<PAGE>
Filed Pursuant to Rule 424 B 5
Registration No. 333-87531
PROSPECTUS SUPPLEMENT DATED NOVEMBER 23, 1999
(To Prospectus Dated November 19, 1999)
$300,000,000
Mortgage Loan Asset Backed Certificates,
Series 1999-5
[LOGO] Saxon Asset Securities Trust 1999-5
Principal and interest payable monthly, beginning December 27, 1999
Saxon Mortgage, Inc. Saxon Asset Securities Company
Seller and Master Servicer Depositor
The Trust will Issue--
.one class of senior certificates; and
.five classes of subordinate certificates.
For a description of the four classes of certificates offered by this
prospectus supplement, see "Offered Certificates" on page S-4.
----------------
The assets of the trust will include a pool of fixed-rate, first mortgage
loans secured by one-to-four family residential properties. The trust will
also hold cash for the purchase of additional mortgage loans on or before
February 28, 2000.
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-9 of
this prospectus supplement and page 3 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 underwriter will offer the certificates offered by this prospectus
supplement from time to time at varying prices to be determined at the time of
sale. The 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 November 30, 1999.
Banc of America Securities LLC
<PAGE>
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. No on
has been authorized to provide you with different information.
The offered certificates are not being offered in any state where the offer
is not permitted.
The depositor does 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.
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.
<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:
. the accompanying prospectus, which provides general information,
some of which may not apply to a particular series of
certificates, and
. this prospectus supplement, which describes the specific terms of
your certificates.
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.
This prospectus supplement describes the terms of the offered
certificates and the mortgage loans in greater detail than our prospectus, and
may provide information that differs from our 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 certain significant defined terms
used in this prospectus supplement beginning on page S-53.
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, accompanying language, including "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.
S-2
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TABLE OF CONTENTS
Prospectus Supplement
Offered Certificates............................................ S-4
Summary of Terms................................................ S-5
Risk Factors.................................................... S-9
Recent Developments............................................. S-12
The Mortgage Loan Pool.......................................... S-13
Prepayment and Yield Considerations............................. S-26
Description of the Offered Certificates......................... S-34
The Trust Agreement............................................. S-39
Material Federal Income Tax
Consequences.................................................. S-43
ERISA Considerations............................................ S-45
Ratings......................................................... S-49
Legal Investment Considerations................................. S-50
Use of Proceeds................................................. S-50
Legal Matters................................................... S-50
Underwriting.................................................... S-51
Glossary........................................................ S-53
Prospectus
Important Notice About Information
Presented in this Prospectus and
the Prospectus Supplement...................................... 2
Risk Factors...................................................... 3
Description of the Certificates................................... 9
Registration of the Offered
Securities..................................................... 10
Maturity, Prepayment and Yield
Considerations................................................. 22
The Trusts........................................................ 25
Credit Enhancement................................................ 34
Origination of Mortgage Loans..................................... 41
Servicing of Mortgage Loans....................................... 43
The Agreement..................................................... 53
Material Legal Aspects of Mortgage
Loans.......................................................... 57
The Depositor..................................................... 68
Use of Proceeds................................................... 69
Material Federal Income Tax
Consequences................................................... 69
State and Local Tax
Considerations................................................. 104
ERISA Considerations.............................................. 105
Legal Investment Matters.......................................... 108
Plan of Distribution.............................................. 109
Available Information............................................. 110
Incorporation of Certain Documents
by Reference................................................... 111
S-3
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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
Certificate Annual
Principal Pass Through Ratings Principal
Class Balance Rates Moody's/Fitch Type
----- -------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
AF(1)(2) $ 264,000,000 7.461% Aaa/AAA Senior
MF-1(1)(2) 15,750,000 8.028% Aa2/AA Subordinate
MF-2(1) 11,250,000 8.584% A2/A Subordinate
BF(1) 9,000,000 9.300% Baa2/BBB Subordinate
</TABLE>
- -------------------------------------
(1) The pass through rates are subject to a cap. After the clean-up call
date, the pass through rates on the class AF, class MF-1 and class MF-2
certificates increase by 0.50%.
(2) "Mortgage related security" for SMMEA upon termination of the funding
period related to the pre-funding account.
S-4
<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 underlying 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 1999-5. 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 November 1, 1999 for the mortgage loans to be
sold to the trust on the closing date.
Closing Date
On or about November 30, 1999.
Offered Certificates
The principal terms of the offered certificates are summarized on page S-4.
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 December 27, 1999.
Pass Through Rates
. Pass through rates on the offered certificates are fixed and are shown on
page S-4. The pass through rates for the class AF, class MF-1, class MF-2
and class BF will be capped at the weighted average of the net mortgage
interest rates of the mortgage loans in the trust. Shortfalls resulting
from the application of a cap will not be repaid on subsequent distribution
dates.
. The amount of interest distributable on the offered certificates on each
distribution date is the interest accrued during the month immediately
preceding the month in which that distribution date occurs. All
calculations are made on the basis of a 360-day year consisting of twelve
30 day months (30/360).
S-5
<PAGE>
Interest Distributions
On each distribution date, the trust will apply interest collected from the
mortgage loans to make distributions in the following order:
. all interest due to the class AF certificates;
. in order of seniority, all interest due to the other classes of
certificates at the applicable pass through rates; and
. any remaining interest as described under "Excess Interest" below.
Excess Interest
On each distribution date, the trust will apply any excess interest 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 subordinate certificates, in order of seniority, the
amount of unpaid interest for prior distribution dates on the related
certificates and amounts in repayment of any realized losses previously
allocated to those certificates; 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 to make
distributions on the certificates as described under "Description of the Offered
Certificates -- Distributions" on page S-35. Initially, principal in respect of
the mortgage loans in the trust will be distributed exclusively to the class AF
certificates until their principal balances have been reduced to specified
levels. At that time, principal distributions not required to maintain the
principal balance of the class AF certificates at the required level will be
distributed to the subordinate 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 to cover losses and to distribute principal to a
limited extent to create overcollateralization;
. the subordination of distributions on the subordinate certificates to the
required distributions on the more senior certificates; and
. the allocation of realized losses on the mortgage loans first to the
subordinate 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-10 for additional
information.
The mortgage loans in the trust are fixed-rate, first mortgage loans secured by
one-to-four family residential properties.
S-6
<PAGE>
Pre-Funding Feature
The trust may purchase additional mortgage loans on or before February 28, 2000
for inclusion in the pool of mortgage loans. At the closing, the trustee will
hold in trust, from the proceeds of the sale of the offered certificates,
approximately $70,000,000, which may be applied to the purchase of additional
fixed rate mortgage loans. If those funds are not completely used by February
28, 2000 any remaining pre-funding amounts will be distributed as principal
prepayments on the certificates as described in this prospectus supplement.
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 aggregate scheduled principal balances of the
mortgage loans and amounts in the pre-funding account (excluding interest and
other investment earnings) have declined to less than 10% of the sum of the
scheduled principal balances of the initial mortgage loans as of the cut off
date and the amount initially deposited into 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.
If, on any distribution date, there is not sufficient excess interest to offset
realized losses as described under "Excess Interest" above, the trust will
generally reduce the certificate principal balances of the class BF
certificates, and then the remaining classes of subordinate certificates in
reverse order of seniority. After a reduction, the holders of any of these
certificates will generally only be entitled to distributions of both principal
and interest on the reduced certificate principal balance of their certificates.
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.
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
proceeds held in the pre-funding account, may be applied to purchase subsequent
mortgage loans until February 28, 2000. The characteristics of the mortgage
loans to be conveyed to the trust on the closing date and the subsequent
mortgage loans to be conveyed to the trust
S-7
<PAGE>
after that date will vary from the characteristics of the identified mortgage
loans.
At November 1, 1999 (the statistical cut off date), there were 2,367 mortgage
loans secured by mortgages on residential properties.
Aggregate Scheduled Principal Balances $190,001,457
Average Scheduled Principal Balance $ 80,271
Range of Scheduled Principal
Balances $14,964 to $279,171
Range of Mortgage Interest Rates 6.550% to 15.670%
Weighted Average Mortgage Interest Rate 10.288%
Weighted Average Original Loan-to-Value Ratio 77.74%
Weighted Average Remaining
Amortization Term 342 Months
Range of Remaining Amortization Terms 118 to 360 Months
Balloon Mortgage Loans 49.59%
Mortgaged Premises
Single-family detached dwellings 84.88%
Single-family attached dwellings 1.39%
Planned unit developments 0.00%
Condominiums 2.95%
2-4 Family 7.30%
Townhouse 0.00%
Manufactured Home 3.48%
Weighted Average Servicing Fee Rate 0.50%
Master Servicing Fee Rate 0.05%
See "Risk Factors - Variations in Loan Characteristics" on page S-10 and "The
Mortgage Loan Pool - Characteristics of the Mortgage Loans" on page S-14.
S-8
<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.
Mortgage The otherwise fixed pass through rates of the offered
interest rates certificates are capped at the weighted average of the net
may limit pass mortgage interest rates for the related mortgage loans. To
through rates the extent mortgage loans in the trust bearing net interest
of certain rates above the pass through rates of those classes prepay,
other classes the weighted average net rate will be reduced and the pass
through rates of those classes of certificates may be
capped. However, if the pass through rates of any of the
offered certificates are capped on any distribution date,
holders of those certificates will not be entitled to any
additional amounts on future distribution dates to make up
for the application of such caps.
Mechanics of Under the interest distribution mechanics of the trust:
the trust place
risk of loss . class MF-1 certificates receive distributions only
principally on after required distributions to the class AF
subordinate certificates;
certificates
. class MF-2 certificates receive distributions only after
required distributions to the class AF and the class MF-1
certificates; and
. class BF certificates receive distributions only after
required distributions to the class AF, class MF-1 and
class MF-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 mortgage loans. In that event, the trust will generally
reduce the certificate principal balances of the class BF
certificates, and then the remaining classes of subordinate
certificates in reverse order of seniority.
You should fully consider the subordination risks associated
with an investment in the class MF-1, class MF-2 and class
BF certificates. These include the possibility that you may
not fully recover your initial investment as a result of
losses on the mortgage loans.
S-9
<PAGE>
Loan This prospectus supplement describes only an identified
characteristics portion of the initial mortgage loans to be sold to the
of the mortgage trust on the closing date. The additional mortgage loans to
pool may vary be delivered on the closing date and subsequent mortgage
from the loans to be delivered after the closing date as a result of
characteristics purchases from the pre-funding account may have
of the mortgage characteristics that differ somewhat from the identified
loans disclosed mortgage loans described in this prospectus supplement.
in this However, each of the additional mortgage loans and
prospectus subsequent mortgage loans must satisfy the criteria
supplement described under "The Mortgage Loan Pool - Conveyance of
Subsequent Mortgage Loans" on page S-18. 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 The seller intends to use substantially all of the funds in
of early the pre-funding account to purchase subsequent mortgage
prepayment of loans for the trust. However, if the principal amount of
principal eligible subsequent mortgage loans available during the
associated funding period is less than the full pre-funded amount, the
with the pre- seller will not have sufficient subsequent mortgage loans to
funding sell to the trust. This could result in a prepayment of
account principal to holders of certificates as described in this
prospectus supplement, which could adversely affect the
yield of those 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.
The following characteristics of the
mortgage loans may increase risk of loss:
Non- As a general matter, the seller originated or purchased or
conforming will originate or purchase the mortgage loans in accordance
underwriting with its mortgage loan program for non-conforming credits
standards -- 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.
S-10
<PAGE>
At November 30, 1999, the closing date, less than 2.00% of
the mortgage loans already identified for inclusion in the
pool will be delinquent. Substantially all of the mortgage
loans already identified for inclusion in the pool had first
monthly payments due on or before December 1, 1999. 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.
Balloon 49.59% of the aggregate scheduled principal balances of the
loans 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 loan-to- Mortgage loans with high loan-to-value ratios may present a
value ratios greater risk of loss than mortgage loans with loan-to-value
increase risk of ratios of 80% or below. Approximately 37.19% of the initial
loss mortgage loans based on aggregate cut off date principal
balances had loan-to-value ratios in excess of 80.00%, but
no more than 32.27%, at origination.
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.
S-11
<PAGE>
Insolvency of The seller believes that the transfers of the mortgage loans
seller could by the seller to the depositor and by the depositor to the
cause payment trust constitute sales by the seller to the depositor and
delays 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.
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-25 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-13.
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 several 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 depositor, the master servicer and the
servicer.
While Dominion Resources and CNG expect to obtain all necessary regulatory
approvals for their merger in a timely manner and Dominion Resources expects to
divest Dominion Capital and Dominion Capital's subsidiaries, including the
seller, the depositor, the master servicer and the servicer, there can be no
assurance as to whether:
S-12
<PAGE>
. 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
and Dominion Capital's subsidiaries or its effect on the seller, the
depositor, the master servicer or the servicer; or
. whether any direct or indirect acquiror of Dominion Capital, the seller,
the depositor, 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 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. In addition, 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.
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 and 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
S-13
<PAGE>
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 may 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 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 November 1, 1999, 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 February 28, 2000. See " -
Conveyance of Subsequent Mortgage Loans" on page S-18. The characteristics of
the mortgage loans as a whole will change upon the acquisition of subsequent
mortgage loans. See "- Additional Information" on page S-20.
The identified mortgage loans satisfy certain criteria including:
. a remaining term to stated maturity of no more than 360 months; and
. a mortgage interest rate of at least 6.550%.
None of the identified mortgage loans had a loan-to-value ratio in excess
of 95% and substantially all of the identified mortgage loans were originated
less than six months prior to the statistical cut off date. 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
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
offered certificates generally represent undivided ownership interests in all
mortgage loans contained in the trust.
S-14
<PAGE>
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.
S-15
<PAGE>
1) Current Scheduled Principal Balance
No. of Scheduled
Current Scheduled Mortgage Principal
Principal Balance ($) Loans (%) Balance (%)
---------------------- --------- -----------
0.01 - 25,000.00 2.70 0.76
25,000.01 - 50,000.00 24.50 11.82
50,000.01 - 75,000.00 28.81 22.38
75,000.01 - 100,000.00 18.12 19.63
100,000.01 - 150,000.00 17.96 27.22
150,000.01 - 200,000.00 5.96 12.79
200,000.01 - 250,000.00 1.90 5.25
250,000.01 - 300,000.00 0.04 0.15
------ ------
Totals: 100.00 100.00
====== ======
The average scheduled principal balance is $80,271.00 for the mortgage loans.
The minimum and maximum scheduled principal balances of the mortgage loans are
$14,963.78 and $279,170.99, respectively.
2) Current Mortgage Interest Rates
Current No. of Scheduled
Mortgage Interest Mortgage Principal
Rate (%) Loans (%) Balance (%)
----------------- --------- -----------
6.51 - 7.00 0.08 0.21
7.01 - 7.50 0.21 0.29
7.51 - 7.75 0.21 0.38
7.76 - 8.00 1.44 2.08
8.01 - 8.25 1.10 1.33
8.26 - 8.50 3.13 3.74
8.51 - 8.75 3.46 4.37
8.76 - 9.00 6.04 7.42
9.01 - 9.25 3.38 4.27
9.26 - 9.50 6.17 6.38
9.51 - 9.75 7.31 8.03
9.76 - 10.00 9.13 10.06
10.01 - 10.25 5.53 5.27
10.26 - 10.50 7.90 7.95
10.51 - 10.75 5.32 5.35
10.76 - 11.00 8.37 8.10
11.01 - 11.25 4.22 3.72
11.26 - 11.50 5.32 4.62
11.51 - 11.75 3.42 2.82
11.76 - 12.00 5.45 4.54
12.01 - 12.25 1.99 1.60
12.26 - 12.50 2.92 1.96
12.51 - 12.75 1.52 1.18
12.76 - 13.00 1.86 1.15
13.01 - 13.25 0.84 0.54
13.26 - 13.50 1.10 0.83
13.51 - 13.75 1.31 0.83
13.76 - 14.00 0.51 0.28
14.01 - 14.25 0.08 0.05
14.26 - 14.50 0.25 0.30
14.51 - 14.75 0.17 0.20
14.76 - 15.00 0.13 0.08
15.01 - 15.25 0.04 0.02
15.26 - 15.50 0.04 0.02
15.51 - 15.75 0.04 0.02
------ ------
Totals: 100.00 100.00
====== ======
The weighted average current mortgage interest rate is 10.288% per annum for the
mortgage loans
3) Original Loan-to-Value Ratios/(1)/
Original No. of Scheduled
Loan-to- Mortgage Principal
Value Ratio (%) Loans (%) Balance (%)
--------------- --------- -----------
10.001 - 15.000 0.08 0.04
15.001 - 20.000 0.17 0.09
20.001 - 25.000 0.38 0.19
25.001 - 30.000 0.38 0.16
30.001 - 35.000 0.46 0.20
35.001 - 40.000 0.76 0.47
40.001 - 45.000 1.06 0.71
45.001 - 50.000 2.28 1.47
50.001 - 55.000 2.07 1.64
55.001 - 60.000 3.59 3.11
60.001 - 65.000 5.75 5.48
65.001 - 70.000 9.29 9.03
70.001 - 75.000 12.89 11.85
75.001 - 80.000 27.08 28.28
80.001 - 85.000 15.17 17.08
85.001 - 90.000 17.11 18.25
90.001 - 95.000 1.48 1.93
------ ------
Totals: 100.00 100.00
====== ======
/(1)/The loan-to-value ratio of a mortgage loan is equal to the ratio (expressed
as a percentage) of the original scheduled principal balance of the mortgage
loan and the fair market value of the mortgaged premises at the time of
origination. The fair market value is the lower of (i) the purchase price and
(ii) the appraised value in the case of purchases and is the appraised value in
all other cases. The weighted average original loan-to-value ratio is 77.74%.
4) Remaining Amortization Term
No. of Scheduled
Remaining Mortgage Principal
Term (Months) Loans (%) Balance (%)
------------- --------- -----------
109 - 120 0.34 0.24
133 - 144 0.42 0.23
169 - 180 10.18 7.50
229 - 240 2.07 1.41
289 - 300 0.25 0.19
325 - 336 0.13 0.13
337 - 348 0.42 0.46
349 - 360 86.19 89.83
------ ------
Totals: 100.00 100.00
====== ======
The weighted average remaining amortization term is 342 months.
S-16
<PAGE>
5) Occupancy Type of Mortgaged Premises
No. of Scheduled
Mortgage Principal
Occupancy Type/(1)/ Loans (%) Balance (%)
- ------------------- --------- -----------
Primary Home 87.71 90.77
Investor 11.49 8.43
Second Home 0.80 0.80
------ ------
Totals: 100.00 100.00
====== ======
/(1)/ As represented by the borrowers on their mortgage loan applications.
6) Origination Program
No. of Scheduled
Mortgage Principal
Origination Program /(1)/ Loans (%) Balance (%)
- ------------------------- --------- -----------
Full Documentation 82.00 80.04
Limited Documentation 4.22 5.21
Stated Documentation 12.97 14.07
No Ratio 0.80 0.68
------ ------
Totals: 100.00 100.00
====== ======
/(1)/ See "The Mortgage Loan Pool -- Underwriting Standards" on page S-21.
7) Mortgage Loan Purpose
No. of Scheduled
Mortgage Principal
Loan Purpose Loans (%) Balance (%)
------------ --------- -----------
Purchase 23.74 23.69
Refinance (cash out) 64.34 62.62
Refinance (no cash-out) 11.91 13.69
------ ------
Totals: 100.00 100.00
====== ======
8) Property Types of Mortgaged Premises
No. of Scheduled
Mortgage Principal
Property Type Loans (%) Balance (%)
------------- --------- -----------
Manufactured Housing 4.65 3.48
2-4 Family 6.68 7.30
High-Rise Condo 0.42 0.53
Low-Rise Condo 2.92 2.42
Single Family Detached 83.65 84.88
Single Family Attached 1.69 1.39
------ ------
Totals: 100.00 100.00
====== ======
S-17
<PAGE>
9) State Distribution of Mortgaged Premises
<TABLE>
<CAPTION>
State No. of Mortgage Loans (%) Scheduled Principal Balance (%)
----- ------------------------- -------------------------------
<S> <C> <C>
Alaska 0.08 0.17
Arizona 1.69 1.87
Arkansas 1.27 0.92
California 9.04 12.96
Colorado 1.77 2.43
Connecticut 1.77 1.91
Delaware 0.63 0.56
District of Columbia 0.13 0.15
Florida 6.38 5.50
Georgia 5.83 5.85
Hawaii 1.14 1.96
Idaho 1.06 0.83
Illinois 4.69 5.04
Indiana 3.80 2.61
Iowa 1.23 1.24
Kansas 1.18 1.03
Kentucky 1.18 0.89
Louisiana 2.28 1.74
Maine 0.13 0.10
Maryland 0.68 0.81
Massachusetts 0.38 0.57
Michigan 5.24 4.40
Minnesota 1.77 2.12
Mississippi 0.68 0.51
Missouri 3.68 3.21
Montana 0.13 0.11
Nebraska 0.84 0.76
Nevada 0.72 0.79
New Jersey 1.77 2.32
New Mexico 1.06 1.19
New York 1.35 2.35
North Carolina 3.55 3.15
North Dakota 0.04 0.02
Ohio 5.62 4.79
Oklahoma 1.61 1.18
Oregon 1.73 2.09
Pennsylvania 4.35 3.96
Rhode Island 0.34 0.39
South Carolina 0.80 0.85
Tennessee 4.86 3.70
Texas 5.41 4.70
Utah 0.93 1.28
Vermont 0.04 0.04
Virginia 2.87 2.86
Washington 1.39 1.88
West Virginia 0.59 0.46
Wisconsin 2.28 1.78
------ ------
Totals: 100.00 100.00
====== ======
</TABLE>
Conveyance of Subsequent Mortgage Loans
After the closing date, the trust may apply funds held in the pre-funding
account toward the purchase of approximately $70,000,000 in aggregate scheduled
principal balances of mortgage loans for addition to the trust. Accordingly, the
statistical characteristics of the mortgage loan pool as a whole will change
after the acquisition by the trust of these subsequent 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 the
pool of mortgage loans.
S-18
<PAGE>
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 have a remaining term to maturity
exceeding 360 months;
. no subsequent mortgage loan may have a loan-to-value ratio greater
than 95.00%.
. no subsequent mortgage loan may be a junior mortgage loan;
. each subsequent mortgage loan must be a fixed rate mortgage loan; and
. no more than 2.00% of the subsequent mortgage loans will be delinquent
as of the related cut off date.
Following the purchase of the subsequent mortgage loans by the trust,
the pool of mortgage loans in the trust is expected to have the following
characteristics:
. a weighted average mortgage interest rate of at least 10.15%;
. a weighted average remaining amortization term of not less than 350
months;
. a weighted average loan-to-value ratio of not more than 79.00%;
. none of the mortgage loans will be secured by second liens and no more
than 57.00% of the mortgage loans will be balloon loans;
. at least 82.00% of the mortgage loans will be secured by single-family,
detached and attached, dwellings;
. no more than 3.50% of the mortgage loans will be manufactured home
loans;
. no more than 9.00% of the mortgage loans will be secured by investment
properties;
. none of the mortgage loans will have balances greater than $461,350;
S-19
<PAGE>
. at least 89.00% of the mortgage loans will be secured by owner occupied
dwellings;
. no more than 39.00% of the mortgage loans will have a loan-to-value
ratio in excess of 80.00%; and
. at least 12.00%, 15.00% and 37.00% of the mortgage loans will have
credit grades of A+, A and A-, respectively, and no more than 12.00% and
2.00% of the mortgage loans will have credit grades of C and D,
respectively. See "-- Underwriting Standards" on page S-21.
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 the mortgage loans is representative of the characteristics of the
pool of mortgage loans 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 underwriter of the offered 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-26. Accordingly, those tables and other materials may not be relevant to or
appropriate for investors other than those specifically requesting them.
S-20
<PAGE>
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 ratio;
. mortgage payment history;
. employment stability; and
. number of 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.
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;
S-21
<PAGE>
. 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.
The seller's general guidelines are set forth below:
<TABLE>
<CAPTION>
A+ A A- B C D
Mortgage History
<S> <C> <C> <C> <C> <C>
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 $1 million Occupied Occupied Occupied Occupied
90% - Non Owner 90% - Non Owner 90% - Non Owner 90% - Non Owner
Occupied Occupied Occupied Occupied
Maximum Loan-To-Value
95% 90% 90% 85% 80% 65%
</TABLE>
S-22
<PAGE>
The following table shows the distribution of the identified mortgage
loans as of the statistical cut off date in relation to the classifications
described above:
<TABLE>
<CAPTION>
Saxon Number of Number of Loans(%) Current Current Balance(%)
Credit Grade Loans Balance($)
<S> <C> <C> <C> <C>
A+ 269 11.36 24,153,537 12.71
A 342 14.45 30,239,326 15.92
A- 878 37.09 72,929,242 38.38
B 484 20.45 38,019,792 20.01
C 344 14.53 21,409,187 11.27
D 50 2.11 3,250,371 1.71
---- ------ ----------- ------
Totals 2367 100.00 190,001,457 100.00
==== ====== =========== ======
</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 some 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 some of its servicing
activities. See "Servicing of Mortgage Loans" in the prospectus.
As of September 30, 1999, the servicer serviced a portfolio of
approximately 45,189 one- to- four family conventional residential mortgage
loans totaling approximately $4.315 billion. 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
--------------------------------------------------------------------------------------------
September 30, 1999 December 31, 1998 December 31, 1997 December 31, 1996
------------------ ------------------- ------------------- -------------------
By No. By By No. By By No. By By No. By Dollar
of Loans Dollar of Loans Dollar of Loans Dollar of Loans Amount
----- Amount ----- Amount ----- Amount ----- ------
------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Period of delinquency
(including foreclosure)
31 to 60 days 5.44% 5.45% 6.48% 6.36% 5.82% 6.25% 3.72% 3.10%
61 to 90 days 1.17% 1.21% 1.28% 1.34% 1.61% 1.49% 1.02% 1.03%
91 days or more 4.02% 4.23% 3.49% 4.05% 1.37% 1.20% 1.33% 1.48%
Percentage of Total
Portfolio /1/
Delinquent 8.21% 8.29% 9.23% 9.30% 8.81% 8.95% 6.08% 5.62%
Foreclosed 2.43% 2.61% 2.03% 2.45% 2.07% 1.47% 0.91% 1.31%
</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
S-23
<PAGE>
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 and 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.
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 on that balance.
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
S-24
<PAGE>
interest, the master servicer will be obligated to make the 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
for the trust. 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;
. 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 a 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 the mortgage loans 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's and the master servicer's
objective is to have its computer systems and equipment ready for the year 2000.
This 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 without significant failure or interruption
related to rollover of two-digit year values from 99 to 00. To that end, the
master servicer has evaluated its critical systems, devices, applications and
business relationships, and determined that they are in fact year 2000 ready.
The servicer has studied the operation of its
S-25
<PAGE>
critical 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.
In addition, 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
those systems and applications and without a material adverse effect upon its
performance of services as trustee.
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.
DTC's ability to perform its services properly also depends upon other
parties, namely 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.
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 trust,
including:
. payments in full prior to stated maturity;
S-26
<PAGE>
. 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 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 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;
. changes in the mortgagors' housing needs or employment status; and
. the credit quality of the mortgage loans.
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.
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 trust 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.
S-27
<PAGE>
As described herein, excess interest will be applied, to the extent
available, as an additional payment of principal on the certificates to create
limited overcollateralization. See "Description of the Offered Certificates -
Excess Interest" on page S-37. 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 loss experience of the mortgage loans. For example, excess interest
will be reduced as a result of realized losses on the mortgage loans;
and
. The extent to which the weighted average net rate of the mortgage loans
exceeds the weighted average of the pass through rates of the offered
certificates.
No assurance can be given as to the amount of excess interest distributable at
any time or in the aggregate.
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-35. The seller
believes that substantially 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-38.
Prepayments and Yields for Offered Certificates
All the mortgage loans in the trust 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 offered certificates on any
distribution date will equal the lesser of:
. a fixed rate as set forth on page S-4, and
. the weighted average mortgage interest rate of the mortgage loans in the
trust, net of servicing fees and master servicing fees, for that
distribution date. This is known as the weighted average net rate.
S-28
<PAGE>
As a result, payments of principal on the mortgage loans in the trust
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 the trust as of the
statistical cut off date are expected to range from 6.550% to 15.670% 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 the trust as of the statistical
cut off date is expected to be 9.738% per annum.
The final distribution date with respect to each class of offered
certificates will depend primarily upon:
. the rate and timing of prepayments which will be distributed in
reduction of the related certificate principal balances, and
. whether or not the master servicer exercises its right to purchase all
of the mortgage loans on the first clean-up call date; and
. the amount of excess interest used to repay principal on the
certificates.
The final distribution date with respect to each class of the offered
certificates will also be affected by the default and recovery experience of the
mortgage loans.
Prepayments on mortgage loans are commonly measured relative to a
prepayment model or standard, called the prepayment assumption. The prepayment
assumption represents an assumed rate of constant prepayment relative to the
then outstanding principal balance of a pool of mortgage loans for a specified
period. 100% of the prepayment assumption (Scenario IV) assumes prepayment rates
of 2.4% per annum of the then outstanding principal balance of the related
mortgage loans in the first month of the life of those mortgage loans and an
additional 2.4% per annum in each month thereafter up to and including the tenth
month. Beginning in the eleventh month and in each month thereafter during the
life of those mortgage loans, 100% of the prepayment assumption assumes a
constant prepayment rate of 24% per annum. As used in the tables below, 0%
prepayment assumption (Scenario I) assumes prepayment rates equal to 0% of the
prepayment assumption. 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 prepay at the indicated percentage of the related
prepayment assumption;
S-29
<PAGE>
. distributions on the offered certificates are received, in cash, on the
25th day of each month, commencing in December 1999, 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 month commencing in December 1999, 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 in
November 1999, and include 30 days' interest thereon;
. the available funds cap with respect to the offered certificates 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 November 30, 1999;
. all of the original pre-funded amount is applied to acquire subsequent
mortgage loans by December 1, 1999;
. for purposes of the "Weighted Average Life -- Optional Termination" in
the tables, the offered certificates are redeemed on the first day on
which they may be redeemed;
. credit enhancement percentages were derived from the certificate
principal balances of the offered certificates set forth in this
prospectus supplement;
. amounts on deposit in the pre-funding account earn interest at a rate
equal to the net mortgage interest rate of the assumed mortgage loans as
set forth below; and
. the trust contains mortgage loans having the approximate characteristics
set forth in the following tables.
S-30
<PAGE>
Assumed Initial Loans
<TABLE>
<CAPTION>
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 263,144.29 11.1270 0.550 10.5770 300 299 N/A
Level 551,080.87 11.3234 0.550 10.7734 120 120 N/A
Level 3,168,619.21 10.7771 0.550 10.2271 240 239 N/A
Level 17,398,041.55 10.0624 0.550 9.5124 179 178 N/A
Level 92,052,391.82 10.1046 0.550 9.5546 360 358 N/A
Balloon 111,566,722.26 10.4530 0.550 9.9030 360 359 180
Assumed Subsequent Loans as of December 1, 1999
Level 87,714.76 11.1270 0.550 10.5770 300 300 N/A
Level 183,693.62 11.3234 0.550 10.7734 120 120 N/A
Level 1,056,206.40 10.7771 0.550 10.2271 240 240 N/A
Level 5,799,347.18 10.0624 0.550 9.5124 179 179 N/A
Level 30,684,130.61 10.1046 0.550 9.5546 360 360 N/A
Balloon 37,188,907.43 10.4530 0.550 9.9030 360 360 180
</TABLE>
PREPAYMENT SCENARIOS
<TABLE>
<CAPTION>
Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI Scenario VII
<S> <C> <C> <C> <C> <C> <C> <C>
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 in 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-31
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
<TABLE>
<CAPTION>
Class AF Scenario
-----------------------------------------------------------------------------------------
I II III IV V VI VII
- -- --- -- - -- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percent 100 100 100 100 100 100 100
11/25/2000 97 83 80 78 73 68 64
11/25/2001 96 64 58 55 46 37 29
11/25/2002 95 49 42 37 27 18 10
11/25/2003 93 38 32 29 21 15 10
11/25/2004 92 31 25 22 15 10 6
11/25/2005 91 25 19 16 10 6 4
11/25/2006 89 20 15 12 7 4 2
11/25/2007 87 16 11 9 5 2 1
11/25/2008 86 13 9 7 3 2 *
11/25/2009 83 10 7 5 2 1 0
11/25/2010 81 8 5 4 2 * 0
11/25/2011 78 7 4 3 1 0 0
11/25/2012 76 5 3 2 * 0 0
11/25/2013 73 4 2 1 * 0 0
11/25/2014 36 2 1 * 0 0 0
11/25/2015 27 1 * 0 0 0 0
11/25/2016 26 1 * 0 0 0 0
11/25/2017 25 * 0 0 0 0 0
11/25/2018 23 * 0 0 0 0 0
11/25/2019 22 * 0 0 0 0 0
11/25/2020 21 0 0 0 0 0 0
11/25/2021 19 0 0 0 0 0 0
11/25/2022 18 0 0 0 0 0 0
11/25/2023 16 0 0 0 0 0 0
11/25/2024 14 0 0 0 0 0 0
11/25/2025 11 0 0 0 0 0 0
11/25/2026 9 0 0 0 0 0 0
11/25/2027 6 0 0 0 0 0 0
11/25/2028 3 0 0 0 0 0 0
11/25/2029 0 0 0 0 0 0 0
Weighted Average Life/(1)/
Maturity 15.53 4.31 3.67 3.33 2.67 2.18 1.80
Optional Termination 15.42 4.07 3.43 3.10 2.47 2.02 1.67
</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.
* Indicates a value less than 0.50% but greater than zero.
S-32
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
<TABLE>
<CAPTION>
Class MF-1 Scenario
----------------------------------------------------
I II III IV V VI VII
- -- --- -- - -- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percent 100 100 100 100 100 100 100
11/25/2000 100 100 100 100 100 100 100
11/25/2001 100 100 100 100 100 100 100
11/25/2002 100 100 100 100 100 100 100
11/25/2003 100 93 79 71 52 38 39
11/25/2004 100 76 61 53 36 24 15
11/25/2005 100 61 47 40 25 15 9
11/25/2006 100 49 37 30 17 10 4
11/25/2007 100 40 28 22 12 6 0
11/25/2008 100 32 22 17 8 1 0
11/25/2009 100 26 17 12 6 0 0
11/25/2010 100 21 13 9 1 0 0
11/25/2011 100 16 10 7 0 0 0
11/25/2012 100 13 7 4 0 0 0
11/25/2013 100 10 6 * 0 0 0
11/25/2014 89 4 0 0 0 0 0
11/25/2015 66 0 0 0 0 0 0
11/25/2016 64 0 0 0 0 0 0
11/25/2017 61 0 0 0 0 0 0
11/25/2018 58 0 0 0 0 0 0
11/25/2019 54 0 0 0 0 0 0
11/25/2020 51 0 0 0 0 0 0
11/25/2021 47 0 0 0 0 0 0
11/25/2022 43 0 0 0 0 0 0
11/25/2023 39 0 0 0 0 0 0
11/25/2024 33 0 0 0 0 0 0
11/25/2025 28 0 0 0 0 0 0
11/25/2026 22 0 0 0 0 0 0
11/25/2027 15 0 0 0 0 0 0
11/25/2028 7 0 0 0 0 0 0
11/25/2029 0 0 0 0 0 0 0
Weighted Average
Life/(1)/
Maturity 21.23 7.95 6.79 6.13 5.03 4.47 4.28
Optional Termination 20.98 7.43 6.22 5.61 4.62 4.13 4.01
<CAPTION>
Class MF-2 Scenario
---------------------------------------------------
I II III IV V VI VII
- -- --- -- - -- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percent 100 100 100 100 100 100 100
11/25/2000 100 100 100 100 100 100 100
11/25/2001 100 100 100 100 100 100 100
11/25/2002 100 100 100 100 100 100 100
11/25/2003 100 93 79 71 52 38 27
11/25/2004 100 76 61 53 36 24 15
11/25/2005 100 61 47 40 25 15 8
11/25/2006 100 49 37 30 17 10 0
11/25/2007 100 40 28 22 12 1 0
11/25/2008 100 32 22 17 6 0 0
11/25/2009 100 26 17 12 * 0 0
11/25/2010 100 21 13 9 0 0 0
11/25/2011 100 16 10 3 0 0 0
11/25/2012 100 13 4 0 0 0 0
11/25/2013 100 10 * 0 0 0 0
11/25/2014 89 0 0 0 0 0 0
11/25/2015 66 0 0 0 0 0 0
11/25/2016 64 0 0 0 0 0 0
11/25/2017 61 0 0 0 0 0 0
11/25/2018 58 0 0 0 0 0 0
11/25/2019 54 0 0 0 0 0 0
11/25/2020 51 0 0 0 0 0 0
11/25/2021 47 0 0 0 0 0 0
11/25/2022 43 0 0 0 0 0 0
11/25/2023 39 0 0 0 0 0 0
11/25/2024 33 0 0 0 0 0 0
11/25/2025 28 0 0 0 0 0 0
11/25/2026 22 0 0 0 0 0 0
11/25/2027 15 0 0 0 0 0 0
11/25/2028 4 0 0 0 0 0 0
11/25/2029 0 0 0 0 0 0 0
Weighted Average
Life/(1)/
Maturity 21.21 7.94 6.70 6.04 4.92 4.29 3.96
Optional Termination 20.98 7.43 6.22 5.61 4.58 4.01 3.74
</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.
* Indicates a value less than 0.50% but greater than zero.
S-33
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
<TABLE>
<CAPTION>
Class BF Scenario
--------------------------------------------------------------------
I II III IV V VI VII
- -- --- -- - -- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percent 100 100 100 100 100 100 100
11/25/2000 100 100 100 100 100 100 100
11/25/2001 100 100 100 100 100 100 100
11/25/2002 100 100 100 100 100 100 100
11/25/2003 100 93 79 71 52 38 27
11/25/2004 100 76 61 53 36 24 10
11/25/2005 100 61 47 40 25 10 0
11/25/2006 100 49 37 30 14 * 0
11/25/2007 100 40 28 22 4 0 0
11/25/2008 100 32 21 12 0 0 0
11/25/2009 100 26 13 5 0 0 0
11/25/2010 100 19 6 0 0 0 0
11/25/2011 100 12 * 0 0 0 0
11/25/2012 100 6 0 0 0 0 0
11/25/2013 100 1 0 0 0 0 0
11/25/2014 89 0 0 0 0 0 0
11/25/2015 66 0 0 0 0 0 0
11/25/2016 64 0 0 0 0 0 0
11/25/2017 61 0 0 0 0 0 0
11/25/2018 58 0 0 0 0 0 0
11/25/2019 54 0 0 0 0 0 0
11/25/2020 51 0 0 0 0 0 0
11/25/2021 47 0 0 0 0 0 0
11/25/2022 43 0 0 0 0 0 0
11/25/2023 39 0 0 0 0 0 0
11/25/2024 33 0 0 0 0 0 0
11/25/2025 28 0 0 0 0 0 0
11/25/2026 21 0 0 0 0 0 0
11/25/2027 9 0 0 0 0 0 0
11/25/2028 0 0 0 0 0 0 0
11/25/2029 0 0 0 0 0 0 0
Weighted Average Life /(1)/
Maturity 21.11 7.69 6.44 5.80 4.71 4.08 3.71
Optional Termination 20.97 7.43 6.21 5.60 4.56 3.94 3.61
</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.
* Refers to value less than 0.50% but greater than zero.
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 Offered Certificates
The effective yield to the holders of offered certificates 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 25/th/ day of
the month following the month of accrual (without any additional distributions
of interest or earnings thereon in respect of such delay).
DESCRIPTION OF THE OFFERED CERTIFICATES
General
The certificates to be issued by the trust will consist of:
. the following certificates, all of which are offered by this prospectus
supplement and the accompanying prospectus:
S-34
<PAGE>
. class AF certificates;
. class MF-1 and class MF-2 certificates;
. class BF certificates; and
. the class C and class R certificates, which are private certificates.
The sum of the initial scheduled principal balances of the mortgage loans
and amounts in the pre-funding account on the closing date will equal the
initial certificate principal balances of the certificates. The class MF-1
certificates are subordinate in right of payment to the class AF certificates;
the class MF-2 certificates are subordinate in right of payment to the class AF
and MF-1 certificates; the class BF certificates are subordinate in right of
payment to the class AF, MF-1 and MF-2 certificates, in each case to the extent
described herein. See "--Distributions - Distributions of Principal."
Significant defined terms that are necessary to develop an understanding of
the manner in which distributions will be made on the offered certificates
appear in the Glossary at the end of this prospectus supplement.
Persons in whose names certificates are registered in the certificate
register maintained by the trustee are the holders of the certificates. For 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 for the trust 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 in this prospectus supplement and the accompanying
prospectus 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-39.
The trust agreement requires that the trustee create an asset proceeds
account and a distribution account. All funds in those accounts 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 and any amounts transferred from the
capitalized interest account in each case for that distribution date.
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
S-35
<PAGE>
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, the amount of
interest distributable with respect to the offered certificates 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. Each period referred to in the prior sentence relating
to the accrual of interest is an accrual period for the related distribution
date.
All calculations of interest on the offered certificates will be made on
the basis of a 360-day year assumed to consist of twelve 30-day months (30/360).
On each distribution date, interest funds and any amounts transferred from
the capitalized interest account for that distribution date 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 the class AF certificates, the Current Interest and any Interest
Carry Forward Amount for that class and distribution date;
. to the class MF-1 certificates, the Current Interest for that class and
distribution date;
. to the class MF-2 certificates, the Current Interest for that class and
distribution date;
. to the class BF certificates, the Current Interest for that class and
distribution date; and
. any remainder as described below under the subheading "-- Excess
Interest" on page S-37.
The pass through rates for the offered certificates on any distribution
date are capped by the Available Funds Cap for that date. Holders of offered
certificates will not receive additional amounts on future distribution dates in
the event the pass through rate on those certificates is limited by the
Available Funds Cap.
After the clean-up call date, the pass through rates on the class AF,
class MF-1 and class MF-2 certificates will increase by 0.50%.
Distributions of Principal. On each distribution date, the Principal
Distribution Amount for that distribution date is required to be distributed in
the following order of priority until the Principal Distribution Amount has been
fully distributed:
. to the class AF certificates, the Class AF Principal Distribution
Amount;
. to the class MF-1 certificates, the Class MF-1 Principal Distribution
Amount;
. to the class MF-2 certificates, the Class MF-2 Principal Distribution
Amount; and
. to the class BF certificates, the Class BF Principal Distribution
Amount.
S-36
<PAGE>
Notwithstanding the foregoing, before the Stepdown Date, or while a
Trigger Event exists, the Principal Distribution Amount will be distributed as
follows:
. exclusively to the class AF certificates until the certificate
principal balance of the class AF certificates have been reduced to
zero;
. after the certificate principal balance of the class AF certificates
has been reduced to zero, exclusively to the class MF-1
certificates;
. after the certificate principal balance of the class MF-1 certificates
has been reduced to zero, exclusively to the class MF-2 certificates;
and
. after the certificate principal balance of the class MF-2 certificates
has been reduced to zero, exclusively to the class BF certificates.
Excess Interest
On each distribution date, interest funds not otherwise required to be
distributed as described under the heading "--Distribution - Distributions of
Interest" will be required to be distributed in the following order of priority
until fully distributed:
. the Extra Principal Distribution Amount for that date:
. to the class MF-1 certificates, the class MF-1 Interest Carry Forward
Amount;
. to the class MF-1 certificates, the class MF-1 Unpaid Realized Loss
Amount;
. to the class MF-2 certificates, the class MF-2 Interest Carry Forward;
. to the class MF-2 certificates, the class MF-2 Unpaid Realized Loss
Amount;
. to the class BF certificates, the class BF Interest Carry Forward
Amount;
. to the class BF certificates, the class BF Unpaid Realized Loss Amount;
and
. to the class C and class R certificates, the remaining amount.
Realized Losses. If on any distribution date, after giving effect to the
Extra Principal Distribution Amount the aggregate certificate principal balances
of the offered certificates exceed the scheduled principal balances of the
mortgage loans in the trust, plus any amounts in the pre-funding account other
than interest and other investment earnings, the certificate principal balances
of the subordinate certificates 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 BF certificates, until the certificate principal
balance of that class has been reduced to zero;
. second, to the class MF-2 certificates, until the certificate principal
balance of that class has been reduced to zero; and
S-37
<PAGE>
. third, to the class MF-1 certificates, until the certificate principal
balance of that class has been reduced to zero.
If the certificate principal balance of a class of subordinate
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. On subsequent distribution dates, however, interest funds not
otherwise required to be distributed to other classes will be applied to reduce
Unpaid Applied Realized Loss Amounts in direct order of seniority.
Although the certificate principal balance of class AF certificates will
not be reduced on account of Realized Losses even if the certificate principal
balances of all the subordinate certificates have been reduced to zero, the
amount available to be distributed to the class AF certificates as principal may
be less than the certificate principal balances of the class AF certificates.
Pre-Funding Account and Capitalized Interest Account
On the closing date, the seller will deposit approximately $70,000,000
into a separate pre-funding account to be maintained in the name of the trustee
for the benefit of the holders of the offered certificates. The original
pre-funded amount will be used to acquire subsequent mortgage loans 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
$100,000; and
. February 28, 2000.
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 for the trust. Any pre-funded amount, excluding any
interest or other investment earnings, remaining at the end of the pre-funding
period will be added to the Principal Distribution Amount and will be
distributed to holders of offered certificates 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
$1,179,115 into a separate capitalized interest account to be maintained in the
name of the trustee for the benefit of holders of the offered certificates.
Amounts on deposit in 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
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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.
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 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 in accordance with a trust agreement to
be dated as of November 1, 1999, 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 trust 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
under 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 under the terms of the trust
agreement. During the pre-funding period, the depositor may sell without
recourse subsequent mortgage loans, excluding any prepayment penalties payable
with respect to any subsequent mortgage loan. 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 to those loans;
. those assets that are held in any account held for the benefit of the
certificateholders;
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. 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 under
the terms of 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
. 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;
. 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, 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 less the servicing and master servicing fee rates;
. the Realized Losses for the related period and cumulatively since the
cut off date;
. the largest mortgage loan balance outstanding;
. the servicing fees and master servicing fees;
. the pass through rates for the offered certificate, if based on the
weighted average net rate, for the current accrual period; and
. 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.
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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 pool, 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:
. 1% to each of the class C and the class R certificates; and
. 98% 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
clean-up call date, 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 100% of
the aggregate scheduled principal balances of the mortgage loans plus one
month's interest computed as provided in the trust agreement.
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
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appeal from which no further appeal may be taken, to the effect that any REMIC
established under the trust agreement does not and will no longer qualify as a
REMIC according 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;
. 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; 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
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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 an original loan-to-value ratio as of the cut
off date in excess of 80%;
. 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 -Advances and Month End
Interest" on page S-24. 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.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion 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
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to special rules. Investors should consult their own tax advisors in determining
the federal, state, local and any other tax consequences of the purchase,
ownership and disposition of the offered certificates.
REMIC Elections
The trustee will cause two 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 several classes of interests, which will
be designated as regular interests and the residual interest in the REMIC. The
offered certificates and the private certificates, other than the class R
certificate will evidence ownership of the regular interests in the issuing
REMIC. The class R certificates will evidence ownership of the entire residual
interest in each of the pooling REMIC and 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;
. 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.
The offered certificates generally will be treated as debt instruments
issued by the REMIC for federal income tax purposes. Although not free from
doubt, the trustee will treat all stated interest on the offered certificates as
qualified stated interest within the meaning of the Treasury regulations related
to original issue discount. A holder must include such stated interest in income
as it accrues, regardless of the holder's regular method of accounting.
Certain classes of offered certificates may be issued with OID. The
prepayment assumption to be used for purposes of accrual of OID is 100%
Prepayment Assumption. No representation is made, however, that the mortgage
loans will prepay at this rate or at any other rate.
For more information concerning the tax treatment of offered certificates,
see, "Material Federal Income Tax Consequences - REMIC Certificates -Taxation of
REMIC Regular Certificates" in the prospectus.
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ERISA CONSIDERATIONS
Fiduciaries of 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 their
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.
On May 14, 1993, the U.S. Department of Labor granted to NationsBank
Corporation, the predecessor to Bank of America Corporation, the corporate
parent of Banc of America Securities LLC, an individual exemption, Prohibited
Transaction Exemption 93-31, 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 underwriter named on the cover page of this prospectus supplement;
. any person directly or indirectly, through one or more intermediaries,
controlling, controlled by or under common control with the
underwriter; 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.;
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. the trustee cannot be an affiliate of any member of a restricted group
consisting of any underwriter, the depositor, the master servicer, the
servicer, any 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 underwriter must represent not more than reasonable
compensation for underwriting the offered certificates;
. the depositor under 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 subservicer 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 with the person's
duties as master servicer, servicer or subservicer;
. 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:
. 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;
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. 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 than 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:
. 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 amounts, 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;
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. 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 pre-funding may be invested
only in certain permitted investments;
. the related prospectus or prospectus supplement must describe:
. 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 plan 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 MF-1, class MF-2 and BF
certificates may not meet the requirements of the exemption or any other issued
exemption under ERISA, the purchase and holding of the class MF-1, class MF-2
and class BF 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 MF-1, class MF-2 and class BF certificates will not be
registered by the trust unless the trustee receives:
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. 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;
. 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 MF-1, class MF-2 and class BF
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 a 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 the purchase of 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-4.
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 Moody's and Fitch to mortgage pass through
certificates address the likelihood of the receipt by certificateholders of all
distributions to which certificateholders are entitled. Moody's and Fitch's
ratings address the structural and legal aspects associated with the
certificates, including the nature of the underlying mortgage loans. Moody's and
Fitch's ratings on mortgage pass through certificates do not represent any
assessment of the likelihood or
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rate of principal prepayments. The ratings do not address the possibility that
certificateholders might suffer a lower-than-anticipated yield.
Explanations of the significance of the ratings may be obtained from
Moody's, 99 Church Street, New York, New York, 10007, and Fitch IBCA, Inc., One
State Street, 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 AF and class MF -
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.
USE OF PROCEEDS
The depositor will sell the initial mortgage loans to the trust
concurrently with the delivery of the offered 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.
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 underwriter 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 Banc of America Securities LLC has agreed to purchase the
offered certificates.
The underwriter has advised the depositor that it proposes 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 underwriter and to
certain other conditions. The underwriter may sell offered certificates to or
through dealers, and dealers may receive compensation in the form of
underwriting discounts, concessions or commissions from the underwriter or
purchasers of the offered certificates for whom they may act as agent. Any
dealers that participate with the underwriter 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 may be deemed to be underwriting discounts or commissions
under the Securities Act of 1933.
The depositor expects to receive proceeds of approximately $299,821,905
plus accrued interest, before deducting expenses payable by it in connection
with the offered certificates, estimated to be $460,000. In connection with the
purchase and sale of the offered certificates, the underwriter 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 underwriter
against certain liabilities including liabilities under the Securities Act of
1933.
There is currently no secondary market for the offered certificates. The
underwriter intends to make a secondary market in the offered certificates
offered by it 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 underwriter.
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
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<PAGE>
independent underwriter. Entities associated or affiliated with the underwriter,
or entities administered by that entity, 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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<PAGE>
GLOSSARY
"Applied Realized Loss Amount," with respect to any class of subordinate
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.
"Assumed Principal Balance," as of any date, is the aggregate scheduled
principal balances of the mortgage loans plus applicable amounts on deposit in
the pre-funding account, in each case as of the end of the related collection
period.
"Available Funds Cap," for any distribution date, is the weighted average
of the net mortgage interest rates for the mortgage loans in the trust.
The "certificate principal balance" of each class of offered certificates,
as of any distribution date, is the aggregate principal amount of the
certificates of that class on the closing date as reduced by:
. all amounts distributed on previous distribution dates on that class
of certificates on account of principal,
. reductions in the certificate principal balance of the subordinated
certificates as a result of the application of Realized Losses, or
. reductions resulting from prepayments made from the pre-funding
account.
Any amounts distributed to a class of subordinate certificates in respect
of any Unpaid Realized Loss Amount will not further reduce the certificate
principal balance of that class.
"Class AF Principal Distribution Amount" 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 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, the excess of
. the class AF certificate principal balance immediately prior to
the distribution date over
----
. the lesser of
. 71.50% of the Assumed Principal Balance on the preceding due
date and
. the Assumed Principal Balance on the preceding due date less
0.50% of the Assumed Principal Balance as of the cut off
date.
"Class BF Principal Distribution Amount" with respect to any distribution
date on or after the related Stepdown Date and as long as a Trigger Event is not
in effect, is the excess of
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. the sum of
. the class AF certificate principal balance (after giving effect
to distributions on that date),
. the class MF-1 certificate principal balance (after giving effect
to distributions on that date),
. the class MF-2 certificate principal balance (after giving effect
to distributions on that date), and
. the class BF certificate principal balance immediately prior to
the distribution date over
----
. the lesser of
. 95.50% of the Assumed Principal Balance on the preceding due date
and
. the Assumed Principal Balance on the preceding due date less
0.50% of the Assumed Principal Balance as of the cut off date.
"Class MF-1 Principal Distribution Amount," with respect to any
distribution date on or after the Stepdown Date and as long as a Trigger Event
is not in effect, is the excess of
. the sum of
. the class AF certificate principal balance (after giving effect
to distributions on that date) and
. the class MF-1 certificate principal balance immediately prior to
the distribution date over
----
. the lesser of
. 82.00% of the Assumed Principal Balance on the preceding due date
and
. the Assumed Principal balance on the preceding due date less
0.50% of the Assumed Principal Balance as of the cut off date.
"Class MF-2 Principal Distribution Amount," with respect to any
distribution date on or after the Stepdown Date and as long as a Trigger Event
is not in effect, is the excess of
. the sum of
. the class AF certificate principal balance (after giving effect
to distributions on that date),
. the class MF-1 certificate principal balance (after giving effect
to distributions on that date), and
. the class MF-2 certificate principal balance immediately prior to
the distribution date over
. the lesser of
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. 89.50% of the Assumed Principal Balance on the preceding due date
and
. the Assumed Principal Balance on the preceding due date less
0.50% of the Assumed Principal Balance as of the cut off date.
"Clean-up call date" is any distribution date when the aggregate
outstanding scheduled principal balances of the mortgage loans plus any amounts
on deposit in the pre-funding account (other than interest and other investment
earnings) are less than 10% of the sum of the aggregate scheduled principal
balances of the mortgage loans as of the cut off date and the amount deposited
into the pre-funding account on the closing 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," with respect to any distribution
date, is the lesser of (i) excess interest and (ii) the excess of (A) the
Required Overcollateralization Amount over (B) the Overcollateralization Amount
(assuming for this purpose that all Principal Funds are distributed as principal
to the certificates).
"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 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.
"Interest funds" with respect to 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.
"Overcollateralization Amount" for each distribution date is the sum of the
excess of the Assumed Principal Balance on that distribution date over the
aggregate certificate principal
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<PAGE>
balance of the certificates after giving effect to the principal distributions
on that distribution date.
"Principal Distribution Amount," with respect to each distribution date, is
the excess of the sum of the Principal Funds for that distribution date and any
Extra Principal Distribution Amount over the Released Principal Amount.
"Principal Funds" with respect to each master servicer remittance date, to
the extent actually deposited in the master servicer custodial account, are
equal to the sum, without duplication, of:
. 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.
"Realized Loss" is 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.
"Released Principal Amount" will equal zero as to any distribution date on
which a Subordinated Trigger Event exists. As to any distribution date on which
a Subordinated Trigger Event does not exist, the "Released Principal Amount"
will equal the amount by which the Overcollateralization Amount (assuming for
this purpose that all Principal Funds for that date are distributed as principal
to the certificates) on that distribution date that exceeds the Required
Overcollateralization Amount for that distribution date.
The "Required Overcollateralization Amount" for each distribution date is
. prior to the Stepdown Date, 2.25% of the Assumed Principal Balance as
of the cut off date and
. on and after the Stepdown Date the greater of
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<PAGE>
. the lesser of
. 2.25% of the Assumed Principal Balance as of the cut off date and
. 4.50% of the Assumed Principal Balance and
. 0.50% of the Assumed Principal Balance as of the cut off date.
"Stepdown Date" is the earlier to occur of
. the later to occur of
. the distribution date in December 2002 and
. the first distribution date on which the class AF certificate
principal balance (less the Principal Funds on that date) is less
than or equal to 71.50% of the scheduled principal balances of
the mortgage loans and
. the distribution date on which the certificate principal balance of
the class AF certificates has been reduced to zero.
A "Subordinated Trigger Event," with respect to each distribution date
after the Stepdown Date, exists if
. Realized Losses since the related cut off date with respect to the
mortgage loans as a percentage of the initial scheduled principal
balance as of the related cut off date exceed the percentage set out
below with respect to the distribution date and
. the scheduled principal balance of the mortgage loans that, as of the
distribution date, are 60 or more days delinquent as a percentage of
the scheduled principal balance of the mortgage loans exceeds the
delinquency percentage set out below with respect to the distribution
date:
Distribution Date (inclusive) Realized Loss Percentage Delinquency Percentage
----------------------------- ------------------------ ----------------------
January 2002 - December 2002 1.4% 4.0%
January 2003 - December 2003 2.4% 4.0%
January 2004 - December 2004 3.0% 6.5%
January 2005 - December 2005 3.4% 6.5%
January 2006 - December 2006 3.7% 8.0%
January 2007 and thereafter 4.0% 8.0%
A "Trigger Event," with respect to each distribution date after the
Stepdown Date, exists if the product, expressed as a percentage, of
. two times and
. the quotient of
. the aggregate scheduled principal balance of all 60 or more day
delinquent mortgage loans and
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<PAGE>
. the scheduled principal balance as of the preceding master
servicer remittance date
equals or exceeds 28.50%.
"Unpaid Realized Loss Amount," with respect to any class of subordinate
certificates and as to any distribution date, is the excess of
. Applied Realized Loss Amounts with respect to the class over
. the sum of all distributions in reduction of the Applied Realized Loss
Amounts to the class on all previous distribution dates
S-58
<PAGE>
Prospectus
SAXON ASSET SECURITIES COMPANY
(Depositor)
[LOGO OF SAXON ASSET
SECURITIES COMPANY]
MORTGAGE LOAN ASSET BACKED CERTIFICATES
(Issuable in series by separate trusts)
--------------------
Each series of certificates:
. will consist of one or more classes of mortgage pass through certificates
representing interests in the assets of a trust;
. will receive principal and interest only from payments collected on the
assets of the related trust; and
. will not be insured or guaranteed by any government agency or
instrumentality and will not be obligations of Saxon Asset Securities
Company or any related companies.
The assets of each trust:
. will be mortgage loans or mortgage backed securities sold to the trust by
Saxon Asset Securities Company; and
. will be serviced by Saxon Asset Securities Company or a related company.
Mortgage loans included in any trust will be secured by first or second
liens on:
. one- to four-family residential properties,
. condominium units,
. manufactured housing, and
. units in planned unit development.
You should carefully consider the risk factors beginning on page 3 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 November 19, 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 balance and interest rate 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.
The prospectus supplement describes the terms of the certificates in
greater detail than this prospectus, and may provide information that differs
from this prospectus. 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.
The trusts will have no significant assets other than the assets assigned to
them by the depositor and certificateholders may look only to those limited
assets for repayment of their certificates
The certificates will represent an ownership interest in the related trust and
will not represent an interest in or obligation of any other entity and will not
be insured by any government agency or instrumentality. Each trust is expected
to have no significant assets other than the assets assigned to it by 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
insure any assets assigned to a trust, except as set forth in the related
prospectus supplement.
Credit enhancement, if provided, will be limited in both amount and scope of
coverage, and may not be sufficient to cover all losses or risks on your
investment
Any credit enhancement for any series of certificates may be limited in amount
and may be subject to periodic reduction in accordance with a schedule or
formula. In addition, credit enhancement may provide only very limited coverage
as to some types of losses and may provide no coverage as to other types of
losses. The trustee may be permitted to reduce, terminate or substitute all or a
portion of the credit enhancement for any series of certificates to the extent
specified in the related prospectus supplement.
Property values may decline, leading to higher losses on the mortgage loans,
which could reduce your ability to be repaid
If the residential real estate market in general or a regional or local area
where the mortgage assets for a trust are concentrated should experience an
overall decline in property values or a significant downturn in economic
conditions, rates of delinquencies, foreclosures and losses could be higher than
those now generally experienced in the mortgage lending industry.
To the extent 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.
3
<PAGE>
The bankruptcy of the seller may result in a delay in or reduction of
distributions
The seller and the depositor intend that the transfers of assets to the
depositor and, in turn, to the related trust constitute sales rather than
pledges to secure indebtedness for insolvency purposes. If the seller becomes a
debtor under the federal Bankruptcy Code, however, a creditor,
trustee-in-bankruptcy or receiver of that seller might argue that those
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 protection laws may limit collection of principal and
interest on the mortgage loans
In addition to anti-deficiency and related legislation, numerous other federal
and state statutory provisions, including the federal bankruptcy laws, the
federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws affording
relief to debtors, may interfere with or affect the ability of a secured
mortgage lender to realize upon its security.
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 loans may delay or reduce certificate payments
With respect to a mortgage loan on which a material default has occurred or a
payment default is imminent, the servicer may enter into a forbearance or
modification agreement with the borrower. 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 mortgage loans could cause you to be paid earlier than you
expect, which may adversely affect your yield to maturity
The prepayment experience on the mortgage assets underlying a particular series
of certificates will affect:
. the average life of each class of those certificates; and
. for certificates purchased at a price other than par, the effective
yield on the 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:
4
<PAGE>
. 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 a
disproportionate allocations of principal and 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 sell your securities, and may have to hold your
securities to maturity even though you may want to sell it
There can be no assurance that a secondary market will develop for the
certificates of any series or, if a market does develop, that it will provide
you with liquidity of investment or that it will continue for the life of your
certificates.
Particular classes of certificates may not constitute mortgage related
securities under SMMEA, and some 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, transferability of some
classes of certificates to particular types of entities may be restricted.
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
the certificates.
Issuance of certificates in book-entry form may reduce the liquidity of the
certificates
If so specified in the related prospectus supplement, a trust may issue
certificates of a series in book-entry form. Issuance of the certificates in
book-entry form may reduce the liquidity of the 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-
5
<PAGE>
entry certificates will, in most cases, be able to be effected only through
persons or entities that participate in the book-entry system, your ability to
pledge a book-entry certificate to persons or entities that do not participate
in the book-entry system, or otherwise to take actions with respect to a
book-entry certificate, may be impaired because physical certificates
representing the certificates will generally not be available. You may
experience some delay in receipt of distributions of interest on and principal
of the book-entry certificates because the trustee will forward distributions
through book-entry system participants which thereafter will be required to
credit those distributions to your accounts as a beneficial owner of the
certificates, whether directly or indirectly through financial intermediaries.
The ratings assigned to your securities by the rating agencies may be lowered or
withdrawn at any time, which may affect the value of your certificates and your
ability to sell them
Any rating of certificates is not a recommendation to buy, sell or hold
certificates and is subject to revision or withdrawal at any time by the rating
agency issuing such rating. The rating of certificates credit-enhanced through
external credit enhancement, examples of which include a letter of credit,
financial guaranty insurance policy or mortgage pool insurance policy, will
depend primarily on the creditworthiness of the provider of such external credit
enhancement. Any lowering of the rating assigned to the claims-paying ability of
the enhancement provider below the rating initially given to the certificates of
the related series would likely result in a lowering of the rating assigned to
the 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 discount must be included in income for tax purposes
Compound interest certificates and some classes of certificates that are
entitled only to interest distributions will be, and particular 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
income. Accrued but unpaid interest on the certificates generally will be
treated as original issue discount for this purpose.
Mortgage loans with balloon payment features may have a greater default risk
A portion of the mortgage assets included in a trust may be balloon loans that
provide for the payment of the unamortized principal balance of the mortgage
loans in a single payment at 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
6
<PAGE>
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 loans may be greater than that associated with fully-amortizing mortgage
loans. The ability of a borrower to repay a balloon loan at maturity frequently
will depend upon the borrower's ability to refinance the 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 junior liens may experience higher rates of
delinquencies and losses
A portion of the mortgage assets included in a trust may be loans secured by
second or more junior liens on residential properties. Because the rights of a
holder of a second or more junior lien are subordinate to the rights of senior
lienholders, the position of 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 mortgage loans secured by non-owner occupied mortgage
premises could be higher
A portion of the mortgage assets included in a trust may be secured by liens on
mortgaged premises which are not owner-occupied. The rate of delinquencies,
foreclosures and losses on the mortgage loans on those mortgaged premises could
be higher than on mortgage loans secured by liens on mortgaged premises which
are the primary residences of the owners.
7
<PAGE>
The seller's underwriting standards are less stringent than those used by
federal agencies, which may increase the risk of default on the mortgage loans
All or a portion of the mortgage assets may consist of mortgage loans
underwritten in accordance with the underwriting standards for non-conforming
credits.
A mortgage loan made to a non-conforming credit means a mortgage loan that is
ineligible for purchase by 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:
. 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, including
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 delinquent, resulting in greater defaults, prepayments and
losses
A substantial portion of the mortgage loans may be delinquent upon the issuance
of the related certificates. Inclusion of delinquent mortgage loans may cause
the rate of defaults and prepayments to increase and, in turn, may cause losses
to exceed the available credit enhancement and affect the yield on the related
certificates.
Any violation of consumer protection laws may give the borrower the right to
rescind or cancel the loan transaction
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 some
instances, any violations of these laws and regulations by the originator of a
loan could cause loans to be unenforceable, or give the borrower the right to
rescind or cancel the loan transaction. Any loan affected by violations of law
would have a significantly increased risk of default or prepayment.
8
<PAGE>
DESCRIPTION OF THE CERTIFICATES
General
The certificates described in this prospectus and in the related prospectus
supplement will be issued from time to time in series under 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 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 by check
mailed to each holder of a certificate at the address of the holder appearing on
the books and records of the trust or by wire transfer of immediately available
funds upon timely request to the trustee in writing by any holder of 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.
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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:
. only principal, only interest or any combination of principal and
interest,
. prepayments of principal throughout the life of the certificates
or only during specified periods,
. amounts only after the occurrence of specified events, or 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, and
. which are interest bearing certificates 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
The prospectus supplement for a series may specify that the certificates of
that series initially will be represented by one or more book-entry
certificates, which are expected to be registered in the name Cede & Co., the
nominee of The Depository Trust Company. Unless and until the certificates are
issued in fully registered, certificated form, no beneficial owner of a
book-entry certificate will be entitled to receive a physical 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 in turn will hold through DTC,
if they participate in DTC, or indirectly through
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organizations participating in DTC. See "-- Cedelbank and Euroclear" in 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 subsequent securities settlement processing, dated the
business day following the DTC
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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 DTC has reason to believe that it will
not receive payment on the distribution date. Payments by
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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.
Payment 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 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,
including 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.
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
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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.
Global Clearance, Settlement and Tax Documentation Procedures
The globally-offered securities to be issued from time to time will
initially be available only in book-entry form. Investors in the
globally-offered securities may hold those securities
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through any of DTC, Cedelbank or Euroclear. The globally-offered securities will
be tradable as home market instruments in both the European and U.S. domestic
markets. Initial settlement and all secondary trades will settle in same-day
funds.
Secondary market trading between investors holding globally-offered
securities through Cedelbank and Euroclear will be conducted in accordance with
their normal rules and operating procedures and in accordance with conventional
eurobond practice.
Secondary market trading between investors holding globally-offered
securities through DTC will be conducted in accordance with the rules and
procedures applicable to U.S. corporate debt obligations.
Secondary cross-market trading between Cedelbank or Euroclear and
organizations participating in DTC that hold offered securities will be effected
on a delivery-against-payment basis through the respective depositaries of
Cedelbank and Euroclear, in such capacity, and as DTC participants.
Initial Settlement
All globally-offered securities will be held in the book-entry form by DTC
in the name of Cede as nominee of DTC. Investors' interests in the
globally-offered securities will be represented through financial institutions
acting on their behalf as direct and indirect participants in DTC. As a result,
Cedelbank and Euroclear will hold positions on behalf of their participants
through their respective depositaries, which in turn will hold positions in
accounts as DTC participants.
Investors electing to hold globally-offered securities through DTC will
follow the settlement practices applicable to U.S. corporate debt obligations.
Investors securities custody accounts will be credited with their holdings
against payment in same-day funds on the settlement date.
Investors electing to hold globally-offered securities through Cedelbank or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no distribution compliance period. All globally-offered securities will be
credited to the securities custody accounts on the settlement date against
payment in same-day funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading Between DTC Participants. Secondary market trading between
organizations participating in DTC will be settled using the procedures
applicable to U.S. corporate debt obligations in same-day funds.
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Trading Between Cedelbank and/or Euroclear Participants. Secondary market
trading between organizations participating in Cedelbank or the Euroclear system
will be settled using the procedures applicable to conventional eurobonds in
same-day funds.
Trading Between DTC Seller and Cedelbank or Euroclear Purchaser. When
globally-offered securities are to be transferred from the account of an
organization participating in DTC to the account of an organization
participating in Cedelbank or the Euroclear system, the purchaser will send
instructions to Cedelbank or Euroclear through a Cedelbank participant or a
Euroclear system participant at least one business day prior to settlement.
Cedelbank or Euroclear will instruct the respective depositary to receive the
globally-offered securities against payment. Payment will include interest
accrued on the globally-offered securities from and including the last coupon
payment date to and excluding the settlement date. Payment will then be made by
the respective depositary to the account of the DTC participant against delivery
of the globally-offered securities. After settlement has been completed, the
globally-offered securities will be credited to the respective clearing system
and by the clearing system, in accordance with its usual procedures, to the
account of the Cedelbank participant or the Euroclear system participant. The
globally-offered securities credit will appear the next day, European Time, and
the cash debit will be back-valued to, and the interest on the globally-offered
securities will accrue from, the value date, which would be the preceding day
when settlement occurred in New York. If settlement is not completed on the
intended value date, the Cedelbank or Euroclear cash debit will be valued
instead as of the actual settlement date.
Organizations participating in Cedelbank or the Euroclear system will need
to make available to the respective clearing systems the funds necessary to
process same-day funds settlement. The most direct means of doing so is to
pre-position funds for settlement, either from cash on hand or existing lines of
credit, as they would for any settlement occurring within Cedelbank or
Euroclear. Under this approach, they may take on credit exposure to Cedelbank or
Euroclear until the globally-offered securities are credited to their accounts
one day later.
As an alternative, if Cedelbank or Euroclear has extended a line of credit
to them, organizations participating in Cedelbank or the Euroclear system can
elect not to pre-position funds that allow that credit line to be drawn upon to
finance settlement. Under this procedure, Cedelbank participants or Euroclear
system participants purchasing globally-offered securities would incur overdraft
charges for one day, assuming they cleared the overdraft when the securities
were credited to their accounts. However, interest on the globally-offered
securities would accrue from the value date. Therefore, in many cases the
investment income on the globally-offered securities earned during the one-day
period may substantially reduce or offset the amount of these overdraft charges,
although this result will depend on the particular cost of funds of the
organization participating in Cedelbank or the Euroclear system.
Since the settlement is taking place during New York business hours,
organizations participating in DTC can employ their usual procedures for sending
globally-offered securities to the respective depositary for the benefit of
organizations participating in Cedelbank or the Euroclear system. The sale
proceeds will be available to the DTC seller on the settlement date.
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Thus, to the DTC participant, a cross-market transaction will settle no
differently than a trade between two DTC participants.
Trading Between Cedelbank or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, organizations participating in Cedelbank
or the Euroclear system may employ their customary procedures for transactions
in which globally-offered securities are to be transferred by the respective
clearing system, through the respective depositary, to an organization
participating in DTC. The seller will send instructions to Cedelbank or
Euroclear through a Cedelbank participant or Euroclear system participant at
least one business day prior to settlement. In these cases, Cedelbank or
Euroclear will instruct the respective depositary, as appropriate, to deliver
the globally-offered securities to the account of the DTC participant against
payment. Payment will include interest accrued on the globally-offered
securities from and including the last coupon payment date to and excluding the
settlement date. The payment will then be reflected in the account of the
Cedelbank participant or the Euroclear system participant the following day, and
receipt of the cash proceeds in the account of the Cedelbank participant or
Euroclear system participant would be back-valued to the value date, which would
be the preceding day, when settlement occurred in New York. Should the Cedelbank
participant or Euroclear system participant have a line of credit with its
respective clearing system and elect to be in debit in anticipation of receipt
of the sale proceeds in its account, the back-valuation will extinguish any
overdraft charges incurred over that one-day period. If settlement is not
completed on the intended value date, receipt of the cash proceeds in the
account of the Cedelbank participant or Euroclear system participant would
instead be valued as of the actual settlement date.
Finally, day traders that use Cedelbank or Euroclear and that purchase
globally-offered securities from organizations participating in DTC for delivery
to organizations participating in Cedelbank or the Euroclear system should note
that these trades would automatically fail on the sale side unless affirmative
action were taken. At least three techniques should be readily available to
eliminate this potential problem:
. borrowing through Cedelbank or Euroclear for one day, until the
purchase side of the day trade is reflected in their Cedelbank or
Euroclear accounts, in accordance with the clearing system's customary
procedures;
. borrowing the globally-offered securities in the U.S. from a DTC
participant no later than one day prior to settlement, which would
give the globally-offered securities sufficient time to be reflected
in their Cedelbank or Euroclear accounts in order to settle the sale
side of the trade; or
. staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase form the DTC participant is at
least one day prior to the value date for the sale to the Cedelbank
participant or the Euroclear system participant.
Material U.S. Federal Income Tax Documentation Requirements
A beneficial owner of globally-offered securities holding securities
through Cedelbank or Euroclear, or through DTC if the holder has an address
outside the U.S., will be subject to the
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30% U.S. withholding tax that usually applies to payments of interest, including
original issue discount, on registered debt issued by U.S. Persons unless:
. each clearing system, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between the beneficial owner and the
U.S. entity required to withhold tax complies with applicable
certification requirements; and
. the beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
Exemption For Non-U.S. Persons. Non-U.S. Persons that are beneficial owners
of the globally-offered securities can obtain a complete exemption from the
withholding tax by filing Form W-8, Certificate of Foreign Status. If the
information shown on Form W-8 changes, a new Form W-8 must be filed within 30
days of that change.
Exemption For Non-U.S. Persons with Effectively Connected Income. Non-U.S.
Persons, including non-U.S. corporations or banks with a U.S. branch, that are
beneficial owners of the globally-offered securities and for which the related
interest income is effectively connected with the conduct of a trade or business
in the United States can obtain a complete exemption from the withholding tax by
filing Form 4224, Exemption from Withholding of Tax on Income Effectively
Connected with the Conduct of a Trade or Business in the United States. For
payments made after December 31, 2000, Form 4224 will not apply, and non-U.S.
persons will be required to file a Form W-8 ECI to obtain an exemption for
interest payments that are effectively connected with the conduct of a trade or
business in the U.S.
Exemption or Reduced Rate for Non-U.S. Persons Resident in Treaty
Countries. Non-U.S. Persons that are beneficial owners of the globally-offered
securities and reside in a country that has a tax treaty with the United States
can obtain an exemption or reduced tax rate, depending on the treaty terms, by
filing Form 1001, Ownership, Exemption or Reduced Rate Certificate. If the
treaty provides only for a reduced rate, withholding tax will be imposed at that
rate unless the filer alternatively files Form W-8. Form 1001 may be filed by
the beneficial owner or his agent. For payments made after December 31, 2000,
Form 1001 will not apply, and non-U.S. persons will be required to file a Form
W-8 BEN to claim the benefit of an applicable tax treaty.
Exemption for U.S. Persons. U.S. Persons that are beneficial owners of the
globally-offered securities can obtain a complete exemption from the withholding
tax by filing Form W-9, Payer's Request for Taxpayer Identification Number and
Certification.
U.S. Federal Income Tax Reporting Procedure. The beneficial owner of a
globally-offered security or, in the case of a Form 1001 or a Form 4224 filer,
his agent, files by submitting the appropriate form to the person through whom
he holds, which person would be the clearing agency in the case of persons
holding directly on the books of the clearing agency. Form W-8 and Form 1001 are
effective for three calendar years and Form 4224 is effective for one calendar
year. For payments made after December 31, 2000, Form 4224 and Form 1001 will be
replaced
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by Form W-8 ECI and Form W-8 BEN, respectively, each of which will be effective
from the date the form is signed through the end of the third succeeding
calendar year.
This summary does not deal with all aspects of U.S. federal income tax
withholding that may be relevant to foreign holders of the globally-offered
securities. The depositor suggests that you consult your own tax advisors with
respect to the tax consequences of holding or disposing of the globally-offered
securities.
Definitive Securities
Book-entry 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:
. DTC or the depositor advise in writing that DTC is no longer willing
or able to discharge properly its responsibilities as a nominee and
depository with respect to the book-entry certificates and the
depositor or the trustee is unable to locate a qualified successor;
. the depositor elects, at its sole option, to terminate the book-entry
system through DTC; or
. DTC, at the direction of the depositary participants to whose accounts
are credited a majority of the outstanding book-entry certificates,
advises the trustee in writing that the continuation of a book-entry
system through DTC, or a successor 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.
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.
All distributions with respect to each certificate of a series will be made
to the person in whose name the certificate is registered as of the close of
business on the record date specified in the related prospectus supplement.
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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.
A due period is, 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.
A prepayment period is, 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 some 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 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.
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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 the mortgage loan in
connection with a proceeding under the federal Bankruptcy Code or
otherwise,
. 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 by 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 the mortgage loan and the failure of the servicer or, in
some instances, 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 the 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 the 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
generally 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 increased by the
amount of negative amortization, if any, with respect thereto and reduced by:
. 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
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. 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 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 trust property, 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 a series will be conditioned upon the
passage of a certain date specified in the prospectus supplement or the
scheduled principal balance of 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. Notice will be given to certificateholders as provided in the
related agreement.
MATURITY, PAYMENT AND YIELD CONSIDERATIONS
The prepayment experience of 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 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,
. the characteristics of the borrowers,
. homeowner mobility,
. economic conditions generally and in the geographic area in which the
mortgaged premises are located,
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. 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 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
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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 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 some circumstances, the master servicer, certain insurers, the
holders of REMIC residual certificates or 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 in this prospectus 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
Under the terms of 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 security 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 security as of the specified date and its
interest rate, its original principal balance and other specified information.
Each mortgage loan or mortgage backed security 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 payments on each
mortgage loan after the specified date or dates will 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 the
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, the 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 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 these 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 the mortgage assets, together with
accrued and unpaid interest on the mortgage assets 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 the 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 of these features or any other
features described in the 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 these limitations. Accrued interest may be deferred and
added to the principal of a mortgage loan for specified periods and
under various circumstances as may be set forth 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 the 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. 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 in this prospectus,
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 are 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 are 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 are 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, 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 lines of credit or specified
balances of those lines of credit 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 balances 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 those balances, and the amounts usually will differ each day, as more
specifically described in the prospectus supplement. Under the 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 line of credit either that the underlying properties or
interests securing the mortgage loan 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 loan 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 the prospectus supplement, the applicable servicer, or other
party specified in the 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 the 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 the converted mortgage loans to the extent provided in the prospectus
supplement. The purchase price specified in the prospectus supplement 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 the
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. The purchase price
specified in the prospectus supplement 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
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in the trust for the series. In general, any substitute mortgage loan must, on
the date of the substitution:
. 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 applicable
agreement, and
. comply with each applicable representation, warranty and covenant
pertaining to an individual mortgage loan set forth in the applicable
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 the 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 in accordance with a private
mortgage-backed securities agreement.
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The related prospectus supplement for a series of certificates that
evidence interests in mortgage-backed securities will specify:
. 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,
. characteristics of credit support, if any, including 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 the trust following the closing date. Any
pre-funding agreement will require that any mortgage loans so transferred
conform to the requirements specified in the 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
transfer must occur. If all moneys originally deposited in the pre-funding
account are not used
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by the end of such specified period, then any remaining moneys will be applied
as a 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
the 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 if payable to the certificateholders, will be
available, to the extent specified in the related prospectus supplement, for the
payment of trustee fees, and any other fees or expenses 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, specified 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
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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 particular classes of certificates are
distributed prior to the distributions to other classes of certificates, the
classes of certificates which receive distributions at a later time are more
likely to bear any losses which exceed the amount covered by credit enhancement.
In some cases, credit enhancement may be canceled or reduced if the 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 the 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 to those
mortgage assets 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 the
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 the reserve account to
required levels. If so specified in the prospectus supplement, amounts on
deposit in any designated 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 the 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 distributions to other classes of senior certificates
and subordinated certificates, respectively, through a cross-support mechanism
or otherwise. If so set forth in the prospectus supplement, the same class of
certificates may constitute senior certificates with respect to specified 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 specified
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 those 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 other amounts specified in the related prospectus supplement, to the
extent of any payments made by the 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
provided in the related prospectus supplement, specified classes of certificates
may be entitled to receive distributions of excess cash as an additional payment
of
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principal, thereby creating a limited acceleration of the payment of the
principal of the certificates relative to the amortization of the related
mortgage assets. 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 that case, credit
enhancement may be provided by a cross-support feature which requires that
distributions be made with respect to specified 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, the prospectus supplement
will identify the trusts or asset groups to which the credit enhancement relates
and the manner of determining the amount of the coverage provided by the credit
enhancement and of the application of the 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 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 under the policy may only be made
for particular defaulted mortgage loans and only upon satisfaction of specified
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 after that
time, 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 the 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 the
series confirms that the reduction or cancellation will not result in a lowering
or withdrawal of the 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 the other securities or
obligations does not, at the time of the extension, result in the downgrade or
withdrawal of any credit rating assigned, at the request of the depositor, to
the outstanding certificates of the 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 limitations,
against specified losses not covered by standard hazard insurance policies will
be obtained and maintained for the related series in an amount specified in the
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 specified hazards, including
vandalism and earthquakes and, except where the borrower is required
to obtain flood insurance, floods and mudflows, not covered by the
standard hazard insurance policies with respect to the mortgage loans
and
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. 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 the damage is not
covered by the standard hazard insurance policy maintained by the borrower or
the servicer or the master servicer with respect to the mortgage loan, the
special hazard insurer will pay the lesser of the cost of repair of the
mortgaged premises or upon transfer of the mortgaged premises to it, the unpaid
principal balance of the mortgage loan at the time of the acquisition of the
mortgaged premises, plus accrued interest to the date of claim settlement,
excluding late charges and penalty interest, and certain expenses incurred in
respect of the 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
specified expenses is paid by the special hazard insurer, that amount of further
coverage under the special hazard insurance policy will be reduced by that
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
that amount.
The terms of the agreement with respect to a series will require the master
servicer to maintain the special hazard insurance policies for the series in
full force and effect throughout the term of the agreement, subject to specified
conditions contained in the agreement, present claims under the policies 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.
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
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coverage, and the corresponding assignment of the special hazard insurance
policy, to any other series or other securities or obligations does not, at the
time of the 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 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 the court of the principal amount of a mortgage loan and will cover certain
unpaid interest on the amount of the 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.
Reserve Funds
If so specified in the related prospectus supplement, cash, U.S. Treasury
securities, instruments evidencing ownership of principal or interest payments
thereon, letters of credit, surety bonds, demand notes, certificates of deposit
or a combination thereof in the aggregate amount specified in the 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 the
prospectus supplement, to provide additional protection against losses in
respect of, the assets in the related trust, to pay the expenses of the trust or
for other purposes as may be specified in the prospectus supplement. If a letter
of credit is deposited with the trustee, it will be irrevocable. Any instrument
deposited in a reserve funds account 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 provided in the prospectus supplement for a series, the related trust
may include, or the related certificates may be entitled to the benefits of,
other specified assets including reserve accounts, insurance policies,
guaranties, surety bonds, letters of credit, guaranteed investment contracts or
similar arrangements:
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. 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 the 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 of these arrangements 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, which may not conform to Fannie Mae or Freddie Mac
guidelines.
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 Fannie Mae or Freddie Mac underwriting
guidelines or a borrower who may have a record of major derogatory credit items
including default on a prior mortgage loan, credit write-offs, outstanding
judgments and prior bankruptcies. Accordingly, mortgage loans underwritten
according 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.
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
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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 including 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 being
employed 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 the 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 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 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 mortgaged premises are located in order to make effective
the lien on the related mortgaged premises, and
. that upon foreclosure on the mortgaged premises, the holders of the
mortgage loan will be able to deliver good and merchantable title to
the 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 the breach
or defect cannot be cured as specified in the agreement, the trustee may require
the seller to purchase the mortgage loan from the related trust upon deposit
with the trustee of funds equal to the then unpaid principal balance of the
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
specified circumstances, in lieu of repurchasing the 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 servicer, the
depositor will review the credit of the servicer and, if necessary for the
approval of
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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 the series or
from proceeds of the liquidation of the mortgage loans. Each servicer also will
provide accounting and reporting services as necessary to enable the master
servicer to provide required information to the depositor and the trustee with
respect to the 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 the servicer and certain other fees, including, but
not limited to, late payments, conversion or modification fees and assumption
fees. 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 the servicer included in the trust for the
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 the account, the servicer will be required within one
business day to withdraw the excess funds from the account and remit the 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 the
series. The amount on deposit in any 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 the 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 the 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 the servicing agreement, with
interest to the date of prepayment or liquidation, subject to specified
limitations. However, each servicer may deduct from the remittance all
applicable servicing fees, 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 the distribution
date. In addition, there will be deposited in the asset proceeds account for the
series any advances of principal and interest made by the master servicer or the
trustee pursuant to the agreement to the extent the 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 the series.
Advances
If so specified in the prospectus supplement for a series, each servicing
agreement with respect to the series will provide that the related servicer will
be obligated to advance funds to cover, to the extent that the amounts are
deemed to be recoverable from any subsequent payments on the mortgage loans:
. delinquent payments of principal or interest on the 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 the servicing agreement for
which the servicer may be terminated. Upon a default by the servicer, the master
servicer or the trustee may be required, if so provided in the agreement, 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 for a series, 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 the 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
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date to which the 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 the 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, the 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 the 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 the advances will be
recoverable out of future payments on the mortgage loans, insurance proceeds or
liquidation proceeds of the mortgage loans for which the 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 the servicing
agreement and the applicable insurance policies with respect to each mortgage
loan, to follow the collection procedures 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 the mortgaged premises have been or are about to be conveyed,
if that 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 of the
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 the
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 the mortgage loan has declined to 80% or
less based upon the current fair market value of the mortgaged premises. 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 specified
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
the mortgaged premises and which have not been applied to the payment
of the 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, after that date, 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 the 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 the 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 master servicer for previously
incurred advances or approved expenses, which may be retained by the servicer or
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the master servicer, will be deposited to the applicable custodial account
maintained with respect to the 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, the policies will not contain identical terms and conditions.
The basic terms of the policies, 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 some 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 the mortgaged premises. The depositor may acquire one or more
special hazard insurance policies covering some 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, the coinsurance clause will provide that the
insurer's liability in the event of partial loss will not exceed the greater of:
. the actual cash value, or the replacement cost less physical
depreciation, of the dwellings, structures and other improvements
damaged or destroyed, or
. that 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 the mortgage loans, to the extent that the policy
names the servicer as loss payee and the policy provides coverage in an amount
equal to the aggregate unpaid principal balance on the mortgage loans without
co-insurance. If the blanket policy contains a deductible clause and there is a
loss not covered by the blanket policy that would have been covered by a
standard hazard insurance policy covering the related mortgage loan, then the
servicer will remit to the master servicer from the servicer's own funds
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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 the
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 the series to the extent the losses are not
covered by a special hazard insurance policy for the series and could affect
distributions to holders of the certificates of the series.
Maintenance of Insurance Policies; Claims Under Those Policies 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 and
requirements of the policy or bond applicable to any servicer or master servicer
will be described in the related prospectus supplement. If any 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
the series confirms that such lesser amount will not impair the rating on such
certificates, of the mortgage pool insurance policy, special hazard insurance
policy or bankruptcy bond. If, however, the cost of any 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 so that the
applicable premium will not exceed the cost of the premium for the terminated
policy or bond or the replacement policy or other credit enhancement may be
secured at such increased cost, so long as the 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 the 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 all reasonable steps 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 the 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 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 that
holders of the certificates of the series may not receive distributions of
principal and interest on the 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 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 the modification,
forbearance or substitution will maximize the recovery on the 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 the 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 the year and a statement from the firm of independent
public accountants that prepared the financial statements to the effect that, in
preparing the 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 the fiscal year and the steps that have been taken to correct
the 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 the servicer under the 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 the 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,
. specified events of insolvency, readjustment of debt, marshaling of
assets and liabilities or similar proceedings regarding the servicer,
or
. specified actions by or on behalf of the servicer indicating its
insolvency or inability to pay its obligations.
The master servicer will have the right under each servicing agreement to
terminate the related servicer upon the occurrence of an event of default under
the servicing agreement. In the event of 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 the appointment will not adversely affect 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
. prepare reports, if any, required under the Securities Exchange Act of
1934, as amended.
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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 the 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 the 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 the 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 the series, but no 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, 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 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,
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. 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 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 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 another percentage specified in the related prospectus supplement,
of the voting rights of the series. Certificate insurers may obtain the right to
exercise all voting rights of holders of certificates. Any resignation or
removal of the trustee and appointment of a successor trustee will not become
effective until acceptance of the appointment by the successor trustee.
Administration of Accounts
Funds deposited in or remitted to the asset proceeds account, any reserve
fund or any other funds or accounts for a series are to be invested by the
trustee, as directed by the depositor, in certain eligible investments, which
may include:
. obligations of the United States or any agency thereof, provided the
obligations are backed by the full faith and credit of the United
States,
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. within specified 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 the depository institution or trust company, or
the senior debt obligations or commercial paper of the parent company
of the 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 the series at the time of issuance of the series and
. specified 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 the series are
required or may be anticipated to be required to be applied for the benefit of
the holders of the certificates of the 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 according to the terms of the reinvestment agreement.
Reports to Certificateholders
Concurrently with each distribution on the certificates of any series,
there will be mailed to the holders of the certificates a statement generally
setting forth, to the extent applicable to the 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,
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. if applicable, the amount otherwise distributable to any class of
certificates that was distributed to any other class of certificates,
and
. 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 the agreement which continues unremedied
for a specified period after the giving of written notice of the
default or breach 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,
. specified events of insolvency, readjustment of debt, marshaling of
assets and liabilities or similar proceedings regarding the master
servicer, if any, and
. specified actions by or on behalf of the master servicer indicating
its insolvency or inability to pay its obligations.
So long as an event of default by the master servicer under an agreement
remains unremedied, the trustee may, and, at the direction of the holders of
outstanding certificates of a series entitled to at least 51% of the voting
rights, the trustee will, terminate all the rights and obligations of the master
servicer under the related agreement, except that the holders of certificates
may not direct the trustee to terminate the master servicer for its failure to
make advances. Upon termination, the trustee will succeed to all the
responsibilities, duties and liabilities of the master servicer under the
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 the successor master servicer 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.
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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 under the agreement or to institute, conduct or defend any litigation
under or in relation to the agreement at the request, order or direction of any
of the holders of the certificates of the related series unless the
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 to the agreement with
the consent of the holders of outstanding certificates of the related series
entitled to at least 66% of the voting rights of the 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 the class
evidencing 66% of the voting rights of such class, or
. reduce the aforesaid percentage of certificateholders required to
consent to any 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 to the
agreement without the consent of certificateholders for the purpose of, among
other things:
. curing any ambiguity,
. correcting or supplementing any provisions of the agreement which may
be inconsistent with any other provision of the agreement,
. modifying, eliminating or adding to any of the provisions of the
agreement to the extent necessary or appropriate to maintain the
qualification of the trust, or specified assets of the trust, 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 the action shall not adversely affect in any material
respect the interests of any certificateholder. No amendment or supplement shall
be deemed 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 the amendment or supplement will not cause
the rating agency to lower or withdraw the then current rating assigned to the
certificates.
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Termination
Each agreement and the respective obligations and responsibilities created
by the agreement 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 the related trust and all
mortgaged premises acquired in respect of the trust, 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 of the trust.
In no event, however, will any trust continue beyond the expiration of 21 years
from the death of the survivor of persons specified 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.
MATERIAL LEGAL ASPECTS OF MORTGAGE LOANS
General
The following discussion contains summaries of the material legal aspects
of mortgage loans which are general in nature. Because the legal aspects are
governed by applicable state law, which laws may differ substantially, the
summaries do not purport to be complete nor to reflect the laws of any
particular state, nor to encompass the laws of all states in which the security
for the mortgage loans is situated.
The Mortgage Loans
Single Family Loans, Multi-Family Loans, Conventional Home Improvement
Loans, Title I Loans and 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 are 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
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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. Particular 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. Particular 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 or
underlying land, as is generally the case, the cooperative, as project
mortgagor, is also responsible for meeting these mortgage obligations. A blanket
mortgage is ordinarily incurred by the cooperative in connection with the
construction or purchase of the cooperative's apartment building. The interest
of the occupants under proprietary leases or occupancy agreements to which the
cooperative is a party are generally subordinate to the interest of the holder
of the blanket mortgage in that building. If the cooperative is unable to meet
the payment obligations arising under its blanket mortgage, the mortgagee
holding the blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements. In addition, the
blanket mortgage on a cooperative may provide financing in the form of a
mortgage that does not fully amortize with a significant portion of principal
being due in one lump sum at final maturity. The inability of the cooperative to
refinance this mortgage or make the 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 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. 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
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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, under 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 some states, the
foreclosure also may be accomplished by judicial action in the manner provided
for foreclosure of mortgages. In some states, the trustee must record a notice
of default and send a copy to the borrower and to any person who has recorded a
request for a copy of a notice of default and notice of sale. In addition, the
trustee must provide notice in some states to any other party having a
subordinate interest in the real estate, including any holder of a junior
encumbrance on the real estate. If the deed of trust is not reinstated within
any applicable cure period, a notice of sale must be posted in a public place
and, in most states, published for a specified period of time in one or more
newspapers. In addition, some state laws require that a copy of the notice of
sale be posted on the property and sent to all parties having an interest of
record in the property. When the beneficiary's right to foreclosure is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming.
In some states, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a statutorily prescribed
reinstatement period, cure a monetary default by paying the entire amount in
arrears plus other designated costs and expenses incurred in enforcing the
obligation. In general, state law controls the amount of foreclosure expenses
and costs, including attorneys' 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
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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
some governmental liens and any redemption rights that may be granted to
borrowers under 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. Subsequently, subject to the right of
the borrower in some states to remain in possession during the redemption
period, the lender will assume the burdens of ownership, including obtaining
hazard insurance and making such repairs at its own expense as are necessary to
render the mortgaged premises suitable for sale. The lender commonly will obtain
the services of a real estate broker and pay the broker a commission in
connection with the sale of the mortgaged premises. Depending upon market
conditions, the ultimate proceeds of the sale of the mortgaged premises may not
equal the lender's investment therein. Any loss may be reduced by the receipt of
insurance proceeds. 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 the non-judicial sale takes place.
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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 the tenant-stockholder. The
proprietary lease or occupancy agreement generally permits the cooperative to
terminate the 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 the lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from the sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the cooperative loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that, in the event of a foreclosure on
a cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease.
In some states, foreclosure on the cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the Uniform Commercial
Code 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.
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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 the default and bring the senior loan current, in either event
adding the amounts expended to the balance due on the junior loan. In most
states, no notice of default is required to be given to a junior mortgagee or
junior beneficiary, and junior mortgagees or junior beneficiaries are seldom
given notice of defaults on senior mortgages. In order for a foreclosure action
in some states to be effective against a junior mortgagee or junior beneficiary,
the junior mortgagee or junior beneficiary must be named in any foreclosure
action, thus giving notice to junior lienors.
The standard form of the mortgage or deed of trust used by most
institutional lenders confers on the mortgagee or beneficiary the right under
some circumstances both to receive all proceeds collected under any standard
hazard insurance policy and all awards made in connection with any condemnation
proceedings, and to apply the proceeds and awards to any indebtedness secured by
the mortgage or deed of trust in any 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 a future advance 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
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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 the 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
some mortgages or deeds of trust to perform the obligation itself, at its
election, with the mortgagor or trustor agreeing to reimburse the mortgagee or
beneficiary for any sums expended by the mortgagee or beneficiary on behalf of
the mortgagor or trustor. All sums so expended by the mortgagee or beneficiary
become part of the indebtedness secured by the mortgage or deed of trust.
Right of Redemption
In some states, after foreclosure of a mortgage or sale pursuant to a deed
of trust, the borrower and certain foreclosed junior lienholders are given a
statutory period in which to redeem the mortgaged premises from the foreclosure
sale. Depending upon state law, the right of redemption may apply to sale
following judicial foreclosure or to sale pursuant to a non-judicial power of
sale. In some states, statutory redemption may occur only upon payment of the
foreclosure purchase price, accrued interest and taxes and certain of the costs
and expenses incurred in enforcing the obligation. In some states, the right to
redeem is a statutory right and in others it is a contractual right. The effect
of a right of redemption is to diminish the ability of the lender to sell the
foreclosed mortgaged premises while the 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
Some 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
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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 the mortgage loan, change the rate of interest and alter the
mortgage loan repayment schedule. The effect of any of these 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 the
payments. Some states also have homestead exemption laws which would protect a
principal residence from a liquidation in bankruptcy.
Federal and local real estate tax laws provide priority to certain tax
liens over the lien of a mortgage or secured party. Numerous federal and state
consumer protection laws impose substantive requirements upon mortgage lenders
in connection with the origination, servicing and enforcement of single family
loans and cooperative loans. These laws include the federal Truth-in-Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act and related statutes 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 military service,
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. may be entitled to a stay of proceedings on any kind of foreclosure or
repossession action in the case of defaults on obligations incurred
before the commencement of military service, and
. may have the maturity of obligations incurred before 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 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 the
amounts, and any loss in respect of those amounts may reduce the amounts
available to be paid to the holders of the certificates of the series. If so
specified in the prospectus supplement for a series, any shortfalls in interest
collections on mortgage loans included in the trust for the series resulting
from application of the Soldiers' and Sailors' Civil Relief Act of 1940 will be
allocated to each class of certificates of the series that is entitled to
receive interest in respect of the mortgage loans in proportion to the interest
that each class of certificates would have otherwise been entitled to receive in
respect of the mortgage loans had the interest shortfall not occurred.
Environmental Considerations
Environmental conditions may diminish the value of the mortgage assets and
give rise to liability of various parties, including liability under 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
some circumstances for the costs of a remedial action if hazardous substances
have been released or disposed of on the property. These 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 EPA will not proceed against owners of residential property
contaminated with hazardous substances under certain circumstances. Similarly,
the EPA and the Department of Justice have adopted a policy not to proceed
against lenders which are acting primarily to protect a security interest at the
inception of a loan, during a workout, in foreclosure or after foreclosure or
the taking of a deed in lieu of foreclosure. Policy on CERCLA Enforcement
Against Lenders and Government Entities that Acquire Property Involuntarily
(September 22, 1995). These policies are not binding on the EPA, a state or
third parties who may have a cause of action under CERCLA, however, and are
subject to limitations and conditions.
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On September 30, 1996, the President signed into law the Asset Conservation
Lender Liability and Deposit Insurance Protection Act of 1996. The Asset
Conservation Act was intended to clarify the scope of the secured creditor
exemption under both CERCLA and other legislation. The Asset Conservation Act
more explicitly defined the kinds of participation in management that would
trigger liability under CERCLA an specified the activities that would not
constitute participation in management or otherwise result in a forfeiture of
the secured creditor exemption before foreclosure or during a workout period.
The Asset Conservation Act also clarified the extent of protection against
liability under CERCLA in the event of foreclosure and authorized certain
regulatory clarifications of the scope of the secured creditor exemption for
purposes of other legislation, similar to the statutory protections under
CERCLA. However, since the courts have not yet had the opportunity to interpret
the new statutory provisions, the scope of the additional protections offered by
the Asset Conservation Act is not fully defined. It also is important to note
that the Asset Conservation Act does not offer complete protection to lenders
and that the risk of liability remains.
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 the trust in certain circumstances and if
the cleanup costs were incurred. Moreover, some states or localities by statute
or ordinance impose a lien for any cleanup costs incurred by the state or
locality on the property that is the subject of such cleanup costs. Some 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 the adverse environmental conditions
will reduce the amounts otherwise available to pay to the holders of the
certificates.
If so specified in the prospectus supplement for a series, the servicers
are not permitted to foreclose on any mortgaged premises without the approval of
the master servicer or the trustee. The master servicer or the trustee is not
permitted to approve foreclosure on any property which it knows or has reason to
know is contaminated with or affected by hazardous wastes or hazardous
substances. The master servicer or the trustee is required to inquire of any
servicer requesting approval of foreclosure whether the property proposed to be
foreclosed upon is so contaminated. If a servicer does not foreclose on
mortgaged premises, the amounts otherwise available to pay the holders of the
certificates may be reduced. A servicer will not be liable to
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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 the
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 contamination or effect exists, the servicer
forecloses on mortgaged premises and takes title to the mortgaged premises and
thereafter the 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 some 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
limitations as set forth in the Act and the regulations promulgated under the
Act.
By virtue of the Garn-St Germain Depository Institutions Act , a mortgage
lender generally may accelerate any conventional mortgage loan which contains a
due-on-sale clause upon transfer of an interest in the mortgaged premises. With
respect to any mortgage loan secured by a residence occupied or to be occupied
by the borrower, this ability to accelerate will not apply to certain types of
transfers, including:
. 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 the lien
or encumbrance is not created under contract for deed,
. 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.
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Enforceability of 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
some states, there are or may be specific limitations upon late charges which a
lender may collect from a borrower for delinquent payments. Some 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,
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 some
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 affected loan would have a
significantly increased risk of default or prepayment.
THE DEPOSITOR
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
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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 other related 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 other related assets and taking particular actions with respect to
those assets. 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 the series and to fund any pre-funding account.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion describes the material federal income tax
consequences of the purchase, ownership and disposition of the certificates.
McGuire, Woods, Battle & Boothe LLP, special counsel to the depositor, 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,
. FASIT certificates,
. trust certificates,
. partnership interests, and
. debt certificates.
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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 of this prospectus, 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
. particular representations set forth in the trust agreement are true,
the 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 this event, the entity may be subject to taxation as a separate
corporation, and the certificates issued by the entity may not be accorded the
status described below under "-- Status of REMIC Certificates." In the case of
an inadvertent termination of REMIC status, the Treasury Department has
authority to issue regulations providing relief; however, sanctions, such as the
imposition of a corporate tax on all or a portion of the entity's income for the
period during which the requirements for REMIC status are not satisfied, may
accompany any such relief.
Among the ongoing requirements to qualify for REMIC treatment is that
substantially all the assets of the REMIC mortgage pool, as of the close of the
third calendar month beginning after the creation of the REMIC and continually
thereafter, must consist of only qualified mortgages and permitted investments.
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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, particular regular interests in a
FASIT.
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."
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 address all
issues presented by debt instruments subject to Code Section 1272(a)(6).
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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 the 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
or all of 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
. 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.
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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 these 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 the 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 certificates providing for variable rates of interest are not
anticipated to have stated interest other than qualified stated interest, but,
if any REMIC regular certificates are so offered, appropriate disclosures will
be made in the prospectus supplement. Some or all of the payments on REMIC
regular certificates providing for the accretion of interest will be included in
the stated redemption price at maturity of such certificates. Interest payments
are unconditionally payable only if a late payment or nonpayment is expected to
be penalized or reasonable remedies exist to compel payments or the terms of the
REMIC regular certificates or the conditions surrounding their issuance make the
likelihood of late payment or nonpayment a remote contingency. Although not free
from doubt, unless the prospectus supplement for a series indicates otherwise,
the trustee for each series will treat all stated interest on the certificates
as qualified stated interest.
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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. Although
not free from doubt, the trustee for each series will take into account the
prepayment assumption in computing the weighted average maturity of a
certificate for purposes of determining whether any certificate has de minimis
OID.
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, this 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) the sum of
distributions made on the 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 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
the certificate, increased by the aggregate amount of original issue discount
with respect to the REMIC regular certificate that accrued in prior accrual
periods, and reduced by the amount of any distributions made on the 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.
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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 the cost exceeds
the adjusted issue price, by an amount equal to the product of (1) the daily
portions and (2) a constant fraction, the numerator of which is the excess and
the denominator of which is the sum of the daily portions of original issue
discount on the 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.
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 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
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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.
Market Discount. The purchaser of a REMIC regular certificate at a market
discount -- that is, at a purchase price less than the stated redemption price
at maturity (or, in the case of a REMIC regular certificate issued with original
issue discount, the REMIC regular certificate's adjusted issue price (as defined
under "REMIC Certificates -- Original Issue Discount")) -- will recognize market
discount upon receipt of each payment of principal. In particular, 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. The 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 the
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.
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The Treasury Department is authorized to issue regulations providing for
the method for accruing market discount of more than a de minimis amount on debt
instruments the principal of which is payable in more than one installment.
Nevertheless, no such regulations have been issued. Until regulations are
issued, certain rules described in the Committee Report might apply. Under those
rules, the holder of a REMIC regular certificate purchased with more than de
minimis market discount may elect to accrue such market discount either on the
basis of a constant yield method or on the basis of the appropriate
proportionate method described below. Under the proportionate method for
obligations issued with original issue discount, the amount of market discount
that accrues during a period is equal to the product of (i) the total remaining
market discount multiplied by (ii) a fraction the numerator of which is the
original issue discount accruing during the period and the denominator of which
is the total remaining original issue discount at the beginning of the period.
The prepayment assumption, if any, used in calculating the accrual of original
issue discount should be used in calculating the accrual of market discount.
Under the proportionate method for obligations issued without original issue
discount, the amount of market discount that accrues during a period is equal to
the product of (i) the total remaining market discount multiplied by (ii) a
fraction the numerator of which is the amount of stated interest paid during the
accrual period and the denominator of which is the total amount of stated
interest remaining to be paid at the beginning of the period. Because
regulations have not been issued, it is not possible to predict what effect such
regulations might have on the tax treatment of a REMIC regular certificate
purchased at a discount in the secondary market.
A certificateholder generally will be required to treat a portion of any
gain on sale or exchange of a REMIC regular certificate as ordinary income to
the extent of the market discount accrued to the date of disposition under one
of the foregoing methods less market discount previously reported as ordinary
income as distributions in reduction of the stated redemption price at maturity
were received. See "-- Sales of REMIC Certificates" below. A certificateholder
may be required to defer a portion of its interest deductions for the taxable
year attributable to any indebtedness incurred or continued to purchase or carry
such REMIC regular certificate. Any such deferred interest expense, in general,
is allowed as a deduction not later than the year in which the related market
discount income is recognized. If such holder elects to include market discount
in income currently as it accrues on all market discount instruments acquired by
such holder in that taxable year or thereafter, the interest expense deferral
rule described above will not apply.
Premium. A REMIC regular certificate purchased at a cost, not including
payment for accrued qualified stated interest, greater than its remaining stated
redemption price at maturity will be considered to be purchased at a premium.
The holder of such a REMIC regular certificate may elect to amortize such
premium under the constant yield method. The OID Regulations also permit
certificateholders to elect to include all interest, discount and premium in
income based on a constant yield method, further treating the certificateholder
as having made the election to amortize premium generally, as described above.
The Committee Report indicates a Congressional intent that the same rules that
apply to accrual of market discount on installment obligations also apply in
amortizing premium under Code Section 171 on installment obligations such as the
REMIC regular certificates.
Treasury regulations concerning amortization of premium ("the Premium
Regulations") describe the constant yield method under which premium is
amortized and provide that the
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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.
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 "loans secured by interests in
real property" 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
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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 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 Code. Solely for purposes of determining whether the REMIC
certificates will be real estate assets within the meaning of section
856(c)(5)(B) 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
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income from Residual certificates may exceed cash distributions with respect
thereto in any taxable year.
The tax treatment of any payments received by a Residual Owner in
connection with the acquisition of such certificate is unclear. Such payments
may be taken into account in determining the income of such holder.
Alternatively, a holder may take another position. Because of the uncertainty
concerning the treatment of such payments, Residual Owners should consult their
tax advisers concerning the treatment of such payments for income tax purposes.
Taxable Income or Net Loss of the REMIC Mortgage Pool. The taxable income
or net loss of the REMIC mortgage pool reflects a netting of income from the
qualified mortgages, any cancellation of indebtedness income due to the
allocation of realized losses to REMIC regular certificates and the deductions
and losses allowed to the REMIC mortgage pool. Such taxable income or net loss
for a given calendar quarter is determined in the same manner as for an
individual having the calendar year as his taxable year and using the accrual
method of accounting, with certain modifications. First, a deduction is allowed
for accruals of interest, including original issue discount, on the REMIC
regular certificates. Second, market discount equal to the excess of any
qualified mortgage's adjusted issue price (as determined under "-- REMIC
Certificates -- Market Discount", and "--Premium") over its fair market value at
the time of its transfer to the REMIC mortgage pool generally will be included
in income as it accrues, based on a constant yield method and on the prepayment
assumption. For this purpose, the fair market value of the mortgage loans will
be treated as being equal to the aggregate issue prices of the REMIC regular
certificates and REMIC residual certificates. If one or more classes of REMIC
regular certificates or REMIC residual certificates are retained by the
depositor, the value of such retained interests will be estimated in order to
determine the fair market value of the qualified mortgages for this purpose.
Third, no item of income, gain, loss or deduction allocable to a prohibited
transaction (see "-- Prohibited Transactions and Other Possible REMIC Taxes") is
taken into account. Fourth, the REMIC mortgage pool generally may deduct only
items that would be allowed in calculating the taxable income of a partnership
by virtue of 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.
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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 by
that Residual Owner to offset income from the REMIC residual certificate.
The effect of these basis and distribution rules is that a Residual Owner
may not amortize its basis in a REMIC residual certificate but may only recover
its basis through distributions, through the deduction of any net losses of the
REMIC mortgage pool or upon the sale of its REMIC residual certificate. See "--
Sales of REMIC Certificates."
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
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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 any amount so allocated will be treated as an
excess inclusion with respect to a REMIC residual certificate as if held
directly by such shareholder.
Noneconomic REMIC Residual Certificates. Under the REMIC Regulations,
transfers of "noneconomic" REMIC residual certificates are disregarded for all
federal income tax purposes if "a significant purpose of the transfer was to
enable the transferor to impede the assessment or collection of tax." If such
transfer is disregarded, the purported transferor will continue to remain liable
for any taxes due with respect to the income on such noneconomic REMIC residual
certificate. The REMIC Regulations provide that a REMIC residual certificate is
noneconomic unless, at the time of its transfer and based on the prepayment
assumption and any required or permitted clean up calls or required liquidation
provided for in the REMIC's organizational documents: (1) the present value of
the expected future distributions (discounted using the AFR) on the REMIC
residual certificate equals at least the product of the present value of the
anticipated excess inclusions and the highest tax rate applicable to
corporations for the year of the transfer and (2) the transferor reasonably
expects that the transferee will receive distributions with respect to the REMIC
residual certificate at or after the time the taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes.
Accordingly, all transfers of REMIC residual certificates will be subject to
certain restrictions under the terms of the related agreement that are intended
to reduce the possibility of any such transfer being disregarded. Such
restrictions will require each party to a transfer to provide an affidavit that
no purpose of such transfer is to impede the assessment or collection of tax,
including certain representations as to the financial condition of the
prospective transferee. Prior to purchasing a REMIC residual certificate,
prospective purchasers should consider the possibility that a purported transfer
of such REMIC residual certificate by such a purchaser to another purchaser at
some future date may be disregarded in accordance with the above-described
rules, which would result in the retention of tax liability by such purchaser.
The applicable prospectus supplement will disclose whether offered REMIC
residual certificates may be considered noneconomic residual interests under the
REMIC Regulations; provided, however, that any disclosure that a REMIC residual
certificate will or will not be considered noneconomic will be based upon
certain assumptions, and the depositor will make no representation that a REMIC
residual certificate will not be considered noneconomic for purposes of the
above-described rules or that a Residual Owner will receive distributions
calculated pursuant to such assumptions. See "-- Foreign Investors in REMIC
Certificates" below for additional restrictions applicable to transfers of
certain REMIC residual certificates to foreign persons.
Tax-Exempt Investors. Tax-exempt organizations, including employee benefit
plans, that are subject to tax on unrelated business taxable income, as defined
in 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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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.
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
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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 include 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.
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
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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 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
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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.
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 (i) a citizen or resident of the United States; (ii) a
corporation (or entity treated as a corporation for tax purposes) created or
organized in the United States or under the laws of the United States or of any
state thereof, including, for this purpose, the District of Columbia; (iii) a
partnership (or entity treated as a partnership for tax purposes) organized in
the United States or under the laws of the United States or of any state
thereof, including, for this purpose, the District of Columbia (unless provided
otherwise by future Treasury regulations); (iv) an estate whose income is
includible in gross income for United
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States income tax purposes regardless of its source; or (v) a trust, if a court
within the United States is able to exercise primary supervision over the
administration of the trust and one or more U.S. Persons having authority to
control all substantial decisions of the trust. Notwithstanding the last clause
of the preceding sentence, to the extent provided in Treasury regulations,
certain trusts in existence on August 20, 1996, and treated as U.S. Persons
prior to such date, may elect to continue to be U.S. Persons.
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 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
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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 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 the depositor 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)
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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 tax 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 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,
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. 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,
(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
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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. 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
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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 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
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. 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 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)(B) 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.
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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)(B), 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.
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)(B) 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
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debt instruments, and thus to have no market discount or premium, and the amount
of original issue discount may differ from the amount of original issue discount
on the mortgage assets and the amount includible in income on account of a trust
fractional certificate may differ significantly from the amount payable thereon
from payments of interest on the mortgage assets. Each trust fractional
certificateholder may report and deduct its allocable share of the servicing and
related fees and expenses at the same time, to the same extent, and in the same
manner as such items would have been reported and deducted had it held directly
interests in the mortgage assets and paid directly its share of the servicing
and related fees and expenses. A holder of a trust fractional certificate who is
an individual, estate or trust will be allowed a deduction for servicing fees in
determining its regular tax liability only to the extent that the aggregate of
such holder's miscellaneous itemized deductions exceeds 2 percent of such
holder's adjusted gross income and will be allowed no deduction for such fees in
determining its liability for alternative minimum tax. Amounts received by trust
fractional certificateholders in lieu of amounts due with respect to any
mortgage assets but not received from the mortgagor will be treated for federal
income tax purposes as having the same character as the payments which they
replace.
Purchasers of trust fractional certificates identified in the applicable
prospectus supplement as representing interests in Stripped mortgage assets
should read the material under "-- Application of Stripped Bond Rules," "--
Market Discount and Premium" and "-- Allocation of Purchase Price" for a
discussion of particular rules applicable to their certificates. A "stripped
mortgage asset" means a mortgage asset having a Retained Yield (as that term is
defined below) or a mortgage asset included in a trust having either trust
interest certificates or more than one class of trust fractional certificates or
identified in the prospectus supplement as related to a class of trust
certificates identified as representing interests in stripped mortgage assets.
Purchasers of trust fractional certificates identified in the applicable
prospectus supplement as representing interests in unstripped mortgage assets
should read the material under "-- Treatment of Unstripped Certificate," "--
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
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there is a class of trust interest certificates or two or more classes of trust
fractional certificates bearing different interest rates or of trust
certificates identified in the prospectus supplement as representing interests
in stripped mortgage assets (subject to certain exceptions which, if applicable,
will be stated in the applicable prospectus supplement) will be treated for
federal income tax purposes as having effected a separation in ownership between
the principal of each mortgage asset and some of or all the interest payable
thereon. As a consequence, each stripped mortgage asset will become subject to
the "stripped bond" rules of the Code (the "Stripped Bond Rules"). The effect of
applying those rules will generally be to require each trust fractional
certificateholder to accrue and report income attributable to its share of the
principal and interest on each of the stripped mortgage assets as original issue
discount on the basis of the yield to maturity of such stripped mortgage assets,
as determined in accordance with the provisions of the Code dealing with
original issue discount. For a description of the general method of calculating
original issue discount, see "REMIC Certificates -- Original Issue Discount."
The yield to maturity of a trust fractional certificateholder's interest in the
stripped mortgage loans will be calculated taking account of the price at which
the holder purchased the certificate and the holder's share of the payments of
principal and interest to be made thereon. Although the provisions of the Code
and the OID Regulations do not directly address the treatment of instruments
similar to trust fractional certificates, in reporting to trust fractional
certificateholders such certificates will be treated as a single obligation with
payments corresponding to the aggregate of the payments allocable thereto from
each of the mortgage assets and the amount of original issue discount on such
certificates will be determined accordingly. See "-- Aggregate Reporting."
Under Treasury regulations, original issue discount determined with respect
to a particular stripped mortgage loan may be considered to be zero under the de
minimis rule described above, in which case it is treated as market discount.
See "-- REMIC Certificates -- Original Issue Discount." Those regulations also
provide that original issue discount so determined with respect to a particular
stripped mortgage asset will be treated as market discount if the rate of
interest on the stripped mortgage asset, including a reasonable servicing fee,
is no more than one percentage point less than the unstripped rate of interest.
See "-- Market Discount and Premium." The foregoing de minimis and market
discount rules will be applied on an aggregate poolwide basis, although it is
possible that investors may be required to apply them on a loan-by-loan basis.
The loan-by-loan information required for such application of those rules may
not be available. See "-- Aggregate Reporting."
Subsequent purchasers of the certificates may be required to include
"original issue discount" in an amount computed using the price at which such
subsequent purchaser purchased the certificates. Further, such purchasers may be
required to determine if the above described de minimis and market discount
rules apply at the time a trust fractional certificate is acquired, based on the
characteristics of the mortgage assets at that time.
Variable Rate Certificates. There is considerable uncertainty concerning
the application of the OID Regulations to mortgage assets bearing a variable
rate of interest. Although such regulations are subject to a different
interpretation, as discussed below, in the absence of other contrary authority
in preparing reports furnished to certificateholders, stripped mortgage assets
bearing a variable rate of interest (other than those treated as having market
discount pursuant to the regulations described above) will be treated as subject
to the provisions of the OID
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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 the closing date and
(c) for any other objective rate, the fixed rate that reflects the yield that is
reasonably expected for the trust fractional certificate. If the interest paid
or accrued with respect to a variable rate trust fractional certificate during
an accrual period differs from the assumed fixed interest rate, such difference
will be an adjustment (to interest or original issue discount, as applicable) to
the certificateholder's taxable income for the taxable period or periods to
which such difference relates.
The provisions in the OID Regulations applicable to variable rate debt
instruments may not apply to certain adjustable and variable rate mortgage
loans, possibly including the mortgage assets, or to stripped certificates
representing interests in such mortgage assets. If variable rate trust
fractional certificates are not governed by the provisions of the OID
Regulations applicable to variable rate debt instruments, such certificates may
be subject to the provisions of the Contingent Debt Regulations. The application
of those provisions to instruments such as the trust fractional certificates is
subject to differing interpretations. Prospective purchasers of variable rate
trust fractional certificates are advised to consult their tax advisers
concerning the tax treatment of such certificates.
Aggregate Reporting. The trustee intends in reporting information relating
to original issue discount to certificateholders to provide such information on
an aggregate poolwide basis. Applicable law is unclear, however, and it is
possible that investors may be required to compute original issue discount on a
loan-by-loan basis (or on the basis of the rights to individual payments) taking
account of an allocation of the investor's basis in the certificates among the
interests in the various mortgage assets represented by such certificates
according to their respective fair market values. Investors should be aware that
after the fact it may not be possible to reconstruct 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
certificate holders 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
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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."
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
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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 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
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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 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, the 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
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by each holder thereof and the stated redemption price at maturity may include
the aggregate amount of all payments to be made with respect to the trust
interest certificate whether or not denominated as interest. The amount of
original issue discount with respect to a trust interest certificate may be
treated as zero under the original issue discount de minimis rules described
above.
The trustee intends in reporting information relating to original issue
discount to certificateholders to provide such information on an aggregate
poolwide basis. Applicable law is, however, unclear, and it is possible that
certificateholders may be required to compute original issue discount either on
a loan-by-loan basis or on a payment-by-payment basis taking account of an
allocation of their basis in the certificates among the interests in the various
mortgage loans represented by such certificates according to their respective
fair market values. The effect of an aggregate computation for the inclusion of
original issue discount in income may be to defer the recognition of losses due
to early prepayments relative to a computation on a loan-by-loan basis. It may
not be possible to reconstruct after the fact sufficient loan-by-loan
information should the IRS require a computation on that basis.
Because the treatment of the trust interest certificates under current law
and the potential application of the 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.
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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 U.S. Person, will not generally be subject to
United States withholding tax, provided that the certificateholder (1) does not
own, directly or indirectly, 10% or more of, and is not a controlled foreign
corporation (within the 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
that 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.
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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, the
depositor may treat such transactions, for financial accounting purposes, as a
transfer of an ownership interest in the related mortgage assets to the related
trust and not as the issuance of debt obligations. In that regard, it should be
noted that the IRS has issued a notice stating that, upon examination, it will
scrutinize instruments treated as debt for federal income tax purposes but as
equity for regulatory, rating agency or financial accounting purposes to
determine if their purported status as debt for federal income tax purposes is
appropriate. Assuming that debt certificates will be treated as indebtedness for
federal income tax purposes, holders of debt certificates, using their method of
tax accounting, will follow the federal income tax treatment hereinafter
described.
Original Issue Discount. It is likely that the debt certificates will be
treated as having been issued with "original issue discount" within the meaning
of 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
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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.
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
not U.S. Persons 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 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; (2) 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); (3) debt
certificates held by a real estate investment trust will not constitute real
estate assets or Government securities within the meaning of section
856(c)(5)(B); and (4) debt certificates held by a regulated investment company
will not constitute Government securities within the meaning of section
851(b)(3)(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
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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.
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
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of ERISA, and transactions occurring between the depositor, the servicer, the
credit enhancer, the underwriters and the trustee, or any of their affiliates,
might constitute prohibited transactions, unless an administrative exemption
applies. Certain such exemptions which may be applicable to the acquisition and
holding of the certificates or to the servicing of the mortgage assets are
discussed below.
DOL has issued an administrative exemption, Prohibited Transaction Class
Exemption 83-1 ("PTCE 83-1"), which, under certain conditions, exempts from the
application of the prohibited transaction rules of ERISA and the excise tax
provisions of section 4975 of the Code transactions involving a Plan in
connection with the operation of a "mortgage pool" and the purchase, sale and
holding of "mortgage pool pass through certificates." A "mortgage pool" is
defined as an investment pool which is held in trust and which consists solely
of interest bearing obligations secured by first or second mortgages or deeds of
trust on single-family residential property, property acquired in foreclosure
and undistributed cash. A "mortgage pool pass through certificate" is defined as
a certificate which represents a beneficial undivided fractional interest in a
mortgage pool which entitles the holder to pass through payments of principal
and interest from the mortgage loans, less any fees retained by the pool
sponsor.
For the exemption to apply, PTCE 83-1 requires that:
. 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:
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. 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.
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, the 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 the
individual exemption 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.
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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 or any state,
territory or possession of the United States, including the District of Columbia
or Puerto Rico, whose authorized investments are subject to state regulation to
the same extent that, under applicable law, obligations issued by or guaranteed
as to principal and interest by the United States or any agency or
instrumentality thereof constitute legal investments for such entities. Pursuant
to SMMEA, a number of states enacted legislation, on or before the October 3,
1991 cut off for such enactments, limiting to varying extents the ability of
certain entities, in particular, insurance companies, to invest in "mortgage
related securities," in most cases by requiring the affected investors to rely
solely upon existing state law and not SMMEA. Accordingly, the investors
affected by such legislation will be authorized to invest in the certificates
only to the extent provided in such legislation. Institutions whose investment
activities are subject to legal investment laws and regulations or to review by
certain regulatory authorities may be subject to restrictions on investment in
certain classes of the certificates of a series.
SMMEA also amended the legal investment authority of federally chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with mortgage
related securities without limitation as to the percentage of their assets
represented thereby; federal credit unions may invest in mortgage related
securities; and national banks may purchase mortgage related securities for
their own account without regard to the limitations generally applicable to
investment securities set forth in 12 U.S.C. ss. 24 (Seventh), subject in each
case to such regulations as the applicable federal regulatory authority may
prescribe. Federal credit unions should review National Credit Union
Administration (the "NCUA") Letter to Credit Unions No. 96, as modified by
Letter to Credit Unions No. 108, which includes guidelines to assist federal
credit unions in making investment decisions for mortgage related securities.
The NCUA has adopted rules, effective December 2, 1991, which prohibit federal
credit unions from investing in some types of mortgage related securities,
possibly including specified series or classes of certificates, except under
limited circumstances. The OTS has issued Thrift Bulletin 13a (December 1,
1998), "Management of Interest Rate Risk, Investment Securities and Derivative
Activities," which thrift institutions subject to the jurisdiction of the OTS
should consider before investing in any certificates.
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If specified in the prospectus supplement for a series, one or more classes
of certificates of the series will not constitute "mortgage related securities"
for purposes of SMMEA. In this 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 Investment Securities and
End-User Derivatives Activities" (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
Office of the Comptroller of the Currency and the Office of Thrift Supervision,
effective May 26, 1998, and by the NCUA effective October 1, 1998, among other
things, sets forth general guidelines which depository institutions must follow
in managing risks, including market, credit, liquidity, operational, and legal
risks, applicable to all securities used for investment purposes. In addition,
depository institutions and other financial institutions should consult their
regulators concerning the risk-based capital treatment of any certificates. Any
financial institution that is subject to the jurisdiction of the Comptroller of
the Currency, the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the Office of Thrift Supervision, the National
Credit Union Administration or other federal or state agencies with similar
authority should review any applicable rules, guidelines and regulations prior
to purchasing the certificates of a series.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review the rules, policies and guidelines
adopted from time to time by these authorities before purchasing certificates,
since some certificates may be deemed unsuitable investments, or may otherwise
be restricted, under these rules, policies or guidelines, in some 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 by this prospectus 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 the series and of each class
of the 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
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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
the offering and any agreements to be entered into between the depositor and the
purchasers of the certificates of the 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 and the exhibits thereto as well 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 the following Regional Offices:
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 these 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 particular series will be provided to
each person to whom a prospectus is delivered upon written or oral request,
provided that the request is made to Saxon Asset Securities Company, 4880 Cox
Road, Glen Allen, Virginia 23060 ((804) 967-7400).
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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 the trust under this prospectus shall be deemed to be
incorporated into and made a part of this prospectus from the date of filing of
those 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 that 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 the
request is made to the depositor, 4880 Cox Road, Glen Allen, Virginia 23060
((804) 967-7400).
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saxon logo
$300,000,000
Saxon Asset Securities
Trust 1999-5
Saxon Asset Securities Company,
as Depositor
Mortgage Loan Asset Backed Certificates
Series 1999-5
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PROSPECTUS SUPPLEMENT
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Banc of America Securities LLC
November 23, 1999
