to each group;
. one month LIBOR on the most recent interest determination date;
. the pass through rates for the class AF-1 certificates, the other
group I certificates, if based on the weighted average net rate, and
the group II certificates for the current accrual period, including
the class BV-1A certificates if based on the weighted average net
rate; and
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<PAGE>
. for each distribution date during the pre-funding period, the amount,
if any, on deposit in the pre-funding account and the capitalized
interest account, separately stated.
Delivery and Substitution of Mortgage Loans
The depositor must repurchase any mortgage loan for which the required
documentation is not delivered on the closing date (or subsequent closing dates,
in the case of subsequent mortgage loans) or reasonably promptly thereafter.
Under the limited circumstances specified in the Trust 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 Loans -- General," and "-- Substitution of Mortgage
Loans" in the prospectus.
The Trustee
Chase Bank of Texas, National Association, will act as trustee of the
trust. The mailing address of the trustee's 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:
. ___% to each of the class C and class R certificates; and
. ___% to the classes of offered 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 the holders and upon the last
to occur of:
. the final payment or other liquidation, or any related advance, of the
last mortgage loan;
. the disposition of all property acquired in respect of any mortgage
loan remaining in the trust; and
. at any time when a qualified tax liquidation of the trust is effected
as described below under "--Termination Upon Loss of REMIC Status."
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 ___% of the sum of:
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<PAGE>
. the aggregate scheduled principal balances of the mortgage loans as of
the cut off date, in the case of the initial mortgage loans, and as of
their related cut-off date or dates, in the case of subsequent
mortgage loans and
. any amounts on deposit in the pre-funding account, excluding any
interest or other investment earnings
purchase from the trust 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 ___% of the aggregate scheduled
principal balances of the mortgage loans plus one month's interest computed as
provided in the Trust Agreement. The date on which this optional repurchase is
made is known as the clean-up call date.
Termination Upon Loss of REMIC Status. Following a final determination by
the IRS 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 the appeal from which no further
appeal may be taken, to the effect that each REMIC established under the Trust
Agreement does not and will no longer qualify as a "REMIC" pursuant to Section
860D of the Code, at any time on or after the date which is 30 calendar days
following that 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:
. the original note endorsed in blank or to the order of the trustee or
a custodian acting on behalf of the trustee, or a lost note affidavit
in lieu thereof, with all prior and intervening endorsements (the
seller, in some instances, having instructed the party selling a
mortgage loan to the seller to have required the originator to endorse
the original note directly to such custodian);
. the original recorded security instrument or a certified copy, or if
the original security instrument has been submitted for recordation
but has not been returned by the applicable public recording office, a
photocopy certified by an officer of the related servicer, title
company, closing/settlement-escrow agent or closing attorney;
. 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 from the originator to the
custodian) or if any 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;
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. 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 the servicer in blank or to the trustee
or custodian in recordable form;
. except as to any second lien 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
. 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 mortgage loan file on or before the
closing date 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
representation, warranty or covenant which materially and adversely affects the
interests of the holders of the certificates, the party will promptly notify the
depositor and the seller. The seller will have 60 days from its discovery or its
receipt of a notice to cure such breach or, if required, to repurchase the
mortgage loan or to substitute a qualified substitute mortgage loan.
The seller will represent and warrant that as of the closing date it has no
reason to believe that any borrower will default under the related mortgage
loan. This representation and warranty will be deemed to be breached only if, as
to any mortgage loan:
. the mortgage loan had a combined loan-to-value ratio as of the cut-off
date in excess of __%;
. the mortgage loan is in default and is liquidated within six months
after the closing date;
. a Realized Loss is incurred on the mortgage loan; and
. prior to liquidation, Realized Losses had been incurred on the
mortgage loans in an amount sufficient to reduce the aggregate
certificate principal amount of the subordinate certificates to zero.
Events of Default
The master servicer will have the right to direct the termination of the
servicer if the servicer breaches its servicing agreement. In the event of a
termination, the master servicer must appoint a successor servicer to assume the
obligations of the servicer under the servicing agreement, including the
obligation to make advances. See "The Mortgage Loan Pool --
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<PAGE>
Advances and Month End Interest" on page S-__. 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. 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 Mortgage Loans " in the prospectus.
Governing Law
The Trust 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 the information
discussed under the heading "Certain Federal Income Tax Consequences" in the
prospectus. The discussion in this prospectus supplement 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, other than the pre-funding account and the capitalized
interest account, 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, other than the pre-funding account and the capitalized
interest account; the pooling REMIC will issue uncertificated interests, which
will be designated as the regular interests and the residual interest in the
pooling REMIC. The assets of the issuing REMIC will consist of the pooling REMIC
regular interests. The issuing REMIC will issue the offered certificates, and
the private certificates, other than the class R certificates, which will be
designated as the regular interests in the issuing REMIC, and the class R
certificates, which will be designated as the residual interest in the issuing
REMIC.
In the opinion of McGuire, Woods, Battle & Boothe LLP, counsel to the
depositor, for federal income tax purposes, 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, assuming that:
. the REMIC elections are made;
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. the Trust Agreement is fully executed, delivered and enforceable
against the parties in accordance with its terms,
. the transactions described in this prospectus supplement are completed
on substantially the terms and conditions described; and
. the Trust Agreement is complied with by all parties.
Holders of offered certificates that otherwise report income under a cash method
of accounting will be required to report income with respect to the 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:
. income from prohibited transactions;
. "net income from foreclosure property;" and
. certain contributions to the trust after the closing date.
The total income of the trust, excluding any income that is taxed at the REMIC
level or income on the pre-funding account and the capitalized interest account,
will be taxable to the beneficial owners of the certificates.
ERISA Considerations
A fiduciary of any employee benefit plans or other retirement plans or
arrangements, including individual retirement accounts and annuities, Keogh
plans and collective investment funds and separate accounts in which those
plans, accounts or arrangements are invested, that are subject to ERISA, or
Section 4975 of the Internal Revenue Code should carefully review with its legal
advisors whether the purchase or holding of offered certificates could give rise
to a transaction that is prohibited or is not otherwise permitted either under
ERISA or Section 4975 of the Code.
The U.S. Department of Labor issued an individual exemption, Prohibited
Transaction Exemption ______, on [May 24, 1990] to [name of underwriter] which
generally exempts from the application of the prohibited transaction provisions
of Section 406 of ERISA, and the excise taxes imposed on those prohibited
transactions pursuant to Sections 4975(a) and (b) of the Code and Section 502(i)
of ERISA, certain transactions, among others, relating to the servicing and
operation of mortgage pools and the purchase, sale and holding of mortgage pass-
through certificates underwritten by an underwriter, provided that certain
conditions set forth in the Exemption are satisfied. For purposes of the
discussion under this heading, the term "underwriter" includes:
. the underwriters named on the cover page of this prospectus
supplement;
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. any person directly or indirectly, through one or more intermediaries,
controlling, controlled by or under common control with any of those
underwriters; and
. any member of the underwriting syndicate or selling group with respect
to the offered certificates.
The individual exemption sets forth seven general conditions which must be
satisfied for a transaction involving the purchase, sale and holding of the
offered certificates to be eligible for exemptive relief:
. the acquisition of the offered certificates by certain employee
benefit plans subject to Section 4975 of the Code must be on terms
that are at least as favorable to the plan as they would be in an
arm's-length transaction with an unrelated party;
. the rights and interests evidenced by the offered certificates must
not be subordinate to the rights and interests evidenced by the other
certificates of the same trust;
. the offered certificates at the time of acquisition by the plan must
be rated in one of the three highest generic rating categories by the
following national credit rating agencies: Standard & Poor's Ratings
Services, a division of The McGraw-Hill Companies, Inc., Moody's
Investors Service, Inc., Duff & Phelps Credit Rating Co. or Fitch
IBCA, Inc.;
. the trustee cannot be an affiliate of any member of a restricted group
consisting of any underwriter, the depositor, the master servicer, the
servicer, each sub-servicer and any mortgagor with respect to mortgage
loans constituting more than 5% of the aggregate unamortized principal
balance of the mortgage loans in the trust as of the date of initial
issuance of the offered certificates;
. the sum of all payments made to and retained by:
. the underwriters must represent not more than reasonable
compensation for underwriting the offered certificates;
. the depositor pursuant to the assignment of the mortgage loans to
the trust must represent not more than the fair market value of
those obligations;
. the master servicer, the servicer and any sub-servicer must
represent not more than reasonable compensation for that person's
services under the Trust Agreement and reimbursement of that
person's reasonable expenses in connection therewith;
. the investing plan must be an accredited investor as defined in Rule
501(a)(1) of Regulation D of the Commission under the Securities Act
of 1933 as amended;
. the following three conditions must be met:
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. the investment pool may consist only of assets of the type
enumerated in the exemption and which have been included in other
investment pools;
. certificates evidencing interests in the other investment pools
have been rated in one of the three highest generic rating
categories by one of the specified national credit rating
agencies for at least one year prior to a plan's acquisition of
certificates; and
. certificates evidencing interests in the other investment pools
have been purchased by investors other than plans for at least
one year prior to a plan's acquisition of certificates.
For further information, see "ERISA Considerations" in the accompanying
prospectus.
In addition, the exemption will not apply to a plan's investment in offered
certificates if the plan fiduciary responsible for the decision to invest in
offered certificates is a mortgagor or obligor with respect to more than 5% of
the fair market value of the obligations constituting the mortgage loans or an
affiliate of the mortgagor or obligor, unless:
. in the case of an acquisition in connection with the initial issuance
of any certificates, at least 50% of each class of certificates in
which plans have invested is acquired by persons independent of the
restricted group and at least 50% of the aggregate interest in the
trust is acquired by persons independent of the restricted group;
. the plan's investment in any class of certificates does not exceed 25%
of the outstanding certificates of the class at the time of
acquisition;
. immediately after the acquisition, no more than 25% of the plan assets
with respect to which the investing fiduciary has discretionary
authority or renders investment advice are invested in certificates
evidencing interest in trusts sponsored or containing assets sold or
serviced by the same entity; and
. the plan is not sponsored by any member of the restricted group.
On July 21, 1997, the DOL published in the Federal Register an amendment to
the exemption, which extends exemptive relief to certain mortgage-backed and
asset-backed securities transactions using pre-funding accounts for trusts
issuing pass-through certificates. The amendment generally allows mortgage loans
or other secured receivables supporting payments to certificateholders, and
having a value equal to no more 25% of the total principal amount of the
certificates being offered by the trust, to be transferred to the trust within a
90-day or three-month period following the closing date, instead of requiring
that all of those obligations be either identified or transferred on or before
the closing date. The relief is available when the following conditions are met:
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. the ratio of the amount allocated to the pre-funding account to
purchase mortgage loans which have not yet been identified to the
total principal amount of the certificates being offered must not
exceed 25%;
. all obligations transferred after the closing date must meet the same
terms and conditions for eligibility as the original obligations used
to create the trust, which terms and conditions have been approved by
a national credit rating agency;
. the transfer of additional obligations to the trust during the pre-
funding period must not result in the certificates to be covered by
the exemption receiving a lower credit rating from a national credit
rating agency upon termination of the pre-funding period than the
rating that was obtained at the time of the initial issuance of the
certificates by the trust;
. solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate for all of the obligations in the
trust at the end of the pre-funding period must not be more than 100
basis points lower than the average interest rate for the obligations
transferred to the trust on the closing date;
. in order to insure that the characteristics of the additional
obligations are substantially similar to the original obligations
which were transferred to the trust:
. the characteristics of the additional obligations must be
monitored by an insurer or other credit support provider that is
independent of the depositor; or
. an independent accountant retained by the depositor must provide
the depositor with a letter, with copies provided to each
national credit rating agency rating the certificates, the
related underwriter and the related trustee, stating whether or
not the characteristics of the additional obligations conform to
the characteristics described in the related prospectus or
prospectus supplement and/or pooling and servicing agreement. In
preparing the letter, the independent accountant must use the
same type of procedures that applied to the obligations
transferred to the trust as of the closing date;
. the pre-funding period must end no later than three months or 90 days
after the closing date or earlier in certain circumstances if the pre-
funding account falls below the minimum level specified in the pooling
and servicing agreement or if an event of default occurs;
. amounts transferred to the pre-funding account and/or capitalized
interest account used in connection with the pre-funding may be
invested only in certain permitted investments;
. the related prospectus or prospectus supplement must describe:
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. the pre-funding account and/or capitalized interest account used
in connection with the pre-funding account;
. the duration of the pre-funding period;
. the percentage and/or dollar amount of the pre-funding limit for
the trust; and
. that the amounts remaining in the pre-funding account at the end
of the pre-funding period will be remitted to certificateholders
as repayments of principal; and
. the related Trust Agreement must describe the permitted investments
for the pre-funding account and/or capitalized interest account and,
if not disclosed in the related prospectus or prospectus supplement,
the terms and conditions for eligibility of additional obligations. As
described in the prospectus and the prospectus supplement, the
criteria are the same.
There have been sufficient obligations identified prior to the closing date
so that these obligations, if transferred to the trust after the closing date,
in exchange for amounts credited to the pre-funding account, would result in a
ratio that is within the pre-funding limit. In addition, these obligations would
meet the same terms and conditions for eligibility as the original obligations
used to create the trust and the other conditions required under the amendment
to the exemption. Thus, the relief granted by the exemption and its subsequent
amendment should continue to be available.
Before purchasing offered certificates, a fiduciary of a loan should itself
confirm:
. that the certificates constitute "certificates" for purposes of the
exemption and
. that the specific and general conditions of the exemption and the
other requirements set forth in the exemption would be satisfied.
Because the characteristics of the class M-1, class M-2, class B-1 and B-1A
certificates may not meet the requirements of the exemption or any other issued
exemption under ERISA, the purchase and holding of the class M-1, class M-2,
class B-1 and class B-1A certificates by a plan or by individual retirement
accounts or other plans subject to Section 4975 of the Code may result in
prohibited transactions or the imposition of excise taxes or civil penalties.
Consequently, transfers of the class M-1, class M-2, class B-1 and class B1-A
certificates will not be registered by the trust unless the trustee receives:
. a representation from the transferee of the certificate, acceptable to
and in form and substance satisfactory to the trustee, to the effect
that the transferee is not an employee benefit plan subject to Section
406 of ERISA or a plan or arrangement subject to Section 4975 of the
Code, nor a person acting on behalf of any plan or arrangement nor
using the assets of any the plan or arrangement to effect such
transfer;
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. if the purchaser is an insurance company, a representation that the
purchaser is an insurance company which is purchasing the certificates
with funds contained in an "insurance company general account" (as
that term is defined in Section V(e) of Prohibited Transaction Class
Exemption 95-60) and that the purchase and holding of the certificates
are covered under PTCE 95-60; or
. an opinion of counsel satisfactory to the trustee that the purchase or
holding of the certificate by a plan, any person acting on behalf of a
plan or using the plan's assets, will not result in the assets of the
trust fund being deemed to be "plan assets" and subject to the
prohibited transaction requirements of ERISA and the Code and will not
subject the trustee to any obligation in addition to those undertaken
in the Trust Agreement.
This representation shall be deemed to have been made to the trustee by a
beneficial owner's acceptance of a class M-1, class M-2, class B-1 and class B1-
A certificate in book-entry form. In the event that the representation is
violated, or any attempt to transfer to a plan or person acting on behalf of a
plan or using the plan's assets is attempted without an acceptable opinion of
counsel, the attempted transfer or acquisition shall be void and of no effect.
Any plan fiduciary considering to purchase an offered certificate on behalf
of a plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to such investment.
Ratings
It is a condition of the issuance of the offered certificates that they
receive ratings as set forth on page S-___.
The ratings do not represent any assessment of the likelihood or rate of
principal prepayments or the likelihood that any Group II Certificates Carryover
will be paid.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. The security rating assigned to the offered certificates should be
evaluated independently of similar security ratings assigned to other kinds of
securities.
The ratings assigned by Fitch and Moody's to mortgage pass-through
certificates address the likelihood of the receipt by certificateholders of all
distributions to which certificateholders are entitled. Fitch's and Moody's
ratings address the structural and legal aspects associated with the
certificates, including the nature of the underlying mortgage loans. Fitch's and
Moody's ratings on mortgage pass-through certificates do not represent any
assessment of the likelihood or rate of principal prepayments. The ratings do
not address the possibility that certificateholders might suffer a lower-than-
anticipated yield.
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Explanations of the significance of the ratings may be obtained from
Moody's, 99 Church Street, New York, New York, 10007, and Fitch, One State
Street Plaza, 33rd Floor, New York, New York, 10004. Those ratings will be the
views only of the rating agencies. There is no assurance that any ratings will
continue for any period of time or that the ratings will not be revised or
withdrawn. Any revision or withdrawal of the ratings may have an adverse effect
on the market price of the offered certificates.
Legal Investment Considerations
Upon the termination of the pre-funding period, 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 or 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 are expected to be rated in one of the two highest rating
categories by Moody's and Fitch, those 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.
Use of Proceeds
The depositor will sell the initial mortgage loans to the trust
concurrently with the delivery of the certificates. Net proceeds from the sale
of the offered certificates less the original pre-funded amount and the amount
deposited in the capitalized interest account 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
initial mortgage loans.
Certain Legal Matters
Legal matters relating to the validity of the issuance of the offered
certificates will be passed upon for the depositor and the seller by McGuire,
Woods, Battle & Boothe LLP, Richmond, Virginia. Legal matters relating to
insolvency issues and federal income tax matters concerning the certificates
will also be passed upon for the depositor by McGuire, Woods, Battle & Boothe
LLP, Richmond, Virginia. Legal matters relating to the validity of the
certificates will be passed upon for the underwriters by Brown & Wood LLP,
Washington, D.C.
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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 have severally agreed to purchase
the principal amount of offered certificates set forth below.
[Name of [Name of [Name of [Name of
Underwriter] Underwriter] Underwriter] Underwriter]
Class
AF-1
AF-2
AF-3
AF-4
AF-5
AF-6
MF-1
MF-2
BF-1
BF-1A
AV-1
AV-2
MV-1
MV-2
BV-1
BV-1A
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
those market prices or
. at negotiated prices.
Offers are subject to prior sale, withdrawal, cancellation or modification of
the offer without notice, to delivery and acceptance by the underwriters and
certain other conditions. The underwriters may sell offered certificates to or
through dealers, and 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
offered certificates may be deemed to be underwriters. Any discounts or
commissions received by dealers or underwriters and any profit on the resale of
the offered certificates by them or the underwriters may be deemed to be
underwriting discounts or commissions under the Securities Act of 1933.
The depositor expects to receive proceeds of approximately $________ plus
accrued interest, before deducting expenses payable by it in connection with the
offered certificates, estimated to be $_______. In connection with the purchase
and sale of the offered certificates,
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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.
There is currently no secondary market for the offered certificates. Each
underwriter intends to make a secondary market in the offered certificates
offered by that 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.
Certain of the mortgage loans may have been the subject of financing
provided by affiliates of the underwriters.
Under Rule 2710(c)(8) of the Corporate Financing Rules to the National
Association of Securities Dealers, Inc., no NASD members can participate in a
public offering of an issuer's securities where more than 10% of the net
offering proceeds, not including underwriting compensation, are intended to be
paid to NASD members participating in the distribution of the offering or
associated or affiliated persons of NASD members unless the price at which an
equity issue is to be distributed to the public is established pursuant to Rule
2720(c)(3) by a qualified independent underwriter. Entities associated or
affiliated with certain of the underwriters, or entities administered by those
entities, may receive in the aggregate 10% or more of the net proceeds of this
offering in repayment of a portion of certain indebtedness. Accordingly, this
offering is being conducted pursuant to Rule 2710(c)(8).
Rule 2720(c)(3)(C), however, allows an NASD member to participate in the
distribution of securities of an issuer where it or its affiliates or associates
will receive more than 10% of the net proceeds without a qualified independent
underwriter establishing the price of the securities being offered if the
offering is of a class of securities rated "Baa" or better by Moody's or "BBB"
or better by S&P or rated in a comparable category by another rating service
acceptable to the NASD. The securities being offered by this prospectus
supplement and the accompanying prospectus are expected to receive at least the
ratings mentioned above and, therefore, there will be no qualified independent
underwriter recommending the minimum price of the securities being offered.
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Glossary
"Applicable Percentage" for each group and distribution date will be the
applicable percent set forth below for the indicated group and date:
Group I Group II
_________ - ____________% ____% ____%
_________ and thereafter ____% ____%
Notwithstanding the foregoing, to the extent provided in the Trust Agreement, if
certain performance tests for a group on any distribution date are not
satisfied, the Applicable Percentage for the group may be increased until the
performance tests are satisfied.
"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 the class.
"Class A Principal Distribution Amount," for a group is
. with respect to any distribution date prior to the related Stepdown
Date or as to which a Trigger Event exists, 100% of the Principal
Distribution Amount for the group and the distribution date and
. with respect to any distribution date on or after the Stepdown Date
and as to which a Trigger Event is not in effect for the group, the
excess of
. the related class A certificate principal balance immediately
prior to the distribution date over
----
. the lesser of
. ____% for group I (____% for group II) of the scheduled
principal balances of the mortgage loans in the group on the
preceding due date and
. the scheduled principal balance of the mortgage loans in the
group on the preceding due date less ____% of the scheduled
principal balance of the mortgage loans in the group as of
the cut off date.
"Class AF-6 Distribution Amount," for any distribution date, is the product
of
. 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 the distribution date,
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. the class A principal distribution amount with respect to group I for
the distribution date and
. the applicable percentage for the distribution date set forth in the
following table:
Distribution Date Percentage
----------------- ----------
0%
_________ - ___________
_________ - ___________ --%
_________ - ___________ --%
_________ - ___________ --%
_________ and thereafter __%
"Class B-1 Principal Distribution Amount" for a group, 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 the group, is the excess of
. the sum for the group of
. the related class A certificate principal balance,
. the related class M-1 certificate principal balance,
. the related class M-2 certificate principal balance and
. the related class B-1 certificate principal balance immediately
prior to the distribution date over
----
. the lesser of
. ____% for group I (____% for group II) of the scheduled principal
balances of the mortgage loans in the group on the preceding due
date and
. the scheduled principal balance of the mortgage loans in the
group on the preceding due date less ____% of the scheduled
principal balance of the mortgage loans in the group as of the
cut off date.
"Class B-1A Principal Distribution Amount," for a group, 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, is the excess of
. the principal distribution amount for the group over
----
. the sum for the group of
. the related Class A Principal Distribution Amount,
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. the related Class M-1 Principal Distribution Amount,
. the related Class M-2 Principal Distribution Amount, and
. the related Class B-1 Principal Distribution Amount.
"Class M-1 Principal Distribution Amount," for a group, 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 the group, is the excess of
. the sum for the group of
. the related class A certificate principal balance and
. the related class M-1 certificate principal balance immediately
prior to the distribution date over
----
. the lesser of
. ____% for group I (____% for group II) of the scheduled principal
balances of the mortgage loans in the group on the preceding due
date and
. the scheduled principal balance of the mortgage loans in the
group on the preceding due date less ____% of scheduled principal
balance of the mortgage loans in the group as of the cut off
date.
"Class M-2 Principal Distribution Amount," for a group, 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, is the excess of
. the sum for the group of
. the related class A certificate principal balance,
. the related class M-1 certificate principal balance, and
. the related class M-2 certificate principal balance immediately
prior to the distribution date over
----
. the lesser of
. ____% for group I (____% for group II) of the scheduled principal
balances of the mortgage loans in the group on the preceding due
date and
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. the scheduled principal balance of the mortgage loans in the
group on the preceding due date less ____% of the schedule
principal balance of the mortgage loans in the group as of the
cut off date.
"Current Interest," with respect to each class of the certificates and each
distribution date, is the interest accrued on the certificate principal balance
of the class immediately prior to the distribution date during the applicable
accrual period at the applicable pass through rate plus any amount previously
distributed with respect to interest for the class that is recovered as a
voidable preference by a trustee in bankruptcy.
"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, means an amount equal to the excess of
. all Realized Losses with respect to the mortgage loan group (including
any such losses for that date) over
----
. all Extra Principal Distribution Amounts for the group with respect to
prior distribution dates.
"Group I Available Funds Cap" for any distribution date is the weighted
average net rate for group I.
"Group II Available Funds Cap" for any distribution date is the weighted
average net rate for group II.
"Interest Carry Forward Amount," with respect to each class of the
certificates and each distribution date, is the sum of
. the excess of
. Current Interest for the class with respect to prior distribution
dates (excluding any Group II Certificates Carryover) over
----
. the amount actually distributed to the class with respect to
interest on those prior distribution dates and
. interest on the excess at the applicable pass through rate.
"Overcollateralization Amount" for each group and distribution date is the
sum of
. the excess of the aggregate principal balance of the mortgage loans in
the group on the date over the aggregate certificate principal balance
of the certificates in the group and
. the certificate principal balance of the related B-1A certificates on
that date.
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"Principal Distribution Amount," with respect to each distribution date and
group, is the excess of
. the sum of
. the principal funds for the distribution date and the group and
. any extra principal distribution amount for the distribution date
and the group over
----
. the Released Principal Amount.
"Realized Loss" means the excess of the scheduled principal balance of a
defaulted mortgage loan over the liquidation proceeds with respect to that loan
that are allocated to principal.
The "Released Principal Amount" for a group will equal zero as to any
distribution date on which a Subordinated Trigger Event exists for a group. As
to any distribution date on which a Subordinated Trigger Event does not exist
for a group, the "Released Principal Amount" for the group will equal the amount
by which the Overcollateralization Amount for the group on the date that exceeds
the Required Overcollateralization Amount for the group and date.
The "Required Overcollateralization Amount" for each group and distribution
date is
. prior to the Stepdown Date, ____% for group I (____% for group II) of
the scheduled principal balance of the mortgage loans in such group as
of the cut off date and
. on and after the Stepdown Date the greater of
. the lesser of
. ____% for group I (____% for group II) of the scheduled
principal balance of the mortgage loans in the group as of
the cut off date and
. ____% for group I (____% for group II) of the scheduled
principal balance of the mortgage loans in the group and
. ____% of the scheduled principal balance of the mortgage loans in
such group as of the cut off date.
"Stepdown Date," with respect to each group, is the earlier to occur of
. the later to occur of
. the distribution date in ______________ and
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. the first distribution date on which
. the class A certificate principal balance of the group (less
the principal funds for the group on that date) is less than
or equal to
. ____% for group I (____% for group II) of the scheduled
principal balances of the mortgage loans in the group and
. the distribution date on which the certificate principal balance of
the related class A certificates has been reduced to zero.
A "Subordinated Trigger Event," with respect to each group and a
distribution date after the Stepdown Date, exists if
. Realized Losses since the cut off date with respect to the mortgage
loans in that group as a percentage of the initial scheduled principal
balance of the group exceed the percentage set out below with respect
to the distribution date and
. the scheduled principal balance of the mortgage loans in that group
that, as of the distribution date, are 60 or more days delinquent as a
percentage of the scheduled principal balance of the mortgage loans in
that group exceeds the delinquency percentage set out below with
respect to such distribution date:
<TABLE>
<CAPTION>
Distribution Date (inclusive) Realized Loss Percentage Delinquency Percentage
- ---------------------------- ------------------------ ----------------------
Group I Group II Group I Group II
------- -------- ------- --------
<S> <C> <C> <C> <C>
__________-_____________ ____% ____% ____% ____%
__________-_____________ ____% ____% ____% ____%
__________-_____________ ____% ____% ____% ____%
__________-_____________ ____% ____% ____% ____%
__________-_____________ ____% ____% ____% ____%
_______ and thereafter ____% ____% ____% ____%
</TABLE>
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
. ___ times for group I (___ times for group II) and
. the quotient of
. the aggregate scheduled principal balance of all 60 and over day
delinquent mortgage loans for the group and
. the scheduled principal balance of that group as of the preceding
master servicer remittance date
S-74
<PAGE>
equals or exceeds ____% for group I (____% for group II).
"Unpaid Realized Loss Amount," with respect to any class of subordinated
certificates and as to any distribution date, is the excess of
. Applied Realized Loss Amounts with respect to the class over
----
. the sum of increases in the certificate principal balance of the class
as the result of the application of Extra Principal Distribution
Amounts on all previous distribution dates.
S-75
<PAGE>
SUBJECT TO COMPLETION, DATED __________________, 1999
Prospectus
SAXON ASSET SECURITIES COMPANY
(Depositor)
[LOGO OF SAXON APPEARS HERE]
MORTGAGE LOAN ASSET BACKED CERTIFICATES
(Issuable in series by separate trusts)
___________________
Each series of certificates: Each trust:
. will consist of one or more . will own a pool of mortgage loans
classes of mortgage pass-through sold to the trust by Saxon Asset
certificates representing interests Securities Company;
in the assets of a trust;
. will be serviced by Saxon Asset
. will receive principal and Securities Company or a related
interest only from payments company; and
collected on the assets of the
related trust; and . will include mortgage loans
secured by first or second liens on:
. will not be insured or guaranteed
by any government agency or - one- to four-family residential
instrumentality and will not be properties;
obligations of Saxon Asset
Securities Company or any related - condominium units;
companies.
- manufactured housing; and
- units in planned unit development.
You should carefully consider the risk factors beginning on page __ of this
prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is ______________, 1999.
<PAGE>
Important Notice About Information Presented
in this Prospectus and the Prospectus Supplement
Information is provided to you about the certificates in two separate
documents that progressively provide more detail: (1) this prospectus, which
provides general information, some of which may not apply to a particular series
of certificates, including your series, and (2) the accompanying prospectus
supplement, which will describe the specific terms of your series of
certificates, including:
. the principal balances and/or interest rates of each class;
. the timing and priority of interest and principal payments;
. statistical and other information about the mortgage assets
. information about credit enhancement, if any, for each class;
. the ratings for each class; and
. the method for selling the certificates.
If the terms of a particular series of certificates vary between this
prospectus and the prospectus supplement, you should rely on the information in
the prospectus supplement.
You should rely only on the information provided in this prospectus and the
accompanying prospectus supplement including the information incorporated by
reference. No one has been authorized to provide you with different information.
The certificates are not being offered in any state where the offer is not
permitted. Saxon Assets Securities Company does not claim the accuracy of the
information in this prospectus or the accompanying prospectus supplement as of
any date other than the dates stated on their respective covers.
Cross-references are included in this prospectus and in the accompanying
prospectus supplement to captions in these materials where you can find further
related discussions.
2
<PAGE>
Risk Factors
Prospective investors should consider the following factors (as well as the
factors identified under "Risk Factors" in the related prospectus supplement) in
connection with a purchase of the certificates of any series.
<TABLE>
<S> <C>
The trusts will have no The certificates will represent an ownership interest in the
significant assets other related trust and will not represent an interest in or obligation
than the assets assigned of any other entity and will not be insured by any government
to it by depositor agency or instrumentality. Each trust is expected to have no
significant assets other than the assets assigned to it by Saxon
Asset Securities Company, the depositor.
You must rely primarily upon payments on the assets assigned to
the related trust, any security for those certificates and any
sources of credit enhancement identified in the related prospectus
supplement for distributions on the certificates.
None of any governmental agency or instrumentality, the depositor,
any servicer, any master servicer, any trustee or any of their
affiliates will guarantee or insured any assets assigned to a
trust, except as set forth in the related prospectus supplement.
Credit enhancement, if Any credit enhancement for any series of certificates may be
provided, will be limited limited in amount and may be subject to periodic reduction in
in both amount and scope accordance with a schedule or formula. In addition, such credit
of coverage, and may not enhancement may provide only very limited coverage as to certain
be sufficient to cover types of losses and may provide no coverage as to certain other
all losses or risks on types of losses. The trustee may be permitted to reduce,
your investment 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.
Property values may If the residential real estate market in general or a regional or
decline, leading to local area where the mortgage assets for a trust are concentrated
higher losses on the should experience an overall decline in property values or a
mortgage loans 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 losses are not covered by credit enhancement, you
will have to look primarily to the value of the mortgaged premises
for recovery of the outstanding principal and unpaid interest of
the defaulted mortgage loans.
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
The bankruptcy of the The seller and the depositor intend that the transfers of assets
seller may result in a to the depositor and, in turn, to the related trust constitute
delay in or reduction of sales rather than pledges to secure indebtedness for insolvency
distributions purposes. If the seller becomes a debtor under the federal
Bankruptcy Code, however, a creditor, trustee-in-bankruptcy or
receiver of that seller might argue that such transfers were
pledges rather than sales. That position, if argued or accepted
by a court, could result in a delay in or reduction of
distributions on the certificates of the related series.
State and federal credit In addition to anti-deficiency and related legislation, numerous
protection laws may limit other federal and state statutory provisions, including the
collection of principal federal bankruptcy laws, the federal Soldiers' and Sailors' Civil
and interest on the Relief Act of 1940 and state laws affording relief to debtors, may
mortgage loans interfere with or affect the ability of a secured mortgage lender
to realize upon its security.
Other federal and state laws provide priority to certain tax and
other liens over the lien of a mortgage or deed of trust.
Modification of mortgage With respect to a mortgage loan on which a material default has
loans may delay or occurred or a payment default is imminent, the servicer may enter
reduce certificate into a forbearance or modification agreement with the borrower.
payments The terms of any forbearance or modification agreement may affect
the amount and timing of payments on the mortgage loan and,
consequently, the amount and timing of payments on one or more
classes of the related series of certificates. For example, a
modification agreement that results in a lower mortgage interest
rate would lower the pass-through rate of any related class of
certificates that accrues interest at a rate based on the weighted
average net rate of the mortgage loans.
Prepayments on the The prepayment experience on the mortgage assets underlying a
mortgage loans could particular series of certificates will affect:
cause you to be paid
earlier than you expect, . the average life of each class of such certificates and
which may adversely
affect your yield to . for certificates purchased at a price other than par, the
maturity 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:
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
. foreclosure, condemnation and other dispositions of the
mortgaged premises (including amounts paid by insurers under
applicable insurance policies);
. 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);
. the repurchase of mortgage loans modified in lieu of
refinancing;
. the repurchase of any liquidated mortgage loan or delinquent
mortgage loan, if applicable; or
. the repurchase or redemption of all the certificates of a
series or all the mortgage loans or mortgage certificates in
certain circumstances.
The yields realized by the holders of certain certificates of a series
with disproportionate allocations of principal or interest will be
extremely sensitive to levels of prepayments on the mortgage assets of
the related trust. No assurance can be given as to the prepayment
experience of the mortgage loans underlying any series of certificates.
You must make your own decision as to the appropriate prepayment
assumption.
You may not be able to There can be no assurance that a secondary market will develop for
sell your securities, and the certificates of any series or, if such a market does develop,
may have to hold your that it will provide you with liquidity of investment or that it
securities to maturity will continue for the life of such certificates.
even though you may want
to sell it 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.
Issuance of certificates If so specified in the related prospectus supplement, a trust may
in book-entry form may issue certificates of a series in book-entry form. Issuance of
reduce the liquidity of the certificates in book-entry form may reduce the liquidity of
such certificates such certificates in the secondary market because investors may be
unwilling to purchase certificates for which they cannot obtain
physical certificates. In addition, because transfers of
book-entry
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
certificates will, in most cases, be able to be
effected only through persons or entities that participate in the
book-entry system, your ability to pledge a book-entry certificate
to persons or entities that do not participate in the book-entry
system, or otherwise to take actions with respect to a book-entry
certificate, may be impaired because physical certificates
representing the certificates will generally not be available. You
may experience some delay in receipt of distributions of interest
on and principal of the book-entry certificates because the
trustee will forward distributions through book-entry system
participants which thereafter will be required to credit those
distributions to your accounts as a beneficial owner of the
certificates, whether directly or indirectly through financial
intermediaries.
The ratings assigned to Any rating of certificates is not a recommendation to buy, sell or
your securities by the hold certificates and is subject to revision or withdrawal at any
rating agencies may be time by the Rating Agency issuing such rating. The rating of
lowered or withdrawn at certificates credit-enhanced through external credit enhancement,
any time, which may such as a letter of credit, financial guaranty insurance policy or
affect your ability to mortgage pool insurance policy, will depend primarily on the
sell your securities creditworthiness of the provider of such external credit
enhancement. Any lowering of the rating assigned to the
claims-paying ability of any such provider below the rating
initially given to the certificates of the related series would
likely result in a lowering of the rating assigned to such
certificates. The depositor will not be obligated to obtain
additional credit enhancement if necessary to maintain the rating
initially assigned to the certificates of any series.
Any original issue Compound interest certificates and certain other classes of
discount must be included certificates that are entitled only to interest distributions will
in income for tax purposes be, and certain other classes of certificates may be, issued with
original issue discount for federal income tax purposes. The
holder of a certificate issued with original issue discount must
include original issue discount in ordinary gross income for
federal income tax purposes as it accrues, in advance of receipt
of the cash attributable to such income. Accrued but unpaid
interest on such certificates generally will be treated as
original issue discount for this purpose.
Mortgage loans with A portion of the mortgage assets included in a trust may be
balloon payment features "balloon loans" that provide for the payment of the unamortized
may have greater default principal balance of such mortgage loans in a single payment at
risk maturity. 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
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
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 loan. Because borrowers
of balloon loans must make substantial single payments at
maturity, the default risk associated with balloon loan may be
greater than that associated with fully-amortizing mortgage loan.
The ability of a borrower to repay a balloon loans 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.
Mortgage loans secured by A portion of the mortgage assets included in a trust may be loans
junior liens may secured by second or more junior liens on residential properties.
experience higher rates Because the rights of a holder of a second or more junior lien are
of delinquencies and subordinate to the rights of senior lienholders, the position of
losses the trust and the holders of the related certificates could be
more adversely affected by a reduction in the value of the
mortgaged premises than would the position of the senior
lienholders. If a borrower defaults, liquidation or other
proceeds may be insufficient to satisfy a second or more junior
lien after satisfaction of the senior lien and the payment of any
liquidation expenses.
The rate of delinquency on A portion of the mortgage assets included in a trust may be
mortgage loans secured by secured by liens on mortgaged premises which are not owner
non-owner occupied occupied. The rate of delinquencies, foreclosures and losses on
mortgage premises could the mortgage loans on those mortgaged premises could be higher
be higher than on mortgage loan secured by liens on mortgaged premises which
are the primary residences of the owners.
The sponsor's underwriting All or a portion of the mortgage assets may consist of mortgage
standards are less loans underwritten in accordance with the underwriting standards
stringent than those used for "non-conforming credits."
by federal agencies,
which may increase risk A mortgage loan made to a non-conforming credit means a mortgage
of default loan that is ineligible for purchase by Fannie Mae or Freddie Mac
due to borrower credit characteristics, property characteristics,
loan documentation guidelines or other characteristics that do not
meet Fannie Mae or Freddie Mac underwriting guidelines, including
a loan made to:
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
. a borrower whose creditworthiness and repayment ability do not
satisfy Fannie Mae or Freddie Mac underwriting guidelines or
. a borrower with a record of major derogatory credit items such
as default on a prior mortgage loan, credit write-offs,
outstanding judgments or prior bankruptcies.
As a consequence, delinquencies and foreclosures can be expected
to be greater with respect to those mortgage loans than with
respect to mortgage loans originated in accordance with Fannie Mae
or Freddie Mac underwriting guidelines. In addition, changes in
the values of the mortgaged premises may have a greater effect on
the loss experience of those mortgage loans than on mortgage loans
originated in accordance with Fannie Mae or Freddie Mac
underwriting guidelines.
You must make your own decision as to the effect of non-conforming
credits upon the delinquency, foreclosure, and prepayment
experience of the mortgage loans.
Mortgage loans may be All or a portion of the mortgage loans may be delinquent upon the
delinquent, resulting in issuance of the related certificates. Inclusion of delinquent
greater defaults, mortgage loans may cause the rate of defaults and prepayments to
prepayments and losses increase and, in turn, may cause losses to exceed the available
credit enhancement and affect the yield on the related
certificates.
Any violation of consumer A number of federal and state laws and regulations related to
protection laws may give residential mortgage refinance transactions contain stringent
the borrower the right to limits on interest rates and origination fees, and impose detailed
rescind or cancel the disclosure requirements. In certain instances, any violations of
loan transaction these laws and regulations by the originator of a loan could cause
d loans to be unenforceable, or give the borrower the right to
rescind or cancel the loan transaction. Any loan affected by the
violations of law would have a significantly increased risk of
default or prepayment.
</TABLE>
8
<PAGE>
Description of the Certificates
General
The certificates described herein and in the related prospectus supplement
will be issued from time to time in series pursuant to one or more trust
agreements or pooling and servicing agreements. 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 of the agreement will
be filed with the Securities and Exchange 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, the seller, any servicer, any master servicer, any
trustee or any of their affiliates, except as set forth herein and in the
related prospectus supplement. Neither the certificates nor the underlying
mortgage assets will be guaranteed or insured by any governmental agency or
instrumentality or by the depositor, the seller, any servicer, any master
servicer, any trustee or any of their affiliates, except as set forth in the
related prospectus supplement. To the extent that delinquent payments on or
losses in respect of defaulted mortgage loans are not advanced by the applicable
servicer or any other entity or paid from any applicable credit enhancement,
those delinquencies may result in delays in the distribution of payments to the
holders of one or more classes of certificates and those 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 (1) 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 (2) 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 any other amount 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 the certificate 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.
9
<PAGE>
Classes of Certificates
Each series of certificates will be issued in one or more classes as
specified in the related prospectus supplement. The certificates of any class of
any series:
. may be entitled to receive distributions:
. allocable only to principal, only to interest or to any combination
of principal and interest,
. allocable to prepayments of principal throughout the life of the
certificates or only during specified periods,
. only after the occurrence of specified events,
. in accordance with a specified schedule or formula or on the basis of
distributions on specified portions of the mortgage assets,
. 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 series,
. in the case of certificates entitled to receive distributions allocable
to interest may be entitled to receive:
. interest at a pass-through rate, which may be fixed, variable or
adjustable and may differ from the rate at which other classes of
certificates of the series are entitled to receive interest and
. the 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.
Registration of the Offered Securities
Book-Entry Registration
Each series of certificates initially will be represented by one or
more certificates, in each case registered in the name Cede & Co., the nominee
of The Depository Trust Company. Cede is expected to be the holder of record of
the offered certificates. Unless and until the certificates are issued in fully
registered, certificated form, no holder of a certificate will be entitled to
receive a physical certificate representing that certificate. All references in
this prospectus to actions by certificateholders refer to actions taken by DTC
or its nominee, as the case may be, upon instructions from the participants in
the DTC system, and all references in this prospectus to payments, notices,
reports and statements to certificateholders refer to participants, notices,
reports and statements to DTC or its nominee, as the case may be, as the
registered holder of the certificates, for distribution to certificateholders in
accordance with DTC's procedures. The beneficial owners of the certificates
will not be recognized by the trustee as certificateholders, and the beneficial
owners of the certificates will be permitted to exercise the rights of
certificateholders only indirectly through DTC and its participating
organizations. The beneficial owners of the certificates may hold certificates
in Europe through Cedelbank or Euroclear, which
10
<PAGE>
in turn will hold through DTC, if they participate in DTC, or indirectly through
organizations participating in DTC. See "-- Cedelbank and Euroclear" beginning
on page ___ of this prospectus for a further discussion of Cedelbank and the
Euroclear system.
The Depository Trust Company
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York Banking
Law, a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered under the provisions of Section 17A of the Securities Exchange Act of
1934, as amended. DTC holds securities for its participating organizations and
facilitates the clearance and settlement among those organizations of securities
transactions, such as transfers and pledges, in deposited securities through
electronic book-entry changes in their accounts. The electronic book-entry
system eliminates the need for physical movement of securities. The
organizations that participate in DTC include securities brokers and dealers,
who may include the underwriters of the certificates, banks, trust companies,
clearing corporations and other organizations. Indirect access to the DTC
system is also available to others such as securities brokers and dealers, banks
and trust companies that clear through or maintain a custodial relationship with
an organization participating in DTC, either directly or indirectly. Transfers
between organizations participating in DTC will occur in accordance with DTC
rules. The rules applicable to DTC and its participating organizations are on
file with the Securities and Exchange Commission.
Cedelbank and Euroclear will hold omnibus positions on behalf of their
respective participating organizations through customers' securities accounts in
the name of Cedelbank and Euroclear on the books of their respective
depositaries. The depositaries will in turn hold those positions in customers'
securities accounts in the depositaries' names on the books of DTC. Transfers
between organizations participating in Cedelbank and organizations participating
in the Euroclear system will occur in accordance with their respective rules and
operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC in the United States, on the one hand, and directly or indirectly
through organizations participating in Cedelbank or the Euroclear system, on the
other, will be effected in DTC in accordance with DTC rules on behalf of the
relevant European international clearing system by its depositary; however,
these cross-market transactions will require delivery of instructions to the
relevant European international clearing system by the counterparty in that
system in accordance with its rules and procedures and within its established
deadlines. The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to its
depositary to take action to effect final settlement on its behalf by delivering
or receiving securities in DTC and making or receiving payment in accordance
with normal procedures for same-day funds settlement applicable to DTC.
Organizations participating in Cedelbank or the Euroclear system may not deliver
instructions directly to the Cedelbank or Euroclear depositaries.
Because of time-zone differences, credits or securities in Cedelbank or
Euroclear as a result of a transaction with an organization participating in DTC
will be made during the
11
<PAGE>
subsequent securities settlement processing, dated the business day following
the DTC settlement date, and these credits or any transactions in these
securities settled during this processing will be reported to the relevant
organization participating in Cedelbank or the Euroclear system on that business
day. Cash received in Cedelbank or the Euroclear system as a result of sales of
securities by or through an organization participating in Cedelbank or the
Euroclear system to an organization participating in DTC will be received with
value on the DTC settlement date but will be available in the relevant Cedelbank
or Euroclear cash account only as of the business day following settlement in
DTC.
Purchases of certificates under the DTC system must be made by or through
an organization participating in DTC, which organization will receive a credit
for the certificates on DTC's records. The ownership interests of the
beneficial owners of the certificates are in turn to be recorded on the records
of that organization or, in the case of a purchase made indirectly through an
organization participating in DTC, on the records of the indirect participant.
The beneficial owners of the certificates will not receive written confirmation
from DTC of their purchase, but they are expected to receive written
confirmations providing details of the transaction, as well as periodic
statements of their holdings, from the organization through which they entered
into the transaction. Transfers of ownership interests in the certificates are
to be accomplished by entries made on the books of organizations participating
in DTC acting on behalf of the beneficial owners of the certificates.
To facilitate subsequent transfers, all certificates deposited with DTC by
its participating organizations are registered in the name of Cede. The deposit
of certificates with DTC and their registration in the name of Cede effects no
change in beneficial ownership. DTC has no knowledge of the identity of the
beneficial owners of the certificates. DTC's records reflect only the identity
of the organizations participating in DTC to whose accounts the certificates are
credited, which may or may not be the beneficial owners of the certificates.
Those organizations will remain responsible for keeping account of their
holdings on behalf of their customers.
Because DTC can only act on behalf of its participating organizations, who
in turn act on behalf of organizations participating indirectly in DTC and
certain banks, the ability of the beneficial owners of the certificates to
pledge those securities to persons or entities that do not participate in the
DTC system, or otherwise take action in respect of the certificates, may be
limited due to lack of a physical certificate for the certificates.
Conveyance of notices and other communications by DTC to its participating
organizations, by those organizations to indirect participants in DTC, and by
direct or indirect participants in DTC to the beneficial owners of the
certificates will be governed by arrangements among them, subject to any
statutory or regulatory requirements as may be in effect from time to time.
Neither DTC nor Cede will consent or vote with respect to the certificates.
Under its usual procedures, DTC mails an omnibus proxy to the issuer as soon as
possible after the record date, which assigns Cede's consenting or voting rights
to those organizations participating in DTC to whose accounts the certificates
are credited on the record date as identified in a listing attached to the
omnibus proxy. Principal and interest payments on the certificates will be made
to DTC. DTC's practice is to credit the accounts of its participating
organizations on the distribution date in accordance with their respective
holdings shown on DTC's records unless
12
<PAGE>
DTC has reason to believe that it will not receive payment on the distribution
date. Payments by organizations participating in DTC to the beneficial owners of
the certificates will be governed by standing instructions and customary
practices, as is the case with securities held for the accounts of customers in
bearer form or registered in "street name," and will be the responsibility of
those organizations and not of DTC, the trustee or Saxon Asset Securities
Company, subject to any statutory or regulatory requirements as may be in effect
from time to time. Payments of principal and interest to DTC is the
responsibility of the trustee, as applicable, disbursement of those payments to
organizations participating in DTC is the responsibility of DTC, and
disbursement of those payments to the beneficial owners of the certificates is
the responsibility of those organizations or indirect participants in DTC.
Accordingly, the beneficial owners of the certificates may experience some delay
in their receipt of principal and interest payments.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the depositor believes to be reliable, but
the depositor assumes no responsibility for its accuracy.
Cedelbank and Euroclear
Cedelbank, societe anonyme, is incorporated under the laws of Luxembourg as
a professional depository. Cedelbank holds securities for its participating
organizations and facilitates the clearance and settlement of securities
transactions between those organizations through electronic book-entry changes
in their accounts. The electronic book-entry system eliminates the need for
physical movement of certificates. Transactions may be settled by Cedelbank in
any of 28 currencies, including United States dollars. Cedelbank provides to
its participating organizations services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Cedelbank interfaces with domestic markets in several
countries. As a registered bank in Luxembourg, Cedelbank is subject to
regulation by the Luxembourg Commission for the Supervision of the Financial
Sector. Organizations participating in Cedelbank are world-wide financial
institutions, including underwriters, securities brokers and dealers, banks,
trust companies, clearing corporations and other organizations and may include
the underwriters of the certificates. Indirect access to Cedelbank is also
available to others, such as banks, brokers, dealers and trust companies, that
clear through or maintain a custodial relationship with an organization
participating in Cedelbank, either directly or indirectly.
The Euroclear system was created in 1968 to hold securities for
organizations participating in the Euroclear system and to clear and settle
transactions between those organizations through simultaneous electronic book-
entry delivery against payment. The electronic book-entry system eliminates the
need for physical movement of certificates and any risk from lack of
simultaneous transfers of securities and cash. Transactions may be settled
through the Euroclear system in any of 27 currencies, including United States
dollars. The Euroclear system includes various other services, including
securities lending and borrowing, and interfaces with domestic markets in
several countries under arrangements generally similar to the arrangements for
cross-market transfers with DTC.
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The Euroclear system is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York under a contract with Euroclear Clearance
System, S.C., a Belgian cooperative corporation. All operations are conducted
by that office, and all Euroclear securities clearance accounts and Euroclear
cash accounts are maintained with that office, not Euroclear Clearance System,
S.C. Euroclear Clearance System, S.C. establishes policy for the Euroclear
system on behalf of organizations participating in the Euroclear system. Those
organizations include banks, including central banks, securities brokers and
dealers and other professional financial intermediaries and may include the
underwriters of the certificates. Indirect access to the Euroclear system is
also available to other firms that clear through or maintain a custodial
relationship with organizations participating in the Euroclear system, either
directly or indirectly.
Morgan Guaranty is a New York banking corporation and a member bank of the
Federal Reserve System. Morgan Guaranty is regulated and examined by the Board
of Governors of the Federal Reserve System and the New York State Banking
Department. The Brussels, Belgium office of Morgan Guaranty is regulated and
examined by the Belgian Banking Commission.
The Terms and Conditions Governing Use of Euroclear, the related Operating
Procedures of the Euroclear system and applicable Belgian law govern the
securities clearance accounts and cash accounts maintained with the operator of
the Euroclear system, transfers of securities and cash within the Euroclear
system, withdrawal of securities and cash from the Euroclear system and receipts
of payments with respect to securities in the Euroclear system. All securities
in the Euroclear system are held on a fungible basis without attribution of
specific certificates to specific securities clearance accounts. The operator
of the Euroclear system acts only on behalf of organizations participating in
the Euroclear system and has no record of or relationship with persons holding
through those organizations.
Distributions with respect to certificates held through Cedelbank or
Euroclear will be credited to the cash accounts of organizations participating
in Cedelbank or Euroclear in accordance with the relevant system's rules and
procedures, to the extent received by its depositary. These distributions will
be subject to tax reporting in accordance with relevant United States tax laws
and regulations. Cedelbank or the operator of the Euroclear system, as the case
may be, will take any other action permitted to be taken by a certificateholder
under the applicable agreement on behalf of an organization participating in
Cedelbank or the Euroclear system only in accordance with its relevant rules and
procedures and subject to its depositary's ability to effect those actions on
its behalf through DTC.
Although DTC, Cedelbank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of the certificates among
participants in DTC, Cedelbank and the Euroclear system, they are under no
obligation to perform or continue to perform these procedures, and these
procedures may be discontinued at any time.
The information in this section concerning Cedelbank and Euroclear has been
obtained from sources that the depositor believes to be reliable, but the
depositor assumes no responsibility for its accuracy.
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Definitive Securities
The certificates will be issued in fully registered, certificated form to
the beneficial owners of the certificates or their respective nominees, rather
than to DTC or its nominee, only if:
. the trustee determines that DTC is no longer willing or able to
discharge properly its responsibilities as depository with respect to
the certificates and the trustee is unable to locate a qualified
successor;
. the trustee elects, at its option, to terminate the book-entry system
through DTC; or
. after the occurrence of a default under the applicable agreement, the
beneficial owners of the certificates representing at least a majority
of the outstanding principal amount of the applicable certificates
advise the trustee through DTC that the continuation of a book-entry
system through DTC, or a successor to DTC, is no longer in the best
interests of the beneficial owners of the certificates.
Upon the occurrence of any of the events described in the preceding
paragraph, the trustee will be required to notify the applicable beneficial
owners of the certificates, through organizations participating in DTC, of the
availability of fully registered, certificates. Upon surrender by DTC of the
certificates representing the certificates and the receipt of instructions for
re-registration, the trustee will issue fully registered, certificates to the
beneficial owners of the certificates.
Each payment of interest and principal on each fully registered certificate
will be made by the trustee on each distribution date directly to the holder in
whose name that certificate was registered at the close of business on the
preceding record date; provided, however, that the final payment on any fully
registered certificate will be made only upon presentation and surrender of the
certificate at the office or agency specified in the notice of final
distribution mailed to the certificateholders.
Each certificate issued in fully registered form will be transferable and
exchangeable at the offices of the trustee or any security registrar appointed
by the trustee. No service charge will be imposed for any registration of
transfer or exchange, but the trustee may require payment of a sum sufficient to
cover any tax or other governmental charge imposed in connection with any
transfer or exchange.
Allocation of Distributions
The prospectus supplement for each series of certificates will specify:
. whether distributions on the certificates will be made monthly,
quarterly, semi-annually or at other intervals;
. the distribution date for each distribution; and
. the amount of each distribution allocable to principal and interest.
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All distributions with respect to each certificate of a series will be made
to the person in whose name such certificate is registered as of the close of
business on the record date specified in the related prospectus supplement.
The amount available to be distributed on each distribution date with
respect to each series of certificates will be determined as set forth in the
related agreement and will be described in the related prospectus supplement
and, in general, will be equal to the amount of principal and interest actually
collected, advanced or received during the related due period or prepayment
period, net of applicable servicing fees, master servicing fees, special
servicing fees, administrative and guarantee fees, insurance premiums, amounts
required to reimburse any unreimbursed advances and any other amounts specified
in the related prospectus supplement. The amount distributed will be allocated
among the classes of certificates in the proportion and order of application set
forth in the related agreement and described in the related prospectus
supplement. If so specified in the related prospectus supplement, amounts
received in respect of the properties securing the mortgage loans 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 the distribution date occurs and continuing through the first day of
the calendar month in which the distribution date occurs, or any other period
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 the 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 certificates and does not represent a
beneficial interest in principal payments on the property securing the mortgage
loans in the related trust. One or more classes of certificates, known as
compound interest certificates, may provide for interest that accrues but is not
currently payable. 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 the 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 the 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 the
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 on those 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
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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 as a result of:
. the final liquidation of the mortgage loan through foreclosure sale,
disposition of the related property securing the mortgage loan if
acquired by deed-in-lieu of foreclosure, or otherwise,
. the reduction of the unpaid principal balance of the 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,
. certain physical damage to the related property securing the mortgage
loan of a type not covered by standard hazard insurance policies or
. fraud, dishonesty or misrepresentation in the origination of the
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 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 the series) will equal or
exceed the aggregate original principal balance of the certificates of the
series.
"Scheduled principal Balance" means, with respect to any mortgage loan as
of any date of determination, the scheduled principal balance of the mortgage
loan as of 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 the series. increased by the amount of
negative amortization, if any, with respect thereto and reduced by:
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. the principal portion of all scheduled monthly payments due on or before
the date of determination, whether or not received,
. all amounts allocable to unscheduled principal payments received on or
before the last day of the preceding prepayment period, and
. without duplication, the amount of any realized loss that has occurred
with respect to the mortgage loan on or before the date of
determination.
Optional Termination
To the extent and under the circumstances specified in the prospectus
supplement for a series, the certificates of the series may be terminated at the
option of the depositor or any other party as specified in the related
prospectus supplement for a purchase price calculated as specified in the
prospectus supplement. Upon termination of the certificates, at the option of
the terminating party, the related trust may be terminated, thereby causing the
sale of the remaining property securing the mortgage loans or the 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 the series will
be conditioned upon the passage of a certain date specified in such prospectus
supplement and/or the scheduled principal balance of the property securing the
mortgage loans 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 property securing the mortgage loans 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, Payment and Yield Considerations
The prepayment experience on the property securing the mortgage loans will
affect (1) the average life of each class of certificates issued by the related
trust and (2) for certificates purchased at a price other than par, the
effective yield on the certificates.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model, such as the single monthly mortality prepayment
model, the constant prepayment rate model or the prepayment speed assumption
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
the 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
property securing the mortgage loans 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,
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. the characteristics of the borrowers,
. homeowner mobility,
. economic conditions generally and in the geographic area in which the
mortgaged premises are located,
. enforceability of "due-on-sale" clauses,
. servicing decisions,
. prevailing mortgage market interest rates in relation to the interest
rates on the mortgage loans,
. the availability of mortgage funds,
. the use of second or home equity loans by borrowers,
. the availability of refinancing opportunities,
. the use of the mortgaged premises as second or vacation homes,
. the net equity of the borrowers in the mortgaged premises, and
. if the mortgage loans are secured by investment properties, tax-related
considerations and the availability of other investments.
The prepayment rate may also be subject to seasonal variations.
The prepayment rate on pools of conventional housing loans has fluctuated
significantly in recent years. In general, if prevailing interest rates were to
fall significantly below the interest rates on a pool of mortgage loans, the
mortgage loans in that pool would be expected to prepay at higher rates than if
prevailing interest rates were to remain at or above the interest rates on those
mortgage loans. Conversely, if interest rates were to rise above the interest
rates on a pool of the mortgage loans, the mortgage loans in that pool would be
expected to prepay at lower rates than if prevailing interest rates were to
remain at or below interest rates on the mortgage loans. In general, junior
mortgage loans have smaller average principal balances than senior or first
mortgage loans and are not viewed by borrowers as permanent financing.
Accordingly, junior mortgage loans may experience a higher rate of prepayment
than senior or first mortgage loans. In addition, any future limitations on the
right of borrowers to deduct interest payments on mortgage loans for federal
income tax purposes may affect the rate of prepayment of mortgage loans.
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 the distribution date. Because interest
generally will not be distributed to the certificateholders of the series until
the distribution date, the effective yield to the certificateholders will be
lower
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than the yield otherwise produced by the applicable pass-through rate and
purchase price for the 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 the 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 the
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 property securing the mortgage loans representing excess interest
may be applied in reduction of the principal balance of one or more specified
classes. The amount of excess interest required so to be applied may affect the
weighted average life of the related series of certificates.
The timing of changes in the rate of prepayments on the mortgage loans (or
on the mortgage loans underlying mortgage backed securities) may significantly
affect an investor's actual yield to maturity, even if the average rate of
principal payments experienced over time is consistent with such investor's
expectation. In general, the earlier a prepayment of principal on the mortgage
loans (or on the mortgage loans underlying mortgage backed securities), the
greater will be the effect on the investor's yield to maturity. As a result,
the effect on an investor's yield of principal payments occurring at a rate
higher (or lower) than the rate anticipated by the investor during the period
immediately following the issuance of the certificates would not be fully offset
by a subsequent like reduction (or increase) in the rate of principal payments.
Because the rate of principal payments (including prepayments) on the mortgage
loans (or on the mortgage loans underlying mortgage backed securities) will
significantly affect the weighted average life and other characteristics of any
class of certificates, prospective investors are urged to consider their own
estimates as to the anticipated rate of future prepayments and the suitability
of the certificates to their investment objectives.
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.
Factors other than those identified herein and in the related prospectus
supplement could significantly affect principal prepayments at any time and over
the lives of the certificates. The relative contribution of the various factors
affecting prepayment may also vary from time to time. There can be no assurance
as to the rate of payment of principal at any time or over the lives of the
certificates.
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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 the
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 the names requested by the depositor
representing the beneficial ownership interest in the related trust. Each
mortgage loan or mortgage backed certificate included in a trust will be
identified in a schedule appearing as an exhibit to the related agreement. The
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.
All mortgage loans transferred to the trustee will be assigned of record
either to the trustee, the servicer of the loan, or to a document custodian
acting on behalf of the trustee, and to provide for all payments thereon after
the specified date or dates to be made directly to the trustee. In some
instances, loans will be assigned directly from the seller or from the
originator that transferred the loan to the seller, directly to such custodian,
in accordance with the seller's loan purchase guidelines. 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, an assignment of the
mortgage or deed of trust 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 the mortgage loan. 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 recording is not required to protect the right, title
and interest of the trustee in the 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, the
seller 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. 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 the breach adversely affects the
interest of the certificateholders, the depositor or the seller will be
required, subject to the terms imposed under the related agreement or sales
agreement:
. to cure the breach,
. to substitute other mortgage assets for the affected mortgage assets or
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. 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 rate in the related mortgage
note.
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 the 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 Securities and Exchange Commission
within fifteen days after the initial issuance of such certificates. A copy of
the agreement with respect to each series of certificates will be attached to
the Form 8-K and will be available for inspection at the corporate trust office
of the trustee specified in the related prospectus supplement.
The Mortgage Loans--General
The mortgage loans will be evidenced by promissory notes and will be
secured by first, second or more junior liens on the related real property or
leasehold interest, together with improvements thereon, or with respect to
cooperative loans, the shares issued by the related cooperative.
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:
. Interest may be payable at a fixed rate or may be payable at a rate that
is adjustable from time to time on specified adjustment dates by adding
a specified fixed percentage to a specified 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. Changes to an adjustable rate may be
subject to periodic limitations, 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 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 property or interest securing the mortgage loan or another
source or may be treated as accrued interest and added to the principal
balance of the mortgage loan.
. 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 rate in the related mortgage note or may not be amortized
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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.
. 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.
. 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. Other mortgage loans may permit prepayments without payment of a
prepayment fee. 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 property or
interest securing the related mortgage loan. Other mortgage loans may be
assumable by persons meeting the then applicable underwriting standards
of the originator.
The property or interest securing the related mortgage loan (and, with
respect to cooperative loans, the buildings owned by cooperatives) may be
located in any state, territory or possession of the United States (including
the District of Columbia or Puerto Rico) or Canada. The property or interest
securing the related mortgage loan 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 part of any loss sustained by reason of nonpayments by
borrowers to the extent specified in the related prospectus supplement.
The prospectus supplement for each series of certificates will contain
information with respect to the mortgage loans expected to be included in the
related trust. This information may include:
. 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,
. the largest expected principal balance and the smallest expected
principal balance of any of the mortgage loans,
. the types of assets securing the mortgage loans,
. the original terms to maturity of the mortgage loans,
. 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,
. the expected aggregate outstanding principal balance of mortgage loans
having loan-to-value ratios at origination exceeding 80%,
. the expected mortgage interest rates and the range of mortgage interest
rates,
. in the case of ARM loans, the expected weighted average of the
adjustable rates,
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. the expected aggregate outstanding scheduled principal balance, if any,
of buy-down loans as of the date set forth in the prospectus supplement,
. the expected aggregate outstanding principal balance, if any, of GPM
loans as of the date set forth in the prospectus supplement,
. the amount of any mortgage pool insurance policy, special hazard
insurance policy or bankruptcy bond to be maintained with respect to the
related trust,
. 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,
. 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
. the expected geographic location of the property or interest securing the
mortgage loans (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.
"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 the mortgage loans which are or may be less than the amount of
interest due on the mortgage loans and as to which unpaid interest is added to
the principal balance of the mortgage loans (resulting in negative amortization)
and paid, together with interest thereon, in later years.
No assurance can be given that values of the properties or interests
securing the mortgage loans 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 so that the outstanding
principal balances of the mortgage loans (plus any additional financing by other
lenders on the same properties or interests securing the mortgage loans) in the
related trust become equal to or greater than the value of the properties or
interests securing the mortgage loans, 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 delinquent 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 the series and affect the yield on the
certificates of the series.
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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 properties 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. The properties may include vacation
and second homes or investment properties. A portion of a dwelling unit may
contain a commercial enterprise.
Cooperative Loans
Cooperative loans generally will be secured by certificate 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 the 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 the 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 depend 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.
Home Improvement Loans
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
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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 the
mortgage loans and the programs under which they were originated.
Home Equity Lines of Credit
Home equity lines of credit 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 home equity lines of credit may be subordinated to
other mortgages on the properties.
As more fully described in the related prospectus supplement, interest on
each home equity line of credit, 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 the loan. Principal amounts on
the home equity lines of credit may be drawn down (up to a maximum amount as set
forth in the related prospectus supplement) or repaid under each home equity
line of credit from time to time. If specified in the related prospectus
supplement, new draws by borrowers under home equity lines of credit
automatically will become part of the trust for a series. As a result, the
aggregate balance of the home equity lines of credit 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
home equity line of credit may choose an interest only payment option and is
obligated to pay only the amount of interest which accrues on the 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 properties or interests securing mortgage loans relating to home
equity lines of credit 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
properties or interests securing mortgage loans 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 home equity lines of credit. 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 home equity lines of credit secured by
properties or interests securing mortgage loans 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
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representation that a given percentage of the home equity lines of credit are
secured by one- to four-family dwelling units that are owner-occupied will be
either:
. the making of a representation by the borrower at origination of the
home equity lines of credit either that the underlying properties or
interests securing such mortgage loans will be used by the borrower for
a period of at least six months every year or that the borrower intends
to use the properties or interests securing the mortgage loans as a
primary residence or
. a finding that the address of the underlying properties or interests
securing the mortgage loans 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 the series may include mortgage loans with respect to which the
related mortgage interest rate is convertible from an adjustable rate to a fixed
rate at the option of the borrower upon the fulfillment of certain conditions.
If so specified in such prospectus supplement, the applicable servicer (or other
party specified in such prospectus supplement) may be obligated to repurchase
from the trust any mortgage loan with respect to which the related mortgage
interest rate has been converted from an adjustable rate to a fixed rate 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 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 the purchase price occurs or the fair market value of the
delinquent mortgage loan at the time of its purchase. Any such purchase price
will be treated as a prepayment of the related mortgage loan.
Substitution of Mortgage Loans
If so specified in the prospectus supplement for a series, the depositor
may deliver to the trustee other mortgage loans in substitution for any one or
more mortgage loans initially included in the trust for such series. In general,
any substitute mortgage loan must, on the date of the substitution:
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. have an unpaid principal balance not greater than the unpaid principal
balance of any deleted mortgage loan,
. with respect to a fixed rate mortgage loan, 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.
. with respect to an ARM loan, provide for a lowest possible net rate and
a highest possible net rate that is not lower than the respective net
rate for the deleted mortgage loan, and have a gross margin that is not
less than the gross margin of the deleted mortgage loan.
. have a net rate that is not less than the net rate of the deleted
mortgage loan.
. have a remaining term to maturity ending not later than one year prior
to the "latest possible maturity date" specified in the Trust
Agreement, and
. comply with each applicable representation, warranty and covenant
pertaining to an individual mortgage loan set forth in the trust
agreement, was underwritten on the basis of credit underwriting
standards at least as strict as the credit underwriting standards used
with respect to the deleted mortgage loan and, if a seller is effecting
the substitution, comply with each applicable representation, warranty
or covenant pertaining to an individual mortgage loan set forth in the
related sales agreement or subsequent sales agreement.
In general, no ARM loan may be substituted unless such deleted mortgage
loan is also an ARM loan and is not convertible to a fixed mortgage interest
rate unless the deleted mortgage loan is so convertible.
If more than one mortgage loan is substituted for one or more deleted
mortgage loans, the amounts, rates, margins, terms and ratios described above
shall be determined on a weighted average basis.
Mortgage-Backed Securities
The mortgage-backed securities may include private (that is not
guaranteed or insured by the United States or any agency or instrumentality
thereof) mortgage participation or pass-through certificates or other mortgage-
backed securities or (representing either debt or equity) and certificates
insured or guaranteed by Fannie Mae, Freddie Mac or GNMA. Private mortgage-
backed securities will not include participations in previously issued mortgage-
backed securities unless such securities 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 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 private mortgage-
backed securities agreement.
The related prospectus supplement for a series of certificates that
evidence interests in mortgage-backed securities will specify:
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. the approximate aggregate principal amount and type of any mortgage-
backed securities to be included in the trust,
. to the extent known to the depositor, certain characteristics of the
mortgage loans underlying the mortgage-backed securities including
. the payment features of the mortgage loans,
. the approximate aggregate principal balance, if known, of
underlying mortgage loans insured or guaranteed by a governmental
entity,
. the servicing fee or range of servicing fees with respect to the
underlying mortgage loans and
. the minimum and maximum stated maturities of the underlying
mortgage loans at origination,
. the maximum original term-to-stated maturity of the mortgage-backed
securities,
. the weighted average term-to-stated maturity of the mortgage-backed
securities,
. the pass-through or certificate rate of the mortgage-backed
securities,
. the weighted average pass-through or certificate rate of the
mortgage-backed securities,
. the issuer, servicer and trustee of the mortgage- backed securities,
. certain characteristics of credit support, if any, such as reserve
funds, insurance policies, surety bonds, letters of credit or
guaranties, relating to the mortgage loans underlying the mortgage-
backed securities or to the mortgage-backed securities themselves,
. 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
. 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 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 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
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mandatory prepayment of one or more class 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 class 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 asset proceeds accounts established and maintained in
trust on behalf of the holders of the 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 the 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 the series, net of amounts required to pay servicing fees
and any amounts that are to be included in any reserve fund account or other
fund or account for the 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 the 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 the
series in accordance with the respective allocations set forth in the related
prospectus supplement.
Credit Enhancement
General
If so specified in the prospectus supplement for a series, the related
trust may include, or the related certificates may be entitled to the benefits
of, certain ancillary or incidental assets intended to provide credit
enhancement for the ultimate or timely distribution of proceeds from the
mortgage assets to the holders of the 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 the 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 lasses 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
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of certificates are distributed prior to the 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 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 the series. 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 the 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
the 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 the seller or the holders of any class of certificates at the times and under
the circumstances specified in the prospectus supplement.
If so specified in the related prospectus supplement, one or more classes
of certificates may bear the risk of losses not covered by credit enhancement
prior to other classes of certificates. Subordination might be effected by
reducing the principal balance of the subordinated certificates on account of
the losses, thereby decreasing the proportionate share of distributions
allocable to such certificates, or by another means specified in the prospectus
supplement.
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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
. in the order of their scheduled final distribution dates,
. in accordance with a schedule or formula,
. in relation to the occurrence of events or
. 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 will be obtained and maintained for one
or more classes or series of certificates. The issuer of any such certificate
guaranty insurance policy 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
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payment of the principal of the 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. This
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 the trusts or asset groups, until
the credit enhancement is exhausted. If applicable, such prospectus supplement
will identify the trusts or asset groups to which such credit enhancement
relates and the manner of determining the amount of the coverage provided
thereby and of the application of such coverage to the identified trusts or
asset groups.
Mortgage Pool Insurance Policies
If so specified in the related prospectus supplement, one or more
mortgage pool insurance policies 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 the
prospectus supplement. The issuer of a mortgage pool insurance policy 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,
. fraud or negligence in the origination or servicing of a mortgage
loan, including misrepresentation by the borrower or persons involved
in the origination of the loan,
. failure to construct mortgaged premises in accordance with plans and
specifications or
. a claim in respect of a defaulted mortgage loan occurring when the
servicer of the mortgage loan, at the time of default or thereafter,
was not approved by the pool insurer.
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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 the
servicer and, in that 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.
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 by the policy. 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 the 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 insuring, subject to their provisions and certain
limitations, against certain losses not covered by standard hazard insurance
policies will be obtained and maintained for the related series in an amount
specified in such prospectus supplement. The issuer of any special hazard
insurance policy 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
. 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
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mudflows) not covered by the standard hazard insurance policies with
respect to the mortgage loans and
. loss from partial damage to the mortgaged premises caused by reason
of the application of the coinsurance clause contained in the
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 the cost of repair of such
mortgaged premises or 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
. 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
. 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 the series for
all losses not otherwise covered by the applicable standard hazard insurance
policies and take all reasonable steps necessary to permit recoveries on the
claims. 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 the series in the related trust to
provide protection in lieu of or in addition to that provided by a special
hazard insurance policy.
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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 the series.
Bankruptcy Bonds
If so specified in the related prospectus supplement, one or more
mortgagor bankruptcy bonds 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 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 the series in the related trust to provide protection in lieu of
or in addition to that provided by a bankruptcy bond.
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 reserve fund
accounts established and maintained with the trustee. In addition, if so
specified in the related prospectus supplement, a reserve fund account may be
funded with all or a portion of the interest payments on the related mortgage
assets not needed to make required distributions. Cash and the principal and
interest payments on 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
the series. Additional information with respect to the instruments deposited in
the reserve funds accounts 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
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accounts, insurance policies, guaranties, surety bonds, letters of credit,
guaranteed investment contracts or similar arrangements:
. for the purpose of maintaining timely payments or providing additional
protection against losses on the assets included in such trust,
. for the purpose of paying administrative expenses,
. 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,
. for the purpose of guaranteeing timely distributions with respect to the
certificates or
. 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
In originating a mortgage loan, the originator will follow either:
. its own credit approval process, to the extent that such process
conforms to underwriting standards generally acceptable to Fannie Mae or
Freddie Mac, or
. credit, appraisal and underwriting standards and guidelines approved by
the depositor.
The underwriting guidelines with respect to loan programs approved by the
depositor may be less stringent than those of Fannie Mae or Freddie Mac. For
example, they may permit the borrower to have a higher debt-to-income ratio and
a larger number of derogatory credit items than do the guidelines of Fannie Mae
or Freddie Mac. These underwriting guidelines are intended to provide for the
origination of single family mortgage loans for non-conforming credits. A
mortgage loan made to a "non-conforming credit" means a mortgage loan that is
ineligible for purchase by Fannie Mae or Freddie Mac due to borrower credit
characteristics that do not meet Fannie Mae or Freddie Mac underwriting
guidelines, including a loan made to a borrower whose creditworthiness and
repayment ability do not satisfy such Fannie Mae or Freddie Mac underwriting
guidelines or a borrower who may have a record of major derogatory credit items
such as default on a prior mortgage loan, credit write-offs, outstanding
judgments and prior bankruptcies. Accordingly, mortgage loans underwritten
pursuant to these guidelines are likely to experience rates of delinquency and
foreclosure that are higher, and may be substantially higher, than mortgage
loans originated in accordance with Fannie Mae or Freddie Mac underwriting
guidelines.
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In general, a prospective borrower is required to complete a detailed
application designed to provide pertinent credit information. The prospective
borrower generally is required to provide a current list of assets as well as an
authorization for a credit report which summarizes the borrower's credit history
with merchants and lenders as well as any suits, judgments or bankruptcies that
are of public record. The borrower may also be required to authorize
verification of deposits at financial institutions where the borrower has demand
or savings accounts.
In determining the adequacy of the mortgaged premises as collateral, an
appraisal is made of each property considered for financing by a qualified
independent appraiser. The appraiser is required to inspect the property and
verify that it is in good repair and that construction, if new, has been
completed. The appraisal is based on the market value of comparable homes and,
if considered applicable by the appraiser, the estimated rental income of the
property and a replacement cost and analysis based on the current cost of
constructing a similar home. All appraisals generally are expected to conform
to Fannie Mae or Freddie Mac 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 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 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.
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Representations and Warranties
The depositor generally will acquire the mortgage loans from the seller.
The seller will make certain customary representations and warranties with
respect to the mortgage loans in the sales agreement by which the seller
transfers its interest in the mortgage loans to Saxon the depositor. The seller
will represent and warrant, among other things:
. that each mortgage loan has been originated in compliance with all
applicable laws, rules and regulations,
. that each primary mortgage insurance policy is issued by the related
mortgage insurer,
. 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
. that upon foreclosure on the mortgage premises, the holders of the
mortgage loan will be able to deliver good and merchantable title to
such mortgaged premises.
In general, the seller will submit to the trustee with each mortgage loan a
mortgagee title insurance policy, title insurance binder, preliminary title
report, or other satisfactory evidence of title insurance, and, if a preliminary
title report is delivered initially, the seller is required to deliver a final
title insurance policy or satisfactory evidence of the existence of such a
policy; however, for second mortgage loans with a balance of less than $50,000,
the seller will generally not obtain a mortgage title insurance policy.
If the seller 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 as specified in the agreement, the trustee
may require the seller 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 the seller of a representation or warranty
with respect to a mortgage loan or the delivery by the seller to the trustee of
a materially defective document with respect to a mortgage loan, the seller 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. The seller's obligation to purchase a mortgage
loan will not be guaranteed by the depositor or any other party.
Servicing of Mortgage Loans
Each servicer generally will be approved or will utilize a sub-servicer
that is approved by Fannie Mae or Freddie Mac as a servicer of mortgage loans
and must be approved by the master servicer. The depositor expects that most or
all of the mortgage loans will be serviced by Meritech Mortgage Services, Inc.,
an affiliate of the seller. In determining whether to approve a
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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:
. has serviced conventional mortgage loans for a minimum of two years,
. maintains a loan servicing portfolio of at least $300,000,000 and
. 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, any sub-servicer.
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 a
periodic servicing fee equal to a specified percentage of the outstanding
principal balance of each mortgage loan serviced by such servicer and certain
other fees, including, but not limited to, late payments, conversion or
modification fees and assumption fees. Certain servicing obligations of a
servicer may be delegated to an approved sub-servicer; provided, however, that
the servicer remains fully responsible and liable for all its obligations under
the servicing agreement. The rights of the depositor under each servicing
agreement with respect to a series will be assigned to the trust for the 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 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 to a custodial account maintained by the trustee or master servicer or
to the trustee or the master servicer for deposit in the asset proceeds account
for such series. The amount on deposit in any such account will be invested in
or collateralized as described herein.
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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 to remit to the master servicer custodial account 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 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). However, 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 to cover, to the extent that such
amounts are deemed to be recoverable from any subsequent payments on the
mortgage loans:
. delinquent payments of principal or interest on such mortgage loans,
. delinquent payments of taxes, insurance premiums or other escrowed items
and
. 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
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which such delinquent payment relates. Amounts so advanced by a servicer, the
master servicer or the trustee, as the case may be, will be reimbursable out of
future payments on the mortgage loans, insurance proceeds or liquidation
proceeds of the mortgage loans for which such amounts were advanced. If an
advance made by a servicer, the master servicer or the trustee, as the case may
be, later proves to be unrecoverable, such servicer, the master servicer or the
trustee, as the case may be, will be entitled to reimbursement from funds in the
asset proceeds account prior to the distribution of payments to the
certificateholders.
Any advances made by a servicer, the master servicer or the trustee with
respect to mortgage loans included in the trust for any series are intended to
enable the trustee to make timely payment of the scheduled distributions on the
certificates of such series. Neither the servicer or the master servicer will
insure or guarantee the certificates of any series or the mortgage loans
included in the trust for any series, and their obligations to advance for
delinquent payments will be limited to the extent that such advances will be
recoverable out of future payments on the mortgage loans, insurance proceeds or
liquidation proceeds of the mortgage loans for which such amounts were advanced.
Collection and Other Servicing Procedures
Each servicing agreement with respect to a series will require the related
servicer to make reasonable efforts to collect all payments required under the
mortgage loans included in the related trust and, consistent with such servicing
agreement and the applicable insurance policies with respect to each mortgage
loan, to follow such collection procedures as it normally would follow with
respect to mortgage loans serviced for Fannie Mae.
The mortgage note or security instrument used in originating a mortgage
loan may contain a "due-on-sale" clause. 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 properties or interests securing mortgage loans 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
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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 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
. 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,
. 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,
. amounts expended but not approved by the mortgage insurer,
. claim payments previously made by the mortgage insurer and
. unpaid premiums.
If so specified in the prospectus supplement for a series, the mortgage
insurer will be required to pay to the insured either the mortgage insurance
loss or, 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 the date the mortgage loan would have been discharged in full if the default
had not occurred and 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 the outstanding principal balance of the related
mortgage loan or 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
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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.
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.
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:
. the actual cash value (the replacement cost less physical depreciation)
of the dwellings, structures and other improvements damaged or
destroyed, or
. 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 such policy
names the servicer as loss payee and such policy provides coverage in an amount
equal to the aggregate unpaid principal balance on the mortgage loans without
co-insurance. If the blanket policy contains a deductible clause and there is a
loss not covered by the blanket policy that would have been covered by a
standard hazard insurance policy covering the related mortgage loan, then the
servicer will remit to the master servicer from the servicer's
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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
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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.
Modification of Mortgage Loans
With respect to a mortgage loan on which a material default has occurred or
a payment default is imminent, the related servicer may enter into a forbearance
or modification agreement with the borrower. The terms of any such forbearance
or modification agreement may affect the amount and timing of principal and
interest payments on the mortgage loan and, consequently, may affect the amount
and timing of payments on one or more classes of the related series of
certificates. For example, a modification agreement that results in a lower
mortgage interest rate would lower the pass-through rate of any related class of
certificates that accrues interest at a rate based on the weighted average net
rate of the mortgage loans.
As a condition to any modification or forbearance related to any mortgage
loan, the servicer and, if required, the master servicer, are required to
determine, in their reasonable business judgment, that such modification,
forbearance or substitution will maximize the recovery on such mortgage loan on
a present value basis. In determining whether to grant a forbearance or a
modification, the servicer and, if required, the master servicer will take into
account the willingness of the borrower to perform on the mortgage loan, the
general condition of the mortgaged premises and the likely proceeds from the
foreclosure and liquidation of the mortgaged premises.
The servicers will not exercise any discretion with respect to changes in
any of the terms of any mortgage loan (including, but not limited to, the
mortgage interest rate and whether the term of the mortgage loan is extended for
a further period and the specific provisions applicable to such extension) or
the disposition of delinquent or defaulted mortgage loans or mortgage loans that
are secured by mortgaged premises acquired by foreclosure or by deed-in-lieu of
foreclosure without the consent of the master servicer.
Evidence as to Servicing Compliance
Within 120 days after the end of each of its fiscal years, each servicer
must provide the master servicer or the trustee with a copy of its audited
financial statements for such year and a statement from the firm of independent
public accountants that prepared such financial statements to the effect that,
in preparing such statements, it reviewed the results of the servicer's
servicing operations in accordance with the Uniform Single-Audit Procedures for
mortgage banks developed by the Mortgage Bankers Association. In addition, the
servicer will be required to deliver an officer's certificate to the effect that
it has fulfilled its obligations under the servicing agreement during the
preceding fiscal year or identifying any ways in which it has failed to fulfill
its obligations during such fiscal year and the steps that have been taken to
correct such failure.
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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:
. 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;
. 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;
. certain events of insolvency, readjustment of debt, marshaling of assets
and liabilities or similar proceedings regarding the servicer; or
. certain actions by or on behalf of the servicer indicating its
insolvency or inability to pay its obligations.
The master servicer will have the right pursuant to each servicing
agreement to terminate the related servicer upon the occurrence of an event of
default under such servicing agreement. In the event of such termination, the
master servicer will appoint a substitute servicer (which may be the master
servicer or the trustee) (subject to written confirmation by each rating agency
that provides, at the request of the depositor, a rating for the certificates of
the related series that such appointment will not adversely effect the ratings
then in effect on the certificates). Any successor servicer, including the
master servicer, will be entitled to compensation arrangements similar to those
provided to the servicer.
Master Servicer Duties
If so specified in the prospectus supplement for a series, the master
servicer will;
. administer and supervise the performance by each servicer of its duties
and responsibilities under the related servicing agreement,
. maintain any insurance policies (other than property specific insurance
policies) providing coverage for losses on the mortgage loans for such
series,
. calculate amounts payable to certificateholders on each distribution
date,
. prepare periodic reports to the trustee or the certificateholders with
respect to the foregoing matters,
. prepare federal and state tax and information returns and
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. 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. However, the master servicer remains fully responsible and
liable for all its obligations under each agreement (other than those
specifically undertaken by a special servicer).
The master servicer will be entitled to a monthly master servicing fee
applicable to each mortgage loan expressed as a fixed percentage of the
remaining scheduled principal balance of such mortgage loan.
The master servicer may terminate a servicer who has failed to comply with
its covenants or breached one or more of its representations and warranties
contained in the related servicing agreement. Upon termination of a servicer by
the master servicer, the master servicer will assume certain servicing
obligations of the terminated servicer or, at its option, may appoint a
substitute servicer acceptable to the trustee to assume the servicing
obligations of the terminated servicer. The master servicer's obligation to act
as a servicer following the termination of a servicer will not require the
master servicer to:
. purchase mortgage loans from a trust due to a breach by the servicer of
a representation or warranty under the related servicing agreement,
. purchase from the trust any converted mortgage loan, or
. 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. However, that the
special servicer must remain fully responsible and liable for all its
responsibilities under the special servicing agreement. As may be further
specified in the related
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prospectus supplement, the special servicer, if any, may be entitled to various
fees, including, but not limited to:
. a monthly engagement fee applicable to each mortgage loan or related REO
properties as of the first day of the immediately preceding Due Period,
. 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
. a performance fee applicable to each liquidated mortgage loan based upon
the related liquidation proceeds.
The Trust 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
the 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 the 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.
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.
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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,
which may include:
. obligations of the United States or any agency thereof provided such
obligations are backed by the full faith and credit of the United
States,
. 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 the series,
. commercial paper which is then rated in the commercial paper rating
category required to support the then applicable rating assigned to the
series,
. 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 the
series,
. 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 FDIC,
. 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
. 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
the investments for a series will be credited or charged to the appropriate fund
or account for the series. In general, reinvestment income from permitted
investments will not accrue for the benefit of the certificateholders of the
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 the
series pursuant to the terms of the reinvestment agreement.
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Reports to Certificateholders
Concurrently with each distribution on the certificates of any series,
there will be mailed to the holders of the certificates a statement generally
setting forth, to the extent applicable to such series, among other things:
. the aggregate amount of the distribution allocable to principal,
separately identifying the amount allocable to each class of
certificates;
. the aggregate amount of the distribution allocable to interest,
separately identifying the amount allocable to each class of
certificates;
. the aggregate principal balance of each class of certificates after
giving effect to distributions on the related distribution date;
. if applicable, the amount otherwise distributable to any class of
certificates that was distributed to any other class of certificates;
. 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 considered 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:
. any default in the performance or breach of any covenant or warranty of
the master servicer under such agreement which continues unremedied for
a specified period after the giving of written notice of such failure to
the master servicer by the trustee or by the holders of certificates
entitled to at least 25% of the aggregate voting rights,
. any failure by the master servicer to make required advances with
respect to delinquent mortgage loans in the related trust,
. certain events of insolvency, readjustment of debt, marshaling of assets
and liabilities or similar proceedings regarding the master servicer, if
any, and
. 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
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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:
. 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,
. adversely affect in any material respect the interests of the holders of
any class of certificates in a manner other than as described above
without the consent of the holders of certificates of such class
evidencing 66% of the voting rights of such class, or
. 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:
. curing any ambiguity,
. correcting or supplementing any provisions thereof which may be
inconsistent with any other provision thereof,
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. 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 Internal Revenue Code
at all times that any certificates are outstanding or
. 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 the certificates.
Termination
Each agreement and the respective obligations and responsibilities created
thereby shall terminate upon the distribution to certificateholders of all
amounts required to be paid to them pursuant to such related agreement
following:
. 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
. 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.
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.
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The Mortgage Loans
Single Family Loans, Multi-Family Loans, Conventional Home Improvement
Loans, Title I Loans and Home equity lines of credit. The single family loans,
multi-family loans, conventional home improvement loans, Title I Loans and home
equity lines of credit 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 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 leases the land generally by a long-term ground lease and owns
the apartment building. The cooperative is directly responsible for project
management and, in most cases, payment of real estate taxes and hazard and
liability insurance. If there is a blanket mortgage on the cooperative and/or
underlying land, as is generally the case, the cooperative, as project
mortgagor, is also responsible for meeting these mortgage obligations. A blanket
mortgage is ordinarily incurred by the cooperative in connection with the
construction or purchase of the cooperative's apartment building. The interest
of the occupants under proprietary leases or occupancy agreements to which the
cooperative is a party are generally subordinate to the interest of the holder
of the blanket mortgage in that building. If the cooperative is unable to meet
the payment obligations arising under its blanket mortgage, the mortgagee
holding the blanket mortgage could foreclose on that mortgage and terminate all
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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 Home Equity Lines of Credit. 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
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default and send a copy to the borrower and to any person who has recorded a
request for a copy of a notice of default and notice of sale. In addition, the
trustee must provide notice in some states to any other party having a
subordinate interest in the real estate, including any holder of a junior
encumbrance on the real estate. If the deed of trust is not reinstated within
any applicable cure period, a notice of sale must be posted in a public place
and, in most states, published for a specified period of time in one or more
newspapers. In addition, some state laws require that a copy of the notice of
sale be posted on the property and sent to all parties having an interest of
record in the property. When the beneficiary's right to foreclosure is
contested, the legal proceedings necessary to resolve the issue can be time-
consuming.
In some states, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a statutorily prescribed
reinstatement period, cure a monetary default by paying the entire amount in
arrears plus other designated costs and expenses incurred in enforcing the
obligation. In general, state law controls the amount of foreclosure expenses
and costs, including attorney's fees, which may be recovered by a lender. After
the reinstatement period has expired without the default having been cured, the
borrower or junior lienholder no longer has the right to reinstate the loan and
must pay the loan in full to prevent the scheduled foreclosure sale. If the
mortgage or deed of trust is not reinstated, a notice of sale must be posted in
a public place and, in most states, published for a specific period of time in
one or more newspapers. In addition, some state laws require that a copy of the
notice of sale be posted on the property and sent to all parties having an
interest in the real property.
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
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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. 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.
Foreclosure of a deed of trust is generally accomplished by a non-judicial sale
under a specific provision in the deed of trust which authorizes the trustee to
sell the property at public auction upon any default by the borrower under the
terms of the note or deed of trust. In some states, the trustee must record a
notice of default and send a copy to the borrower-trustor, to any person who has
recorded a request for a copy of any notice of default and notice of sale, to
any successor in interest to the borrower-trustor, to the beneficiary of any
junior deed of trust and to certain other persons. In some states, a notice of
sale must be posted in a public place and published during a specific period of
time in one or more newspapers, posted on the property and sent to parties
having an interest of record in the property before such non-judicial sale takes
place.
Courts have imposed general equitable principles upon foreclosure, which
are generally designed to mitigate the legal consequences to the borrower of the
borrower's defaults under the loan documents. Some courts have been faced with
the issue of whether federal or state constitutional provisions reflecting due
process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust does not involve sufficient state
action to afford constitutional protection to the borrower.
Cooperative Loans. The cooperative shares owned by the tenant-stockholder
and pledged to the lender are, in almost all cases, subject to restrictions on
transfer as set forth in the cooperative's charter documents, as well as the
proprietary lease or occupancy agreement, and may be canceled by the cooperative
for failure by the tenant-stockholder to pay rent or other obligations or
charges owed by such tenant-stockholder, including mechanics' liens against the
cooperative apartment building incurred by such tenant-stockholder. The
proprietary lease or occupancy agreement generally permits the cooperative to
terminate such lease or agreement in the event an obligor fails to make payments
or defaults in the performance of covenants required thereunder. Typically, the
lender and the cooperative enter into a recognition agreement which establishes
the rights and obligations of both parties in the event of a default by the
tenant-stockholder on its obligations under the proprietary lease or occupancy
agreement. A default by the tenant-stockholder under the proprietary lease or
occupancy agreement will usually constitute a default under the security
agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from the sale of the cooperative apartment,
subject, however, to
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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 and the security agreement relating to those shares. Article 9 of the
Uniform Commercial Code 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 Uniform Commercial Code 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.
Junior Mortgage Loans; Rights of Senior Mortgagees
Some of the mortgage loans included in a trust may be secured by mortgages
or deeds of trust that are junior to other mortgages or deeds of trust. The
rights of the trustee (and therefore the certificateholders) as mortgagee under
a junior mortgage or beneficiary under a junior deed of trust are subordinate to
those of the mortgagee under the senior mortgage or beneficiary under the senior
deed of trust, including the prior rights of the senior mortgagee to receive
hazard insurance and condemnation proceeds and to cause the property securing
the mortgage loan to be sold upon default of the mortgagor or trustor, thereby
extinguishing the junior mortgagee's or junior beneficiary's lien unless the
junior mortgagee or junior beneficiary asserts its subordinate interest in the
property in foreclosure litigation and, possibly, satisfies the defaulted senior
mortgage or deed of trust. As discussed more fully below, a junior mortgagee or
junior beneficiary may satisfy a defaulted senior loan in full and, in some
states, may cure such default and bring the senior loan current, in either event
adding the amounts expended to the balance due on the junior loan. In most
states, no notice of default is required to be given to a junior mortgagee or
junior beneficiary, and junior mortgagees or junior beneficiaries are seldom
given notice of defaults on senior mortgages. In order for a foreclosure action
in some states to be effective against a junior mortgagee or junior beneficiary,
the junior mortgagee or junior beneficiary must be named in any foreclosure
action, thus giving notice to junior lienors.
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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.
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Right of Redemption
In some states, after foreclosure of a mortgage or sale pursuant to a deed
of trust, the borrower and certain foreclosed junior lienholders are given a
statutory period in which to redeem the mortgaged premises from the foreclosure
sale. Depending upon state law, the right of redemption may apply to sale
following judicial foreclosure or to sale pursuant to a non-judicial power of
sale. In some states, statutory redemption may occur only upon payment of the
foreclosure purchase price, accrued interest and taxes and certain of the costs
and expenses incurred in enforcing the obligation. In some states, the right to
redeem is a statutory right and in others it is a contractual right. The effect
of a right of redemption is to diminish the ability of the lender to sell the
foreclosed mortgaged premises while such right of redemption is outstanding. The
exercise of a right of redemption would defeat the title of any purchaser at a
foreclosure sale or of any purchaser from the lender subsequent to judicial
foreclosure or sale under a deed of trust. The practical effect of the
redemption right is to force the lender to maintain the property and pay the
expenses of ownership until the redemption period has run.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory prohibitions which limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a mortgage.
In some states, statutes limit the right of the beneficiary or mortgagee to
obtain a deficiency judgment against the borrower following foreclosure or sale
under a deed of trust. A deficiency judgment would be a personal judgment
against the former borrower equal in most cases to the difference between the
amount due to the lender and the fair market value of the real property sold at
the foreclosure sale. As a result of these prohibitions, it is anticipated that
in many instances servicers will not seek deficiency judgments against
defaulting borrowers.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws
and state laws affording relief to debtors, may interfere with or affect the
ability of the secured mortgage lender to realize upon collateral and/or enforce
a deficiency judgment. For example, if a mortgagor is in a proceeding under the
federal Bankruptcy Code, a lender may not foreclose on the mortgaged premises
without the permission of the bankruptcy court. The rehabilitation plan proposed
by the debtor may provide, if the court determines that the value of the
mortgaged premises is less than the principal balance of the mortgage loan, for
the reduction of the secured indebtedness to the value of the mortgaged premises
as of the date of the commencement of the bankruptcy, rendering the lender a
general unsecured creditor for the difference, and also may reduce the monthly
payments due under such mortgage loan, change the rate of interest and alter the
mortgage loan repayment schedule. The effect of any such proceedings under the
federal Bankruptcy Code, including, but not limited to, any automatic stay,
could result in delays in receiving payments on the mortgage loans underlying a
series of certificates and possible reductions in the aggregate amount of such
payments. Some states also have homestead exemption laws which would protect a
principal residence from a liquidation in bankruptcy.
Federal and local real estate tax laws provide priority to certain tax
liens over the lien of a mortgage or secured party. Numerous federal and state
consumer protection laws impose substantive requirements upon mortgage lenders
in connection with the origination, servicing
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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 Uniform Commercial Code governs foreclosure on
cooperative shares and the related proprietary lease or occupancy agreement.
Some courts have interpreted section 9-504 of the Uniform Commercial Code 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,
. 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 the military
service
. 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
. 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 described above are
subject to challenge by creditors, however, and if, in the opinion of
the court, the ability of a person to comply with such obligations is
not materially impaired by military service, the court may apply
equitable principles accordingly. If a borrower's obligation to repay
amounts otherwise due on a mortgage loan included in the trust for a
series is relieved pursuant to the Soldiers' and Sailors' Civil Relief
Act of 1940, neither the servicer, the master servicer nor the trustee
will be required to advance such amounts and any loss in respect
thereof may reduce the amounts available to be paid to the holders of
the certificates of such series. If so specified in the prospectus
supplement for a series, any shortfalls in interest collections on
mortgage loans included in the trust for such series resulting from
application of the Soldiers' and Sailors' Civil Relief Act of 1940
will be allocated to each class of certificates of such series that is
entitled to receive interest in respect of such mortgage loans in
proportion to the interest that each such class of certificates would
have otherwise been entitled to receive in respect of such mortgage
loans had such interest shortfall not occurred.
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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 under the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended. 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 if hazardous substances have
been released or disposed of on the property. Such cleanup costs may be
substantial. The U.S. Environmental Protection Agency has established a Policy
Towards Owners of Residential Property at Superfund Sites (July 3, 1991) which
provides that the Environmental Protection Agency will not proceed against
owners of residential property contaminated with hazardous substances under
certain circumstances. Similarly, the Environmental Protection Agency 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 Environmental Protection Agency, 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. Some such liens take priority over
all other prior recorded liens, and others take the same priority as taxes in
the jurisdiction. In both instances, the lien of the states or localities 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.
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If so specified in the prospectus supplement for a series, the servicers
are not permitted to foreclose on any mortgaged premises without the approval of
the master servicer or the trustee. The master servicer or the trustee is not
permitted to approve foreclosure on any property which it knows or has reason to
know is contaminated with or affected by hazardous wastes or hazardous
substances. The master servicer or the trustee is required to inquire of any
servicer requesting approval of foreclosure whether the property proposed to be
foreclosed upon is so contaminated. If a servicer does not foreclose on
mortgaged premises, the amounts otherwise available to pay the holders of the
certificates may be reduced. A servicer will not be liable to the holders of the
certificates if it fails to foreclose on mortgaged premises that it reasonably
believes may be so contaminated or affected, even if such mortgaged premises
are, in fact, not so contaminated or affected. In addition, a servicer will not
be liable to the holders of the certificates if, based on its reasonable belief
that no such contamination or effect exists, the servicer forecloses on
mortgaged premises and takes title to such mortgaged premises and thereafter
such mortgaged premises are determined to be so contaminated or affected.
"Due-on-Sale" Clauses
The forms of mortgage note, mortgage and deed of trust relating to
conventional mortgage loans may contain a "due-on-sale" clause permitting
acceleration of the maturity of a loan if the borrower transfers its interest in
the mortgaged premises. The Garn-St. Germain Depository Institutions Act of 1982
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 Garn-St. Germain Depository Institutions Act of 1982 are enforceable
within certain limitations as set forth in the Act and the regulations
promulgated thereunder.
By virtue of the Garn-St. Germain Depository Institutions Act of 1982, 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:
. the granting of a leasehold interest which has a term of three years
or less and which does not contain an option to purchase,
. 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,
. 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,
. 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),
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. a transfer by devise, descent or operation of law on the death of a
joint tenant or tenant by the entirety and
. other transfers as set forth in the Garn-St. Germain Depository
Institutions 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.
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.
Consumer Protection Laws
A number of federal and state laws and regulations related to residential
mortgage refinance transactions contain stringent limits on interest rates and
origination fees, and impose detailed disclosure requirements. In certain
instances, any violations of these laws and regulations by the originator of the
loan could cause any affected loan to be unenforceable, or give the borrower the
right to rescind or cancel the loan transaction. Any loan affected by such
violations would have a significantly increased risk of default or prepayment.
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Saxon Asset Securities Company
The depositor 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 is a wholly owned subsidiary of
Dominion Capital, Inc., a Virginia corporation. Dominion Capital is a wholly
owned subsidiary of Dominion Resources, Inc., a Virginia corporation. 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 discussion describes the anticipated material federal income
tax consequences of the purchase, ownership and disposition of the certificates.
The discussion is based upon the advice of McGuire, Woods, Battle & Boothe
special counsel to the depositor. McGuire, Woods, Battle & Boothe LLP has
delivered to the depositor its opinion stating that the discussion of federal
income tax issues in this section accurately sets forth its views on those
issues.
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, including insurance companies, tax-exempt organizations,
financial institutions or broker dealers and holders that will hold the
certificates as other than capital assets. In particular, this discussion
applies only to investors that purchase certificates directly from the issuer
and hold the certificates as capital assets. The discussion is based upon laws,
regulations, rulings and decisions now in effect, all of which are subject to
change or differing interpretation perhaps with retroactive effect. 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.
The discussion addresses certificates of five general types:
. REMIC certificates
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. FASIT certificates
. trust certificates,
. partnership interests and
. debt certificates.
The prospectus supplement for each series of certificates will indicate
whether a REMIC or FASIT election or elections will be made for the trust and,
if a REMIC or FASIT election is to be made, will identify all regular interests
and residual interests in the REMIC or all regular interest, high-yield
interests or ownership interests in the FASIT. As used in this section and the
"ERISA Considerations" section, Code means the Internal Revenue Code of 1986, as
amended, and IRS means the Internal Revenue Service.
REMIC Certificates
With respect to each series of REMIC certificates representing interests in
all or a portion of a trust ("REMIC mortgage pool"), McGuire, Woods, Battle &
Boothe LLP, special counsel for the depositor, will deliver its opinion
generally to the effect that, assuming that:
. a REMIC election is timely made in the required form,
. there is ongoing compliance with all provisions of the related trust
agreement and
. certain representations set forth in the trust 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 Code.
REMICs may issue one or more classes of regular interests and must issue
one and only one class of residual interest. A REMIC certificate representing a
regular interest in a REMIC mortgage pool will be referred to as a "REMIC
regular certificate" and a REMIC certificate representing a residual interest in
a REMIC mortgage pool will be referred to as a "REMIC residual certificate".
If an entity elects to be treated as a REMIC but fails to comply with one
or more of the ongoing requirements of the Code for REMIC status during any
taxable year, the entity will not qualify as a REMIC for such year and
thereafter. In such event, the entity may be subject to taxation as a separate
corporation, and the certificates issued by the entity may not be accorded the
status described below under "-- Status of REMIC certificates". In the case of
an inadvertent termination of REMIC status, the Treasury Department has
authority to issue regulations providing relief; however, sanctions, such as the
imposition of a corporate tax on all or a portion of the entity's income for the
period during which the requirements for REMIC status are not satisfied, may
accompany any such relief.
Among the ongoing requirements to qualify for REMIC treatment is that
substantially all the assets of the REMIC mortgage pool (as of the close of the
third calendar month beginning
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after the creation of the REMIC and continually thereafter) must consist of only
qualified mortgages and permitted investments.
A qualified mortgage means:
. 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,
. any qualified replacement mortgage,
. any regular interest in another REMIC transferred to the REMIC on the
closing date in exchange for REMIC certificates or
. beginning on September 1, 1997, certain regular interests in a
financial asset securitization investment trust.
Any property acquired as a result of a foreclosure or deed in lieu with
respect to a qualified mortgage ("foreclosure property") is required generally
to be disposed of within two years. The REMIC Regulations treat an obligation
secured by a manufactured home that has a minimum of 400 square feet of living
space and a minimum width in excess of 102 inches and that is of a kind
customarily used at a fixed location as an obligation secured by real property
without regard to the treatment of the obligation or the property under state
law.
Taxation of REMIC Regular Certificates. Except as otherwise stated in this
discussion, the REMIC regular certificates will be treated for federal income
tax purposes as debt instruments issued by the REMIC mortgage pool and not as
ownership interests in the REMIC mortgage pool or its assets. In general,
interest, original issue discount and market discount paid or accrued on a REMIC
regular certificate will be treated as ordinary income to the holder of the
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 the 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 section 1273(a) of the Code.
Holders of REMIC regular certificates issued with original issue discount
generally will be required to include original issue discount in income as it
accrues, in accordance with a constant yield method that takes into account the
compounding of interest, in advance of the receipt of the cash attributable to
such income. The certificateholders will receive reports annually (or more
frequently if required) with respect to the original issue discount accruing on
the REMIC regular certificates as may be required under section 6049 of the Code
and the regulations thereunder. See "-- Reporting and Other Administrative
Matters of REMICs".
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Rules governing original issue discount are set forth in sections 1271
through 1273 and 1275 of the Code and in the regulations thereunder (the "OID
Regulations"). 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).
Section 1272(a)(6) requires that a mortgage 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 Conference Committee
Report to the Tax Reform Act of 1986 ("the Committee Report") indicates that the
regulations should provide that the prepayment assumption, if any, used with
respect to a particular transaction must be the same as that used by the parties
in pricing the transaction. In reporting original issue discount a prepayment
assumption consistent with this standard will be used. Nevertheless, the
depositor does not make any representation that prepayment will in fact be made
at the rate reflected in the prepayment assumption or at any other rate. Each
investor must make its own decision as to the appropriate prepayment assumption
to be used in deciding to purchase any of the REMIC regular certificates. The
prospectus supplement with respect to a series of REMIC certificates will
disclose the prepayment assumption to be used in reporting original issue
discount, if any, and for certain other federal income tax purposes.
The total amount of original issue discount on a REMIC regular certificate
is the excess of the stated redemption price at maturity of the REMIC regular
certificate over its "issue price". Except as discussed in the following two
paragraphs, in general, the issue price of a particular class of REMIC regular
certificates will be the price at which a substantial amount thereof are first
sold to the public (excluding bond houses and brokers). The stated redemption
price at maturity of a REMIC regular certificate is equal to the total of all
payments to be made on such certificate other than qualified stated interest.
If a REMIC regular certificate is sold with accrued interest that relates
to a period prior to the closing date of such REMIC regular certificate, the
amount paid for the accrued interest will be treated instead as increasing the
issue price of the REMIC regular certificate. In addition, that portion of the
first interest payment in excess of interest accrued from the closing date to
the first distribution date will be treated for federal income tax reporting
purposes as includible in the stated redemption price at maturity of the REMIC
regular certificates, and as excludable from income when received as a payment
of interest on the first distribution date (except to the extent of any accrued
market discount as of that date). The OID Regulations suggest, however, that
some of or all this pre-issuance accrued interest may be treated as a separate
asset (and hence is not includible in a REMIC regular certificate's issue price
or stated redemption price at maturity), whose cost is recovered entirely out of
interest paid on the first distribution date.
Under the OID Regulations, qualified stated interest is interest that is
unconditionally payable at least annually during the entire term of the
certificate at either:
. a single fixed rate that appropriately takes into account the length
of the interval between payments or
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. 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
(1) a fixed, positive multiple greater than 0.65 but not exceeding
1.35,
(2) increased or decreased by a fixed rate, or
(3) both (1) and (2).
Certain combinations of rates constitute a single qualified floating rate,
including (1) 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 (2) two or
more qualified floating rates that can reasonably be expected to have
approximately the same values throughout the term of the debt instrument. A
combination of such rates is conclusively presumed to be a single floating rate
if the values of all rates on the closing date are within 0.25 percentage points
of one another. A variable rate that is subject to an interest rate cap, floor,
governor or similar restriction on rate adjustment may be a qualified floating
rate only if such restriction is fixed throughout the term of the instrument, or
is not reasonably expected as of the closing date to cause the yield on the debt
instrument to differ significantly from the expected yield absent the
restriction.
An objective rate is a rate determined using a single fixed formula and
based on objective financial information or economic information (excluding a
rate based on information that is in the control of the issuer or that is unique
to the circumstances of a related party). A combination of interest stated at a
fixed rate for an initial period of less than one year followed by an objective
rate is treated as a single objective rate if the value of the objective rate at
the closing date is intended to approximate the fixed rate, such a combination
of rates is conclusively presumed to be a single objective rate if the objective
rate on the closing date does not differ from the fixed rate by more than 0.25
percentage points.
Under the foregoing rules, some of the payments of interest on a REMIC
regular certificate bearing a fixed rate of interest for an initial period
followed by a qualified floating rate of interest in subsequent periods could be
treated as included in the stated redemption price at maturity if the initial
fixed rate were to differ sufficiently from the rate that would have been set
using the formula applicable to subsequent periods. REMIC regular certificates
other than such certificates providing for variable rates of interest are not
anticipated to have stated interest other than qualified stated interest, but,
if any such REMIC regular certificates are so offered, appropriate disclosures
will be made in the prospectus supplement. Some of or all the payments on REMIC
regular certificates providing for the accretion of interest will be included in
the
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stated redemption price at maturity of such certificates. Interest payments are
unconditionally payable only if a late payment or nonpayment is expected to be
penalized or reasonable remedies exist to compel payments. Certain debt
securities may provide for default remedies in the event of late payment or
nonpayment of interest. The interest on such securities will be unconditionally
payable and constitute qualified stated interest, not original issue discount.
Nevertheless, absent clarification of the OID Regulations, where debt securities
do not provide for default remedies, the interest payments will be included in
their stated redemption prices at maturity and taxed as original issue discount.
Any stated interest in excess of qualified stated interest is included in the
stated redemption price at maturity.
Under a de minimis rule in the Code, as interpreted in the OID Regulations,
original issue discount on a REMIC regular certificate will be considered to be
zero if it is less than 0.25% of the stated redemption price at maturity of the
REMIC regular certificate multiplied by the number of complete years to its
weighted average maturity. For this purpose, the weighted average maturity is
computed as the sum of the products of each payment (other than a payment of
qualified stated interest) multiplied by a fraction the numerator of which is
the number of complete years from the issue date until such payment is made and
the denominator of which is the stated redemption price at maturity. The IRS may
take the position that this rule should be applied taking into account the
prepayment assumption and the effect of any anticipated investment income. Under
the OID Regulations, REMIC regular certificates bearing only qualified stated
interest except for any "teaser" rate, interest holiday or similar provision are
treated as subject to the de minimis rule if the greater of the foregone
interest or any excess of stated principal balance over the issue price is less
than such de minimis amount.
The OID Regulations generally treat de minimis original issue discount as
includible in income as each principal payment is made, based on the product of
the total amount of such de minimis original issue discount and a fraction, the
numerator of which is the amount of such principal payment and the denominator
of which is the outstanding principal balance of the REMIC regular certificate.
The OID Regulations also permit a certificateholder to elect to accrue de
minimis original issue discount (together with stated interest, market discount
and original issue discount) into income currently based on a constant yield
method. See "-- Market Discount" and "-- Premium".
Each holder of a REMIC regular certificate must include in gross
income the sum of the daily portions of original issue discount on its REMIC
regular certificate for each day during its taxable year on which it held such
REMIC regular certificate. For this purpose, in the case of an original holder
of a REMIC regular certificate, a calculation will first be made of the portion
of the original issue discount that accrued during each accrual period,
generally each period that ends on a date that corresponds to a distribution
date on the REMIC regular certificate and begins on the first day following the
immediately preceding accrual period (or in the case of the first such period,
begins on the closing date). For any accrual period such portion will equal the
excess of (1) the sum of (A) the present value of all the distributions
remaining to be made on the REMIC regular certificate, as of the end of the
accrual period that are included in the stated redemption price at maturity and
(B) distributions made on such REMIC regular certificate during the accrual
period of amounts included in the stated redemption price at maturity over (2)
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 (1)(A) of the preceding
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sentence will be calculated based on (1) the yield to maturity of the REMIC
regular certificate, calculated as of the closing date, giving effect to the
prepayment assumption, (2) events (including actual prepayments) that have
occurred prior to the end of the accrual period and (3) the prepayment
assumption. The adjusted issue price of a REMIC regular certificate at the
beginning of any accrual period will equal the issue price of such certificate,
increased by the aggregate amount of original issue discount with respect to
such REMIC regular certificate that accrued in prior accrual periods and reduced
by the amount of any distributions made on such REMIC regular certificate in
prior accrual periods of amounts included in the stated redemption price at
maturity. The original issue discount accruing during any accrual period will
then be allocated ratably to each day during the period to determine the daily
portion of original issue discount for each day. With respect to an accrual
period between the closing date and the first distribution date that is shorter
than a full accrual period, the OID Regulations permit the daily portions of
original issue discount to be determined according to any reasonable method.
A subsequent purchaser of a REMIC regular certificate that purchases such
REMIC regular certificate at a cost (not including payment for accrued qualified
stated interest) less than its remaining stated redemption price at maturity
will also be required to include in gross income, for each day on which it holds
such REMIC regular certificate, the daily portions of original issue discount
with respect to such REMIC regular certificate, but reduced, if such cost
exceeds the adjusted issue price, by an amount equal to the product of (1) such
daily portions and (2) 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 (1)(a) more than one qualified floating rate or (b) a single
fixed rate and (2)(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 section 1272(a)(6) of
the Code 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 section 1272(a)(6) to such certificates
for the purpose of preparing reports furnished to certificateholders. A REMIC
regular certificate bearing interest at a Single Variable Rate will take into
account for each accrual period an amount corresponding to the sum of (1) the
qualified stated interest accruing
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on the outstanding principal balance of the REMIC regular certificate
(as the stated interest rate for that certificate varies from time to time) and
(2) the amount of original issue discount that would have been attributable to
that period on the basis of a constant yield to maturity for a bond issued at
the same time and issue price as the REMIC regular certificate, having the same
principal balance and schedule of payments of principal as such certificate,
subject to the same prepayment assumption, and bearing interest at a fixed rate
equal to the applicable qualified floating rate or qualified inverse floating
rate in the case of a REMIC regular certificate providing for either such rate,
or equal to the fixed rate that reflects the reasonably expected yield on the
certificate in the case of a REMIC regular certificate providing for an
objective rate other than a qualified inverse floating rate, in each case as of
the closing date. Holders of REMIC regular certificates bearing interest at a
Multiple Variable Rate generally will take into account interest and original
issue discount under a similar methodology, except that the amounts of qualified
stated interest and original issue discount attributable to such a certificate
first will be determined for an equivalent debt instrument bearing fixed rates,
the assumed fixed rates for which are (a) for a qualified floating rate or
qualified inverse floating rate, such rate as of the closing date (with
appropriate adjustment for any differences in intervals between interest
adjustment dates), and (b) for any other objective rate, the fixed rate that
reflects the yield that is reasonably expected for the REMIC regular
certificate. If the interest paid or accrued with respect to a Multiple Variable
Rate certificate during an accrual period differs from the assumed fixed
interest rate, such difference will be an adjustment (to interest or original
issue discount, as applicable) to the certificateholder's taxable income for the
taxable period or periods to which such difference relates.
In the case of a REMIC regular certificate that provides for stated
interest at a fixed rate in one or more accrual periods and either one or more
qualified floating rates or a qualified inverse floating rate in other accrual
periods, the fixed rate is first converted into an assumed variable rate. The
assumed variable rate will be a qualified floating rate or a qualified inverse
floating rate according to the type of actual variable rate provided by the
certificate and must be such that the fair market value of the REMIC regular
certificate as of the closing date is approximately the same as the fair market
value of an otherwise identical debt instrument that provides for the assumed
variable rate in lieu of the fixed rate. The certificate is then subject to the
determination of the amount and accrual of original issue discount as described
above, by reference to the hypothetical variable rate instrument.
The provisions of the OID Regulations applicable to variable rate debt
instruments may not apply to some REMIC regular certificates having variable
rates. If such a certificate is not governed by the provisions of the OID
Regulations applicable to variable rate debt instruments, it may be subject to
the Treasury regulations concerning debt instruments providing for contingent
payments (the "Contingent Payment Regulation"). The application of the
Contingent Payment Regulations to instruments such as variable rate REMIC
regular certificates is subject to differing interpretations. If certificates
with variable rates are subject to the Contingent Payment Regulations, the
related prospectus supplement will include additional information about their
application.
Market Discount. The purchaser of a REMIC regular certificate at a market
discount, that is at a purchase price less than the stated redemption price at
maturity (or, in the case of a REMIC regular certificate issued with original
issue discount, the REMIC regular certificate's
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adjusted issue price (as defined under "REMIC certificates -- Original Issue
Discount")), will recognize market discount upon receipt of each payment of
principal. In particular, the 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 the principal payment
does not exceed the aggregate amount of accrued market discount on the 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. The election, if made, will apply to all market
discount bonds acquired by the certificateholder on or after the first day of
the first taxable year to which the 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 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 sections
1276 through 1278 of the Code if it is less than 0.25% of the stated redemption
price at maturity of such REMIC regular certificate multiplied by the number of
complete years to maturity remaining after the date of its purchase. In
interpreting the de minimis rule with respect to original issue discount, the
OID Regulations refer to the weighted average maturity of obligations, and it is
likely that the same principle will be applied in determining whether market
discount is de minimis. It appears that de minimis market discount on a REMIC
regular certificate would be treated in a manner similar to de minimis original
issue discount. See "REMIC certificates -- Original Issue Discount". Such
treatment would result in de minimis market discount being included in income at
a slower rate than market discount would be required to be included using the
method described in the preceding paragraph.
The Treasury Department is authorized to issue regulations providing for
the method for accruing market discount of more than a de minimis amount on debt
instruments the principal of which is payable in more than one installment.
Nevertheless, no such regulations have been issued. Until regulations are
issued, certain rules described in the Committee Report might apply. Under those
rules, the holder of a REMIC regular certificate purchased with more than de
minimis market discount may elect to accrue such market discount either on the
basis of a constant yield method or on the basis of the appropriate
proportionate method described below. Under the proportionate method for
obligations issued with original issue discount, the amount of market discount
that accrues during a period is equal to the product of (i) the total remaining
market discount multiplied by (ii) a fraction the numerator of which is the
original issue discount accruing during the period and the denominator of which
is the total remaining original issue discount at the beginning of the period.
The prepayment assumption, if any, used in calculating the accrual of original
issue discount should be used in calculating the accrual of market discount.
Under the proportionate method for obligations issued without original issue
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discount, the amount of market discount that accrues during a period is equal to
the product of (i) the total remaining market discount multiplied by (ii) a
fraction the numerator of which is the amount of stated interest paid during the
accrual period and the denominator of which is the total amount of stated
interest remaining to be paid at the beginning of the period. Because
regulations have not been issued, it is not possible to predict what effect such
regulations might have on the tax treatment of a REMIC regular certificate
purchased at a discount in the secondary market.
A certificateholder generally will be required to treat a portion of any
gain on sale or exchange of a REMIC regular certificate as ordinary income to
the extent of the market discount accrued to the date of disposition under one
of the foregoing methods less market discount previously reported as ordinary
income as distributions in reduction of the stated redemption price at maturity
were received. See "-- Sales of REMIC Certificates" below. A certificateholder
may be required to defer a portion of its interest deductions for the taxable
year attributable to any indebtedness incurred or continued to purchase or carry
such REMIC regular certificate. Any such deferred interest expense, in general,
is allowed as a deduction not later than the year in which the related market
discount income is recognized. If such holder elects to include market discount
in income currently as it accrues on all market discount instruments acquired by
such holder in that taxable year or thereafter, the interest expense deferral
rule described above will not apply.
Premium. A REMIC regular certificate purchased at a cost (not including
payment for accrued qualified stated interest) greater than its remaining stated
redemption price at maturity will be considered to be purchased at a premium.
The holder of such a REMIC regular certificate may elect to amortize such
premium under the constant yield method. The OID Regulations also permit
certificateholders to elect to include all interest, discount and premium in
income based on a constant yield method, further treating the certificateholder
as having made the election to amortize premium generally, as described above.
The Committee Report indicates a Congressional intent that the same rules that
apply to accrual of market discount on installment obligations also apply in
amortizing premium under Code Section 171 on installment obligations such as the
REMIC regular certificates.
Treasury regulations concerning amortization of premium ("the Premium
Regulations") describe the constant yield method under which premium is
amortized and provide that the resulting offset to interest income may be taken
into account only as a certificateholder takes the corresponding interest income
into account under the holder's regular accounting method. In the case of
instruments that may be called or repaid prior to maturity, the Premium
Regulations provide that the premium is calculated by assuming that the issuer
will exercise its redemption rights in the manner that maximizes the
certificateholder's yield and the certificateholder will exercise its option in
a manner that maximizes the certificateholder's yield. The Premium Regulations
do not apply to debt instruments subject to section 1272(a)(6) of the Code.
Nevertheless, if a certificateholder elects to amortize premium for the taxable
year containing the effective date of March 2, 1998, the Premium Regulations
will apply to all the certificateholder's debt instruments held on or after the
first day of that taxable year.
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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 REMIC regular 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 REMIC regular 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 section 7701(a)(19)(C)(xi) of the
Code in the same proportion that the assets of the REMIC mortgage pool
underlying such certificates would be treated as "loans secured by an interest
in real property" within the meaning of section 7701(a)(19)(C)(v) or as other
assets described in 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 section 856(c)(5)(B), 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 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 section 856(c)(5)(C) or, as provided
in the Committee Report, as "real estate assets" as defined in section
856(c)(5)(B)) and as "interest on obligations secured by mortgages on real
property or on interests in real property", respectively. See, in this regard,
"Trust Certificates -- Characterization of Investments in Trust Certificates --
Buydown Mortgage Loans," below. Moreover, if 95% or more of the assets qualify
for any of the foregoing treatments, the REMIC certificates (and income thereon)
will qualify for the corresponding status in their entirety. The investment of
amounts in any reserve fund in non-qualifying assets would, and, holding
property acquired by foreclosure pending sale might, reduce the amount of the
REMIC certificates that would qualify for the foregoing treatment. The REMIC
Regulations provide that payments on qualified mortgages held pending
distribution are considered part of the qualified mortgages for purposes of
section 856(c)(5)(B) of the Code; it is unclear whether such collected payments
would be so treated for purposes of 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
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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
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 section 25(e)(10) of the Code will constitute (1) a real estate asset
within the meaning of section 856 and (2) an asset described in 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
as REMICs ("Tiered REMICs") for federal income tax purposes. Upon the issuance
of any such series of certificates, McGuire, Woods, Battle & Boothe LLP, special
counsel to the depositor, will deliver its opinion generally to the effect that,
assuming compliance with all provisions of the related trust 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 Code. Solely for purposes of determining whether the REMIC
certificates will be real estate assets within the meaning of section
856(c)(5)(A) of the Code, and assets described in section 7701(a)(19)(C) of the
Code, and whether the income on such certificates is interest described in
section 856(c)(3)(B), the Tiered REMICs will be treated as one REMIC.
Taxation of REMlC Residual Certificates. An owner of a REMIC residual
certificate ("Residual Owner") generally will be required to report its daily
portion of the taxable income or, subject to the limitation described below in
"Basis Rules and Distributions", the net loss of the REMIC mortgage pool for
each day during a calendar quarter that the Residual Owner owned such REMIC
residual certificate. For this purpose, the daily portion will be determined by
allocating to each day in the calendar quarter, using a 30 days per month/90
days per quarter/360 days per year counting convention, its ratable portion of
the taxable income or net loss of the REMIC mortgage pool for such quarter, and
by allocating the daily portions among the Residual Owners (on such day) in
accordance with their percentage of ownership interests on such day. Any amount
included in the gross income of, or allowed as a loss to, any Residual Owner by
virtue of the rule referred to in this paragraph will be treated as ordinary
income or loss. Taxable income from Residual certificates may exceed cash
distributions with respect thereto in any taxable year. For example, if
qualified mortgages are acquired by a REMIC at a discount, then the Residual
Owner may recognize original issue discount as income without corresponding cash
distributions. This result could occur because a payment produces recognition by
the REMIC of discount on the qualified mortgages while all or a portion of such
payment could be used in whole or in part to make principal payments on REMIC
regular certificates issued without substantial discount.
The tax treatment of any payments received by a Residual Owner in
connection with the acquisition of such certificate is unclear. Such payments
may be taken into account in determining the income of such holder.
Alternatively, a holder may take another position.
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Because of the uncertainty concerning the treatment of such payments, Residual
Owners should consult their tax advisers concerning the treatment of such
payments for income tax purposes.
Taxable Income or Net Loss of the REMIC Mortgage Pool. The taxable income
or net loss of the REMIC mortgage pool reflects a netting of income from the
qualified mortgages, any cancellation of indebtedness income due to the
allocation of realized losses to REMIC regular certificates and the deductions
and losses allowed to the REMIC mortgage pool. Such taxable income or net loss
for a given calendar quarter is determined in the same manner as for an
individual having the calendar year as his taxable year and using the accrual
method of accounting, with certain modifications. First, a deduction is allowed
for accruals of interest (including original issue discount) on the REMIC
regular certificates. Second, market discount equal to the excess of any
qualified mortgage's adjusted issue price (as determined under "-- REMIC
Certificates -- Market Discount", and "--Premium") over its fair market value at
the time of its transfer to the REMIC mortgage pool generally will be included
in income as it accrues, based on a constant yield method and on the prepayment
assumption. For this purpose, the fair market value of the mortgage loans will
be treated as being equal to the aggregate issue prices of the REMIC regular
certificates and REMIC residual certificates. If one or more classes of REMIC
regular certificates or REMIC residual certificates are retained by Saxon Asset
Securities Company, 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 section 703(a)(2) of the Code. Fifth, the limitation on
miscellaneous itemized deductions imposed on individuals by 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. The 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 the REMIC
residual certificate, increased by amounts included in the income of the
Residual Owner and decreased by distributions and by net losses taken into
account with respect to such interest.
A Residual Owner is not allowed to take into account any net loss for any
calendar quarter to the extent such net loss exceeds such Residual Owner's
adjusted basis in its REMIC residual certificate as of the close of such
calendar quarter (determined without regard to such net loss). Any loss
disallowed by reason of this limitation may be carried forward indefinitely to
future calendar quarters and, subject to the same limitation, may be used to
offset income from the REMIC residual certificate.
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The effect of these basis and distribution rules is that a Residual Owner
may not amortize its basis in a REMIC residual certificate but may only recover
its basis through distributions, through the deduction of any net losses of the
REMIC mortgage pool or upon the sale of its REMIC residual certificate. See "--
Sales of REMIC Certificates". The Residual Owner does, however, receive reduced
taxable income over the life of the REMIC because the REMIC's basis in the
underlying REMIC mortgage pool used to determine taxable income or net loss
includes the fair market value of the REMIC regular certificates and REMIC
residual certificates at the closing date, not the unpaid principal balances of
the REMIC mortgage pool.
Excess Inclusions. Excess inclusions with respect to a REMIC residual
certificate are subject to special tax rules. With respect to a Residual Owner,
the excess inclusion for any calendar quarter is defined as the excess of the
daily portions of taxable income over the sum of the "daily accruals" for each
day during such quarter that the Residual Owner held such REMIC residual
certificate. The daily accruals are determined by allocating to each day during
a calendar quarter its ratable portion of the product of the adjusted issue
price of the REMIC residual certificate at the beginning of the calendar quarter
and 120 percent of the long-term "applicable federal rate" (generally, an
average of current yields on Treasury securities of comparable maturity, and
hereafter the "AFR") in effect at the time of issuance of the REMIC residual
certificate. For this purpose, the adjusted issue price of a REMIC residual
certificate as of the beginning of any calendar quarter is the issue price of
the REMIC residual certificate, increased by the amount of daily accruals for
all prior quarters and decreased by any distributions made with respect to such
REMIC residual certificate before the beginning of such quarter. The issue price
of a REMIC residual certificate (a) if it is publicly offered is the initial
offering price to the public (excluding bond houses and brokers) at which a
substantial amount of the REMIC residual certificates were sold, or (b) if it is
not public offered, is its fair market value on the pricing date when the prices
of the REMIC regular certificates are fixed.
For Residual Owners, an excess inclusion may not be offset by deductions,
losses or loss carryovers from other activities. For Residual Owners that are
subject to tax on unrelated business taxable income (as defined in section 511
of the Code), 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 section 857(b)(2) of the
Code, 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
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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 Saxon Asset Securities Company 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 section 511 of the Code) 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 section 511 of the
Code are treated as disqualified organizations. Under provisions of the
agreement, such organizations generally are prohibited from owning Residual
certificates. See "-- Sales of REMIC Certificates".
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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 sections
856(f) and 856(j) of the Code. 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. Section 475 of the Code 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 Treasury 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 "-- Basis Rules and Distributions". Gain from the disposition of a REMIC
regular certificate that might otherwise be treated as a capital gain will be
treated as ordinary income to the extent that such gain does not exceed the
excess of (1) 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 (2) the amount actually includible in such holder's income. Except as
otherwise provided under "-- Market Discount" and "-- Premium" and under section
582(c) of the Code, 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 section 1221. The Code currently provides for a top marginal tax rate
of 39.6% for individuals with a maximum marginal tax rate for long-term capital
gains of individuals at 20%. There is no such rate differential for
corporations. In addition, the distinction between a capital gain or loss and
ordinary income or loss is relevant for other purposes, including limitations on
the use of capital losses to offset ordinary income.
All or a portion of any gain from the sale of a REMIC certificate that
might otherwise be capital gain may be treated as ordinary income (1) if such
certificate is held as part of a "conversion transaction" as defined in section
1258(c) of the Code, 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 (2)
in the case of a noncorporate taxpayer that has made an election under 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, the Residual Owner purchases another residual
interest in any REMIC or any interest in a taxable mortgage pool (as defined in
section 7701(i) of the Code) 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 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 the entity equal to the
product of (1) 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 (2) 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 (1) 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 (2) 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 section 860E(e)(6) of the Code. 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.
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Pass-Through of Servicing Fees. In general, Residual Owners take into
account taxable income or net loss of the related REMIC mortgage pool.
Consequently, expenses of the REMIC mortgage pool to service providers, such as
servicing compensation of the master servicer and the servicers, will be
allocated to the holders of the REMIC residual certificates, and therefore will
not affect the income or deductions of holders of REMIC regular certificates. In
the case of a single-class REMIC (as described below), however, such expenses
and an equivalent amount of additional gross income will be allocated among all
holders of REMIC regular certificates and REMIC residual certificates for
purposes of the limitations on the deductibility of certain miscellaneous
itemized deductions by individuals contained in sections 56(b)(1) and 67 of the
Code. Generally, any holder of a REMIC residual certificate and any holder of a
REMIC regular certificate issued by a "single-class REMIC" who is an individual,
estate or trust (including such a person that holds an interest in a pass-
through entity holding such a REMIC certificate) are permitted to deduct such
expenses in determining regular taxable income only to the extent that such
expenses together with certain other miscellaneous itemized deductions of such
individual, estate or trust exceed 2% of adjusted gross income; such a holder
may not deduct such expenses to any extent in determining liability for
alternative minimum tax. Accordingly, REMIC residual certificates, and REMIC
regular certificates receiving an allocation of servicing compensation, may not
be appropriate investments for individuals, estates or trusts.
A single-class REMIC is a REMIC that either (i) would be treated as an
investment trust under the provisions of Treasury Regulation section
301.7701-4(c) in the absence of a REMIC election or (ii) is substantially
similar to such an investment trust and is structured with the principal purpose
of avoiding the allocation of investment expenses to holders of REMIC regular
certificates. The master servicer intends (subject to certain exceptions which,
if applicable, will be stated in the applicable prospectus supplement) to treat
each REMIC mortgage pool as other than a single-class REMIC, consequently
allocating servicing compensation expenses and related income amounts entirely
to REMIC residual certificates.
Prohibited Transactions and Other Possible REMIC Taxes. The Code imposes a
tax on REMIC mortgage pools equal to 100% of the net income derived from
prohibited transactions. In general, a prohibited transaction means the
disposition of a qualified mortgage other than pursuant to certain specified
exceptions, the receipt of income from a source other than a qualified mortgage
or certain other permitted investments, the receipt of compensation for
services, or gain from the disposition of an asset purchased with the payments
on the qualified mortgages for temporary investment pending distribution on the
REMIC certificates. The Code also imposes a 100% tax on the value of any
contribution of assets to the REMIC after the closing date other than pursuant
to specified exceptions, and subjects net income from foreclosure property to
tax at the highest corporate rate. It is not anticipated that a REMIC mortgage
pool will engage in any such transactions or receive any such income.
Termination of a REMIC Mortgage Pool. In general, no special tax
consequences will apply to a holder of a REMIC regular certificate upon the
termination of the REMIC mortgage pool by virtue of the final payment or
liquidation of the last mortgage asset remaining in the REMIC mortgage pool. If
a Residual Owner's adjusted basis in its REMIC residual certificate at the time
such termination occurs exceeds the amount of cash distributed to such Residual
Owner in liquidation of its interest, then, although the matter is not entirely
free from doubt, it appears
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that the Residual Owner would be entitled to a loss (which could be a capital
loss) equal to the amount of such excess.
Reporting and Other Administrative Matters of REMICs. Reporting of interest
income, including any original issue discount, with respect to REMIC regular
certificates is required annually, and may be required more frequently under
Treasury regulations. Certain holders of REMIC regular certificates which are
generally exempt from information reporting on debt instruments, such as
corporations, banks, registered securities or commodities brokers, real estate
investment trusts, registered investment companies, common trust funds,
charitable remainder annuity trusts and unitrusts, will be provided interest and
original issue discount income information and the information set forth in the
following paragraph upon request in accordance with the requirements of the
Treasury regulations. The information must be provided by the later of 30 days
after the end of the quarter for which the information was requested, or two
weeks after the receipt of the request. The REMIC mortgage pool must also comply
with rules requiring the face of a REMIC certificate issued at more than a de
minimis discount to disclose the amount of original issue discount and the issue
date and requiring such information to be reported to the Treasury Department.
The REMIC regular certificate information reports must include a statement
of the adjusted issue price of the REMIC regular certificate at the beginning of
each accrual period. In addition, the reports must include information necessary
to compute the accrual of any market discount that may arise upon secondary
trading of REMIC regular certificates. Because exact computation of the accrual
of market discount on a constant yield method would require information relating
to the holder's purchase price which the REMIC mortgage pool may not have, it
appears that this provision will only require information pertaining to the
appropriate proportionate method of accruing market discount.
For purposes of the administrative provisions of the Code, REMIC mortgage
pools are treated as partnerships and the holders of residual certificates are
treated as partners. One of the Holders of the residual interest will be the tax
matters person with respect to the REMIC mortgage pool in all respects and will
file or cease to be filed federal income tax information returns on behalf of
the related REMIC mortgage pool.
The tax matters person will, subject to certain notice requirements and
various restrictions and limitations, generally have the authority to act on
behalf of the REMIC mortgage pool and the Residual Owners in connection with the
administrative and judicial review of items of income, deduction, gain or loss
of the REMIC mortgage pool, as well as the REMIC mortgage pool's classification.
Residual Owners will generally be required to report such REMIC mortgage pool
items consistently with their treatment on the REMIC mortgage pool's federal
income tax information return and may in some circumstances be bound by a
settlement agreement between the person serving as the tax matters person, and
the IRS concerning any such REMIC mortgage pool item. Adjustments made to the
REMIC mortgage pool tax return may require a Residual Owner to make
corresponding adjustments on its return, and an audit of the REMIC mortgage
pool's tax return, or the adjustments resulting from such an audit, could result
in an audit of a Residual Owner's return.
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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 section 3406 of the Code 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 (1)
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, (2)
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 (3) 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 or classified 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 (1) a court within the United States is able
to exercise primary supervision over the administration of the trust and (2) one
or more United States persons 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 section 951 of the Code)
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
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exception if the underlying obligations held by the REMIC mortgage pool would so
qualify. Such withholding tax generally is imposed at a rate of 30 percent but
is subject to reduction under any tax treaty applicable to the Residual Owner.
Nevertheless, there is no exemption from withholding tax nor may the rate of
such tax be reduced, under a tax treaty or otherwise, with respect to any
distribution of income that is an excess inclusion. Although no regulations have
been proposed or adopted addressing withholding on residual interests held by
Non-U.S. Persons, the provisions of the REMIC Regulations, relating to the
transfer of residual interests to Non-U.S. Persons may be read to imply that
withholding with respect to excess inclusion income is to be determined by
reference to the amount of the excess inclusion income rather than to the amount
of cash distributions. If the IRS were successfully to assert such a position,
cash distributions on Residual certificates held by Non-U.S. Persons could be
subject to withholding at rates as high as 100%, depending on the relationship
of accrued excess inclusion income to cash distributions with respect to such
Residual certificates. See "REMIC Certificates -- Excess Inclusions".
Certain restrictions relating to transfers of REMIC residual certificates
to and by investors who are Non-U.S. Persons are also imposed by the REMIC
Regulations. First, transfers of REMIC residual certificates to a Non-U.S.
Person that have tax avoidance potential are disregarded for all federal income
tax purposes. If such transfer is disregarded, the purported transferor of such
a REMIC residual certificate to a Non-U.S. Person continues to remain liable for
any taxes due with respect to the income on such REMIC residual certificate. A
transfer of a REMIC residual certificate has tax avoidance potential unless, at
the time of the transfer, the transferor reasonably expects (1) that the REMIC
will distribute to the transferee Residual certificateholder amounts that will
equal at least 30 percent of each excess inclusion and (2) that such amounts
will be distributed at or after the time at which the excess inclusion accrues
and not later than the close of the calendar year following the calendar year of
accrual. This rule does not apply to transfers if the income from the REMIC
residual certificate is taxed in the hands of the transferee as income
effectively connected with the conduct of a U.S. trade or business. Second, if a
Non-U.S. Person transfers a REMIC residual certificate to a U.S. Person (or to a
Non-U.S. Person in whose hands income from the REMIC residual certificate would
be effectively connected) and the transfer has the effect of allowing the
transferor to avoid tax on accrued excess inclusions, that transfer is
disregarded for all federal income tax purposes and the purported Non-U.S.
Person transferor continues to be treated as the owner of the REMIC residual
certificate. Thus, the REMIC's liability to withhold 30 percent of the excess
inclusions is not terminated even though the REMIC residual certificate is no
longer held by a Non-U.S. Person.
Treasury regulations may affect the United States taxation of foreign
investors in REMIC certificates. The withholding regulations are generally
proposed to be effective for payments after December 31, 2000, regardless of the
issue date of the REMIC certificate with respect to which such payments are
made, subject to certain transition rules. The withholding regulations provide
certain presumptions with respect to withholding for holders not providing the
required certifications to qualify for the withholding exemption described above
and would replace a number of current tax certification forms with a single,
restated form and standardize the period of time for which withholding agents
could rely on such certifications. The withholding regulations also provide
rules to determine whether, for purposes of United States federal
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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.
FASIT Certificates
General. With respect to a particular series of certificates, an election
may be made to treat the trust or one or more trusts or segregated pools of
assets therein as one or more FASITs within the meaning of section 860L of the
Code. The FASIT provisions of the Code were enacted by the Small Business Job
Protection Act of 1996 and create a new elective statutory vehicle for the
issuance of mortgage-backed and asset-backed securities. A trust or a portion
or portions thereof as to which one or more FASIT elections will be made will be
referred to as a "FASIT Pool." For purposes of this discussion, certificates of
a series as to which one or more FASIT elections are made are referred to as
"FASIT certificates" and will consist of one or more classes of "FASIT Regular
certificates" and one "Ownership Interest Security" in the case of each FASIT
Pool. Although the FASIT provisions of the Code became effective on September 1,
1997, no Treasury regulations or other administrative guidance has been issued
with respect to those provisions. Accordingly, definitive guidance cannot be
provided with respect to many aspects of the tax treatment of Holders of FASIT
certificates. Investors also should note that the FASIT discussion contained
herein constitutes only a summary of the federal income tax consequences to
Holders of FASIT certificates.
Qualification as a FASIT requires ongoing compliance with certain
conditions. With respect to each series of FASIT certificates, Special Counsel
has advised Saxon Asset Securities Company that in their opinion (unless
otherwise limited in the related prospectus supplement), assuming (1) the making
of an appropriate election, (2) compliance with all provisions of the related
agreement and (3) compliance with the applicable provisions of the law,
including any amendments to the Code or applicable Treasury regulations
thereunder, each FASIT Pool will qualify as a FASIT. In such case, the FASIT
Regular certificates will be considered to be "regular interests" in the FASIT
Pool and generally will be treated for federal income tax purposes as if they
were newly originated debt instruments, and the Ownership Interest Security will
be considered to be the "ownership interest" in the FASIT Pool, which generally
is not treated as debt for such purposes, but rather as representing rights and
responsibilities with respect to the taxable income or loss of the FASIT Pool.
The prospectus supplement for each series of certificates will indicate whether
one or more FASIT elections with respect to the related trust will be made and
will also cover any material federal income tax consequences applicable to the
holders of FASIT certificates.
Status of FASIT Regular Certificates. FASIT Regular certificates held by a
REIT will qualify as "real estate assets" within the meaning of section
856(c)(4)(A) of the Code, and interest on such certificates will be considered
Qualifying REIT Interest to the same extent that REMIC certificates would be so
considered. FASIT Regular certificates held by a thrift institution taxed as a
domestic building and loan association will represent qualifying assets for
purposes of the qualification requirements set forth in section 7701(a)(19) to
the same extent that REMIC certificates would be so considered. See "-- REMIC
Certificates -- Status as REMIC Certificates." In addition, FASIT Regular
certificates held by a financial institution to which section 585 applies will
be treated as evidences of indebtedness for purposes of Code Section
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582(c)(1). FASIT certificates will not qualify as "Government Securities" for
either REIT or RIC qualification purposes.
Qualification as a FASIT. On order for the FASIT Pool to qualify as a
FASIT, there must be ongoing compliance on the part of the FASIT Pool with the
requirements set forth in the Code. The FASIT Pool will qualify under the Code
as a FASIT in which the FASIT Regular certificates and the Ownership Interest
Security will constitute the "regular interests" and the "ownership interest,"
respectively, if (1) a FASIT election is in effect, (2) certain tests concerning
(a) the composition of the FASIT Pool's assets and (b) the nature of the
Holders' interests in the FASIT Pool are met on a continuing basis and (3) the
FASIT Pool is not a regulated company as defined in section 851(a) of the Code.
Asset Composition. In order for a FASIT Pool to be eligible for FASIT
status, substantially all of the assets of the FASIT Pool must consist of
permitted assets as of the close of the third month beginning after the closing
date and at all times thereafter (the "FASIT Qualification Test"). Permitted
assets include
. cash or cash equivalents,
. debt instruments with fixed terms that would qualify as REMIC regular
interests if issued by a REMIC (generally, instruments that provide
for interest at a fixed rate, a qualifying variable rate, or a
qualifying interest-only type rate),
. foreclosure property,
. certain hedging instruments (generally, interest and currency rate
swaps and credit enhancement contracts) that are reasonably required
to guarantee or hedge against the FASIT's risks associated with being
the obligor on FASIT interests,
. contract rights to acquire qualifying debt instruments or qualifying
hedging instruments,
. FASIT regular interests and
. REMIC regular interests. Permitted assets do not include any debt
instruments issued by the Holder of the Ownership Interest Security or
by any person related to such Holder.
Interests in a FASIT. In addition to the FASIT Qualification Test, the
interests in a FASIT also must meet certain requirements. All the interests in a
FASIT must belong to either of the following: (1) one or more classes of regular
interests or (2) a single class of ownership interest that is held directly by a
fully taxable domestic corporation. A FASIT interest generally qualifies as a
regular interest if,
(1) it is designated as a regular interest,
(2) it has a stated maturity (including options to renew) no greater than
thirty years,
(3) it entitles its Holder to a specified principal amount,
(4) the issue price of the interest does not exceed 125% of its stated
principal amount,
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(5) the yield to maturity of the interest is less than the applicable
federal rate published by the IRS plus 5% and
(6) if it pays interest, such interest is payable at either (a) a fixed
rate with respect to the principal amount of the regular interest or
(b) a permissible variable rate with respect to such principal amount.
Permissible variable rates for FASIT regular interests are the same as
those for REMIC regular interest (i.e., certain qualified floating
rates and weighted average rates). See "-- REMIC Certificates --
Taxation of Regular Certificates -- Variable Rate Regular
Certificates."
If a FASIT certificate fails to meet one or more of the requirements set
out in items 3, 4 or 5 above, but otherwise meets the above requirements, it may
still qualify as a type of regular interest known as a "High-Yield Interest." In
addition, if a FASIT certificate fails to meet the requirements of item (6), but
the interest payable on the FASIT certificate consists of a specified portion of
the interest payments on permitted assets and that portion does not vary over
the life of the certificate, the certificate also will qualify as a High-Yield
Interest. A High-Yield Interest may be held only by domestic corporations that
are fully subject to corporate income tax ("Eligible Corporations"), other
FASITs and dealers in securities who acquire such interests as inventory, rather
than for investment. In addition, Holders of High-Yield Interests are subject to
limitations on the use of losses to offset income derived from such interest.
See "-- FASIT Certificates -- Tax Treatment of FASIT Regular Certificates --
Treatment of High-Yield Interests."
Consequences of Disqualification. If a FASIT Pool fails to comply with one
or more of the Code's ongoing requirements for FASIT status during any taxable
year, the Code provides that its FASIT status may be lost for that year and
thereafter. If FASIT status is lost, the treatment of the former FASIT and the
interests therein for federal income tax purposes is uncertain. The former
FASIT might be treated as a grantor trust, as a separate association taxable as
a corporation, or as a partnership. The FASIT Regular certificates could be
treated as debt instruments for federal income tax purposes or as equity
interests in the former FASIT. Although the Code authorizes the Treasury to
issue regulations that address situations where a failure to meet the
requirements for FASIT status occurs inadvertently and in good faith, such
regulations have not yet been issued. It is possible that disqualification
relief might be accompanied by sanctions, such as the imposition of a corporate
tax on all or a portion of the FASIT's income for a period of time in which the
requirements for FASIT status are not satisfied.
Tax Treatment of FASIT Regular Certificates. Payments received by Holders
of FASIT Regular certificates generally should be accorded the same tax
treatment under the Code as payments received on other taxable corporate debt
instruments and on REMIC regular certificates. As in the case of Holders of
REMIC regular certificates, Holders of FASIT Regular certificates must report
income from such certificates under an accrual method of accounting, even if
they otherwise would have used the cash receipts and disbursements method.
Except in the case of FASIT Regular certificates issued with original issue
discount or acquired with market discount or premium, interest paid or accrued
on a FASIT Regular certificate generally will be treated as ordinary income to
the Holder and a principal payment on such certificate will be treated as a
return of capital to the extent that the Holder's basis is allocable to that
payment.
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Holders of FASIT Regular certificates issued with original issue discount or
acquired with market discount or premium generally will treat interest and
principal payments on such certificates in the same manner described for REMIC
regular certificates. See "-- REMIC Certificates --Taxation of Regular
Certificates -- Market Discount," and "--Premium."
If a FASIT Regular certificate is sold or exchanged, the Holder generally
will recognize gain or loss upon the sale in the same manner as that described
for REMIC regular certificates. See "-- REMIC Certificates -- Taxation of
Regular Certificates -- Sale or Exchange of Regular Certificates." In addition,
if a FASIT Regular certificate becomes wholly or partially worthless as a result
of default and delinquencies of the underlying assets, the Holder of such
certificate should be allowed to deduct the loss sustained (or alternatively be
able to report a lesser amount of income).
Treatment of High-Yield Interests. High-Yield Interests are subject to
taxation as FASIT Regular Interests. In addition, High-Yield Interests are
subject to special rules regarding the eligibility of Holders of such interests,
and the ability of such Holders to offset income derived from their FASIT
certificate with losses. High-Yield Interests may be held only by Eligible
Corporations, other FASITs, and dealers in securities who acquire such interests
as inventory. If a securities dealer (other than an Eligible Corporation)
initially acquires a High-Yield Interest as inventory, but later begins to hold
it for investment or ceases to be a dealer, the dealer will become subject to an
excise tax equal to the income from the High-Yield Interest multiplied by the
highest corporate income tax rate. In addition, transfers of High-Yield
Interests to disqualified Holders will be disregarded for federal income tax
purposes, and the transferor still will be treated as the Holder of the High-
Yield Interest.
The Holder of a High-Yield Interest may not use non-FASIT current losses or
net operating loss carryforwards or carrybacks to offset any income derived from
the High-Yield Interest, for either regular income tax purposes or for
alternative minimum tax purposes. In addition, the FASIT provisions contain an
anti-abuse rule that imposes corporate income tax on income derived from a FASIT
Regular certificate that is held by a pass-through entity (other than another
FASIT) that issues debt or equity securities backed by the FASIT Regular
certificate and that have the same features as High-Yield Interests.
Tax Treatment of Ownership Interest Security. A FASIT is not subject to
taxation. An Ownership Interest Security represents the residual equity
interest in a FASIT. As such, the Holder of an Ownership Interest Security
determines its taxable income by taking into account all assets, liabilities and
items of income, gain, deduction, loss and credit of a FASIT (other than those
allocable to prohibited transactions as described below). In general, the
character of the income to the Holder of an Ownership Interest Security will be
the same as the character of such income of the FASIT, except that any tax-
exempt interest income taken into account by the Holder of an Ownership Interest
Security is treated as ordinary income. In determining that taxable income, the
Holder of an Ownership Interest Security must determine the amount of interest,
original issue discount, market discount and premium recognized with respect to
the FASIT's assets and the FASIT Regular certificates issued by the FASIT
according to a constant yield methodology and under an accrual method of
accounting. In addition, the Holder of Ownership Interest certificates are
subject to the same limitations on its ability to use losses to
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offset income from its FASIT Security as are the Holders of High-Yield
Interests. See "-- FASIT Certificates -- Treatment of High-Yield Interests."
Rules similar to the wash sale rules applicable to REMIC residual
certificates also will apply to Ownership Interest certificates. Accordingly,
losses on dispositions of an Ownership Interest Security generally will be
disallowed where, within six months before or after the disposition, the seller
of such Security acquires any other Ownership Interest Security or, in the case
of a FASIT holding mortgage assets, any interest in a taxable mortgage pool that
is economically comparable to an Ownership Interest Security. In addition, if
any security that is sold or contributed to a FASIT by the Holder of the related
Ownership Interest Security was required to be marked-to-market under section
475 of the Code by such Holder, then section 475 will continue to apply to such
securities, except that the amount realized under the mark-to-market rules will
be a greater of the securities' value under present law or the securities' value
after applying special valuation rules contained in the FASIT provisions. Those
special valuation rules generally require that the value of debt instruments
that are not traded on an established securities market be determined by
calculating the present value of the reasonably expected payments under the
instrument using a discount rate of 120% of the applicable federal rate,
compounded semiannually.
The Holder of an Ownership Interest Security will be subject to a tax equal
to 100% of the net income derived by the FASIT from any "prohibited
transactions." Prohibited transactions include:
. the receipt of income derived from assets that are not permitted
assets,
. certain dispositions of permitted assets,
. the receipt of any income derived from any loan originated by a FASIT
and
. in certain cases, the receipt of income representing a servicing fee
or other compensation. Any FASIT Pool for which a FASIT election is
made generally will be structured in order to avoid application of the
prohibited transaction tax.
Backup Withholding, Reporting and Tax Administration. Holders of FASIT
certificates will be subject to backup withholding to the same extent as Holders
of REMIC certificates. See "-- REMIC Certificates -- Backup Withholding." For
purposes of reporting and tax administration, Holders of FASIT certificates
generally will be treated in the same manner as Holders of REMIC certificates.
Trust Certificates
Classification of Trust Certificates. With respect to each series of trust
certificates for which no REMIC or FASIT election is made and which are not
subject to partnership treatment or debt treatment (without reference to the
REMIC Provisions and the FASIT Provisions), McGuire, Woods, Battle & Boothe LLP,
special counsel to the depositor, will deliver its opinion (unless otherwise
limited by the related prospectus supplement) generally to the effect that the
arrangements pursuant to which the related trust will be administered and such
trust certificates will be issued will not be classified as an association
taxable as a corporation and that each such
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trust will be classified as a trust whose taxation will be governed by the
provisions of subpart E, Part I, of subchapter J of the Code.
A trust certificate representing an undivided equitable ownership interest
in the principal of the mortgage loans constituting the related trust, together
with interest thereon at a remittance rate (which may be less than, greater
than, or equal to the net rate on the related mortgage assets) is referred to as
a "trust fractional certificate" and a trust certificate representing an
equitable ownership of all or a portion of the interest paid on each mortgage
loan constituting the related trust (net of normal servicing fees) is referred
to as a "trust interest certificate".
Characterization of Investments in Trust Certificates.
Trust Fractional Certificates. In the case of trust fractional
certificates, McGuire, Woods, Battle & Boothe LLP, special counsel to the
depositor, will deliver their opinion that, in general (and subject to the
discussion below under "--Buydown Mortgage Loans"), (1) trust fractional
certificates held by a thrift institution taxed as a "domestic building and loan
association" will represent "loans . . . secured by an interest in real
property" within the meaning of section 7701(a)(19)(C)(v) of the Code; (2) trust
fractional certificates held by a real estate investment trust will represent
"real estate assets" within the meaning of 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 section 856(c)(5)(B) of the Code; and (3) trust fractional
certificates acquired by a REMIC in accordance with the requirements of section
860G (a)(3)(A)(i) and (ii) or section 860G(a)(4)(B) will be treated as qualified
mortgages within the meaning of section 860D(a)(4).
Trust Interest Certificates. Although there appears to be no policy reason
not to accord to Trust Interest certificates the treatment described above for
trust fractional certificates, there is no authority addressing such
characterization for instruments similar to trust Interest certificates.
Consequently, it is unclear to what extent, if any, (1) a trust Interest
certificate owned by a domestic building and loan association within the meaning
of section 7701 (a) (19) of the Code will be considered to represent "loans ....
secured by an interest in real property" within the meaning of 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 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 section 856(c)(3)(B). . Prospective purchasers to which such
characterization of an investment in trust Interest certificates is material
should consult their own tax advisers regarding whether the trust Interest
certificates, and the income therefrom, will be so characterized.
Buydown Mortgage Loans. The assets of certain trusts may include buydown
mortgage loans. The characterization of an investment in buydown mortgage loans
will depend upon the precise terms of the related buydown agreement. There are
no directly applicable precedents with respect to the federal income tax
treatment or the characterization of investments in buydown mortgage loans.
Accordingly, holders of trust certificates should consult their own tax advisers
with respect to characterization of investments in trusts that include buydown
mortgage loans.
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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 section 7701(a)(19)(C)(v) of the Code 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 section 856(c)(5)(A) of the Code. 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 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 section 1286 of the Code, such interests would be
considered to be newly issued debt instruments, and thus to have no market
discount or premium, and the amount of original issue discount may differ from
the amount of original issue discount on the mortgage assets and the amount
includible in income on account of a trust fractional certificate may differ
significantly from the amount payable thereon from payments of interest on the
mortgage assets. Each trust fractional certificateholder may report and deduct
its allocable share of the servicing and related fees and expenses at the same
time, to the same extent, and in the same manner as such items would have been
reported and deducted had it held directly interests in the mortgage assets and
paid directly its share of the servicing and related fees and expenses. A holder
of a trust fractional certificate who is an individual, estate or trust will be
allowed a deduction for servicing fees in determining its regular tax liability
only to the extent that the aggregate of such holder's miscellaneous itemized
deductions exceeds 2 percent of such holder's adjusted gross income and will be
allowed no deduction for such fees in determining its liability for alternative
minimum tax. Amounts received by trust fractional certificateholders in lieu of
amounts due with respect to any mortgage assets but not received from the
mortgagor will be treated for federal income tax purposes as having the same
character as the payments which they replace.
Purchasers of trust fractional certificates identified in the applicable
prospectus supplement as representing interests in Stripped mortgage assets
should read the material under
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"-- Application of Stripped Bond Rules," "-- Market Discount and Premium" and
"-- Allocation of Purchase Price" for a discussion of particular rules
applicable to their certificates. A "stripped mortgage asset" means a mortgage
asset having a Retained Yield (as that term is defined below) or a mortgage
asset included in a trust having either trust interest certificates or more than
one class of trust fractional certificates or identified in the prospectus
supplement as related to a class of trust certificates identified as
representing interests in stripped mortgage assets.
Purchasers of trust fractional certificates identified in the applicable
prospectus supplement as representing interests in unstripped mortgage assets
should read the material under "-- Treatment of Unstripped Certificates",
"-- Market Discount and Premium", and "-- Allocation of Purchase Price" for a
discussion of particular rules applicable to their certificates. Nevertheless,
the IRS has indicated that under some circumstances it will view a portion of
servicing and related fees and expenses paid to or retained by the master
servicer or sub-servicers as an interest in the mortgage assets, essentially
equivalent to that portion of interest payable with respect to each mortgage
asset that is retained ("Retained Yield"). If such a view were sustained with
respect to a particular trust, such purchasers would be subject to the rules set
forth under "-- Application of Stripped Bond Rules" rather than those under
"-- Treatment of Unstripped Certificates". Saxon Asset Securities Company 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 McGuire, Woods,
Battle & Boothe LLP, special counsel to the depositor, will deliver their
opinion (unless otherwise limited by the related prospectus supplement)
generally to the effect that any Retained Yield will be treated for federal
income tax purposes as an ownership interest retained by the owner thereof in a
portion of each interest payment on the underlying mortgage assets. The sale of
the trust certificates associated with any trust for which there is a class of
trust Interest certificates or two or more classes of trust fractional
certificates bearing different interest rates or of trust certificates
identified in the prospectus supplement as representing interests in stripped
mortgage assets (subject to certain exceptions which, if applicable, will be
stated in the applicable prospectus supplement) will be treated for federal
income tax purposes as having effected a separation in ownership between the
principal of each mortgage asset and some of or all the interest payable
thereon. As a consequence, each stripped mortgage asset will become subject to
the "stripped bond" rules of the Code (the "Stripped Bond Rules"). The effect of
applying those rules will generally be to require each trust fractional
certificateholder to accrue and report income attributable to its share of the
principal and interest on each of the stripped mortgage assets as original issue
discount on the basis of the yield to maturity of such stripped mortgage assets,
as determined in accordance with the provisions of the Code dealing with
original issue discount. For a description of the general method of calculating
original issue discount, see "REMIC Certificates -- Original Issue Discount".
The yield to maturity of a trust fractional certificateholder's interest in the
stripped mortgage loans will be calculated taking account of the price at which
the holder purchased the certificate and the holder's share of the payments of
principal and interest to be made thereon. Although the provisions of the Code
and the OID Regulations do not directly address the treatment of
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instruments similar to trust fractional certificates, in reporting to trust
fractional certificateholders such certificates will be treated as a single
obligation with payments corresponding to the aggregate of the payments
allocable thereto from each of the mortgage assets and the amount of original
issue discount on such certificates will be determined accordingly. See
"-- Aggregate Reporting".
Under Treasury regulations, original issue discount determined with respect
to a particular stripped mortgage loan may be considered to be zero under the de
minimis rule described above, in which case it is treated as market discount.
See "-- REMIC Certificates -- Original Issue Discount". Those regulations also
provide that original issue discount so determined with respect to a particular
stripped mortgage asset will be treated as market discount if the rate of
interest on the stripped mortgage asset, including a reasonable servicing fee,
is no more than one percentage point less than the unstripped rate of interest.
See "-- Market Discount and Premium". The foregoing de minimis and market
discount rules will be applied on an aggregate poolwide basis, although it is
possible that investors may be required to apply them on a loan-by-loan basis.
The loan-by-loan information required for such application of those rules may
not be available. See "-- Aggregate Reporting".
Subsequent purchasers of the certificates may be required to include
"original issue discount" in an amount computed using the price at which such
subsequent purchaser purchased the certificates. Further, such purchasers may be
required to determine if the above described de minimis and market discount
rules apply at the time a trust fractional certificate is acquired, based on the
characteristics of the mortgage assets at that time.
Variable Rate Certificates. There is considerable uncertainty concerning
the application of the OID Regulations to mortgage assets bearing a variable
rate of interest. Although such regulations are subject to a different
interpretation, as discussed below, in the absence of other contrary authority
in preparing reports furnished to certificateholders stripped mortgage assets
bearing a variable rate of interest (other than those treated as having market
discount pursuant to the regulations described above) will be treated as subject
to the provisions of the OID Regulations governing variable rate debt
instruments. The effect of the application of such provisions generally will be
to cause certificateholders holding trust fractional certificates bearing
interest at a Single Variable Rate or at a Multiple Variable Rate (as defined
above under "-- REMIC Certificates -- Original Issue Discount") to accrue
original issue discount and interest as though the value of each variable rate
were a fixed rate, which is (a) for each qualified floating rate, such rate as
of the closing date (with appropriate adjustment for any differences in
intervals between interest adjustment dates), (b) for a qualified inverse
floating rate, such rate as of closing date and (c) for any other objective
rate, the fixed rate that reflects the yield that is reasonably expected for the
trust fractional certificate. If the interest paid or accrued with respect to a
variable rate trust fractional certificate during an accrual period differs from
the assumed fixed interest rate, such difference will be an adjustment (to
interest or original issue discount, as applicable) to the certificateholder's
taxable income for the taxable period or periods to which such difference
relates.
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
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trust fractional certificates are not governed by the provisions of the OID
Regulations applicable to variable rate debt instruments, such certificates may
be subject to the provisions of the Contingent Debt Regulations. The application
of those provisions to instruments such as the trust fractional certificates is
subject to differing interpretations. Prospective purchasers of variable rate
trust fractional certificates are advised to consult their tax advisers
concerning the tax treatment of such certificates.
Aggregate Reporting. The trustee intends in reporting information relating
to original issue discount to certificateholders to provide such information on
an aggregate poolwide basis. Applicable law is unclear, however, and it is
possible that investors may be required to compute original issue discount on a
loan-by-loan basis (or on the basis of the rights to individual payments) taking
account of an allocation of the investor's basis in the certificates among the
interests in the various mortgage assets represented by such certificates
according to their respective fair market values. Investors should be aware that
it may not be possible to reconstruct after the fact sufficient loan-by-loan
information should the IRS require a computation on that basis.
Because the treatment of the certificates under the OID Regulations is both
complicated and uncertain, certificateholders should consult their tax advisers
to determine the proper method of reporting amounts received or accrued on
certificates.
Treatment of Unstripped Certificates. Mortgage assets in a fund for which
there is neither any class of trust Interest certificates, nor more than one
class of trust fractional certificates, nor any Retained Yield otherwise
identified in the prospectus supplement as being unstripped mortgage assets
("unstripped mortgage assets") will be treated as wholly owned by the trust
fractional certificateholders of the stated trust. Trust fractional
certificateholders using the cash method of accounting must take into account
their pro rata shares of original issue discount as it accrues and qualified
stated interest (as described in "-- REMIC Certificates -- Original Issue
Discount") from unstripped mortgage assets as and when collected by the trustee.
trust fractional certificateholders using an accrual method of accounting must
take into account their pro rata shares of qualified stated interest from
unstripped mortgage assets as it accrues or is received by the trustee,
whichever is earlier.
Sections 1272 through 1275 of the Code provide generally for the inclusion
of original issue discount in income on the basis of a constant yield to
maturity. Nevertheless, the application of the OID Regulations to mortgage
loans is unclear in certain respects. The OID Regulations provide a de minimis
rule for determining whether certain self-amortizing installment obligations are
to be treated as having original issue discount. Such obligations have original
issue discount if the points charged at origination (or other loan discount)
exceed the greater of one-sixth of one percent times the number of full years to
final maturity or one-fourth of one percent times weighted average maturity. The
OID Regulations treat certain variable rate mortgage loans as having original
issue discount because of an initial rate of interest that differs from that
determined by the mechanism for setting the interest rate during the remainder
of the term of the mortgage loan, or because of the use of an index that does
not vary in a manner approved in the OID Regulations. For a description of the
general method of calculating the amount of original issue discount see
"-- REMIC Certificates -- Original Issue Discount" and "-- Application of
Stripped Bond Rules" and "-- Variable Rate Certificates".
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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 (1) the daily portion and (2) 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 section 1276 of the Code, to include as
ordinary income the previously unrecognized accrued market discount in an amount
not exceeding each principal payment on any such mortgage assets at the time
each principal payment is received or due, in accordance with the purchaser's
method of accounting, or upon a sale or other disposition of the certificate. In
general, the amount of market discount that has accrued is determined on a
ratable basis. A trust fractional certificateholder may, however, elect to
determine the amount of accrued market discount on a constant yield to maturity
basis. This election is made on a loan-by-loan basis and is irrevocable. In
addition, the description of the market discount rules under "REMIC
Certificates -- Market Discount" and "-- Premium" with respect to (1) conversion
to ordinary income of a portion of any gain recognized on sale or exchange of a
market discount bond, (2) deferral of interest expense deductions, (3) the de
minimis exception from the market discount rules and (4) the elections to
include in income either market discount or all interest, discount and premium
as they accrue, is also generally applicable to trust fractional certificates.
Treasury regulations implementing the market discount rules have not yet been
issued and investors therefore should consult their own tax advisers regarding
the application of these rules.
If a trust fractional certificate is purchased at a premium, under existing
law such premium must be allocated to each of the mortgage assets (on the basis
of its relative fair market value). In general, the portion of any premium
allocated to unstripped mortgage assets can be amortized and deducted under the
provisions of the Code relating to amortizable bond premium.
The application of the Stripped Bond Rules to stripped mortgage assets will
generally cause any premium allocable to stripped mortgage assets to be
amortized automatically by adjusting the rate of accrual of interest and
discount to take account of the allocable portion of
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the actual purchase price of the certificate. In that event, no additional
deduction for the amortization of premium would be allowed. See "REMIC
Certificates -- Market Discount" and "-- Premium" for a discussion of the
application of the Premium Regulations.
Allocation of Purchase Price. As noted above, a purchaser of a trust
fractional certificate relating to unstripped mortgage assets will be required
to allocate the purchase price therefor to the undivided interest it acquires in
each of the mortgage assets, in proportion to the respective fair market values
of the portions of such mortgage assets included in the trust at the time the
certificate is purchased. The depositor believes that it may be reasonable to
make such allocation in proportion to the respective principal balances of the
mortgage assets, where the interests in the mortgage assets represented by a
trust fractional certificate have a common remittance rate and other common
characteristics, and otherwise so as to produce a common yield for each interest
in a mortgage asset, provided the mortgage assets are not so diverse as to evoke
differing prepayment expectations. Nevertheless, if there is any significant
variation in interest rates among the mortgage assets, a disproportionate
allocation of the purchase price taking account of prepayment expectations may
be required.
Taxation of Trust Interest Certificates. With respect to each series of
certificates McGuire, Woods, Battle & Boothe LLP, special counsel to the
depositor, will deliver its opinion (unless otherwise limited by the related
prospectus supplement) generally to the effect that each holder of a trust
interest certificate (a "trust interest certificateholder") will be treated as
the owner of an undivided interest in the interest portion ("Interest Portion ")
of each of the mortgage assets in the related trust. Accordingly, and subject to
the discussion below, each trust interest certificateholder is treated as owning
its allocable share of the Interest Portion from the mortgage assets, will
report income as described below, and may deduct its allocable share of the
servicing and related fees and expenses paid to or retained by the related trust
at the same time and in the same manner as such items would have been reported
under the trust interest certificateholder's tax accounting method had it held
directly an interest in the Interest Portion from the mortgage assets, received
directly its share of the amounts received with respect to the mortgage assets
and paid directly its share of the servicing and related fees and expenses. An
individual, estate or trust holder of a trust interest certificate will be
allowed a deduction for servicing fees in determining its regular tax liability
only to the extent that the aggregate of such holder's miscellaneous itemized
deductions exceeds 2 percent of such holder's adjusted gross income, and will be
allowed no deduction for such fees in determining its liability for alternative
minimum tax. Amounts, if any, received by trust interest certificateholders in
lieu of amounts due with respect to any mortgage asset but not received from the
mortgagor will be treated for federal income tax purposes as having the same
character as the payment which they replace.
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 Saxon Asset Securities Company 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
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which the holder purchased the trust interest certificate. The Stripped Bond
Rules generally require a holder of stripped bonds or coupon portions to accrue
and report income therefrom daily on the basis of the yield to maturity of such
stripped bonds or coupons, as determined in accordance with the provisions of
the Code dealing with original issue discount. For a discussion of the general
method of calculating original issue discount, see "-- REMIC certificates --
Original Issue Discount". The provisions of the Code and the OID Regulations do
not directly address the treatment of instruments similar to trust interest
certificates. In reporting to trust interest certificateholders such
certificates will be treated as a single obligation with payment corresponding
to the aggregate of the payment allocable thereto from each of the mortgage
assets.
Alternatively, IRS may require trust interest certificateholders to treat
each scheduled payment on each Stripped Interest (or their interests in all
scheduled payments from each of the Stripped Interests) as a separate obligation
for purposes of allocating purchase price and computing original issue discount.
The tax treatment of the trust interest certificates with respect to the
application of the original issue discount provisions of the Code is currently
unclear. Each trust interest certificate will be treated as a single debt
instrument issued on the day it is purchased for purposes of calculating any
original issue discount. Original issue discount with respect to a trust
interest certificate must be included in ordinary gross income for federal
income tax purposes as it accrues in accordance with a constant yield method
that takes into account the compounding of interest and such accrual of income
may be in advance of the receipt of any cash attributable to such income. In
general, the rules for accruing original issue discount set forth above under
"REMIC certificates -- Original Issue Discount" apply; however, there is no
authority permitting trust interest certificateholders to take into account the
prepayment assumption in computing original issue discount accruals. See "--
Prepayments" below. For purposes of applying the original issue discount
provisions of the Code, the issue price used in reporting original issue
discount with respect to a trust interest certificate will be the purchase price
paid by each holder thereof and the stated redemption price at maturity may
include the aggregate amount of all payments to be made with respect to the
trust interest certificate whether or not denominated as interest. The amount of
original issue discount with respect to a trust interest certificate may be
treated as zero under the original issue discount de minimis rules described
above.
The trustee intends in reporting information relating to original issue
discount to certificateholders to provide such information on an aggregate
poolwide basis. Applicable law is however, unclear, and it is possible that
certificateholders may be required to compute original issue discount either on
a loan-by-loan basis or on a payment-by-payment basis taking account of an
allocation of their basis in the certificates among the interests in the various
mortgage loans represented by such certificates according to their respective
fair market values. The effect of an aggregate computation for the inclusion of
original issue discount in income may be to defer the recognition of losses due
to early prepayments relative to a computation on a loan-by-loan basis. It may
not be possible to reconstruct after the fact sufficient loan-by-loan
information should the IRS require a computation on that basis.
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Because the treatment of the trust interest certificates under current law
and the potential application of the Contingent Debt Regulations are both
complicated and uncertain, trust interest certificateholders should consult
their tax advisers to determine the proper method of reporting amounts received
or accrued on trust interest certificates.
Prepayments. The proper treatment of interests, such as the trust
fractional certificates and the trust interest certificates, in debt instruments
that are subject to prepayment is unclear. The rules of section 1272(a)(6) of
the Code described above require original issue discount to be taken into
account on the basis of a constant yield to assumed maturity and actual
prepayments to any pool of debt instruments the payments on which may be
accelerated by reason of prepayments. The manner of determining the prepayment
assumption is to be determined under Treasury regulations, but no regulations
have been issued. trust fractional certificateholders and trust interest
certificateholders should consult their tax advisers as to the proper reporting
of income from trust fractional certificates and trust interest certificates, as
the case may be, in the light of the possibility of prepayment and, with respect
to the trust interest certificates, as to the possible application of the
Contingent Debt Regulations.
Sales of Trust Certificates. If a certificate is sold, gain or loss will be
recognized by the holder thereof in an amount equal to the difference between
the amount realized on the sale and the certificateholder's adjusted tax basis
in the certificate. Such tax basis will equal the certificateholder's cost for
the certificate, increased by any original issue or market discount previously
included in income and decreased by any deduction previously allowed for premium
and by the amount of payments, other than payments of qualified stated interest,
previously received with respect to such certificate. The portion of any such
gain attributable to accrued market discount not previously included in income
will be ordinary income, as will gain attributable to a certificate which is
part of a conversion transaction or which the holder elects to treat as
ordinary. See "REMIC Certificates -- Sales of REMIC Certificates" above. Any
remaining gain or any loss will be capital gain or loss if the certificate was
held as a capital asset except to the extent that section 582(c) of the Code
applies to such gain or loss.
Trust Reporting. Each holder of a trust fractional certificate will be
furnished with each distribution a statement setting forth the allocation of
such distribution to principal and interest. In addition, within a reasonable
time after the end of each calendar year, each holder of a trust certificate who
was such a holder at any time during such year, will be furnished with
information regarding the amount of servicing compensation and such other
customary factual information necessary or desirable to enable holders of trust
certificates to prepare their tax returns.
Back-up Withholding. In general, the rules described in "REMIC
Certificates__Back-up Withholding" will also apply to trust certificates.
Foreign Certificateholders. Payments in respect of interest or original
issue discount (including amounts attributable to servicing fees) to a
certificateholder who is not a citizen or resident of the United States, a
corporation or other entity organized in or under the laws of the United States
or of any State thereof, or a United States estate or trust, will not generally
be subject to United States withholding tax, provided that such
certificateholder (1) does not own, directly or indirectly, 10% or more of, and
is not a controlled foreign corporation (within the
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meaning of section 957 of the Code) related to, each of the issuers of the
mortgage assets and (2) provides required certification as to its non-United
States status under penalty of perjury. Any withholding tax that does apply may
be reduced or eliminated by an applicable tax treaty. Notwithstanding the
foregoing, if any such payments are effectively connected with a United States
trade or business conducted by the certificateholder, they will be subject to
regular United States income tax and, in the case of a corporation, to a
possible branch profits tax, but will ordinarily be exempt from United States
withholding tax provided that applicable documentation requirements are met.
See further the discussion of the Withholding Regulations, under "REMIC
Certificates--Foreign Investors in REMIC certificates".
Certificates Classified as Partnership Interests
Certain arrangements may be treated as partnerships for federal income tax
purposes. In such event, the related certificates will characterized, for
federal income tax purposes, as Partnership Interests as discussed in the
related prospectus supplement. With respect to certificates classified as
partnership interests, McGuire, Woods, Battle & Boothe LLP, special counsel to
the depositor, will deliver their opinion (unless otherwise limited in the
related prospectus supplement) generally to the effect that the arrangement
pursuant to which such certificates are issued will be characterized as a
partnership and not as an association taxable as a corporation or taxable
mortgage pool for federal income tax purposes. The related prospectus supplement
will also address any material federal income tax consequences applicable to the
holder.
Debt Certificates
General. Debt certificates may be treated, for federal income tax purposes,
either as (1) non-recourse debt of the depositor secured by the related mortgage
assets, in which case the related trust will constitute only a security device
which constitutes a collateral arrangement for the issuance of secured debt and
not an entity for federal income tax purposes or (2) debt of a partnership, in
which case the related trust will constitute a partnership for federal income
tax purposes, in either case without reliance on the REMIC Provisions or the
FASIT Provisions. McGuire, Woods, Battle & Boothe LLP, special counsel to the
depositor, will deliver its opinion (unless otherwise limited by the related
prospectus supplement) generally to the effect that, for federal income tax
purposes, assuming compliance with all the provisions of the related agreement,
(1) the debt certificates will be characterized as debt issued by, and not
equity in, the related trust and (2) the related trust will not be characterized
as an association (or publicly traded partnership within the meaning of section
7704 of the Code) taxable as a corporation or as a taxable mortgage pool within
the meaning of section 7701(i). Because, however, different criteria are used to
determine the accounting treatment of the issuance of debt certificates, Saxon
Asset Securities Company may treat such transactions, for financial accounting
purposes, as a transfer of an ownership interest in the related mortgage assets
to the related trust and not as the issuance of debt obligations. In that
regard, it should be noted that the IRS has issued a notice stating that, upon
examination, it will scrutinize instruments treated as debt for federal income
tax purposes but as equity for regulatory, rating agency or financial accounting
purposes to determine if their purported status as debt for federal income tax
purposes is appropriate.
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Assuming that debt certificates will be treated as indebtedness for federal
income tax purposes, holders of debt certificates, using their method of tax
accounting, will follow the federal income tax treatment hereinafter described.
Original Issue Discount. It is likely that the debt certificates will be
treated as having been issued with "original issue discount" within the meaning
of section 1273(a) of the Code because interest payments on the debt
certificates may, in the event of certain shortfalls, be deferred for periods
exceeding one year. As a result, interest payments may not be considered
qualified stated interest payments.
In general, a holder of a debt certificate having original issue discount
must include original issue discount in ordinary income as it accrues in advance
of receipt of the cash attributable to the discount, regardless of the method of
accounting otherwise used. The amount of original issue discount on a debt
certificate will be computed generally as described under "-- REMIC
Certificates -- Original Issue Discount". The depositor intends to report any
information required with respect to the debt certificates based on the OID
Regulations.
Market Discount. A purchaser of a debt certificate may be subject to the
market discount rules of Code Sections 1276 through 1278. In general, market
discount is the amount by which the stated redemption price at maturity (or, in
the case of a debt certificate issued with original issue discount, the adjusted
issue price) of the debt certificate exceeds the purchaser's basis in a debt
certificate. The holder of a debt certificate that has market discount generally
will be required to include accrued market discount in ordinary income to the
extent payments includible in the stated redemption price at maturity of such
debt certificate are received. The amount of market discount on a debt
certificate will be computed generally as described under "-- REMIC
Certificates -- Market Discount".
Premium. A debt certificate purchased at a cost greater than its stated
redemption price at maturity is considered to be purchased at a premium. A
holder of a debt certificate who holds a debt certificate as a capital asset
within the meaning of section 1221 of the Code may elect under section 171 to
amortize the premium under the constant interest method. That election will
apply to all premium obligations that the holder of a debt certificate acquires
on or after the first day of the taxable year for which the election is made,
unless the IRS permits the revocation of the election. In addition, it appears
that the same rules that apply to the accrual of market discount on installment
obligations are intended to apply in amortizing premium on installment
obligations such as the debt certificates. The treatment of premium incurred
upon the purchase of a debt certificate will be determined generally as
described above under "-- REMIC Certificates -- Premium".
Sale or Exchange of Debt Certificates. If a holder of a debt certificate
sells or exchanges a debt certificate, such holder will recognize gain or loss
equal to the difference, if any, between the amount received and such holder's
adjusted basis in the debt certificate. The adjusted basis in the debt
certificate generally will equal its initial cost, increased by any original
issue discount or market discount with respect to the debt certificate
previously included in such holder's gross income and reduced by the payments
previously received on the debt certificate, other than payments of qualified
stated interest, and by any amortized premium.
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In general, except as described above with respect to market discount, and
except for certain financial institutions subject to section 582(c) of the Code,
any gain or loss on the sale or exchange of a debt certificate recognized by an
investor who holds the debt certificate as a capital asset (within the meaning
of section 1221), will be capital gain or loss and will be long term or short
term depending on whether the debt certificate has been held for more than one
year. For corporate taxpayers, there is no preferential rate afforded to long-
term capital gains. For individual taxpayers, net capital gains are subject to
varying tax rates depending upon the holding period of the debt certificates.
Backup Withholding. Holders of debt certificates will be subject to backup
withholding rules identical to those applicable to REMIC regular Certificates.
See "-- REMIC Certificates -- Backup Withholding" with respect to REMIC
Certificates.
Tax Treatment of Foreign Investors. Holders of debt certificates who are
foreign investors will be subject to taxation in the same manner as foreign
holders of REMIC regular certificates. See "-- REMIC Certificates -- Foreign
Investors in REMIC Certificates".
For federal income tax purposes, (1) debt certificates held by a thrift
institution taxed as a "mutual savings bank" or domestic building and loan
association will not represent interests in "qualifying real property loans"
within the meaning of section 593(d)(1); (2) of the Code debt certificates held
by a thrift institution taxed as a domestic building and loan association will
not constitute "loans ... secured by an interest in real property" within the
meaning of section 7701(a)(19)(C)(v) of the Code; (3) interest on debt
certificates held by a real estate investment trust will not be treated as
"interest on obligations secured by mortgages on real property or on interests
in real property" within the meaning of section 856(c)(3)(B); (4) debt
certificates held be a real estate investment trust will not constitute real
estate assets or Government securities within the meaning of section
856(c)(5)(A); and (5) debt certificates held by a regulated investment company
will not constitute Government securities within the meaning of section
851(b)(4)(A)(i).
State and Local Tax Considerations
In addition to the federal income tax consequences described above,
potential investors should consider the state and local income tax consequences
of the acquisition, ownership, and disposition of the certificates. State and
local income tax law may differ substantially from the corresponding federal
law, and this discussion does not purport to describe any aspect of the income
tax laws of any state or locality.
For example, a REMIC or FASIT mortgage pool or Non-REMIC or Non-FASIT trust
may be characterized as a corporation, a partnership, or some other entity for
purposes of state income tax law. Such characterization could result in entity
level income or franchise taxation of the REMIC mortgage pool or trust Fund
formed in, owning mortgages or property in, or having servicing activity
performed in a state. Further, REMIC regular certificateholders resident in non-
conforming states may have their ownership of REMIC regular certificates
characterized as an interest other than debt of the REMIC such as stock or a
partnership interest. Therefore, potential investors should consult their own
tax advisers with respect to the various state and local tax consequences of an
investment in the certificates.
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ERISA Considerations
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain requirements and restrictions on employee benefit plans within
the meaning of Section 3(3) of ERISA (including collective investment funds,
separate accounts and insurance company general accounts in which such plans are
invested). ERISA also imposes certain duties on those persons who are
fiduciaries with respect to employee benefit plans that are subject to ERISA.
Investments by employee benefit plans covered by ERISA are subject to the
general fiduciary requirements of ERISA, including the requirement of investment
prudence and diversification, and the requirement that the employee benefit
plan's investments be made in accordance with the documents governing the
employee benefit plan.
In addition, employee benefit plans subject to ERISA (including collective
investment funds, separate accounts and insurance company general accounts in
which such plans are invested), and individual retirement accounts and annuities
or certain types of Keogh plans not subject to ERISA but subject to Section 4975
of the Code (each, a "Plan"), are prohibited from engaging in a broad range of
transactions involving Plan assets and persons having certain specified
relationships to a Plan ("parties in interest" under ERISA and "disqualified
persons" under the Code). Such transactions are treated as "prohibited
transactions" under Sections 406 and 407 of ERISA and excise taxes are imposed
upon disqualified persons by Section 4975 of the Code (or, in some cases, a
civil penalty may be assessed pursuant to Section 502(i) of ERISA). The
depositor, the credit enhancer, the underwriters and the trustee, and certain of
their affiliates, might be considered parties in interest or disqualified
persons with respect to a Plan. If so, the acquisition or holding or transfer
of certificates by or on behalf of such Plan could be considered to give rise to
a prohibited transaction within the meaning of ERISA and the Code unless an
exemption is available. The United States Department of Labor ("DOL") has issued
a regulation (29 C.F.R. Section 2510.3-101) concerning the definition of what
constitutes the assets of a Plan (the "Plan Asset Regulations"). Under the Plan
Asset Regulations, the underlying assets and properties of corporations,
partnerships, trusts and certain other entities in which a Plan makes an "equity
interest" investment could be deemed for purposes of ERISA to be assets of the
investing Plan unless certain exceptions apply. If an investing Plan's assets
were deemed to include an interest in the mortgage assets and any other assets
of a trust and not merely an interest in the certificates, the assets of the
trust would become subject to the fiduciary responsibility standards of ERISA,
and transactions occurring between the depositor, the servicer, the credit
enhancer, the underwriters and the trustee, or any of their affiliates, might
constitute prohibited transactions, unless an administrative exemption applies.
Certain such exemptions which may be applicable to the acquisition and holding
of the certificates or to the servicing of the mortgage assets are discussed
below.
DOL has issued an administrative exemption, Prohibited Transaction class
Exemption 83-1 ("PTCE 83-1"), which, under certain conditions, exempts from the
application of the prohibited transaction rules of ERISA and the excise tax
provisions of Section 4975 of the Code transactions involving a Plan in
connection with the operation of a "mortgage pool" and the purchase, sale and
holding of "mortgage pool pass-through certificates". A "mortgage pool" is
defined as an investment pool which is held in trust and which consists solely
of interest bearing obligations secured by first or second mortgages or deeds of
trust on single-family residential property, property acquired in foreclosure
and undistributed cash. A "mortgage pool pass-
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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:
. 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;
. the trustee may not be an affiliate of the depositor; and
. 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, any credit enhancer or the
trustee is a party in interest if the Plan does not pay more than fair market
value for such certificates and the rights and interests evidenced by such
certificates are not subordinated to the rights and interests evidenced by other
certificates of the same pool. PTCE 83-1 also exempts from the prohibited
transaction rules transactions in connection with the servicing and operation of
the trust, provided that any payments made to the servicer in connection with
the servicing of the trust are made in accordance with a binding agreement,
copies of which must be made available to prospective investors before they
purchase certificates.
In the case of any Plan with respect to which the depositor, the servicer,
the credit enhancer or the trustee is a fiduciary, PTCE 83-1 will only apply if,
in addition to the other requirements:
. 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;
. the Plan pays no more for the certificates than would be paid in an
arm's length transaction;
. 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;
. the total value of the certificates purchased by the Plan does not
exceed 25% of the amount issued; and
. 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.
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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, 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
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or any state, territory or possession of the United States (including the
District of Columbia or Puerto Rico) whose authorized investments are subject to
state regulation to the same extent that, under applicable law, obligations
issued by or guaranteed as to principal and interest by the United States or any
agency or instrumentality thereof constitute legal investments for such
entities. Pursuant to SMMEA, a number of states enacted legislation, on or
before the October 3, 1991, cut-off for such enactments, limiting to varying
extents the ability of certain entities (in particular, insurance companies) to
invest in "mortgage related securities," in most cases by requiring the affected
investors to rely solely upon existing state law and not SMMEA. Accordingly, the
investors affected by such legislation will be authorized to invest in the
certificates only to the extent provided in such legislation. Institutions whose
investment activities are subject to legal investment laws and regulations or to
review by certain regulatory authorities may be subject to restrictions on
investment in certain classes of the certificates of a series.
SMMEA also amended the legal investment authority of federally chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with mortgage
related securities without limitation as to the percentage of their assets
represented thereby; federal credit unions may invest in mortgage related
securities; and national banks may purchase mortgage related securities for
their own account without regard to the limitations generally applicable to
investment securities set forth in 12 U.S.C. (S) 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
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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 prospectus supplement for each series will set
forth the terms of the offering of such series and of each class of such series,
including the name or names of the underwriters, the proceeds to and their use
by the depositor and either the initial public offering price, the discounts and
commissions to the underwriters and any discounts or concessions allowed or
reallowed to certain dealers or the method by which the price at which the
underwriters will sell the certificates will be determined.
The certificates of a series may be acquired by the underwriters for their
own account and may be resold from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices determined at the time of sale. The obligations of the
underwriters will be subject to certain conditions precedent, and the
underwriters will be severally obligated to purchase all the certificates of a
series described in the related prospectus supplement if any are purchased. If
certificates of a series are offered other than through underwriters, the
related prospectus supplement will contain information regarding the nature of
such offering and any agreements to be entered into between the depositor and
the purchasers of the certificates of such series.
The place and time of delivery for the certificates of a series in respect
of which this prospectus is delivered will be set forth in the related
prospectus supplement.
Available Information
The depositor has filed a registration statement with the Securities and
Exchange Commission with respect to the certificates. The registration
statement and amendments thereto
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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 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 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 the depositor, 4880 Cox Road, Glen Allen, Virginia 23060 ((804) 967-7400).
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________________________________________________________________________________
We suggest that you should rely only on the information contained or
incorporated by reference in this prospectus supplement and the accompany
prospectus. We have not authorized anyone to provide you with different
information.
We are not offering the offered certificates in any state where the offer is not
permitted.
We do not claim the accuracy of the information in this prospectus supplement
and the accompanying prospectus as of any date other than the dates stated on
their cover pages.
________________
TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
<S> <C>
Summary of Terms............................................
Risk Factors................................................
Recent Developments.........................................
The Mortgage Loan Pool......................................
Prepayment and Yield Considerations.........................
Description of the Offered Certificates.....................
The Trust Agreement.........................................
Certain Federal Income Tax Consequences.....................
ERISA Considerations........................................
Ratings.....................................................
Legal Investment Considerations.............................
Certain Legal Matters.......................................
Underwriting................................................
Index to Location of Principal Defined Terms................
Prospectus
Prospectus Summary..........................................
Risk Factors................................................
Description of the Certificates.............................
Maturity, Prepayment and Yield Considerations...............
The Trusts..................................................
Credit Enhancement..........................................
Origination of Mortgage Loans...............................
Servicing of Mortgage Loans.................................
The Agreement...............................................
Certain Legal Aspects of Mortgage Loans.....................
The Depositor...............................................
Use of Proceeds.............................................
Certain Federal Income Tax Consequences.....................
State and Local Tax Considerations..........................
Canadian Income Tax Considerations..........................
ERISA Considerations........................................
Legal Investment Matters....................................
Plan of Distribution........................................
Available Information.......................................
Incorporation of Certain Documents by Reference.............
Index to Location of Principal Defined Terms................
</TABLE>
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the certificates and with respect to their unsold allotments or
subscriptions. In addition, all dealers selling the offered certificates,
whether or not participating in this offering, may be required to deliver a
prospectus supplement and prospectus until 90 days after the date of the
prospectus supplement.
_______________________________________________________________________________
_______________________________________________________________________________
[LOGO OF SAXON APPEARS HERE]
$________________
Saxon Asset Securities Trust ____-__
Saxon Asset Securities Company,
as Depositor
Mortgage Loan Asset Backed Certificates
Series ____-__
[NAMES OF UNDERWRITERS]
---------------------
PROSPECTUS SUPPLEMENT
---------------------
__________, ______
_______________________________________________________________________________
<PAGE>
Part II.
Item 14. Other Expenses of Issuance and Distribution
The following is an itemized list of the estimated expenses to be incurred
in connection with the offering of the securities being offered hereunder other
than underwriting discounts and commissions.
Registration Fee...................... $ 278
Printing and Engraving................ *
----------
Trustee's Fees........................ *
----------
Legal Fees and Expenses............... *
----------
Blue Sky Fees and Expenses............ *
----------
Accountant's Fees and Expenses........ *
----------
Rating Agency Fees.................... *
----------
Miscellaneous Fees.................... *
----------
Total............................ $ *
==========
______________________
*To be completed by amendment.
Item 15. Indemnification of Directors and Officers
Article 10 of the Virginia Stock Corporation Act provides in substance
that Virginia corporations shall have the power, under specified circumstances,
to indemnify their directors, officers, employees and agents in connection with
actions, suits or proceedings brought against them by a third party or in the
right of the corporation, by reason of the fact that they were or are such
directors, officers, employees or agents, against expenses incurred in any such
action, suit or proceeding. The Virginia Stock Corporation Act also provides
that Virginia corporations may purchase insurance on behalf of any such
director, officer, employee or agent.
Under certain sales agreements entered into by the Depositor and various
transferors of mortgage-related collateral, such transferors are obligated to
indemnify the Depositor against certain expenses and liabilities.
Reference is made to the Standard Terms to Underwriting Agreement filed as
an exhibit hereto for provisions relating to the indemnification of directors,
officers and controlling persons of the Depositor against certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
Item 16. Exhibits and Financial Statements
(a) Exhibits
II-1
<PAGE>
1.1 Form of Underwriting Agreement (including Standard Terms January 1997
Edition) incorporated by reference to Exhibit 1.1 to Registration
Statement No. 333-20025.
3.1 Articles of Incorporation incorporated by reference to Exhibit 3.1 to
Registration Statement No. 333-4127.
3.2 Bylaws incorporated by reference to Exhibit 3.2 to Registration
Statement No. 333-4127.
4.1* Form of Agreement (including Forms of Certificates and Standard Terms
July 1998 Edition) incorporated by reference to Exhibit 4.1 to
Registration Statement No. 333-59479.
5.1* Draft of opinion of McGuire, Woods, Battle & Boothe LLP with respect
to legality.
8.1* Draft of opinion of McGuire, Woods, Battle & Boothe LLP with respect
to tax matters.
23.1* Consent of McGuire, Woods, Battle & Boothe LLP (included in its
opinion filed as Exhibit 5.1).
23.2* Consent of McGuire, Woods, Battle & Boothe LLP (included in its
opinion filed as Exhibit 8.1).
24.1* Powers of Attorney
_________________________________
*To be filed by amendment.
(b) Financial Statements
All financial statements, schedules and historical financial information
have been omitted as they are not applicable.
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement: (i) to include
any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii)
to reflect in the prospectus any facts or events arising after the effective
date of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement; (iii) to include any
material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change in such
information in the registration statement; provided, however, that (a)(i) and
(a)(ii) will not apply if the information required to be included in a post-
effective amendment thereby is contained in periodic reports filed pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in this registration statement.
II-2
<PAGE>
(b) That, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(d) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual report pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(e) To provide to the underwriters at the closing specified in the
underwriting agreements certificates in such denominations and registered in
such names as are required by the underwriters to permit prompt delivery to each
purchaser.
(f) That, insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions described under Item 15
above, or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(g) That, for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of the registration statement in reliance upon Rule 430A and
contained in a form of prospectus field by the registrant pursuant to Rule
424(b)(i) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to
be part of the registration statement as of the time it was declared effective.
(h) That, for purposes of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
Signatures
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, therunto duly
authorized, in Glen Allen, Commonwealth of Virginia, on September 17, 1999.
SAXON ASSET SECURITIES COMPANY
By: /s/ Hayden D. McMillian
------------------------------
Hayden D. McMillian, President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed on September 17, 1999, by the
following persons in the capacities indicated.
Signature Title
--------- -----
/s/ Hayden D. McMillian Principal Executive Officer
- -------------------------------
Hayden D. McMillian
/s/ Robert G. Partlow Principal Financial Officer and Controller
- -------------------------------
Robert G. Partlow
/s/ David L. Heavenridge Director
- -------------------------------
David L. Heavenridge
/s/ Bryan S. Reid Director
- -------------------------------
Bryan S. Reid
