<PAGE>
As filed with the Securities and Exchange Commission on July 9, 1996
Registration Statement No. 333-4911
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------------------------------------------
IMC Securities, Inc.
(Exact name of Registrant as specified in its governing instruments)
--------------------------------------------
DELAWARE 59-3284026
(State of Incorporation) (I.R.S. Employer Identification Number)
3450 Bushwood Park Drive
Tampa, FL 33618
(Address of principal executive offices)
(813) 932-2211
-----------------------------------------------------
H. John Steele, Esq.
Arter & Hadden
1801 K Street, N.W.
Suite 400K
Washington, DC 20006
(202) 775-7169
Fax: (202) 857-0172
(Name and address of agent for service)
-----------------------------------------------------
Please send copies of communications to:
Thomas Middleton
Industry Mortgage Company, L.P.
3450 Bushwood Park Drive
Tampa, FL 33618
(813) 915-2533
Fax: (813) 932-8257
-----------------------------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC. From time to
time after the effective date of this Registration Statement as determined by
market conditions and pursuant to Rule 415.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
Box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(C)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
-----------------------------------------------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
==================================================================================================================================
Proposed Maximum Proposed Maximum
Title of Securities Amount Being Offering Price Aggregate Offering Amount of
Being Registered Registered Per Unit* Price Registration Fee
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Home Equity Loan Asset $1,500,000,000.00 100% $1,500,000,000.00 $517,241.40**
Backed Certificates
==================================================================================================================================
<FN>
* Estimated solely for purposes of calculating the registration fee.
** $344,83 of such Registration Fee was previously paid by wire transfer on
May 31, 1996.
</FN>
</TABLE>
-----------------------------------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a),
may determine.
<PAGE>
This registration statement registers up to $1,500,000,000 of home equity
loan pass-through certificates collateralized by various types of mortgage
collateral described herein. The registration statement contains a form of
prospectus covering one-to-four ("single") family residential first and junior
lien, fixed and adjustable rate home equity loans or interests therein
represented by agency or private label pass-through securities. The prospectus
is accompanied by a form of prospectus supplement describing the structure that
is expected to be employed by the Registrant. As described in the Prospectus,
each transaction may have Classes of Certificates with various characteristics,
mortgage assets with various characteristics, various forms and terms of credit
enhancement, one or more subservicers, various underwriting and servicing
standards with respect to mortgage assets, various tax consequences and various
other characteristics, each of which will be fully described in the actual form
of prospectus supplement filed pursuant to Rule 424(b)(2)(3) or (5).
2
<PAGE>
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Items and Caption in Form S-3 Location in Prospectus
<S> <C> <C>
1. Forepart of Registration Statement and Outside Front Cover
Page of Prospectus.............................................. Forepart of Registration
Statement and Outside Front
Cover Page **
2. Inside Front and Outside Back Cover Pages of Prospectus............ Inside Front Cover Page and
Outside Back Cover Page of
Prospectus **
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges....................................... Summary**; The Seller**;
Special Considerations**
4. Use of Proceeds.................................................... Use of Proceeds**
5. Determination of Offering Price.................................... *
6. Dilution........................................................... *
7. Selling Security-Holders........................................... *
8. Plan of Distribution............................................... Plan of Distribution **
9. Description of Securities to be Registered......................... Outside Front Cover; Summary;
The Trusts; The Securities;
Administration of Agreement
and Servicing of Mortgage
Loans **
10. Interests of Named Experts and Counsel............................. *
11. Material Changes................................................... *
12. Incorporation of Certain Information by Reference.................. Inside Front Cover Page**;
Incorporation of Certain
Documents by Reference**
13. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities...................................... See Page II-2
- --------------------------
<FN>
* Answer negative or item inapplicable.
** To be completed from time to time by Prospectus Supplement.
</FN>
</TABLE>
3
<PAGE>
PROSPECTUS SUPPLEMENT
- ---------------------
(To Prospectus Dated __________ __, 199__)
$----------
IMC HOME EQUITY LOAN TRUST 199_-__
INDUSTRY MORTGAGE COMPANY, L.P.
[Logo] Seller and Servicer
IMC SECURITIES, INC.
Depositor
The IMC Home Equity Loan Pass-Through Certificates, Series 199_-__ (the
"Certificates") will consist of (i) the Class A-1 Certificates, the Class A-2
Certificates, the Class A-3 Certificates, the Class A-4 Certificates, the Class
A-5 Certificates, the Class A-6 Certificates and Class A-7 Certificates
(collectively, the "Fixed Rate Certificates"), (ii) the Class A-8 Certificates
(the "Adjustable Rate Certificates" and collectively with the Fixed Rate
Certificates, the "Class A Certificates"), (iii) a residual Class of
Certificates (the "Class R Certificates"), and (iv) one or more Classes of
insured "interest only" certificates. Only the Class A Certificates are offered
hereby.
For a discussion of significant matters affecting investment in the
Certificates, see "Risk Factors" beginning on page S-14 herein, "Prepayment and
Yield Considerations" beginning on page S-33 herein and "Risk Factors" beginning
on page 6 in the Prospectus.
The Certificates represent undivided ownership interests in one of two
pools (each, a "Home Equity Loan Group") of fixed and adjustable rate home
equity loans (the "Home Equity Loans") held by IMC Home Equity Loan Trust
199_-__ (the "Trust"). The Fixed Rate Certificates will represent undivided
ownership interests in the Home Equity Loans in the Fixed Rate Group, which are
secured by first and second lien mortgages or deeds of trust primarily on
one-to-four family residential properties. The Class A-8 Certificates will
represent undivided ownership interests in the Home Equity Loans in the
Adjustable Rate Group, which are secured solely by first lien mortgages or deeds
of trust primarily on one-to four family residential properties. The Class A
Certificates also represent undivided ownership interests in all interest and
principal due under the respective Home Equity Loans after __________ 1, 199__
(the "Cut-Off Date"), security interests in the properties which secure the
related Home Equity Loans (the "Properties"), the Insurance Policy, funds on
deposit in certain trust accounts, and certain other property.
Simultaneously with the issuance of the Certificates, the Seller will
obtain from ____________________ (the "Certificate Insurer") a certificate
guaranty insurance policy (the "Insurance Policy") in favor of the Trustee. The
Insurance Policy will require the Certificate Insurer to make certain Insured
Payments (as defined herein) on the Class A Certificates.
[Logo]
(continued on following page)
THE CLASS A CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN THE TRUST ONLY AND
DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR, THE SERVICER,
EXCEPT AS DESCRIBED HEREIN, THE CERTIFICATE INSURER OR ANY OF THEIR AFFILIATES.
NEITHER THE CLASS A CERTIFICATES NOR THE HOME EQUITY LOANS
ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
[Underwriters]
The Class A Certificates are offered subject to prior sale, when, as,
and if accepted by the Underwriters and subject to the Underwriters' right to
reject orders in whole or in part. It is expected that delivery of the Class A
Certificates in book-entry form will be made through the facilities of The
Depository Trust Company ("DTC") on or about the Closing Date.
---------------------
The date of this Prospectus Supplement is __________ __, 199__
<PAGE>
(cover continued from previous page)
The Original Aggregate Loan Balance of the Home Equity Loans as of the
Cut-Off Date was $__________ (of which approximately _____% by principal balance
are first liens and the remainder are second liens). The Home Equity Loans were
originated or purchased by Industry Mortgage Company, L.P. (collectively, the
"Seller" and "Servicer"). The Trust will be created pursuant to a Pooling and
Servicing Agreement (the "Pooling and Servicing Agreement") to be dated as of
__________ 1, 199__ among the Seller, the Servicer, IMC Securities, Inc. (the
"Depositor") and ____________________, as Trustee (the "Trustee").
The Pooling and Servicing Agreement provides that additional home
equity loans (the "Subsequent Home Equity Loans") may be purchased by the Trust
from the Depositor from time to time on or before __________ 1, 199__ from funds
on deposit in the Pre-Funding Account. All Subsequent Home Equity Loans so
acquired by the Trust will be assigned to the [Fixed Rate] Group. On the Closing
Date (as defined below), an aggregate cash amount of $_____________ will be
deposited with the Trustee in the Pre- Funding Account which will be used to
acquire Subsequent Home Equity Loans for the [Fixed Rate] Group.
Distributions of principal and interest will be distributed to holders
(the "Owners") of the Certificates on the ___ day of each month (or, if such day
is not a business day, the next following business day) beginning _____________,
1996 (each, a "Payment Date"). Interest will be passed through on each Payment
Date to the Owners of the Class A Certificates based on the related Class A
Certificate Principal Balance (as defined herein) at the Pass-Through Rate
applicable to such Class of Certificates. The Pass-Through Rate for each Class
of Fixed Rate Certificates is set out on the cover hereof. The Pass-Through Rate
for the Adjustable Rate Certificates adjusts monthly based upon one-month LIBOR
(as defined herein) or as otherwise described herein.
It is a condition to issuance that the Class A Certificates be rated
"Aaa" by Moody's Investors Service, Inc. and "AAA" by Standard & Poor's Ratings
Services, a division of The McGraw-Hill Companies.
The yield to investors on the Class A Certificates sold at prices other
than par may be extremely sensitive to the rate and timing of principal payments
(including prepayments, repurchases, defaults and liquidations) on the Home
Equity Loans, which may vary over time. See "Prepayment and Yield
Considerations" herein and "Risk Factors" and "Yield, Prepayment and Maturity
Considerations" in the Prospectus.
The Trust Estate will consist primarily of two segregated asset pools,
with respect to which elections will be made to treat each as a real estate
mortgage investment conduit (a "REMIC"), for federal income tax purposes. As
described more fully herein, the Class A Certificates will constitute "regular
interests" in the Upper-Tier REMIC (as defined herein). See "Federal Income Tax
Consequences" herein.
Prior to their issuance, there has been no market for the Class A
Certificates nor can there be any assurance that one will
develop, or if it does develop, that it will provide liquidity, or that it will
continue for the life of the Class A Certificates. The Underwriters intend, but
are not obligated, to make a market in the Class A Certificates.
---------------------
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS A CERTIFICATES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS
TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
The Class A Certificates offered by this Prospectus Supplement will be
part of a separate series of Certificates being offered by the Depositor
pursuant to its Prospectus dated __________ __, 199__, of which this Prospectus
Supplement is a part and which accompanies this Prospectus Supplement. The
Prospectus contains important information regarding this offering which is not
contained herein, and prospective investors are urged to read the Prospectus and
this Prospectus Supplement in full.
<PAGE>
TABLE OF CONTENTS
Prospectus Supplement
Page
----
SUMMARY OF TERMS..........................................................S-1
RISK FACTORS.............................................................S-14
THE SELLER AND SERVICER..................................................S-17
General.............................................................S-17
Credit and Underwriting Guidelines..................................S-18
Delinquency, Loan Loss and Foreclosure Information..................S-19
THE DEPOSITOR............................................................S-20
USE OF PROCEEDS..........................................................S-21
THE HOME EQUITY LOAN POOL................................................S-21
General.............................................................S-21
Initial Home Equity Loans...........................................S-22
Conveyance of Subsequent Home Equity Loans -- Fixed Rate Group......S-25
Interest Payments on the Home Equity Loans..........................S-33
PREPAYMENT AND YIELD CONSIDERATIONS......................................S-33
General.............................................................S-33
Mandatory Prepayment................................................S-34
Projected Prepayment and Yield for Class A Certificates.............S-34
Payment Lag Feature of Class A Certificates.........................S-38
FORMATION OF THE TRUST AND TRUST PROPERTY................................S-38
ADDITIONAL INFORMATION...................................................S-39
DESCRIPTION OF THE CLASS A CERTIFICATES..................................S-39
General.............................................................S-39
Payment Dates.......................................................S-39
Distributions.......................................................S-40
Pre-Funding Account.................................................S-42
Capitalized Interest Account........................................S-43
Book Entry Registration of the Class A Certificates.................S-43
Assignment of Rights................................................S-45
THE CERTIFICATE INSURER..................................................S-45
General.............................................................S-45
Reinsurance.........................................................S-46
Ratings of Claims-Paying Ability....................................S-46
Capitalization......................................................S-46
Incorporation of Certain Documents by Reference.....................S-46
Insurance Regulation................................................S-47
CREDIT ENHANCEMENT.......................................................S-47
Insurance Policy....................................................S-47
Overcollateralization Provisions....................................S-49
THE POOLING AND SERVICING AGREEMENT......................................S-51
Covenant of the Seller to Take Certain Actions with Respect
to the Home Equity Loans in Certain Situations..................S-51
Assignment of Home Equity Loans.....................................S-52
Servicing and Sub-Servicing.........................................S-53
Removal and Resignation of Servicer.................................S-57
The Trustee.........................................................S-57
Reporting Requirements..............................................S-57
Removal of Trustee for Cause........................................S-59
Governing Law.......................................................S-59
Amendments..........................................................S-59
Termination of the Trust............................................S-60
Optional Termination................................................S-60
FEDERAL INCOME TAX CONSEQUENCES..........................................S-60
REMIC Elections.....................................................S-60
ERISA CONSIDERATIONS.....................................................S-61
RATINGS..................................................................S-63
LEGAL INVESTMENT CONSIDERATIONS..........................................S-63
UNDERWRITING.............................................................S-64
REPORT OF EXPERTS........................................................S-66
CERTAIN LEGAL MATTERS....................................................S-66
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS..............................A-1
Prospectus
SUMMARY OF PROSPECTUS....................................................
RISK FACTORS.............................................................
DESCRIPTION OF THE CERTIFICATES..........................................
General.............................................................
Classes of Certificates.............................................
Distributions of Principal and Interest.............................
Book Entry Registration.............................................
List Owners of Certificates.........................................
THE TRUSTS...............................................................
Home Equity Loans...................................................
Mortgage-Backed Securities..........................................
Other Mortgage Securities...........................................
CREDIT ENHANCEMENT.......................................................
SERVICING OF HOME EQUITY LOANS AND CONTRACTS.............................
Payments on Home Equity Loans.......................................
Advances............................................................
Collection and Other Servicing Procedures...........................
Primary Mortgage Insurance..........................................
Standard Hazard Insurance...........................................
Title Insurance Policies............................................
Claims Under Primary Mortgage Insurance Policies and Standard Hazard
Insurance Policies; Other Realization Upon Defaulted Loan.......
Servicing Compensation and Payment of Expenses......................
Master Servicer.....................................................
ADMINISTRATION...........................................................
Assignment of Mortgage Assets.......................................
Evidence as to Compliance...........................................
The Trustee.........................................................
Administration of the Certificate Account...........................
Reports.............................................................
Forward Commitments; Pre-Funding....................................
Servicer Events of Default..........................................
Rights Upon Servicer Event of Default...............................
Amendment...........................................................
Termination.........................................................
USE OF PROCEEDS..........................................................
THE DEPOSITOR............................................................
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS ............................
General.............................................................
Foreclosure.........................................................
Soldiers' and Sailors' Civil Relief Act.............................
LEGAL INVESTMENT MATTERS.................................................
ERISA CONSIDERATIONS.....................................................
FEDERAL INCOME TAX CONSEQUENCES..........................................
Federal Income Tax Consequences For REMIC Certificates..............
Taxation of Regular Certificates....................................
Taxation of Residual Certificates...................................
Treatment of Certain Items of REMIC Income and Expense..............
Tax-Related Restrictions on Transfer of Residual Certificate
Sale or Exchange of a Residual Certificate..........................
Taxes That May Be Imposed on the REMIC Pool.........................
Liquidation of the REMIC Pool.......................................
Administrative Matters..............................................
Limitations on Deduction of Certain Expenses........................
Taxation of Certain Foreign Investors...............................
Backup Withholding..................................................
Reporting Requirements..............................................
Federal Income Tax Consequences for Certificates as to
Which No REMIC Election Is Made.................................
Standard Certificates...............................................
Premium and Discount................................................
Stripped Certificates...............................................
Reporting Requirements and Backup Withholding.......................
Taxation of Certain Foreign Investors...............................
Debt Securities.....................................................
Taxation of Securities Classified as Partnership Interests..........
PLAN OF DISTRIBUTION.....................................................
LEGAL MATTERS............................................................
FINANCIAL INFORMATION....................................................
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS............................. A-1
<PAGE>
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus. Reference is made to the "Index to Location of
Principal Defined Terms" for the location of the definitions of certain
capitalized terms.
Issuer: IMC Home Equity Loan Trust 199_-__ (the
"Trust").
Certificates Offered: $__________ IMC Home Equity Loan Pass-Through
Certificates, Series 199_- __, to be issued in
the following Classes (each, a "Class"):
<TABLE>
<CAPTION>
Initial Certificate Pass-Through
Principal Balance Rate Class
<S> <C> <C> <C>
$__________ ___% Class A-1 Certificates
$__________ ___% Class A-2 Certificates
$__________ ___% Class A-3 Certificates
$__________ ___% Class A-4 Certificates
$__________ ___% Class A-5 Certificates
$__________ ___% Class A-6 Certificates
$__________ ___% Class A-7 Certificates
$__________ (1) Class A-8 Certificates
</TABLE>
(i) On each Payment Date, the Class A-8
Pass-Through Rate will be equal to the lesser
of (i) the rate equal to the London interbank
offered rate for one-month United States dollar
deposits ("LIBOR")(calculated as described
under "Description of the Class A Certificates
-- Calculation of LIBOR" herein) plus ____% per
annum and (ii) the weighted average of the
Coupon Rates on the Home Equity Loans in the
Adjustable Rate Group, less ____% per annum
(the "Available Funds Cap").
The Class A-1 Certificates, Class A-2
Certificates, Class A-3 Certificates, Class A-4
Certificates, the Class A-5 Certificates, the
Class A-6 Certificates and the Class A-7
Certificates are collectively referred to
herein as the "Fixed Rate Certificates" and the
Class A-8 Certificates are referred to as the
"Adjustable Rate Certificates." The Fixed Rate
Certificates and the Adjustable Rate
Certificates are collectively referred to as
the "Class A Certificates".
Depositor: IMC Securities, Inc. (the "Depositor"), a
Delaware corporation.
Seller and Servicer: Industry Mortgage Company, L.P. (the "Seller"
and the "Servicer"), a Delaware limited
partnership. The Seller's and Servicer's
principal executive offices are located at 3450
Buschwood Park Drive, Suite 250, Tampa, Florida
33618.
Trustee: ____________________ (the "Trustee"), a New
York banking corporation. The Trustee shall
receive a fee equal to ___% per annum, payable
monthly at one-twelfth the annual rate, of the
aggregate outstanding Loan Balance of the Home
Equity Loans.
Cut-Off Date: As of the close of business on ___________,
199__ (the "Cut-Off Date").
Closing Date: On or about __________, 199__.
S-1
<PAGE>
Description of the
Certificates Offered: The Class A Certificates represent fractional
undivided interests in the Trust and have the
rights described in the Pooling and Servicing
Agreement dated as of __________, 199__ among
the Depositor, the Seller, the Servicer and the
Trustee (the "Agreement"). The Trust assets
(not all of which will be included in a REMIC
election) will include the two Groups of home
equity loans (the "Home Equity Loans"), all
interest and principal due under the respective
Home Equity Loans after the Cut-Off Date,
security interests in the properties securing
such Home Equity Loans (the "Properties"),
funds on deposit in the Pre- Funding Account,
the Capitalized Interest Account and certain
other property. In addition to the foregoing,
the Depositor shall cause the Certificate
Insurer to deliver the Insurance Policy to the
Trustee for the benefit of the Owners of the
Class A Certificates and Class S Certificates.
See "Formation of the Trust and Trust Property"
herein.
On the Closing Date, an aggregate cash amount
of $__________ will be deposited in a trust
account in the name of the Trustee (the
"Pre-Funding Account"). It is intended that
additional Home Equity Loans satisfying the
criteria specified in the Pooling and Servicing
Agreement (the "Subsequent Home Equity Loans")
will be purchased by the Trust from the
Depositor from time to time on or before
__________, 199__ from funds on deposit in the
Pre- Funding Account. Each Subsequent Home
Equity Loan so acquired by the Trust will be
assigned to the [Fixed Rate] Group. As a
result, the aggregate principal balance of the
Home Equity Loans in the [Fixed Rate] Group
will increase by an amount equal to the
aggregate principal balance of the Subsequent
Home Equity Loans so purchased and the amount
in the Pre-Funding Account will decrease
proportionately.
As described below, on the Closing Date, cash
will be deposited in the name of the Trustee in
the Capitalized Interest Account (as defined
herein). Funds in the Capitalized Interest
Account will be applied by the Trustee to cover
shortfalls in interest during the Funding
Period (as described under "Pre-Funding
Account") on the Class A Certificates
attributable to the provisions allowing for
purchase of Subsequent Home Equity Loans after
the Cut-Off Date.
Other Certificates: In addition to the Class A Certificates, the
Trust will issue, pursuant to the Pooling and
Servicing Agreement, (i) [one or more]
interest-only Classes of Certificates
(collectively, the "Class S Certificates"),
which will represent a fractional undivided
interest in the Trust, having the rights
described in the Pooling and Servicing
Agreement, and (ii) a residual Class of
Certificates (the "Class R Certificates") which
will represent an undivided ownership interest
in all of the Home Equity Loans. The Class A
Certificates, the Class S Certificates and the
Class R Certificates are herein referred to as
the "Certificates." Only the Class A
Certificates are offered hereby.
Denominations: The Class A Certificates are issuable in
minimum denominations of an original principal
amount of $1,000 and integral multiples
thereof, with the exception of one Class A
Certificate of each Class, which may be issued
in another principal amount.
S-2
<PAGE>
The Home Equity Loans: The Home Equity Loans to be conveyed to the
Trust by the Depositor on the Closing Date (the
"Initial Home Equity Loans") consist of ______
fixed rate conventional home equity loans and
the Notes relating thereto. The Initial Home
Equity Loans are secured by first and second
lien mortgages or deeds of trust primarily on
one- to four- family residential properties
located in ___ states and the District of
Columbia. No Loan-to-Value Ratio (based upon
appraisals made at the time of origination of
the related Initial Home Equity Loan) relating
to any Initial Home Equity Loan exceeded ___%
as of the Cut-Off Date except for ___ loans
with an aggregate Loan Balance of
$________________ (or _____% of the aggregate
Loan Balance of the Initial Home Equity Loans),
which had a Loan-to-Value Ratio not greater
than ___%. None of the Initial Home Equity
Loans are insured by pool mortgage insurance
policies and no significant portion of the
Initial Home Equity Loans are insured by
primary mortgage insurance policies; however,
certain distributions due to the Owners of the
Class A Certificates (the "Owners") are insured
by the Certificate Insurer pursuant to the
Insurance Policy. See "The Insurance Policy".
The Home Equity Loans are not guaranteed by the
Depositor, the Seller or any of their
affiliates. The Home Equity Loans will be
serviced by the Servicer generally in
accordance with the standards and procedures
required by FNMA for FNMA mortgage-backed
securities and in accordance with the terms of
the Pooling and Servicing Agreement.
Fixed Rate Group. As of the Cut-Off Date, the
average Loan Balance of the Initial Home Equity
Loans in the Fixed Rate Group was
$____________; the weighted average interest
rate (the "Coupon Rate") of the Initial Home
Equity Loans in the Fixed Rate Group was
_______; the Coupon Rates of the Initial Home
Equity Loans in the Fixed Rate Group ranged
from _______% to _______%; the weighted average
combined Loan-to-Value Ratio of the Initial
Home Equity Loans in the Fixed Rate Group was
________; the weighted average remaining term
to maturity of the Initial Home Equity Loans in
the Fixed Rate Group was _____ months; and the
remaining terms to maturity of the Initial Home
Equity Loans in the Fixed Rate Group ranged
from ____ months to ____ months. As of the
Cut-Off Date, _____% of the Initial Home Equity
Loans in the Fixed Rate Group were secured by
first mortgages and _____% of the Initial Home
Equity Loans in the Fixed Rate Group were
secured by second mortgages. The maximum and
minimum Loan Balances of the Initial Home
Equity Loans in the Fixed Rate Group as of the
Cut-Off Date were $____________ and
$____________, respectively. Home Equity Loans
in the Fixed Rate Group containing "balloon"
payments represented not more than ______% of
the Initial Home Equity Loans in the Fixed Rate
Group. No Initial Home Equity Loan in the Fixed
Rate Group will mature later than
___________________. See "The Home Equity Loan
Pool--Initial Home Equity Loans" -- Fixed Rate
Group herein.
Adjustable Rate Group. As of the Cut-Off Date,
_____% of the Home Equity Loans in the
Adjustable Rate Group bear interest at rates
that adjust semiannually based on the London
interbank offered rate for six-month United
States dollar deposits ("Six Month LIBOR");
_____% of the Home Equity Loans in the
Adjustable Rate Group adjust annually based on
the weekly average yield on United States
Treasury securities adjusted to a constant
maturity of one year ("CMT Loans"); and ______%
of the Home Equity Loans in the Adjustable Rate
Group bear interest at a fixed rate from the
date of their
S-3
<PAGE>
origination until the fifth anniversary date
from the date of origination and, for the
remaining 25 years of their term, bear interest
at a variable rate that adjusts in the same
manner as CMT Loans ("5/25 Loans"). The Coupon
Rates with respect to all of the Home Equity
Loans in the Adjustable Rate Group are subject
to periodic and lifetime interest rate
adjustment caps. See "The Home Equity Loan Pool
-- Initial Home Equity Loans in the Adjustable
Rate Group" herein.
As of the Cut-Off Date, the average Loan
Balance of the Home Equity Loans in the
Adjustable Rate Group was $__________; the
weighted average Coupon Rate of the Home Equity
Loans in the Adjustable Rate Group was
_______%; the Coupon Rates of the Home Equity
Loans in the Adjustable Rate Group ranged from
______% to ______%; the weighted average
maximum Coupon Rate of the Home Equity Loans in
the Adjustable Rate Group was _______%; the
maximum Coupon Rates of the Home Equity Loans
in the Adjustable Rate Group ranged from
______% to _____%; the weighted average minimum
Coupon Rate of the Home Equity Loans in the
Adjustable Rate Group was ______%; the minimum
Coupon Rates of the Home Equity Loans in the
Adjustable Rate Group ranged from _____% to
_____%; the weighted average Loan-to-Value
Ratio of the Home Equity Loans in the
Adjustable Rate Group was _____%; the weighted
average remaining term to maturity of the Home
Equity Loans in the Adjustable Rate Group was
_____ months; and the remaining terms to
maturity as of the Cut-Off Date of the Home
Equity Loans in the Adjustable Rate Group
ranged from ___ months to ___ months. All of
the Home Equity Loans in the Adjustable Rate
Group are secured by first mortgages. The
maximum and minimum Loan Balance of the Home
Equity Loans in the Adjustable Rate Group as of
the Cut-Off Date was $___________ and
$__________, respectively. None of the Home
Equity Loans in the Adjustable Rate Group
contain "balloon" payments. No Home Equity
Loans in the Adjustable Rate Group will mature
later than __________, ____. See "The Home
Equity Loan Pool-- Initial Home Equity
Loans--Adjustable Rate Group."
All of the Home Equity Loans in the Adjustable
Rate Group have maximum Coupon Rates. The
weighted average maximum Coupon Rate of the
Home Equity Loans in the Adjustable Rate Group
is ______%, with maximum Coupon Rates that
range from approximately _____% to _____%. The
Home Equity Loans in the Adjustable Rate Group
have a weighted average margin as of the
Cut-Off Date of _______%. The margin for the
Home Equity Loans in the Adjustable Rate Group
ranges from ______% to _____%.
With respect to the Six-Month LIBOR Loans, the
lowest margin over the index is _____%, and the
highest margin over the index is _____% and the
weighted average margin over the index is
_____%. With respect to the CMT Loans, the
lowest margin over the index is _____%, the
highest margin over the index is _____% and the
weighted average margin over the index is
_____%. With respect to the 5/25 Loans, after
their fixed rate period ends, the lowest margin
over the index is _____%, the highest margin
over the index is _____% and the weighted
average margin over the index is _____%.
Final Scheduled Payment
Date: The Final Scheduled Payment Dates for each of
the respective classes of Class A Certificates
are as set forth below, although it is
anticipated that the actual
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final Payment Date for each Class of Class A
Certificates will occur significantly earlier
than the related Final Scheduled Payment Date.
See "Prepayment and Yield Considerations"
herein.
Final Scheduled
Payment Date
Class A-1 Certificates
Class A-2 Certificates
Class A-3 Certificates
Class A-4 Certificates
Class A-5 Certificates
Class A-6 Certificates
Class A-7 Certificates
Class A-8 Certificates
Class A Distributions:
General: On the ___ day of each month, or if such a day
is not a Business Day, then the next succeeding
Business Day, commencing __________, 199__
(each such day being a "Payment Date"), the
Trustee will be required to distribute to the
Owners of the Fixed Rate Certificates of record
as of the last day of the calendar month
preceding the month in which such Payment Date
occurs and to the Owners of the Adjustable Rate
Certificates of record as of the day
immediately preceding such Payment Date (each,
such date, the "Record Date") the "Class A
Distribution Amount" which shall be the sum of
(x) Class A Current Interest and (y) the Class
A Principal Distribution Amount. Such amounts
shall be allocated to the Class A Certificates
in the manner described below.
A "Business Day" is any day other than a
Saturday or Sunday or a day on which banking
institutions in The City of New York and Tampa,
Florida are authorized or obligated by law or
executive order to be closed.
For each Payment Date, interest due with
respect to the Fixed Rate Certificates will be
interest which has accrued thereon at the
applicable Pass-Through Rate during the
calendar month immediately preceding the month
in which such Payment Date occurs; the interest
due with respect to the Adjustable Rate
Certificates will be the interest which has
accrued thereon at the Class A-8 Pass- Through
Rate from the preceding Payment Date (or from
the Closing Date in the case of the first
Payment Date) to and including the day prior to
the current Payment Date. Each period referred
to in the prior sentence relating to the
accrual of interest is the "Accrual Period" for
the related Class A Certificates. All
calculations of interest on the Fixed Rate
Certificates will be made on the basis of a
360-day year assumed to consist of twelve
30-day months. Calculations of interest on the
Adjustable Rate Certificates will be made on
the basis of the actual number of days elapsed
in the related Accrual Period and in a year of
360 days.
Allocations of Interest
and Principal: The Class A Distribution Amount relating to
each Group of Home Equity Loans for each
Payment Date (to the extent funds are available
therefor) shall be
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<PAGE>
allocated among the Class A Certificates in the
following amounts and in the following order of
priority:
(i) First, to the Owners of the Class A
Certificates of the related Group, the related
Current Interest for such Certificates on a pro
rata basis without any priority among such
Class A Certificates.
(ii) Second, to the Owners of the Class A
Certificates, (A) the Class A Principal
Distribution Amount (as defined below under the
heading "Principal" applicable to the Fixed
Rate Group shall be distributed as follows: (I)
first, to the Owners of the Class A-1
Certificates until the Class A-1 Certificate
Principal Balance is reduced to zero; (II)
second, to the Owners of the Class A-2
Certificates until the Class A-2 Certificate
Principal Balance is reduced to zero; (III)
third, to the Owners of the Class A-3
Certificates until the Class A-3 Certificate
Principal Balance is reduced to zero; (IV)
fourth, to the Owners of the Class A-4
Certificates until the Class A-4 Certificate
Principal Balance is reduced to zero; (V)
fifth, to the Owners of the Class A-5
Certificates until the Class A-5 Certificate
Principal Balance is reduced to zero; (VI)
sixth, to the Owners of the Class A-6
Certificates until the Class A-6 Certificate
Principal Balance is reduced to zero; and (VII)
seventh, to the Owners of the Class A-7
Certificates until the Class A-7 Certificate
Principal Balance is reduced to zero and (B)
the Class A Principal Distribution Amount
applicable to the Adjustable Rate Group shall
be distributed to the Owners of the Class A-8
Certificates until the Class A-8 Certificate
Principal Balance is reduced to zero.
Principal: The Owners of the related Class A Certificates
will be entitled to receive on each Payment
Date, in the manner and priority set forth
herein, to the extent funds are available
therefor after the Class A Current Interest is
distributed to the Owners of the Class A
Certificates, a monthly distribution in
reduction of the Class A Certificate Principal
Balance in the amount described herein.
The Fixed Rate Certificates are "sequential
pay" classes such that the Owners of the Class
A-7 Certificates will receive no payments of
principal until the Class A-6 Certificate
Principal Balance has been reduced to zero, the
Owners of the Class A-6 Certificates will
receive no payments of principal until the
Class A-5 Certificate Principal Balance has
been reduced to zero, the Owners of the Class
A-5 Certificates will receive no payments of
principal until the Class A-4 Certificate
Principal Balance has been reduced to zero, the
Owners of the Class A-4 Certificates will
receive no payments of principal until the
Class A-3 Certificate Principal Balance has
been reduced to zero, the Owners of the Class
A-3 Certificates will receive no payments of
principal until the Class A-2 Certificate
Principal Balance has been reduced to zero, and
the Owners of the Class A-2 Certificates will
receive no payments of principal until the
Class A-1 Certificate Principal Balance has
been reduced to zero.
On each Payment Date, distributions in
reduction of the Certificate Principal Balance
of the related Class of Class A Certificates
will be made in the amounts described herein.
The "Class A Principal Distribution Amount" for
each Home Equity Loan Group and Payment Date
shall be the lesser of:
(a) the Total Available Funds (as defined
herein) for the related Home Equity Loan Group
plus any Insured Payment with respect to the
related Class
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<PAGE>
A Certificates minus the related Class A
Current Interest for such Payment Date with
respect to the related Class A Certificates;
and
(b) the excess, if any, of
(i) the sum of:
(A) the Preference Amount with respect
to principal owed to an Owner of the
Class A Certificates for the related
Home Equity Loan Group that remains
unpaid as of such Payment Date;
(B) the principal portion of all
scheduled monthly payments on the Home
Equity Loans in the related Home Equity
Loan Group due on or prior to the
related Due Date thereof, to the extent
actually received by the Trustee during
the related Remittance Period and any
Prepayments made by the Mortgagors and
actually received by the Trustee during
the related Remittance Period;
(C) the balance of each Home Equity
Loan (the "Loan Balance") in the
related Home Equity Loan Group that was
repurchased by the Seller or purchased
by the Servicer on or prior to the
related Monthly Remittance Date, to the
extent such Loan Balance is actually
received by the Trustee during the
related Remittance Period;
(D) any Substitution Amounts (i.e. the
excess, if any, of the Loan Balance of
a Home Equity Loan being replaced over
the outstanding principal balance of a
replacement Home Equity Loan plus
accrued and unpaid interest) delivered
by the Seller on the related Monthly
Remittance Date in connection with a
substitution of a Home Equity Loan in
the related Home Equity Loan Group (to
the extent such Substitution Amounts
relate to principal), to the extent
such Substitution Amounts are actually
received by the Trustee on the related
Remittance Date;
(E) all Net Liquidation Proceeds
actually collected by the Servicer with
respect to the Home Equity Loans in the
related Home Equity Loan Group during
the related Remittance Period (to the
extent such Net Liquidation Proceeds
relate to principal), to the extent
such Net Liquidation Proceeds are
actually received by the Trustee;
(F) the amount of any Subordination
Deficit with respect to the related
Home Equity Loan Group for such Payment
Date;
(G) the portion of the proceeds
received with respect to the related
Home Equity Loan Group by the Trustee
upon termination of the Trust (to the
extent such proceeds relate to
principal);
(H) with respect to the [Fixed Rate]
Group only, on the Payment Date
immediately following the last day of
the Funding Period, all amounts
remaining on deposit in the Pre-Funding
Account to the extent not used to
purchase Subsequent Home Equity Loans
during the Funding Period; and
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<PAGE>
(I) the amount of any Subordination
Increase Amount with respect to the
related Home Equity Loan Group for such
Payment Date to the extent of any Net
Monthly Excess Cashflow available for
such purpose;
over
(ii) the amount of any Subordination
Reduction Amount with respect to the
related Home Equity Loan Group for such
Payment Date;
The "Preference Amount" is any amount
previously distributed to an Owner on a Class A
Certificate that is recoverable and sought to
be recovered as a voidable preference by a
trustee in bankruptcy pursuant to the United
States Bankruptcy Code (Title 11 of the United
States Code).
The "Remittance Period" with respect to any
Monthly Remittance Date is the second day of
the month immediately preceding such Monthly
Remittance Date to the first day of the month
in which such Monthly Remittance Date occurs. A
"Monthly Remittance Date" is any date on which
funds on deposit in the Principal and Interest
Account are remitted to the Certificate
Account, which is the ____ day of each month,
or if such day is not a Business Day, the next
succeeding Business Day, commencing in
_____________, 199__.
A "Subordination Deficit" with respect to a
Payment Date is the amount, if any, by which
(x) the aggregate Class A Certificate Principal
Balance, after taking into account all
distributions to be made on such Payment Date,
exceeds (y) the sum of (i) the aggregate Loan
Balances of the Home Equity Loans as of the
close of business on the last day of the
related Remittance Period and (ii) the amount,
if any, on deposit in the Pre-Funding Account
as of the close of business on the last day of
the related Remittance Period.
Monthly Servicing Fee: The Servicer will retain a fee (the "Servicing
Fee") equal to _____% per annum, payable
monthly at one-twelfth the annual rate of the
then outstanding principal balance of each Home
Equity Loan as of the first day of each
Remittance Period.
Credit Enhancement: The credit enhancement provided for the benefit
of the Owners of the Class A Certificates
consists of (x) the overcollateralization and
crosscollateralization mechanics which utilize
the internal cash flows of the Trust and (y)
the Insurance Policy.
Overcollateralization. The credit enhancement
provisions of the Trust result in a limited
acceleration of the Class A Certificates (in
the aggregate) relative to the amortization of
the related Home Equity Loans in the early
months of the transaction. The accelerated
amortization is achieved by the application of
certain excess interest to the payment in
reduction of the related Class A Certificate
Principal Balance. This acceleration feature
creates with respect to each Home Equity Loan
Group, overcollateralization (i.e., the excess
of the aggregate outstanding Loan Balance of
the Home Equity Loans in the related Home
Equity Loan Group over the aggregate Class A
Certificate Principal Balance). Once the
required level of overcollateralization is
reached, and subject to the provisions
described in the next paragraph, the
acceleration feature will cease.
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<PAGE>
The Pooling and Servicing Agreement provides
that, subject to certain floors, caps and
triggers, the required level of
overcollateralization with respect to a Home
Equity Loan Group may increase or decrease over
time. An increase would result in a temporary
period of accelerated amortization of the
related Class of Class A Certificates to
increase the actual level of
overcollateralization to its required level; a
decrease would result in a temporary period of
decelerated amortization to reduce the actual
level of overcollateralization to its required
level.
As a result of the "sequential pay" feature of
the Fixed Rate Certificates, any such
accelerated principal will be paid to that
Class of the Fixed Rate Certificates then
entitled to receive distributions of principal.
Crosscollateralization. In addition to the
foregoing, the Pooling and Servicing Agreement
provides for crosscollateralization through the
application of excess amounts generated by one
Home Equity Loan Group to fund shortfalls in
Available Funds and the required
overcollateralization level in the other Home
Equity Loan Group, subject to certain prior
debt service and credit enhancement
requirements of such Home Equity Loan Group.
See "Prepayment and Yield Considerations",
"Credit Enhancement --Overcollateralization
Provisions" herein and "Credit Enhancement" in
the Prospectus.
Certificate Insurance Policy.
____________________ (the "Certificate
Insurer") will issue a certificate guaranty
insurance policy (the "Insurance Policy")
pursuant to which it will irrevocably and
unconditionally guarantee payment on each
Payment Date to the Trustee for the benefit of
the holders of each Class of Class A
Certificates of an amount equal to the Class A
Distribution Amount for such Payment Date. The
amount of the actual payment, if any, made by
the Certificate Insurer to the Owners of the
Class A Certificates under the Insurance Policy
on each Payment Date (the "Insured Payment") is
the sum of (i) any shortfall in the amount
required to pay the Subordination Deficit for
such Payment Date from a source other than the
Insurance Policy, (ii) any shortfall in the
amount required to pay Class A Current Interest
for such Payment Date from a source other than
the Insurance Policy and (iii) any shortfall in
the amount required to pay the Preference
Amount for such Payment Date from a source
other than the Insurance Policy. The effect of
the Insurance Policy is to guaranty the timely
payment of interest on, and the ultimate
payment of the principal amount of, each Class
of Class A Certificates.
Except upon the occurrence of a Certificate
Insurer Default, the Certificate Insurer shall
have the right to exercise certain rights of
the Owners of the related Class A Certificates,
as specified in the Pooling and Servicing
Agreement, without any consent of such Owners;
and such Owners may exercise such rights only
with the prior written consent of the
Certificate Insurer, except as provided in the
Pooling and Servicing Agreement. In addition,
to the extent of unreimbursed payments under
the Insurance Policy, the Certificate Insurer
will be subrogated to the rights of the Owners
of the related Class A Certificates on which
such Insured Payments were made. In connection
with each Insured Payment on a related Class A
Certificate, the Trustee, as attorney-in-fact
for the
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<PAGE>
Owner thereof, will be required to assign to
the Certificate Insurer the rights of such
Owner with respect to the Class A Certificate
to the extent of such Insured Payment.
"Certificate Insurer Default" is defined under
the Pooling and Servicing Agreement as (x) the
failure by the Certificate Insurer to make a
required payment under the Insurance Policy or
(y) the bankruptcy or insolvency of the
Certificate Insurer.
The Certificate Insurer is an insurance company
engaged exclusively in the business of writing
financial guaranty insurance, principally in
respect of asset- backed and other
collateralized securities offered in domestic
and foreign markets. The Certificate Insurer's
claims paying ability is rated "Aaa" by Moody's
Investors Services, Inc. ("Moody's") and "AAA"
by each of Standard & Poor's Ratings Services,
a division of The McGraw-Hill Companies
("Standard & Poor's"). See "The Certificate
Insurer" herein.
Pre-Funding Account: On the Closing Date, an aggregate cash amount
(the "Pre-Funded Amount"), of $______________
will be deposited in the Pre-Funding Account
which account will be in the name of, and
maintained by, the Trustee on behalf of the
Trust and which may be used to acquire
Subsequent Home Equity Loans for addition to
the Fixed Rate Group. During the period (the
"Funding Period") from the Closing Date until
the earliest of (i) the date on which the
amount on deposit in the Pre-Funding Account is
less than $______, (ii) the date on which an
event of default under the Pooling and
Servicing Agreement occurs and (iii) _______,
199__, the Pre-Funded Amount will be maintained
in the Pre-Funding Account. The Pre-Funded
Amount will be reduced during the Funding
Period by the amount thereof used to purchase
Subsequent Home Equity Loans in accordance with
the Pooling and Servicing Agreement. Subsequent
Home Equity Loans purchased by and added to the
Fixed Rate Group on any date (each, a
"Subsequent Transfer Date") must satisfy the
criteria set forth in the Pooling and Servicing
Agreement. The aggregate principal amount of
Subsequent Home Equity Loans which may be
acquired by the Trust is $________________. Any
Pre-Funded Amount remaining at the end of the
Funding Period will be distributed to the
Owners of the related Class of the Fixed Rate
Certificates then entitled to receive payment
of principal on the Payment Date in ________,
199__, in reduction of the related Class A
Certificate Principal Balance of such Owners'
Certificates, thus resulting in a partial
principal prepayment of such Class of Fixed
Rate Certificates as specified herein under
"Description of the Class A Certificates--
Distributions." All interest and other
investment earnings on amounts on deposit in
the Pre-Funding Account will be deposited in
the Capitalized Interest Account. The
Pre-Funding Account will not be an asset of
either REMIC.
Capitalized Interest
Account: On the Closing Date, cash in an amount
satisfactory to the Certificate Insurer will be
deposited in a trust account (the "Capitalized
Interest Account") in the name of, and
maintained by, the Trustee on behalf of the
Trust. During the Funding Period, the amount on
deposit in the Capitalized Interest Account,
including reinvestment income thereon, will be
used by the Trustee to fund the excess, if any,
of (i) the sum of the amount of interest
accruing during the related interest accrual
period at the weighted average of the
Pass-Through Rates of the Fixed Rate
Certificates on the amount by which the
aggregate Class A Certificate Principal Balance
of the Fixed Rate Certificates exceeds the
aggregate
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<PAGE>
Loan Balance of the Home Equity Loans in the
Fixed Rate Group plus the Class S Distribution
Amount (as defined in the Pooling and Servicing
Agreement) plus any Trustee Reimbursable
Expenses and amounts payable to the Certificate
Insurer as premium on the Insurance Policy (the
"Premium Amount") accruing during the related
interest accrual period on such excess balance
over (ii) the amount of any reinvestment income
on monies on deposit in the Pre-Funding
Account. Such amounts on deposit will be so
applied by the Trustee on the first two Payment
Dates to fund any such excess. Any amounts
remaining in the Capitalized Interest Account
not needed for such purpose will be paid to the
depositors of such funds at the end of the
Funding Period. The Capitalized Interest
Account will not be an asset of either REMIC.
Mandatory Prepayment of
Certificates: Although no assurance can be given, it is
intended that the principal amount of
Subsequent Home Equity Loans sold to the Trust
and added to the Fixed Rate Group will require
application of substantially all of the
original Pre-Funded Amount and it is not
intended that there will be any material amount
of principal prepaid to the Owners of the Fixed
Rate Certificates from the Pre-Funding Account.
In the event that the Depositor is unable to
sell Subsequent Home Equity Loans to the Trust
in an amount equal to the original Pre-Funded
Amount, principal prepayments to Owners of the
related Class of the Fixed Rate Certificates
then entitled to receive payments of principal
will occur on the Payment Date in __________
199__ in an amount equal to the Pre-Funded
Amount remaining at the end of the Funding
Period.
Book-Entry Registration of the
Class A Certificates Each Class of Class A Certificates will
initially be issued in book-entry form. Persons
acquiring beneficial ownership interests in
such Class A Certificates ("Beneficial Owners")
may elect to hold their interests through The
Depository Trust Company ("DTC"). Transfers
within DTC will be in accordance with the usual
rules and operating procedures thereof. So long
as the Class A Certificates are Book-Entry
Certificates (as defined herein), such
Certificates will be evidenced by one or more
Certificates registered in the name of Cede &
Co. ("Cede"), as the nominee of DTC. The Class
A Certificates will initially be registered in
the name of Cede. The interests of the Owners
of such Certificates will be represented by
book-entries on the records of DTC and
participating members thereof. No Beneficial
Owner will be entitled to receive a definitive
certificate representing such person's
interest, except in the event that Definitive
Certificates (as defined herein) are issued
under the limited circumstances described
herein. All references in this Prospectus
Supplement to any Class A Certificates reflect
the rights of Beneficial Owners only as such
rights may be exercised through DTC and its
participating organizations for so long as such
Class A Certificates are held by DTC. See
"Description of the Class A Certificates--
Book-Entry Registration of the Class A
Certificates" herein, and "Description of the
Certificates--Book-Entry Registration" in the
Prospectus.
Optional Termination: The Owners of the Class R Certificates will
have the right to purchase all the Home Equity
Loans on any Monthly Remittance Date when the
aggregate Loan Balance of the Home Equity Loans
has declined to ____% or less of the sum of (x)
the Original Aggregate Loan Balance plus (y)
the original Pre-Funded
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<PAGE>
Amount (such sum, the "Maximum Collateral
Amount"). See "The Pooling and Servicing
Agreement--Optional Termination" herein.
Ratings: It is a condition of issuance of the Class A
Certificates that the Class A Certificates
receive ratings of "AAA" by Standard & Poor's,
and "Aaa" by Moody's. Standard & Poor's and
Moody's are referred to herein collectively as
the "Rating Agencies". A security rating is not
a recommendation to buy, sell or hold
securities, and may be subject to revision or
withdrawal at any time by the assigning entity.
See "Ratings" herein. No person is obligated to
maintain any rating on any Certificate, and,
accordingly, there can be no assurance that the
ratings assigned to any Class of Certificates
upon initial issuance thereof will not be
lowered or withdrawn at any time thereafter.
Federal Tax Aspects: For federal income tax purposes, the Trust
(exclusive of the Pre-Funding Account and the
Capitalized Interest Account) created by the
Pooling and Servicing Agreement will consist of
two segregated asset pools (the "Upper Tier
REMIC" and the "Base REMIC") with respect to
which elections will be made to treat each as a
separate "real estate mortgage investment
conduit" ("REMIC"). The Class A Certificates
will be designated as a "regular interest" in
the Upper-Tier REMIC and such Certificates will
be treated as debt instruments of the
Upper-Tier REMIC for federal income tax
purposes. The Class R Certificates will be
designated as the sole "residual interest" in
the Upper-Tier REMIC.
Owners of the Class A Certificates, including
Owners that generally report income on the cash
method of accounting, will be required to
include interest on the Class A Certificates in
income in accordance with the accrual method of
accounting. In addition, the Class A
Certificates may be considered to have been
issued with original issue discount or at a
premium. Any such original issue discount will
be includible in the income of the Owner as it
accrues under a method taking into account the
compounding of interest and using the
Prepayment Assumption described herein. Premium
may be deductible by the Owner either as it
accrues or when principal is received. No
representation is made as to whether the Home
Equity Loans will prepay at the assumed rate,
or any other rate. See "Prepayment and Yield
Considerations" herein. In general, as a result
of the qualification of the Class A
Certificates as regular interests in a REMIC,
the Class A Certificates will be treated as
"qualifying real property loans" under Section
593(d) of the Internal Revenue Code of 1986, as
amended (the "Code"), "regular . . .
interest(s) in a REMIC" under Section
7701(a)(19)(C) of the Code and "real estate
assets" under Section 856(c) of the Code in the
same proportion that the assets in the REMIC
consist of qualifying assets under such
sections. In addition, interest on the Class A
Certificates will be treated as "interest on
obligations secured by mortgages on real
property" under Section 856(c) of the Code to
the extent that such Class A Certificates are
treated as "real estate assets" under Section
856(c) of the Code. For further information
regarding the federal income tax consequences
of investing in the Class A Certificates, see
"Federal Income Tax Consequences" herein and
in the Prospectus.
ERISA Considerations: Subject to the considerations discussed under
"ERISA Considerations" herein, the Class A
Certificate may be purchased by employee
benefit plans that are subject to ERISA. See
"ERISA Considerations" herein and in the
Prospectus.
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<PAGE>
Legal Investment
Considerations: Although the Fixed Rate Certificates are
expected to be rated "AAA" by Standard & Poor's
and "Aaa" by Moody's, the Class A Certificates
will not constitute "mortgage related
securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984
("SMMEA") because the Home Equity Loans include
second liens. Accordingly, many institutions
with legal authority to invest in comparably
rated securities based on first home equity
loans may not be legally authorized to invest
in the Fixed Rate Certificates.
[The Class A-8 Certificates will constitute
"mortgage related securities "for purposes of
SMMEA for so long as they are rated in one of
the two highest rating categories by one or
more nationally recognized statistical rating
organizations. As such, the Class A-8
Certificates 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. In addition,
institutions whose 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.] See
"Legal Investment Considerations" herein.
S-13
<PAGE>
RISK FACTORS
Prospective investors in the Class A Certificates should consider,
among other things, the following risk factors (as well as the factors set forth
under "Risk Factors" in the Prospectus) in connection with the purchase of the
Class A Certificates.
Sensitivity to Prepayments. The majority of the Home Equity Loans may
be prepaid by the related Mortgagors in whole or in part, at any time without
payment of any prepayment fee or penalty. In addition, a substantial portion of
the Home Equity Loans contain due-on-sale provisions which, to the extent
enforced by the Servicer, will result in prepayment of such Home Equity Loans.
See "Prepayment and Yield Considerations" herein and "Certain Legal Aspects of
the Home Equity Loans--Enforceability of Certain Provisions" in the Prospectus.
The rate of prepayments on fixed rate home equity loans, such as the Home Equity
Loans, is sensitive to prevailing interest rates. Generally, if prevailing
interest rates fall significantly below the interest rates on the Home Equity
Loans, the Home Equity Loans are likely to be subject to higher prepayment rates
than if prevailing rates remain at or above the interest rates on the Home
Equity Loans. Conversely, if prevailing interest rates rise significantly above
the interest rates on the Home Equity Loans, the rate of prepayments is likely
to decrease. The average life of each Class of Class A Certificates, and, if
purchased at other than par, the yields realized by Owners of the Class A
Certificates will be sensitive to levels of payment (including prepayments
relating to the Home Equity Loans (the "Prepayments")) on the Home Equity Loans.
In general, the yield on a Class of Class A Certificates that is purchased at a
premium from the outstanding principal amount thereof will be adversely affected
by a higher than anticipated level of Prepayments of the Home Equity Loans and
enhanced by a lower than anticipated level. Conversely, the yield on a Class of
Class A Certificates that is purchased at a discount from the outstanding
principal amount thereof will be enhanced by a higher than anticipated level of
Prepayments and adversely affected by a lower than anticipated level. See
"Prepayment and Yield Considerations" herein.
Nature of Collateral; Junior Liens. Because _____% of the aggregate
Loan Balance of the Initial Home Equity Loans are secured by second liens
subordinate to the rights of the mortgagee or beneficiary under the related
first mortgage or deed of trust, the proceeds from any liquidation, insurance or
condemnation proceedings with respect to such Home Equity Loans will be
available to satisfy the outstanding balance of a Home Equity Loan only to the
extent that the claims of such first mortgagee or beneficiary have been
satisfied in full, including any related foreclosure costs. In addition, a
second mortgagee may not foreclose on the property securing a second mortgage
unless it forecloses subject to the first mortgage, in which case it must either
pay the entire amount due on the first mortgage to the first mortgagee at or
prior to the foreclosure sale or undertake the obligation to make payments on
the first mortgage in the event the mortgagor is in default thereunder. In
servicing second mortgages in its portfolio, it is generally the Servicer's
practice to satisfy the first mortgage at or prior to the foreclosure sale. The
Servicer may also advance funds to keep the first mortgage current until such
time as the Servicer satisfies the first mortgage. The Trust will have no source
of funds (and may not be permitted under the REMIC provisions of the Code) to
satisfy the first mortgage or make payments due to the first mortgagee. The
Servicer generally will be required to advance such amounts in accordance with
the Pooling and Servicing Agreement. See "The Pooling and Servicing
Agreement--Servicing and Sub-Servicing" herein.
An overall decline in the residential real estate market, the general
condition of a Property, or other factors, could adversely affect the values of
the Properties such that the outstanding balances of the Home Equity Loans,
together with any senior liens on the Properties, equal or exceed the value of
the Properties. A decline in the value of a Property would affect the interest
of the Trust in the Property before having any effect on the interest of the
related first mortgagee, and could cause the Trust's interest in the Property to
be extinguished. If such a decline occurs, the actual rates of delinquencies,
foreclosures and losses on the Home Equity Loans could be higher than those
currently experienced in the mortgage lending industry in general. In addition,
adverse economic conditions (which may or may not affect real property values)
may affect the timely payment by borrowers of scheduled payments of principal
and interest on the Home Equity Loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to the Trust.
Risk of Home Equity Loan Rates Reducing the Class A-8 Pass-Through
Rate. The calculation of the Class A-8 Pass-Through Rate is based upon (i) the
value of an index (LIBOR) which is different from the value of
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<PAGE>
the index applicable to the Home Equity Loans as described under "The Home
Equity Loan Pool -- Initial Home Equity Loans -- Adjustable Rate Group" (either
as a result of the use of a different rate determination date or rate adjustment
date) and (ii) the weighted average on the Coupon Rates of the Adjustable Rate
Group Home Equity Loans, which are subject to periodic adjustment caps, maximum
rate caps and minimum rate floors. ____% of the Home Equity Loans in the
Adjustable Rate Group adjust semi-annually based upon Six-Month LIBOR and ___%
of the Home Equity Loans in the Adjustable Rate Group adjust annually based on
the weekly average yield on U.S. Treasury securities, whereas the Pass-Through
Rate on the Class A-8 Certificates adjusts monthly based upon LIBOR as described
under "Description of the Class A Certificates -- Calculation of LIBOR" herein,
subject to the Available Funds Cap. Consequently, the interest which becomes due
on the Home Equity Loans in the Adjustable Rate Group (net of the Servicing Fee,
the Premium Amount and the Trustee Fee related to the Adjustable Rate Group)
during any Remittance Period may not equal the amount of interest that would
accrue at LIBOR plus the margin on the Class A-8 Certificates during the related
Accrual Period. In particular, the Class A-8 Pass-Through Rate adjusts monthly,
while the interest rates of the Home Equity Loans in the Adjustable Rate Group
adjust less frequently with the result that the Available Funds Cap may limit
increases in the Class A-8 Pass-Through Rate for extended periods in a rising
interest rate environment. In addition, LIBOR and Six-Month LIBOR or the rate on
U.S. Treasury securities may respond to different economic and market factors,
and there is not necessarily a correlation between them. Thus, it is possible,
for example, that LIBOR may rise during periods in which Six-Month LIBOR or the
rate on U.S. Treasury Securities is stable or is falling or that, even if both
LIBOR and Six-Month LIBOR or the rate on U.S. Treasury Securities rise during
the same period, LIBOR may rise more rapidly than Six-Month LIBOR or the rate on
U.S. Treasury Securities. Furthermore, if the Available Funds Cap determines the
Class A-8 Pass-Through Rate for a Payment Date, the value of the Class A-8
Certificates may be temporarily or permanently reduced.
The Subsequent Home Equity Loans and the Pre-Funding Account. If the
principal amount of eligible Home Equity Loans available during the Funding
Period and sold to the Trust is less than 100% of the Pre-Funded Amount,
prepayments of principal will be made to Owners of the [Fixed Rate] Certificates
as described herein. See "Social, Economic and Other Factors" below. In
addition, any conveyance of Subsequent Home Equity Loans is subject to the
following conditions, among others (i) each such Subsequent Home Equity Loan
must be accepted by the Certificate Insurer and must satisfy the representations
and warranties specified in the agreement pursuant to which such Subsequent Home
Equity Loans are transferred to the Trust (each, a "Subsequent Transfer
Agreement") and in the Pooling and Servicing Agreement; (ii) the Seller will not
select such Subsequent Home Equity Loans in a manner adverse to the interest of
the Owners of the [Fixed Rate] Certificates or the Certificate Insurer; (iii)
the Seller will deliver certain opinions of counsel with respect to the validity
of the conveyance of such Subsequent Home Equity Loans; and (iv) as of each
cut-off date (each, a "Subsequent Cut-Off Date") applicable thereto, the Home
Equity Loans at that time, including the Subsequent Home Equity Loans to be
conveyed by the Seller as of such Subsequent Cut-Off Date, will satisfy the
criteria set forth in the Pooling and Servicing Agreement, as described herein
under "The Home Equity Loan Pool--Conveyance of Subsequent Home Equity Loans"
herein.
To the extent that amounts on deposit in the Pre-Funding Account have
not been fully applied to the purchase of Subsequent Home Equity Loans by the
Trust for inclusion in the [Fixed Rate] Group by the end of the Funding Period,
the Owners of the Class of [Fixed Rate] Certificates then entitled to receive
payments of principal will receive a prepayment of principal in an amount equal
to the Pre-Funded Amount remaining in the Pre-Funding Account on the Payment
Date in ______ 199__. Although no assurances can be given, the Depositor intends
that the principal amount of Subsequent Home Equity Loans sold to the Trust will
require the application of substantially all amounts on deposit in the
Pre-Funding Account and that therefore there will be no material principal
prepayment to the Owners of the [Fixed Rate] Certificates.
Each Subsequent Home Equity Loan must satisfy the eligibility criteria
referred to above at the time of its addition. However, Subsequent Home Equity
Loans may have been originated or purchased by the Seller using credit criteria
different from those which were applied to the Initial Home Equity Loans and may
be of a different credit quality. Therefore, following the transfer of
Subsequent Home Equity Loans to the [Fixed Rate] Group, the aggregate
characteristics of the Home Equity Loans then held in the [Fixed Rate] Group may
vary from those of
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<PAGE>
the Initial Home Equity Loans in the [Fixed Rate] Group. See "The Home Equity
Loan Pool--Conveyance of Subsequent Home Equity Loans" herein.
Social, Economic and Other Factors. The ability of the Trust to invest
in Subsequent Home Equity Loans is largely dependent upon the ability of the
Seller to originate or purchase additional home equity loans. The ability of the
Seller to originate or purchase additional home equity loans may be affected by
a variety of social and economic factors. Economic factors include interest
rates, unemployment levels, the rate of inflation and consumer perception of
economic conditions generally. However, the Seller is unable to determine and
has no basis to predict whether or to what extent economic or social factors
will affect its origination ability or its ability to purchase additional home
equity loans.
Other Legal Considerations. Applicable state laws generally regulate
interest rates and other charges, require certain disclosures, and require
licensing of the Seller. In addition, other state laws, public policy and
general principles of equity relating to the protection of consumers, unfair and
deceptive practices and debt collection practices may apply to the origination,
servicing and collection of the Home Equity Loans. The Seller will be required
to repurchase any Home Equity Loans which, at the time of origination, did not
comply with applicable federal and state laws and regulations. Depending on the
provisions of the applicable law and the specific facts and circumstances
involved, violations of these laws, policies and principles may limit the
ability of the Trust to collect all or part of the principal of or interest on
the Home Equity Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the Seller to damages and
administrative enforcement.
See "Certain Legal Aspects of Home Equity Loans" in the Prospectus.
The Home Equity Loans are also subject to federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z
promulgated thereunder, which require certain disclosures to the
borrowers regarding the terms of the Home Equity Loans;
(ii) the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination on the basis of
age, race, color, sex, religion, marital status, national origin,
receipt of public assistance or the exercise of any right under the
Consumer Credit Protection Act, in the extension of credit; and
(iii) the Fair Credit Reporting Act, which regulates the use
and reporting of information related to the borrower's credit
experience.
Violations of certain provisions of these federal laws may limit the ability of
the Seller to collect all or part of the principal of or interest on the Home
Equity Loans and, in addition, could subject the Seller to damages and
administrative enforcement. The Seller will be required to repurchase any Home
Equity Loans which, at the time of origination did not comply with such federal
laws or regulations. See "Certain Legal Aspects of the Home Equity Loans" in the
Prospectus.
Risk of Higher Default Rates for Home Equity Loans with Balloon
Payments. _____% of the aggregate Loan Balance of the Initial Home Equity Loans
[in the Fixed Rate Group] as of the Cut-Off Date are "balloon loans" that
provide for the payment of the unamortized Loan Balance of such Home Equity Loan
in a single payment at maturity ("Balloon Loans"). [None of the Home Equity
Loans in the Adjustable Rate Group are Balloon Loans.] Such Balloon Loans
provide for equal monthly payments, consisting of principal and interest,
generally based on a ___-year amortization schedule, and a single payment of the
remaining balance of the Balloon Loan ___ years after origination. Amortization
of a Balloon Loan based on a scheduled period that is longer than the term of
the loan results in a remaining principal balance at maturity that is
substantially larger than the regular scheduled payments. The Seller does not
have any information regarding the default history or prepayment history of
payments on Balloon Loans. Because borrowers of Balloon Loans are required to
make substantial single payments upon maturity, it is possible that the default
risk associated with the Balloon Loans is greater than that associated with
fully-amortizing Home Equity Loans.
S-16
<PAGE>
Risk of Seller Insolvency. The Seller believes that the transfer of the
Home Equity Loans to the Depositor and by the Depositor to the Trust constitutes
a sale by the Seller to the Depositor and by the Depositor to the Trust and,
accordingly, that such Home Equity Loans will not be part of the assets of the
Seller in the event of the insolvency of the Seller and will not be available to
the creditors of the Seller. However, in the event of an insolvency of the
Seller, it is possible that a bankruptcy trustee or a creditor of the Seller may
argue that the transaction between the Seller and the Depositor was a pledge of
such Home Equity Loans in connection with a borrowing by the Seller rather than
a true sale. Such an attempt, even if unsuccessful, could result in delays in
distributions on the Certificates.
On the Closing Date, the Trustee, the Seller, the Depositor, the Rating
Agencies and the Certificate Insurer will have received an opinion of Arter &
Hadden, counsel to the Seller, with respect to the true sale of the Initial Home
Equity Loans from the Seller to the Depositor and from the Depositor to the
Trustee, in form and substance satisfactory to the Certificate Insurer and the
Rating Agencies.
Risk Associated with the Certificate Insurer. If the protection
afforded by overcollateralization is insufficient and if, upon the occurrence of
a Subordination Deficit, the Certificate Insurer is unable to meet its
obligations under the Certificate Insurance Policy, then the Owners of the Class
A Certificates could experience a loss on their investment.
THE SELLER AND SERVICER
General
The Seller and Servicer, Industry Mortgage Company, L.P., is a Delaware
limited partnership. The principal executive offices of the Seller are located
at 3450 Buschwood Park Drive, Suite 250, Tampa, Florida 33618 and its telephone
number is (813) 932-2211.
The Seller has been in the mortgage lending business since 1993 and the
Seller and certain subsidiaries are engaged in originating, purchasing and
servicing home equity loans secured by first and second mortgages and deeds of
trust on Properties located in at least ___ states and the District of Columbia.
The Seller will sell and assign each Home Equity Loan to the Depositor,
which will in turn sell and assign each Home Equity Loan to the Trust, in
consideration of the net proceeds from the sale of the Class A Certificates,
which are being offered hereby. The Seller will also service each Home Equity
Loan.
The Servicer may not assign its obligations under the Pooling and
Servicing Agreement, in whole or in part, unless it shall have first obtained
the written consent of the Trustee and the Certificate Insurer, which consent is
required not to be unreasonably withheld; provided, however, that any assignee
must meet the eligibility requirements for a successor servicer set forth in the
Pooling and Servicing Agreement.
With the consent of the Certificate Insurer and the Trustee, the
Servicer may enter into sub-servicing agreements (the "Sub-Servicing
Agreements") with qualified sub-servicers (the "Sub-Servicers") with respect to
the servicing of the Home Equity Loans. None of the Sub-Servicing arrangements
discharge the Servicer from its servicing obligations. See "The Pooling and
Servicing Agreement--Servicing and Sub-Servicing" herein.
The Trustee and the Certificate Insurer may remove the Servicer, and
the Servicer may resign, only in accordance with the terms of the Pooling and
Servicing Agreement. No removal or resignation shall become effective until the
Trustee or a successor servicer shall have assumed the Servicer's
responsibilities and obligations in accordance therewith. Any collections
received by the Servicer after removal or resignation shall be endorsed by it to
the Trustee and remitted directly to the Trustee.
Upon removal or resignation of the Servicer, the Trustee (x) may
solicit bids for a successor servicer as described in the Pooling and Servicing
Agreement or (y) shall serve in the capacity of Backup Servicer (the "Backup
Servicer") subject to the right of the Trustee to assign such duties to a party
acceptable to the Certificate Insurer
S-17
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and the Owners of a majority of the Class R Certificates. If the Trustee is
unable to obtain a qualifying bid and is prevented by law from acting as
servicer and from appointing the Backup Servicer as servicer, the Trustee will
be required to appoint, or petition a court of competent jurisdiction to
appoint, an eligible successor. Any successor (including the Backup Servicer) is
required to be a housing and home finance institution, bank or mortgage
servicing institution which has been designated as an approved seller-servicer
by FNMA or FHLMC for first and second home equity loans having equity of not
less than $5,000,000 as determined in accordance with generally accepted
accounting principles, and which is acceptable to the Certificate Insurer and
shall assume all or any part of the responsibilities, duties or liabilities of
the Servicer.
The Certificates will not represent an interest in or obligation of,
nor are the Home Equity Loans guaranteed by, the Depositor, the Seller, the
Servicer, or any of their affiliates.
Credit and Underwriting Guidelines
The following is a description of the underwriting guidelines
customarily and currently employed by the Seller with respect to home equity
loans which it originates or purchases from others. Each Home Equity Loan was
underwritten according to those guidelines. The Seller revises such guidelines
from time to time in connection with changing economic and market conditions.
In certain cases loans may be acquired or originated outside of the
criteria included in the guidelines as then in effect with the prior approval of
a pre-designated senior official of the Seller and in light of compensating
factors or other business considerations. No information is available with
respect to the portion of the Home Equity Loans as to which exceptions to the
criteria specified in the guidelines described herein were made. Substantially
all of the Home Equity Loans were acquired or originated in accordance with the
underwriting guidelines described herein or with such permitted exceptions as
are described herein.
The Seller's business consists primarily of acquiring home equity
loans. The Seller specializes in home equity loans that do not conform to the
underwriting standards of the Federal National Mortgage Association ("FNMA") or
the Federal Home Loan Mortgage Corporation ("FHLMC") and those standards
typically applied by banks and other primary lending institutions, particularly
with regard to a prospective borrower's credit history.
The Seller acquires and originates home equity loans through its
principal office in Tampa, Florida and branches in Cincinnati, Ohio, Ft.
Washington, Pennsylvania and Cherry Hill, New Jersey. The Seller acquires home
equity loans from a referral network of mortgage lenders and brokers, banks and
other referral sources, which may include one or more affiliates of the Seller.
Home equity loans acquired from mortgage brokers and other lenders are
pre-approved by the Seller prior to funding, or purchased in bulk after funding,
only after each loan has been re-underwritten by the Seller in accordance with
its established underwriting guidelines. These guidelines are designed to assess
the adequacy of the real property which serves as collateral for the loan and
the borrower's ability to repay the loan. The Seller analyzes, among other
factors, the equity in the collateral, the credit history and debt-to-income
ratio of the borrower, the property type, and the characteristics of the
underlying senior mortgage, if any.
The Seller purchases and originates home equity loans with different
credit characteristics depending on the credit profiles of individual borrowers.
The Seller primarily purchases and originates fixed rate loans which fully
amortize (subject to adjustments by reason of being simple interest loans) over
a period not to exceed 30 years. The Seller also acquires and originates Balloon
Loans, which generally provide for scheduled amortization over 30 years, with a
due date and a balloon payment at the end of the fifteenth year. The principal
amount of the loans purchased or originated by the Seller generally ranges up to
a maximum of $________. Under current policy the Seller generally does not
acquire or originate any home equity loan where the combined Loan-to-Value Ratio
exceeds ___%. The collateral securing loans acquired or originated by the Seller
is generally one- to four-family residences, including condominiums and
townhomes. The Seller accepts mobile homes or unimproved land as collateral only
in limited circumstances. The Seller does not purchase loans where any senior
mortgage contains open-end advance, negative amortization or shared appreciation
provisions.
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<PAGE>
The Seller's home equity loan program includes: (i) a full
documentation program for salaried borrowers and (ii) a non-income qualification
program for self-employed, and in limited instances, salaried borrowers. The
borrower's total monthly debt obligations (which include principal and interest
on all other mortgages, loans, charge accounts and all other scheduled
indebtedness) generally cannot exceed 50% of the borrower's monthly gross
income. Loans to substantially all borrowers who are salaried employees must be
supported by current employment information in addition to employment history.
This information for salaried borrowers is verified based on written
confirmation from employers or one or more pay-stubs, recent W-2 tax forms,
recent tax returns or telephone confirmation from the employers. For the
Seller's non-income qualification program, proof of a two year history of
self-employment in the same business plus proof of current self-employed status
is required. The Seller typically requires lower combined Loan-to-Value Ratios
with respect to loans made to self-employed borrowers.
The Seller requires that a full appraisal of the property used as
collateral for any loan that is acquired or originated be performed in
connection with the origination of the loan. These appraisals are performed by
third party, fee-based appraisers. Appraisals of substantially all of the
Properties were completed on standard FNMA/FHLMC forms and conform to current
FNMA/FHLMC secondary market requirements for residential property appraisals.
Each such appraisal includes, among other things, an inspection of the exterior
of the subject property, photographs of two or more different views of the
property and data from sales within the preceding 12 months of similar
properties within the same general location as the subject property.
A credit report by an independent, nationally recognized credit
repository agency reflecting the applicant's credit history is required. The
credit report typically contains information reflecting delinquencies,
repossessions, judgments, foreclosures, garnishments, bankruptcies and similar
instances of adverse credit that can be discovered by a search of public
records.
Certain laws protect loan applicants by offering them a period of time
after loan documents are signed, termed the rescission period, during which the
applicant has the right to cancel the loan. The rescission period must have
expired prior to the funding of the loan and may not be waived by the applicant
except as permitted by law.
The Seller requires title insurance coverage issued by an approved ALTA
or CLTA title insurance company on all property securing home equity loans it
originates or purchases. The loan originator and its assignees are generally
named as the insured. Title insurance policies indicate the lien position of the
home equity loan and protect the Seller against loss if the title or lien
position is not indicated. The applicant is also required to secure hazard and,
in certain instances, flood insurance in an amount sufficient to cover the new
loan and any senior mortgage.
Delinquency, Loan Loss and Foreclosure Information
The Seller began originating or purchasing home equity loans in October 1993. In
addition, from October 1993 to July 1994 the Seller sold all the home equity
loans it originated to third parties on a servicing released basis.
The Servicer began servicing home equity loans in April 1994 and thus
has limited servicing, delinquency, loan loss and liquidation experience with
respect to home equity loans. The delinquency and loss experience percentages
indicated below are calculated on the basis of the total home equity loans
serviced as of the end of the periods indicated. However, because the total
amount of loans originated or purchased by the Servicer has increased over these
periods as a result of new originations, the total amount of loans serviced as
of the end of any indicated period will include many loans which will not have
been outstanding long enough to give rise to some or all of the indicated
periods of delinquencies. Accordingly, the historical delinquency experience and
loan loss information set forth below may not be indicative of the future
performance of the home equity loans.
S-19
<PAGE>
Delinquency and Default Experience of the Servicer's Servicing
Portfolio of Home Equity Loans
As of As of
Number of Dollar Amount Number of Dollar Amount
Loans Loans
Portfolio At
Delinquency
Percentage (1)
_______ days
_______ days
_______ days
Total Delinquency
Default
Percentage (2)
Foreclosure
Bankruptcy
Real Estate Owned
Total Default
- -----------------
(1) The delinquency percentage represents the number and dollar value of
account balances contractually past due, including home equity loans in
foreclosure or bankruptcy but exclusive of real estate owned.
(2) The default percentage represents the number and dollar value of
delinquent payments on home equity loans in foreclosure, bankruptcy or
real estate owned.
Loan Loss Experience on the Servicer's Servicing
Portfolio of Home Equity Loans
Year Ending Year Ending
Average Amount Outstanding(1)
Gross Losses(2)
Recoveries(3)
Net Losses(4)
Net Losses as a Percentage of Average Amount Outstanding
- -----------------------
(1) "Average Amount Outstanding" during the period is the arithmetic
average of the principal balances of the home equity loans outstanding
on the last business day of each month during the period.
(2) "Gross Losses" are actual losses incurred on liquidated properties for
each respective period. Losses include all principal, foreclosure costs
and accrued interest to date.
(3) "Recoveries" are recoveries from liquidation proceeds and deficiency
judgments.
(4) "Net Losses" means "Gross Losses" minus "Recoveries."
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware in November
1994. The Depositor maintains its principal offices at 3450 Buschwood Park
Drive, Suite 250, Tampa, Florida 31618, None of the Depositor, the Seller or the
Servicer nor any of their affiliates will insure or guarantee distributions on
the Certificates.
S-20
<PAGE>
USE OF PROCEEDS
The Seller will sell the Initial Home Equity Loans to the Depositor and
the Depositor will sell the Initial Home Equity Loans to the Trust concurrently
with delivery of the Certificates. Net proceeds from the sale of the Class A
Certificates will be applied by the Depositor (i) to the purchase of the Initial
Home Equity Loans from the Seller, (ii) to the deposit of the Pre-Funded Amount
in the Pre-Funding Account and (iii) to the deposit of certain amounts in the
Capitalized Interest Account. Such net proceeds less the Pre-Funded Amount and
the amount deposited in the Capitalized Interest Account will (together with the
Class S and Class R Certificates retained by the Depositor and the Seller)
represent the purchase price to be paid by the Trust to the Depositor and by the
Depositor to the Seller for the Home Equity Loans.
THE HOME EQUITY LOAN POOL
General
The statistical information presented in this Prospectus Supplement
concerning the pool of Home Equity Loans is based on the pool of Initial Home
Equity Loans as of the Cut-Off Date. Subsequent Home Equity Loans are intended
to be purchased by the Trust for inclusion in the [Fixed Rate] Group from the
Depositor from time to time on or before _____________, 199__ from funds on
deposit in the Pre-Funding Account. The Initial Home Equity Loans and the
Subsequent Home Equity Loans are referred to collectively as the Home Equity
Loans. The Subsequent Home Equity Loans to be purchased by the Trust, if
available, will be sold by the Seller to the Depositor and then by the Depositor
to the Trust.
This subsection describes generally certain characteristics of the
Initial Home Equity Loans. Unless otherwise noted, all statistical percentages
in this Prospectus Supplement are measured by the aggregate principal balance of
the related Initial Home Equity Loans as of the Cut-Off Date. The columns
entitled "% of Initial Home Equity Loans" and "% of Aggregate Loan Balance" in
the following tables may not sum to 100% due to rounding.
Each Home Equity Loan in the Trust will be assigned to one of two home
equity loan groups comprised of Home Equity Loans which bear fixed interest
rates only, in the case of the Fixed Rate Group, and Home Equity Loans which
bear adjustable interest rates only, in the case of the Adjustable Rate Group.
The Fixed Rate Certificates represent undivided ownership interests in all Home
Equity Loans contained in the Fixed Rate Group, and distributions on the Fixed
Rate Certificates will be based primarily on amounts available for distribution
in respect of Home Equity Loans in the Fixed Rate Group. The Adjustable Rate
Certificates represent undivided ownership interests in all Home Equity Loans
contained in the Adjustable Rate Group, and distributions on the Adjustable Rate
Certificates will be based primarily on amounts available for distribution in
respect of Home Equity Loans in the Adjustable Rate Group.
The Initial Home Equity Loans to be transferred by the Depositor to the
Trust on the Closing Date will consist of ______ fixed rate conventional home
equity loans evidenced by promissory notes (the "Notes") secured by first and
second lien deeds of trust, security deeds or mortgages, which are located in
___ states and the District of Columbia. The Properties securing the Initial
Home Equity Loans consist primarily of one-to-four family residential
properties. The Properties may be owner-occupied and non-owner occupied
investment properties (which includes second and vacation homes). All of the
Initial Home Equity Loans were originated or purchased after ________________,
19__. Initial Home Equity Loans aggregating _____% of the aggregate Loan
Balances of the Initial Home Equity Loans as of the Cut-Off Date (the "Original
Aggregate Loan Balance") are secured by first liens on the related properties,
and the remaining Initial Home Equity Loans are secured by second liens on the
related properties.
The Loan-to-Value Ratios shown below were calculated based upon either
the appraised values of the Properties at the time of origination (the
"Appraised Values") or the sales price. In a limited number of circumstances,
and within the Seller's underwriting guidelines, the Seller has reduced the
Appraised Value of Properties where the Properties are unique, have a high value
or where the comparables are not within FNMA
S-21
<PAGE>
guidelines. The purpose for making these reductions is to value the Properties
more conservatively than would otherwise be the case if the appraisal were
accepted as written.
No assurance can be given that values of the Properties have remained
or will remain at their levels on the dates of origination of the related Home
Equity Loans. If the residential real estate market has experienced or should
experience an overall decline in property values such that the outstanding
balances of the Home Equity Loans, together with the outstanding balances of any
first mortgage, become equal to or greater than the value of the Properties, the
actual rates of delinquencies, foreclosures and losses could be higher than
those now generally experienced in the mortgage lending industry.
Initial Home Equity Loans -- Fixed Rate Group
As of the Cut-Off Date, the average Loan Balance of the Initial Home
Equity Loans in the Fixed Rate Group was $_____________; the weighted average
Coupon Rate of the Initial Home Equity Loans in the Fixed Rate Group was _____%;
the Coupon Rates of the Initial Home Equity Loans in the Fixed Rate Group ranged
from _____% to _____%; the weighted average combined Loan-to-Value Ratio of the
Initial Home Equity Loans in the Fixed Rate Group was _____%; the weighted
average remaining term to maturity of the Initial Home Equity Loans in the Fixed
Rate Group was ____ months; and the remaining terms to maturity of the Initial
Home Equity Loans in the Fixed Rate Group ranged from ____ months to ____
months. As of the Cut-Off Date, _____% of the Initial Home Equity Loans in the
Fixed Rate Group were secured by first mortgages and _____% of the Initial Home
Equity Loans in the Fixed Rate Group are secured by second mortgages. The
maximum and minimum Loan Balances of the Initial Home Equity Loans in the Fixed
Rate Group as of the Cut-Off Date were $___________ and $___________,
respectively. Home Equity Loans in the Fixed Rate Group containing "balloon"
payments represented not more than _____% of the Initial Home Equity Loans in
the Fixed Rate Group. No Initial Home Equity Loan in the Fixed Rate Group will
mature later than __________________.
S-22
<PAGE>
Geographic Distribution of Properties - Fixed Rate Group
The geographic distribution of Initial Home Equity Loans in the Fixed
Rate Group by state, as of the Cut-Off Date, was as follows:
Number of Initial Aggregate % of Aggregate
State Home Equity Loans Loan Balance Loan Balance
- ----- ----------------- ------------ ------------
Total $ %
Original Loan-to-Value Ratios - Fixed Rate Group
The original loan-to-value ratios as of the origination dates of the
Initial Home Equity Loans in the Fixed Rate Group (based upon appraisals made at
the time of origination thereof) (the "Loan-to-Value Ratios") as of the Cut-Off
Date were distributed as follows:
Range of Number of Initial Aggregate % of Aggregate
Original LTVs Home Equity Loans Loan Balance Loan Balance
- ------------- ----------------- ------------ ------------
Total $ %
Combined Loan-to-Value Ratios - Fixed Rate Group
The original combined loan-to-value ratios as of the dates of
origination of the Initial Home Equity Loans in the Fixed Rate Group (based upon
appraisals made at the time of origination hereunder) (the "Combined
Loan-to-Value Ratios") as of the Cut-Off Date were distributed as follows:
Range of Number of Initial Aggregate % of Aggregate
Original CLTV's Home Equity Loans Loan Balance Loan Balance
- --------------- ----------------- ------------ ------------
Total $
Cut-Off Date Coupon Rates - Fixed Rate Group
The Coupon Rates borne by the Notes relating to the Initial Home Equity
Loans in the Fixed Rate Group as of the Cut- Off Date were distributed as
follows as of the Cut-Off Date:
Range of Number of Initial Aggregate % of Aggregate
Coupon Rates Home Equity Loans Loan Balance Loan Balance
- ------------ ----------------- ------------ ------------
Total $
S-23
<PAGE>
Cut-Off Date Loan Balances - Fixed Rate Group
The distribution of the outstanding principal amounts of the Initial
Home Equity Loans in the Fixed Rate Group as of
the Cut-Off Date was as follows:
Range of Number of Initial Aggregate % of Aggregate
Loan Balances Home Equity Loans Loan Balance Loan Balance
- ------------- ----------------- ------------ ------------
Total $
Types of Mortgaged Properties - Fixed Rate Group
The Properties securing the Initial Home Equity Loans in the Fixed Rate Group as
of the Cut-Off Date were of the property types as follows:
Property Types Number of Initial Aggregate % of Aggregate
Home Equity Loans Loan Balance Loan Balance
----------------- ------------ ------------
Single Family Detached
Two-to-Four Family
Single Family Attached
Condominium
Planned Unit Development
Townhouse
Mixed Use
Multifamily Residential
Cooperative
Total $
Distribution of Months Since Origination - Fixed Rate Group
The distribution of the number of months since the date of origination
of the Initial Home Equity Loans in the Fixed Rate Group as of the Cut-Off Date
was as follows:
Number of Months Number of Initial Aggregate % of Aggregate
Since Origination Home Equity Loans Loan Balance Loan Balance
- ----------------- ----------------- ------------ ------------
Total $
S-24
<PAGE>
Distribution of Remaining Term to Maturity - Fixed Rate Group
The distribution of the number of months remaining to maturity of the
Initial Home Equity Loans in the Fixed Rate Group as of the Cut-Off Date was as
follows:
Months Remaining Number of Initial Aggregate % of Aggregate
to Maturity Home Equity Loans Loan Balance Loan Balance
- ----------- ----------------- ------------ ------------
Total $
Occupancy Status - Fixed Rate Group
The occupancy status of the Properties securing the Initial Home Equity
Loans in the Fixed Rate Group as of the CutOff Date was as follows:
Number of Initial Aggregate % of Aggregate
Occupancy Status Home Equity Loans Loan Balance Loan Balance
- ---------------- ----------------- ------------ ------------
Conveyance of Subsequent Home Equity Loans -- Fixed Rate Group
The Pooling and Servicing Agreement permits the Trust to acquire
$_____________ in aggregate principal balance of Subsequent Home Equity Loans
for addition to the Fixed Rate Group. Accordingly, the statistical
characteristics of the Home Equity Loan Pool and the Fixed Rate Group will vary
as of any Subsequent Cut-Off Date upon the acquisition of Subsequent Home Equity
Loans.
The obligation of the Trust to purchase a Subsequent Home Equity Loan
for addition to the Fixed Rate Group on a Subsequent Transfer Date is subject,
among other factors, to the following requirements (which may be waived or
modified by the Certificate Insurer): (i) such Subsequent Home Equity Loan may
not be 30 or more days contractually delinquent as of the related Subsequent
Cut-Off Date (except that Subsequent Home Equity Loans representing not more
than __% of the aggregate Loan Balance of the Subsequent Home Equity Loans may
not be more than 60 days Delinquent as of the related Subsequent CutOff Date);
(ii) such Subsequent Home Equity Loan will be a fixed rate Home Equity Loan;
(iii) the original term to maturity of such Subsequent Home Equity Loan may not
exceed 30 years; (iv) such Subsequent Home Equity Loan will have a Coupon Rate
of not less than _____%; (v) each Subsequent Home Equity Loan is not secured by
a Property that is a manufactured home; and (vi) following the purchase of such
Subsequent Home Equity Loan by the Trust, the Home Equity Loans (including the
Subsequent Home Equity Loans) (a) will have a weighted average Coupon Rate of at
least ______%; (b) will have a weighted average combined Loan-to-Value Ratio of
not more than ______%; (c) will not have Balloon Loans representing more than
_____% by aggregate principal balance and no such Subsequent Home Equity Loan
which is a Balloon Loan shall have an original term to maturity of less than 15
years; and, (d) will have no Home Equity Loan with a principal balance in excess
of
$-------.
S-25
<PAGE>
Initial Home Equity Loans - Adjustable Rate Group
As of the Cut-Off Date, the average Loan Balance of the Home Equity
Loans in the Adjustable Rate Group was $________; the weighted average Coupon
Rate of the Home Equity Loans in the Adjustable Rate Group was _____%; the
Coupon Rates of the Home Equity Loans in the Adjustable Rate Group ranged from
_____% to _____%; the weighted average maximum Coupon Rate of the Home Equity
Loans in the Adjustable Rate Group was _____%; the maximum Coupon Rate of the
Home Equity Loans in the Adjustable Rate Group ranged from _____% to _____%; the
minimum Coupon Rate of the Loans in the Adjustable Rate Group ranged from _____%
to _____%; the weighted average Loan-to-Value Ratio of the Home Equity Loans in
the Adjustable Rate Group was _____%; the weighted average remaining term to
maturity of the Home Equity Loans in the Adjustable Rate Group was ___ months;
and the remaining terms to maturity as of the Cut-Off Date of the Home Equity
Loans in the Adjustable Rate Group ranged from ___ months to ___ months. All of
the Home Equity Loans in the Adjustable Rate Group are secured by first
mortgages. The maximum and minimum Loan Balance of the Home Equity Loans in the
Adjustable Rate Group as of the Cut-Off Date was $_______ and $_______,
respectively. None of the Home Equity Loans in the Adjustable Rate Group
contains "balloon" payments. No Home Equity Loans in the Adjustable Rate Group
will mature later than __________, ____.
All of the Home Equity Loans in the Adjustable Rate Group have maximum
Coupon Rates. The weighted average maximum Coupon Rate of the Home Equity Loans
in the Adjustable Rate Group is _____%, with maximum Coupon Rates that range
from approximately _____% to _____%. The Home Equity Loans in the Adjustable
Rate Group have a weighted average margin as of the Cut-Off Date of _____%. The
margin for the Home Equity Loans in the Adjustable Rate Group ranges from _____%
to _____%.
Six-Month LIBOR Loans. The Six-Month LIBOR Loans consist of ___ loans
aggregating $____________ which have semi-annual interest rate and semi-annual
payment adjustment frequencies. The Six-Month LIBOR Loans have a weighted
average margin of _____%. The margin for the Six-Month LIBOR Loans ranges from
_____% to _____ The Six-Month LIBOR Loans have a weighted average periodic
semi-annual rate adjustment cap of _____%. The weighted average initial Coupon
Rate is _____%, with initial Coupon Rates that range from _____% to _____%. The
Six-Month LIBOR Loans have a weighted average maximum Coupon Rate of _____% with
maximum Coupon Rates that range from _____% to _____%. The weighted average
number of months to the next rate adjustment date on the Six-Month Libor Loans
is __ months.
[CMT Loans. The CMT Loans consist of __ loans aggregating $____________
which have annual interest rate and annual payment adjustment frequencies based
on the weekly average yield on United States Treasury securities adjusted to a
constant maturity of one year. The CMT Loans have a weighted average margin of
_____%. The margin for the CMT Loans ranges from _____% to _____%. The CMT Loans
have a weighted average periodic annual rate adjustment cap of _____%. The
weighted average initial Coupon Rate is _____%, with initial Coupon Rates that
range from _____% to _____%. The CMT Loans have a weighted average maximum
Coupon Rate of _____%, with maximum Coupon Rates that range from _____% to
_____%. The weighted average number of months to the next rate adjustment date
on the CMT Loans is __ months.]
[5/25 Loans. The 5/25 Loans consist of __ Mortgage Loans aggregating
$__________, which have a weighted average first interest rate adjustment of 60
months from the origination date and, generally thereafter, an annual interest
rate and annual prepayment adjustment frequencies in the same manner as CMT
Loans and subject to a _____% periodic rate adjustment cap. The 5/25 Loans have
a weighted average margin of _____% ranging from _____% to _____%. The weighted
average initial Coupon Rate is _____%, with initial Coupon Rates that range from
_____% to _____%. The 5/25 Loans have a weighted average maximum Coupon Rate of
_____%, with maximum Coupon Rates that range from _____% to _____%. The weighted
average number of months to the next rate adjustment date on the 5/25 Loans is
__ months.]
S-26
<PAGE>
Geographic Distribution of Properties - Adjustable Rate Group
The geographic distribution of Home Equity Loans in the Adjustable Rate
Group by state, as of the Cut-Off Date, was as follows:
Number of Aggregate % of Aggregate
State Home Equity Loans Loan Balance Loan Balance
- ----- ----------------- ------------ ------------
Total $
Original Loan-to-Value Ratios - Adjustable Rate Group
The original loan-to-value ratios as of the origination dates of the
Home Equity Loans in the Adjustable Rate Group (based upon appraisals made at
the time of origination thereof) (the "Loan-to-Value Ratios") as of the Cut-Off
Date were distributed as follows:
Range of Number of Aggregate % of Aggregate
Original LTVs Home Equity Loans Loan Balance Loan Balance
- ------------- ----------------- ------------ ------------
Total $
Cut-Off Date Coupon Rates - Adjustable Rate Group
The Coupon Rates borne by the Notes relating to the Home Equity Loans
in the Adjustable Rate Group as of the CutOff Date were distributed as follows
as of the Cut-Off Date:
Range of Number of Aggregate % of Aggregate
Coupon Rates Home Equity Loans Loan Balance Loan Balance
- ------------ ----------------- ------------ ------------
Total $
S-27
<PAGE>
Cut-Off Date Loan Balances - Adjustable Rate Group
The distribution of the outstanding principal amounts of the Home
Equity Loans in the Adjustable Rate Group as of the Cut-Off Date was as follows:
Range of Number of Aggregate % of Aggregate
Loan Balances Home Equity Loans Loan Balance Loan Balance
- ------------- ----------------- ------------ ------------
Total $
Types of Mortgaged Properties - Adjustable Rate Group
The Properties securing the Home Equity Loans in the Adjustable Rate
Group as of the Cut-Off Date were of the property types as follows:
Number of Aggregate % of Aggregate
Property Types Home Equity Loans Loan Balance Loan Balance
- -------------- ----------------- ------------ ------------
Single Family Detached $ %
Condominium
Planned Unit Development
Two-to-Four Family
Townhouse
Total $
Distribution of Months Since Origination - Adjustable Rate Group
The distribution of the number of months since the date of origination
of the Home Equity Loans in the Adjustable Rate Group as of the Cut-Off Date was
as follows:
Number of Months Number of Aggregate % of Aggregate
Since Origination Home Equity Loans Loan Balance Loan Balance
- ----------------- ----------------- ------------ ------------
Total
S-28
<PAGE>
Distribution of Remaining Term to Maturity - Adjustable Rate Group
The distribution of the number of months remaining to maturity of the
Home Equity Loans in the Adjustable Rate Group as of the Cut-Off Date was as
follows:
Months Remaining Number of Aggregate % of Aggregate
to Maturity Home Equity Loans Loan Balance Loan Balance
- ----------- ----------------- ------------ ------------
Total $
Occupancy Status - Adjustable Rate Group
The occupancy status of the Properties securing the Home Equity Loans
in the Adjustable Rate Group as of the Cut-Off Date was as follows:
Number of Aggregate % of Aggregate
Occupancy Status Home Equity Loans Loan Balance Loan Balance
- ---------------- ----------------- ------------ ------------
Owner Occupied $ %
Investor Owned
Vacation/Second Home
Total $
S-29
<PAGE>
Distribution of Margins -- Adjustable Rate Group
The margins borne by the Notes relating to the Home Equity Loans in the
Adjustable Rate Group as of the Cut-Off Date was as follows:
SIX MONTH LIBOR
Number of Aggregate % of Aggregate
Margins Home Equity Loans Loan Balance Loan Balance
------- ----------------- ------------ ------------
Total $
[ONE YEAR CMT ARM]
Number of Aggregate % of Aggregate
Margins Home Equity Loans Loan Balance Loan Balance
------- ----------------- ------------ ------------
Total $
[5/25 LOANS]
Number of Aggregate % of Aggregate
Margins Home Equity Loans Loan Balance Loan Balance
------- ----------------- ------------ ------------
Total $
S-30
<PAGE>
Distribution of Maximum Coupon Rates -- Adjustable Rate Group
The maximum Coupon Rates borne by the Notes relating to the Home Equity
Loans in the Adjustable Rate Group as of the Cut-Off Date was as follows:
SIX MONTH LIBOR
Maximum Number of Aggregate % of Aggregate
Coupon Rates Home Equity Loans Loan Balance Loan Balance
------------ ----------------- ------------ ------------
Total $
[ONE YEAR CMT ARM]
Maximum Number of Aggregate % of Aggregate
Coupon Rates Home Equity Loans Loan Balance Loan Balance
------------ ----------------- ------------ ------------
Total $
[5/25 LOANS]
Maximum Number of Aggregate % of Aggregate
Coupon Rates Home Equity Loans Loan Balance Loan Balance
------------ ----------------- ------------ ------------
Total $
S-31
<PAGE>
Distribution of Next Coupon Rate Change -- Adjustable Rate Group
The number of months until the next Coupon Rate change for each of the
Notes relating to the Home Equity Loans in the Adjustable Rate Group as of the
Cut-Off Date was as follows:
SIX MONTH LIBOR
Number of Months to Number of Aggregate % of Aggregate
Next Coupon Rate Change Home Equity Loans Loan Balance Loan Balance
1 $ %
2
3
4
5
6
Total $
ONE YEAR CMT ARM
Numbers of Months to Number of Aggregate % of Aggregate
Next Coupon Rate Change Home Equity Loans Loan Balance Loan Balance
----------------------- ----------------- ------------ ------------
1 $ %
3
4
5
6
7
8
9
10
11
Total $
5/25 LOANS
Number of Months to Number of Aggregate % of Aggregate
Next Coupon Rate Change Home Equity Loans Loan Balance Loan Balance
----------------------- ----------------- ------------ ------------
43 $ %
49
50
51
52
53
Total $
S-32
<PAGE>
Interest Payments on the Home Equity Loans
All of the Home Equity Loans provide that interest is charged to the
obligor (the "Mortgagor") thereunder, and payments are due from such Mortgagors,
as of a scheduled day of each month which is fixed at the time of origination.
Scheduled monthly payments made by the Mortgagors on the Home Equity Loans
either earlier or later than the scheduled due dates thereof will not affect the
amortization schedule or the relative application of such payments to principal
and interest.
PREPAYMENT AND YIELD CONSIDERATIONS
General
The weighted average life of, and, if purchased at other than par, the
yield to maturity on, a Class A Certificate will relate to the rate of payment
of principal of the Home Equity Loans in the related Home Equity Loan Group,
including for this purpose Prepayments, liquidations due to defaults, casualties
and condemnations, and repurchases of Home Equity Loans by the Seller. A
significant number of the Home Equity Loans may be prepaid by the related
Mortgagors, in whole or in part, at any time without payment of any prepayment
fee or penalty. The actual rate of principal prepayments on pools of home equity
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 home
equity loans at any time because of specific factors relating to the home equity
loans in the particular pool, including, among other things, the age of the home
equity loans, the geographic locations of the properties securing the loans and
the extent of the mortgagors' equity in such properties, and changes in the
mortgagors' housing needs, job transfers and unemployment.
As with fixed rate obligations generally, the rate of prepayment on a
pool of home equity loans with fixed rates (such as the Home Equity Loans in the
Fixed Rate Group) is affected by prevailing market rates for home equity loans
of a comparable term and risk level. When the market interest rate is below the
mortgage coupon, mortgagors may have an increased incentive to refinance their
home equity loans. Depending on prevailing market rates, the future outlook for
market rates and economic conditions generally, some mortgagors may sell or
refinance mortgaged properties in order to realize their equity in the mortgaged
properties, to meet cash flow needs or to make other investments.
As is the case with conventional fixed-rate home equity loans,
adjustable-rate home equity loans may also be subject to a greater rate of
principal prepayments in a declining interest rate environment. For example, if
prevailing interest rates fall significantly, adjustable-rate home equity loans
could be subject to higher prepayment rates than if prevailing interest rates
remain constant because the availability of fixed-rate home equity loans at
competitive interest rates may encourage mortgagors to refinance their
adjustable-rate home equity loan to "lock in" a lower fixed interest rate.
However, no assurance can be given as to the level of prepayments that the Home
Equity Loans will experience.
In addition to the foregoing factors affecting the weighted average
life of the Class A Certificates, the overcollateralization provisions of the
Trust result in a limited acceleration of each Class of Class A Certificates
relative to the amortization of the Home Equity Loans in early months of the
transaction. The accelerated amortization is achieved by the application of
certain excess interest to the payment of the Class A Certificate Principal
Balance. This acceleration feature creates overcollateralization which results
from the excess of the aggregate Loan Balance of the Home Equity Loans over the
Class A Certificate Principal Balance. Once the required level of
overcollateralization is reached, the acceleration feature will cease, unless
necessary to maintain the required level of overcollateralization.
S-33
<PAGE>
Mandatory Prepayment
In the event that at the end of the Funding Period not all of the
original Pre-Funded Amount has been used to acquire Subsequent Home Equity Loans
for inclusion in the [Fixed Rate] Group, then the [Fixed Rate] Class A
Certificates then entitled to receive payments of principal will receive a
partial prepayment pro rata on the Payment Date in _______ 199__.
Although no assurances can be given, the Seller intends to use
substantially all of the amount on deposit in the Pre-Funding Account to
purchase Subsequent Home Equity Loans such that no material amount of principal
is expected to be prepaid to the Owners of the [Fixed Rate] Certificates on or
before the Payment Date in _______ 199__.
Projected Prepayment and Yield for Class A Certificates
As indicated above, if purchased at other than par (disregarding, for
purposes of this discussion, the effects on an investor's yield resulting from
the timing of the settlement date and those considerations discussed below under
"Payment Lag Feature of Certificates"), the yield to maturity on a Class of
Class A Certificates will be affected by the rate of the payment of principal of
the Home Equity Loans. If the actual rate of payments on the Home Equity Loans
is slower than the rate anticipated by an investor who purchases a Class of
Class A Certificates at a discount, the actual yield to such investor will be
lower than such investor's anticipated yield. If the actual rate of payments on
the Home Equity Loans is faster than the rate anticipated by an investor who
purchases a Class of Class A Certificates at a premium, the actual yield to such
investor will be lower than such investor's anticipated yield.
The Final Scheduled Payment Date for each Class of Class A Certificates
is as set forth in the "Summary of Terms" hereof. These dates are dates on which
the "Initial Certificate Principal Balance" set forth in the "Summary of Terms"
hereof for the related Class of Class A Certificates as of the Closing Date less
all amounts previously distributed to the Owners (other than the Certificate
Insurer) on account of principal (such amount as to any Class of Class A
Certificates and as of any time, the related "Class A Certificate Principal
Balance" and as to the Class A Certificates collectively, the "Certificate
Principal Balance" or the "Class A Certificate Principal Balance") would be
reduced to zero, assuming that no Prepayments are received on the Home Equity
Loans, that scheduled monthly payments of principal and interest on the Home
Equity Loans are timely received and that Net Monthly Excess Cashflow will be
used to make accelerated payments of principal (i.e., Subordination Increase
Amounts) to the Owners of the related Class A Certificates. The Final Scheduled
Payment Date for the Class A-7 Certificates is the month following the
Remittance Period in which the Loan Balances of all Home Equity Loans in the
Fixed Rate Group (including Subsequent Home Equity Loans) have been reduced to
zero assuming that such Home Equity Loans pay in accordance with their terms.
The Final Scheduled Payment Date for the Class A-8 Certificates is the
thirteenth Payment Date following the calendar month in which the Loan Balances
of all Home Equity Loans in the Adjustable Rate Group have been reduced to zero
assuming that the Home Equity Loans in such Group pay in accordance with their
terms. The weighted average life of the Class A Certificates is likely to be
shorter than would be the case if payments actually made on the Home Equity
Loans conformed to the foregoing assumptions, and the final Payment Date with
respect to the Class A Certificates could occur significantly earlier than the
Final Scheduled Payment Date because (i) Prepayments are likely to occur and
(ii) the Owners of the Class R Certificates may cause a termination of the Trust
when the aggregate outstanding Loan Balance of the Home Equity Loans is less
than __% of the Maximum Collateral Amount thereof.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
such security will be repaid to the investor. The weighted average life of the
related Class A Certificates will be influenced by the rate at which principal
of the Home Equity Loans in the related Home Equity Loan Group is paid, which
may be in the form of scheduled amortization or prepayments (for this purpose,
the term "prepayment" includes Prepayments and liquidations due to default).
Prepayments on home equity loans are commonly measured relative to a prepayment
standard or model.
It is very unlikely that the Home Equity Loans will prepay at rates
consistent with the Prepayment Assumption until maturity or that all of the Home
Equity Loans in the related Home Equity Loan Group will prepay
S-34
<PAGE>
at the same rate. There will be discrepancies between the actual characteristics
of the Home Equity Loans included in the Trust and the assumed characteristics
used in preparing the following tables. Any discrepancy may have an effect upon
the percentages of Initial Certificate Principal Balance outstanding set forth
in the table and weighted average lives of the Class A Certificates.
The model used in this Prospectus Supplement is the prepayment
assumption (the "Prepayment Assumption") which represents an assumed rate of
prepayment each month relative to the then outstanding principal balance of a
pool of home equity loans for the life of such home equity loans. With respect
to the Class A Certificates, a ___% Prepayment Assumption assumes constant
prepayment rates ("CPR") of ___% per annum of the then outstanding principal
balance of the Home Equity Loans in the first month of the life of the Home
Equity Loans and an additional ___% per annum in each month thereafter until the
twelfth month. Beginning in the thirteenth month and in each month thereafter
during the life of the Home Equity Loans, ___% Prepayment Assumption assumes a
constant prepayment rate of ___% per annum each month. As used in the table
below, ___% Prepayment Assumption assumes prepayment rates equal to ___% of the
Prepayment Assumption; i.e., no prepayments. Correspondingly, ___% Prepayment
Assumption assumes prepayment rates equal to ___% of the Prepayment Assumption,
and so forth. The Prepayment Assumption does not purport to be a historical
description of prepayment experience or a prediction of the anticipated rate of
prepayment of any pool of home equity loans, including the Home Equity Loans.
The Seller believes that no existing statistics of which it is aware provide a
reliable basis for Owners of Class A Certificates to predict the amount or the
timing of receipt of prepayments on the Home Equity Loans.
Since the tables were prepared on the basis of the assumptions in the
following paragraph, there are discrepancies between the characteristics of the
actual Home Equity Loans and the characteristics of the Home Equity Loans
assumed in preparing the tables. Any such discrepancy may have an effect upon
the percentages of the Certificate Principal Balances outstanding and weighted
average lives of the Class A Certificates set forth in the tables. In addition,
since the actual Home Equity Loans in the Trust have characteristics which
differ from those assumed in preparing the tables set forth below, the
distributions of principal on the Class A Certificates may be made earlier or
later than as indicated in the tables.
For the purpose of the tables below, it is assumed that: (i) the Home
Equity Loans of each Home Equity Loan Group which consist of pools of loans with
level-pay and balloon amortization methodologies, Cut-Off Date Loan Balances,
coupon rates, net coupon rates, original and remaining terms to maturity, and
original amortization terms as applicable, are as set forth below, (ii) the
Closing Date for the Certificates occurs on __________, 199__, (iii)
distributions on the Certificates are made on the __th day of each month
regardless of the day on which the Payment Date actually occurs, commencing in
_______ 199__ in accordance with the priorities described herein, (iv) the
difference between the Gross Coupon Rate and the Net Coupon Rate is equal to the
Servicing Fee and the Net Coupon Rate is further reduced by the Premium Amount
and the Trustee Fee, (v) the Home Equity Loans' prepayment rates are a multiple
of the applicable Prepayment Assumption, (vi) prepayments include 30 day's
interest thereon, (vii) no optional termination or mandatory termination is
exercised, (viii) the "Specified Subordinated Amount" (as defined under "Credit
Enhancement -- Overcollateralization Provisions") for each Home Equity Loan
Group is set initially as specified in the Pooling and Servicing Agreement, (ix)
all of the Pre-Funded Amount is used to acquire Subsequent Home Equity Loans for
inclusion in the Fixed Rate Group as of the close of business on ______________
and prior to such date, the Pre-Funded Amount accrued interest at a rate of
_____% per annum for one month, (x) the Coupon Rate for each Home Equity Loan in
the Adjustable Rate Group is adjusted on its next rate adjustment date (and no
subsequent rate adjustment dates, if necessary) to equal the sum of (a) an
assumed level of the applicable index of _____% for Six-Month LIBOR Loans,
_____% for CMT Loans and _____% for the 5/25 Loans, and (b) the respective gross
margin (such sum being subject to the applicable periodic adjustment cap and
maximum interest rate) and (xi) the scheduled monthly payments of principal and
interest on the Home Equity Loans will be timely delivered on the first day of
the Remittance Period (with no defaults).
S-35
<PAGE>
<TABLE>
<CAPTION>
HOME EQUITY LOANS FIXED RATE GROUP
<S> <C> <C> <C> <C> <C> <C> <C>
Original Remaining Original
Term to Term to Amortization
Pool Principal Gross Coupon Net Coupon Maturity Maturity Term Amortization
Number Balance Rate Rate (in months) (in months) (in months) Method
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
ADJUSTABLE RATE GROUP
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Original Remaining
Term to Term to Original
Pool Principal Gross Net Coupon Months Maximum Maturity Maturity Amortization
Number Balance Coupon Rate to Rate Margin Interest (in months) (in months) Term Amortization
Rate Change Rate (in months) Method
- -----------------------------------------------------------------------------------------------------------------------------------
$ Level
Level
</TABLE>
S-36
<PAGE>
The following tables set forth the percentages of the initial principal
amount of the Class A Certificates that would be outstanding after each of the
dates shown, based on a rate equal to __%, __%, __%, __%, __% and __% of the
Prepayment Assumption (as defined above).
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
Class A-1 Class A-2 Class A-3
Payment Date
S-37
<PAGE>
Payment Lag Feature of Class A Certificates
Pursuant to the Pooling and Servicing Agreement, an amount equal to
Mortgagor payments with respect to each Home Equity Loan (net of the Servicing
Fee) received by the Servicer during each Remittance Period is to be remitted to
the Trustee on or prior to the related Monthly Remittance Date; the Trustee will
not be required to distribute any such amounts to the Owners until the next
succeeding Payment Date. As a result, the monthly distributions to the Owners
generally reflect Mortgagor payments during the prior Remittance Period, and the
first Payment Date will not occur until ___________, 199__. Thus, the effective
yield to the Owners will be below that otherwise produced by the related
Pass-Through Rate because the distribution of the Class A Distribution Amount in
respect of any given month will not be made until on or about the ____ day of
the following month. This 25 day period between the last day of the Remittance
Period and the Payment Date is identical to the 25 day delay period for FNMA
securities.
FORMATION OF THE TRUST AND TRUST PROPERTY
The Trust will be created and established pursuant to the Pooling and
Servicing Agreement. The Seller will convey without recourse the Home Equity
Loans to the Depositor, the Depositor will convey without recourse the Home
Equity Loans to the Trust and the Trust will issue the Class A Certificates, the
Class S Certificates and the Class R Certificates to the Owners thereof.
The property of the Trust shall include all (a) the Home Equity Loans
together with the related Home Equity Loan documents and the Seller's interest
in any Property which secures a Home Equity Loan and all payments thereon and
proceeds of the conversion, voluntary or involuntary, of the foregoing, (b) such
amounts as may be held by the Trustee in the Certificate Account, the
Pre-Funding Account, the Capitalized Interest Account and any other accounts
held by the Trustee for the Trust together with investment earnings on such
amounts and such amounts may be held by the Servicer in the Principal and
Interest Account, if any, exclusive of investment earnings thereon (except as
otherwise provided) whether in the form of cash, instruments, securities or
other properties and (c) proceeds of all the foregoing (including, but not by
way of limitation, all proceeds of any mortgage insurance, hazard insurance and
title insurance policy relating to the Home Equity Loans, cash proceeds,
accounts, accounts receivable, notes, drafts, acceptances, chattel paper,
checks, deposit accounts, rights to payment of any and every kind, and other
forms of obligations and receivables which at any time constitute all or part of
or are included in the proceeds of any of the foregoing) to pay the Certificates
as specified in the Pooling and Servicing Agreement (collectively, the "Trust
Estate"). In addition to the foregoing, the Seller shall cause the Certificate
Insurer to deliver the Insurance Policy to the Trustee for the benefit of the
Owners of the Class A Certificates.
The Class A Certificates will not represent an interest in or an
obligation of, nor will the Home Equity Loans be guaranteed by, the Depositor,
the Seller, the Servicer or any of their affiliates; however, certain
distributions due to the Owners of the Class A Certificates are insured by the
Certificate Insurer.
For Federal income tax purposes, the Trust Estate created by the
Pooling and Servicing Agreement will include two segregated asset pools, each of
which will be treated as a separate REMIC. The assets of the Base REMIC will
generally consist of the Home Equity Loans. The assets of the Upper-Tier REMIC
will generally consist of uncertificated regular interests issued by the Base
REMIC, which in the aggregate will correspond to the Class A Certificates. In
addition to the Class A Certificates, the Trust will also issue: the Class S
Certificates, entitled "IMC Home Equity Loan Trust 199_-__, Class S
Certificates," which are not themselves an interest in a REMIC, but represent
the sum of specified portions of certain uncertificated interests issued by the
Upper-Tier REMIC; a noncertificated residual interest in the Base REMIC; and, a
residual Class entitled "IMC Home Equity Loan Trust 199_-__, Class R
Certificates" which will be designated as the "residual interest" in the
Upper-Tier REMIC for purposes of the Code. The Class S Certificates and the
Class R Certificates are not being offered hereby.
Prior to its formation the Trust will have had no assets or
obligations. Upon formation, the Trust will not engage in any business activity
other than acquiring, holding and collecting payments on the Home Equity Loans,
issuing the Certificates and distributing payments thereon. The Trust will not
acquire any receivables or assets other than the Home Equity Loans and the
rights appurtenant thereto, and will not have any need for additional capital
resources. To the extent that borrowers make scheduled payments under the Home
Equity Loans, the Trust will have sufficient liquidity to make distributions on
the Certificates. As the Trust does not have any operating history
S-38
<PAGE>
and will not engage in any business activity other than issuing the Certificates
and making distributions thereon, there has not been included any historical or
pro forma ratio of earnings to fixed charges with respect to the Trust.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Initial Home
Equity Loans and the Properties is based upon the pool as constituted at the
close of business on the Cut-Off Date. Prior to the issuance of the Class A
Certificates, Initial Home Equity Loans may be removed from the pool as a result
of incomplete documentation or non-compliance with representations and
warranties set forth in the Pooling and Servicing Agreement, if the Seller deems
such removal necessary or appropriate. A limited number of other Initial Home
Equity Loans may be included in the pool prior to the issuance of the
Certificates and the Subsequent Home Equity Loans will be added to the pool
after the issuance of the Certificates.
A current report on Form 8-K will be available to purchasers of the
Class A Certificates and will be filed, and incorporated by reference to the
Registration Statement together with the Pooling and Servicing Agreement, with
the Securities and Exchange Commission within fifteen days after the initial
issuance of the Class A Certificates and within fifteen days of the addition of
any Subsequent Home Equity Loans. In the event Initial Home Equity Loans are
removed from or added to, or Subsequent Home Equity Loans are added to, the pool
as set forth in the preceding paragraph, such removal or addition will be noted
in a current report on Form 8-K.
DESCRIPTION OF THE CLASS A CERTIFICATES
General
Each Class A Certificate will represent certain undivided, fractional
ownership interests in the Trust Estate created and held pursuant to the Pooling
and Servicing Agreement, subject to the limits and the priority of distribution
described therein.
The Home Equity Loan Pool is divided into two Groups, the Fixed Rate
Group, which contains only fixed rate Home Equity Loans and the Adjustable Rate
Group, which contains only adjustable rate Home Equity Loans. For each Home
Equity Loan Group, the related Class of Class A Certificates will evidence the
right to receive on each Payment Date the Class A Distribution Amount for such
Class of Class A Certificates, in each case until the related Class A
Certificate Principal Balance has been reduced to zero.
Payment Dates
On each Payment Date, the Owners of each Class of Class A Certificates
will be entitled to receive, from amounts then on deposit in the certificate
account established and maintained by the Trustee in accordance with the Pooling
and Servicing Agreement (the "Certificate Account") and until the Certificate
Principal Balance of such Class of Class A Certificates is reduced to zero, the
aggregate Class A Distribution Amount as of such Payment Date allocated among
each Class of Class A Certificates as described below. Distributions will be
made in immediately available funds to Owners of Class A Certificates by wire
transfer or otherwise, to the account of such Owner at a domestic bank or other
entity having appropriate facilities therefor, if such Owner has so notified the
Trustee at least five Business Days prior to the Record Date, or by check mailed
to the address of the person entitled thereto as it appears on the register (the
"Register") maintained by the Trustee as registrar (the "Registrar"). Beneficial
Owners may experience some delay in the receipt of their payments due to the
operations of DTC. See "Risk Factors--Book Entry Registration" in the Prospectus
and "Description of the Class A Certificates--Book Entry Registration of the
Class A Certificates" herein and "Description of the Certificates--Book Entry
Registration" in the Prospectus.
The Pooling and Servicing Agreement will provide that an Owner, upon
receiving the final distribution on such Owner's Certificate, will be required
to send such Certificate to the Trustee. The Pooling and Servicing Agreement
additionally will provide that, in any event, any Certificate as to which the
final distribution thereon has been made shall be deemed canceled for all
purposes of the Pooling and Servicing Agreement and the Insurance Policy.
Each Owner of record of the related Class of Class A Certificates will
be entitled to receive such Owner's Percentage Interest in the amounts due such
Class on such Payment Date. The "Percentage Interest" of a Class A Certificate
as of any date of determination will be equal to the percentage obtained by
dividing the principal
S-39
<PAGE>
balance of such Class A Certificate as of the Cut-Off Date by the Certificate
Principal Balance for the related Class of the Class A Certificates as of the
Cut-Off Date.
Distributions
Upon receipt, the Trustee will be required to deposit into the
Certificate Account, (i) any Insured Payments, (ii) the proceeds of any
liquidation of the assets of the Trust, (iii) all remittances made to the
Trustee by the Servicer and (iv) on the first three Payment Dates, the
Capitalized Interest Requirement (as defined in the Pooling and Servicing
Agreement) and any portion of the Pre-Funded Amount, if any, to be transferred
on such Payment Dates.
The Pooling and Servicing Agreement establishes a pass-through rate on
each Class of Class A Certificates (each, a "Pass-Through Rate") as set forth in
the Summary herein under "Certificates Offered; provided, that the Pass-Through
Rate with respect to the Class A-8 Certificates will equal the lesser of (i) the
London interbank offered rate for one-month United States dollar deposits
(calculated as described under "-- Calculation of LIBOR" below) as of the second
to last business day prior to the immediately preceding Payment Date (or as of
the second to last business day prior to the Closing Date with respect to the
__________ 199__ Payment Date) (the "LIBOR Determination Date") plus ____% per
annum, and (ii) the weighted average of the Coupon Rates of the Home Equity
Loans in the Adjustable Rate Group less ____% per annum, calculated as of the
first day of the related Remittance Period.
On each Payment Date, the Trustee is required to make the following
disbursements and transfers from monies then on deposit in the Certificate
Account as specified below in the following order of priority of each such
transfer and disbursement:
(i) first, on each Payment Date from amounts then on deposit in
the Certificate Account, (A) to the Trustee, the Trustee Fee
and the Trustee Reimbursable Expenses and (B) provided that no
Certificate Insurer Default has occurred and is continuing,
the Premium Amount for such Payment Date to the Certificate
Insurer;
(ii) second, on each Payment Date, the Trustee shall allocate an
amount equal to the sum of (x) the Total Monthly Excess Spread
with respect to such Home Equity Loan Group and Payment Date
plus (y) any Subordination Reduction Amount with respect to
such Home Equity Loan Group and Payment Date (such sum being
the "Total Monthly Excess Cashflow" with respect to such Home
Equity Loan Group and Payment Date) in the following order of
priority:
(A) first, such Total Monthly Excess Cashflow shall be
allocated to the payment of the Class A Principal
Distribution Amount (excluding any Subordination
Increase Amount) pursuant to clause (iv)(C) below in
an amount equal to the amount, if any, by which (x)
the Class A Principal Distribution Amount (excluding
any Subordination Increase Amount) exceeds (y) the
Available Funds with respect to such Home Equity Loan
Group for such Payment Date (net of Trustee Fees, the
Premium Amount, the Servicing Fee, any Trustee
Reimbursable Expense and Current Interest); (the
amount of such difference with respect to a Home
Equity Loan Group being an "Available Index Funds
Shortfall" for such Home Equity Loan Group);
(B) second, any portion of the Total Monthly Excess
Cashflow with respect to such Home Equity Loan Group
remaining after the application described in clauses
(A), (B) and (C) above shall be allocated against any
Available Funds Shortfall with respect to the other
Home Equity Loan Group;
(C) third, any portion of the Total Monthly Excess
Cashflow with respect to such Home Equity Loan Group
remaining after the allocations described in clauses
(A) and (B) above shall be paid to the Certificate
Insurer in respect of amounts owed on account of any
Reimbursement Amount (as defined in the Pooling and
Servicing Agreement) owed to the Certificate Insurer
with respect to the related Home Equity Loan Group;
and
(D) fourth, any portion of the Total Monthly Excess
Cashflow with respect to such Home Equity Loan Group
remaining after the allocations described in clauses
(A), (B) and (C) above shall be paid to the
Certificate Insurer in respect of amounts owed on
account of
S-40
any Reimbursement Amount owed to the Certificate
Insurer with respect to the other Home Equity Loan
Group;
(iii) third, the amount, if any, of the Total Monthly Excess
Cashflow with respect to such Home Equity Loan Group on a
Payment Date remaining after the allocations and payments
described in clause (ii) above is the "Net Monthly Excess
Cashflow" with respect to such Home Equity Loan Group Payment
Date and is required to be applied in the following order or
priority:
(A) first, such Net Monthly Excess Cashflow shall be used
to reduce to zero, through the payment of a
Subordination Increase Amount to the Owners of the
Class A Certificates pursuant to clause (iv)(C)
below, any Subordination Deficiency Amount with
respect to such Home Equity Loan Group as of such
Payment Date; and
(B) second, any Net Monthly Excess Cashflow remaining
after the application described in clause (A) above
shall be used to reduce to zero, through the payment
of a Subordination Increase Amount, the Subordination
Deficiency Amount, if any, with respect to the other
Home Equity Loan Group; and
(C) third, any Net Monthly Excess Cashflow remaining
after the applications and payments described in
clauses (A) and (B) above shall be paid to the
Servicer to the extent of any unreimbursed
Delinquency Advances, unreimbursed Servicing Advances
and unreimbursed Compensating Interest;
(iv) fourth, following the making by the Trustee of all
allocations, transfers and disbursements described above from
amounts (including any related Insured Payment ) then on
deposit in the Certificate Account with respect to the related
Home Equity Loan Group, the Trustee shall distribute:
(A) to the Owners of the Class A Certificates of the
related Group, the related Class A Current Interest
for each Class (including the proceeds of any Insured
Payments made by the Certificate Insurer) on a pro
rata basis based on each such Class A Certificate's
Current Interest without any priority among the Class
A Certificates;
(B) to the Owners of the Class S Certificates, the Class
S Distribution Amount (as defined in the Pooling and
Servicing Agreement);
(C) to the Owners of Class A Certificates, (I) the Class
A Principal Distribution Amount applicable to the
Fixed Rate Group shall be distributed as follows: (i)
first, to the ----- Owners of the Class A-1
Certificates until the Class A-1 Certificate
Principal Balance is reduced to zero; (ii) second, to
the Owners of the Class A-2 Certificates until the
Class ------ A-2 Certificate Principal Balance is
reduced to zero; (iii) third, to the Owners of the
----- Class A-3 Certificates until the Class A-3
Certificate Principal Balance is reduced to zero;
(iv) fourth, to the Owners of the Class A-4
Certificates until the Class A-4 Certificate ------
Principal Balance is reduced to zero; (v) fifth, to
the Owners of the Class A-5 ----- Certificates until
the Class A-5 Certificate Principal Balance is
reduced to zero; (vi) sixth, ----- to the Owners of
the Class A-6 Certificates until the Class A-6
Certificate Principal Balance is reduced to zero; and
(vii) seventh, to the Owners of the Class A-7
Certificates ------- until the Class A-7 Certificate
Principal Balance is reduced to zero; and (II) the
Class A Principal Distribution Amount applicable to
the Adjustable Rate Group shall be distributed to the
Owners of the Class A-8 Certificates until the Class
A-8 Certificate Principal Balance has been reduced to
zero; and
(D) to the Trustee, as reimbursement for all
unreimbursable expenses incurred in connection with
duties and obligations under the Pooling and
Servicing Agreement; and
(v) fifth, following the making by the Trustee of all allocations,
transfers and disbursements described above, from amounts then
on deposit in the Certificate Account, the Trustee shall
distribute to the Owners of the Class R Certificates, the
remaining distributable amounts as specified in the Pooling
and Servicing Agreement, for such Payment Date.
S-41
<PAGE>
The Trustee Fee, the Trustee Reimbursable Expenses, and the Premium
Amount as of each Payment Date will be as set out in the Pooling and Servicing
Agreement.
"Current Interest" with respect to each Class of Class A Certificates
means, with respect to any Payment Date (i) the aggregate amount of interest
accrued during the preceding Accrual Period on the Class A Certificate Principal
Balance of the related Class A Certificates plus (ii) the Preference Amount as
it relates to interest previously paid on such Class of the Class A Certificates
prior to such Payment Date plus (iii) the Carry Forward Amount, if any, with
respect to such Class of Class A Certificates.
The "Carry-Forward Amount" with respect to any Class of Class A
Certificates is the amount as of any Payment Date, equal to the sum of (i) the
amount, if any, by which (x) the Class A Current Interest for such Class
exceeded (y) the amount of the actual distribution in respect of interest on
such Class of Class A Certificates, made to the Owners of such Class of Class A
Certificates on such immediately preceding Payment Date and (ii) 30 days
interest on such excess at the related Pass-Through Rate for such Class of Class
A Certificates.
"Available Funds" as to any Home Equity Loan Group and Payment Date is
the amount on deposit in the Certificate Account on such Payment Date (net of
Total Monthly Excess Cashflow and disregarding the amounts of any Insured
Payments with respect to a Home Equity Loan Group to be made on such Payment
Date and inclusive of any investment earnings on eligible investments therein).
"Total Available Funds" as to any Home Equity Loan Group and Payment
Date is (x) the amount on deposit in the Certificate Account (net of Total
Monthly Excess Cashflow) on such Payment Date plus, (y) any amounts of Total
Monthly Excess Cashflow to be applied on such Payment Date (disregarding the
amount of any Insured Payment with respect to a Home Equity Loan Group to be
made on such Payment Date) plus in the case of the Fixed Rate Group, (z) any
deposit to the Certificate Account from the Pre-Funding Account and Capitalized
Interest Account expected to be made in accordance with the Pooling and
Servicing Agreement.
The Trustee or Paying Agent shall (i) receive as attorney-in-fact of
each Owner of Class A Certificates any Insured Payment from the Certificate
Insurer and deposit such amounts into the Certificate Account and (ii) disburse
the same to each Owner of Class A Certificates. The Pooling and Servicing
Agreement will provide that to the extent the Certificate Insurer makes Insured
Payments, either directly or indirectly (as by paying through the Trustee or
Paying Agent), to the Owners of such Class A Certificates the Certificate
Insurer will be subrogated to the rights of such Owners of Class A Certificates
with respect to such Insured Payments, and shall receive reimbursement for such
Insured Payment as provided in the Pooling and Servicing Agreement, but only
from the sources and in the manner provided in the Pooling and Servicing
Agreement for the payment of the Class A Distribution Amount to Owners of Class
A Certificates, if any; such subrogation and reimbursement to have no effect on
the Certificate Insurer's obligations under the Insurance Policy.
The Pooling and Servicing Agreement provides that the term "Available
Funds" does not include Insured Payments and does not include any amounts that
cannot be distributed to the Owners of Class A Certificates, if any, by the
Trustee as a result of proceedings under the United States Bankruptcy Code.
Each Owner of a Class A Certificate will be required promptly to notify
the Trustee in writing upon the receipt of a court order relating to a
Preference Amount and will be required to enclose a copy of such order with such
notice to the Trustee.
Pre-Funding Account
On the Closing Date, the Pre-Funded Amount will be deposited in the
Pre-Funding Account, which account shall be in the name of and maintained by the
Trustee and shall be part of the Trust. During the Funding Period, the
Pre-Funded Amount will be maintained in the Pre-Funding Account. The Pre-Funded
Amount will be reduced during the Funding Period by the amount thereof used to
purchase Subsequent Home Equity Loans for addition to the Fixed Rate Group in
accordance with the Pooling and Servicing Agreement. Any Pre-Funded Amount
remaining at the end of the Funding Period will be distributed to the Owners of
the related Fixed Rate Certificates then entitled to receive principal payments
on the Payment Date in __________ 199__ in reduction of the Certificate
Principal Balance of such Owner's Certificates, thus resulting in a partial
principal prepayment of the related Fixed Rate Certificates.
S-42
<PAGE>
Amounts on deposit in the Pre-Funding Account will be invested in
Eligible Investments. All interest and any other investment earnings on amounts
on deposit in the Pre-Funding Account will be deposited in the Capitalized
Interest Account prior to each Payment Date during the Funding Period. The
Pre-Funding Account will not be an asset of either the Base REMIC or the
Upper-Tier REMIC.
Capitalized Interest Account
On the Closing Date cash will be deposited in the Capitalized Interest
Account, which account shall be in the name of and maintained by the Trustee and
shall be part of the Trust. The amount on deposit in the Capitalized Interest
Account, including reinvestment income thereon, will be used by the Trustee to
fund the excess, if any, of (i) the sum of the amount of interest accruing
during the related interest accrual period at the weighted average of the Class
A Pass-Through Rates of all Fixed Rate Certificates on the amount by which the
aggregate Class A Certificate Principal Balance of the Fixed Rate Certificates
exceeds the aggregate Loan Balance of the Home Equity Loans in the Fixed Rate
Group plus the Class S Distribution Amount and any Trustee Reimbursable Expenses
and Certificate Insurer fees with respect to the Fixed Rate Group accruing
during the related interest accrual period on such excess balance over (ii) the
amount of any reinvestment income on monies on deposit in the Pre-Funding
Account; such amounts on deposit will be so applied by the Trustee on the first
two Payment Dates to fund any such excess. Any amounts remaining in the
Capitalized Interest Account at the end of the Funding Period and not needed for
such purpose will be paid to the depositor of such funds and will not thereafter
be available for distribution to the Owners of the Fixed Rate Certificates.
Amounts on deposit in the Capitalized Interest Account will be invested
in Eligible Investments. The Capitalized Interest Account will not be part of
either the Base REMIC or the Upper-Tier REMIC.
Calculation of LIBOR
On each LIBOR Determination Date (as defined above), the Trustee will
determine LIBOR for the next Accrual Period for the Class A-8 Certificates.
"LIBOR" means, as of any LIBOR Determination Date, the rate for
deposits in United States dollars for a period equal to the relevant Accrual
Period (commencing on the first day of such Accrual Period) which appears in the
Telerate Page 3750 as of 11:00 a.m., London time, on such date. If such rate
does not appear on Telerate Page 3750, the rate for that day will be determined
on the basis of the rates at which deposits in United States dollars are offered
by the Reference Banks at approximately 11:00 a.m., London time, on that day to
prime banks in the London interbank market for a period equal to the relevant
Accrual Period (commencing on the first day of such Accrual Period). The Trustee
will request the principal London office of each of the Reference Banks to
provide a quotation of its rate. If at least two such quotations are provided,
the rate for that day will be the arithmetic mean of the quotations. If fewer
than two quotations are provided as requested, the rate for that day will be the
arithmetic mean of the rates quoted by major banks in New York City, selected by
the Servicer, at approximately 11:00 a.m., New York City time, on that day for
loans in United States dollars to leading European banks for a period equal to
the relevant Accrual Period (commencing on the first day of such Accrual
Period).
"Telerate Page 3750" means the display page currently so designated on
the Dow Jones Telerate Service (or such other page as may replace that page on
that service for the purpose of displaying comparable rates or prices) and
"Reference Banks" means leading banks selected by the Trustee and engaged in
transactions in Eurodollar deposits in the international Eurocurrency market.
Book Entry Registration of the Class A Certificates
The Class A Certificates will be book-entry Certificates (the
"Book-Entry Certificates"). Persons acquiring beneficial ownership interests in
such Book-Entry Certificates ("Beneficial Owners") may elect to hold their Book-
Entry Certificates directly through DTC participants of such system
("Participants"), or indirectly through organizations which are Participants.
The Book-Entry Certificates will be issued in one or more certificates per class
of Class A Certificates which in the aggregate equal the principal balance of
such Class A Certificates and will initially be registered in the name of Cede &
Co., the nominee of DTC. Investors may hold such beneficial interests in the
Book-Entry Certificates in minimum denominations representing principal amounts
of $1,000 and in integral multiples in excess thereof. Except as described
below, no Beneficial Owner will be entitled to receive a physical certificate
representing such Certificate (a "Definitive Certificate"). Unless and until
Definitive Certificates are issued, it is anticipated that the only "Owner" of
such Book-Entry Certificates will be Cede & Co.,
S-43
<PAGE>
as nominee of DTC. Beneficial Owners will not be Owners as that term is used in
the Pooling and Servicing Agreement. Beneficial Owners are only permitted to
exercise their rights indirectly through Participants and DTC.
The Beneficial Owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Beneficial Owner's account for such purpose. In turn, the Financial
Intermediary's Ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Owner's Financial Intermediary is not a DTC Participant).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Book-Entry Certificates from the Trustee through DTC and DTC
Participants. While such Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to such Certificates and is required to receive and transmit
distributions of principal of, and interest on, such Certificates. Participants
and indirect participants with whom Beneficial Owners have accounts with respect
to Book-Entry Certificates are similarly required to make book-entry transfers
and receive and transmit such distributions on behalf of their respective
Beneficial Owners. Accordingly, although Beneficial Owners will not possess
certificates, the Rules provide a mechanism by which Beneficial Owners will
receive distributions and will be able to transfer their interest.
Beneficial Owners will not receive or be entitled to receive
certificates representing their respective interests in the Class A
Certificates, except under the limited circumstances described below. Unless and
until Definitive Certificates are issued, Beneficial Owners who are not
Participants may transfer ownership of Class A Certificates only through
Participants and indirect participants by instructing such Participants and
indirect participants to transfer such Class A Certificates, by book-entry
transfer, through DTC for the account of the purchasers of such Class A
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of such Class A Certificates will be executed through DTC and the
accounts of the respective Participants at DTC will be debited and credited.
Similarly, the Participants and indirect participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing Beneficial Owners.
Transfers between Participants will occur in accordance with DTC rules.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its Participants ("DTC Participants"), some of which
(and/or their representatives) own DTC. In accordance with its normal
procedures, DTC is expected to record the positions held by each DTC Participant
in the Book-Entry Certificates, whether held for its own account or as a nominee
for another person. In general, beneficial ownership of Book- Entry Certificates
will be subject to the rules, regulations and procedures governing DTC and DTC
Participants as in effect from time to time.
Distributions on the Book-Entry Certificates will be made on each
Payment Date by the Trustee to DTC. DTC will be responsible for crediting the
amount of such payments to the accounts of the applicable DTC Participants in
accordance with DTC's normal procedures. Each DTC Participant will be
responsible for disbursing such payment to the Beneficial Owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the Beneficial Owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede. Because DTC can only act on
behalf of Financial Intermediaries, the ability of a Beneficial Owner to pledge
Book-Entry Certificates to persons or entities that do not participate in the
Depository system, or otherwise take actions in respect of such Book-Entry
Certificates, may be limited due to the lack of physical certificates for such
Book-Entry Certificates. In addition, issuance of the Book-Entry Certificates in
book-entry form may reduce the liquidity of such Certificates in the secondary
market since certain potential investors may be unwilling to purchase
Certificates for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust provided by the Servicer to
Cede, as nominee of DTC, may be made available to Beneficial Owners upon
request, in accordance with the rules, regulations and procedures creating
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and affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such Beneficial Owners are credited.
DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Certificates under the Pooling and Servicing Agreement
only at the direction of one or more Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates are credited, to the extent that such
actions are taken on behalf of Financial Intermediaries whose holdings include
such Book-Entry Certificates. DTC may take actions, at the direction of the
related Participants, with respect to some Class A Certificates which conflict
with actions taken with respect to other Class A Certificates.
Definitive Certificates will be issued to Beneficial Owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as a nominee and
depository with respect to the Book-Entry Certificates and the Depositor or the
Trustee is unable to locate a qualified successor, (b) the Depositor, at its
sole option, elects to terminate a book-entry system through DTC or (c) DTC, at
the direction of the Beneficial Owners representing a majority of the
outstanding Percentage Interests of the Class A Certificates, advises the
Trustee in writing that the continuation of a book-entry system through DTC (or
a successor thereto) is no longer in the best interests of Beneficial Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Beneficial
Owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book- Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as Owners
under the Pooling and Servicing Agreement.
Although DTC has agreed to the foregoing procedures in order to
facilitate transfers of Certificates among Participants of DTC, it is under no
obligation to perform or continue to perform such procedures and such procedures
may be discontinued at any time.
Assignment of Rights
An Owner may pledge, encumber, hypothecate or assign all or any part of
its right to receive distributions under any Certificate, but such pledge,
encumbrance, hypothecation or assignment shall not constitute a transfer of an
ownership interest sufficient to render the transferee an Owner of the Trust
without compliance with the provisions of the Pooling and Servicing Agreement
described above. Notwithstanding the foregoing, the Pooling and Servicing
Agreement provides that the Certificate Insurer will, in connection with the
subrogation of the Certificate Insurer to the rights of the Owners of the Class
A Certificates in an amount equal to Insured Payments for which the Certificate
Insurer has not received reimbursement, be considered to be an "Owner" to the
extent (but only to the extent) of such rights.
THE CERTIFICATE INSURER
The information set forth in this section has been provided by the
Certificate Insurer. No representation is made by the Underwriters, the Seller,
the Servicer, the Depositor or any of their affiliates as to the accuracy or
completeness of such information or any information related to the Certificate
Insurer incorporated by reference herein.
General
The Certificate Insurer is a ___________________ incorporated in ____
under the laws of the State of ________. The Certificate Insurer is licensed,
directly or through its subsidiaries, to engage in financial guaranty insurance
business in [all 50 states, the District of Columbia, Puerto Rico and the United
Kingdom.]
The Certificate Insurer and its subsidiaries are engaged exclusively in
the business of writing financial guaranty insurance, principally in respect of
securities offered in domestic and foreign markets. In general, financial
guaranty insurance consists of the issuance of a guaranty of scheduled payments
of an issuer's securities -- thereby enhancing the credit rating of those
securities -- in consideration for the payment of a premium to the insurer. The
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Certificate Insurer and its subsidiaries principally insure asset-backed,
collateralized and municipal securities. Asset- backed securities are generally
supported by residential mortgage loans, consumer or trade receivables,
securities or other assets having an ascertainable cash flow or market value.
Collateralized securities include public utility first mortgage bonds and
sale/leaseback obligation bonds. Municipal securities consist largely of general
obligation bonds, special revenue bonds and other special obligations of state
and local governments. The Certificate Insurer insures both newly issued
securities sold in the primary market and outstanding securities sold in the
secondary market that satisfy the Certificate Insurer's underwriting criteria.
The principal executive offices of the Certificate Insurer are located
at ______________________________, and its telephone number at that location is
______________.
Reinsurance
Pursuant to an intercompany agreement, liabilities on financial
guaranty insurance written or reinsured from third parties by the Certificate
Insurer or any of its domestic operating insurance company subsidiaries are
reinsured among such companies on an agreed-upon percentage substantially
proportional to their respective capital, surplus and reserves, subject to
applicable statutory risk limitations. In addition, the Certificate Insurer
reinsures a portion of its liabilities under certain of its financial guaranty
insurance policies with other reinsurers under various quota share treaties and
on a transaction-by-transaction basis. Such reinsurance is utilized by the
Certificate Insurer as a risk management device and to comply with certain
statutory and rating agency requirements; it does not alter or limit the
Certificate Insurer's obligations under any financial guaranty insurance policy.
Ratings of Claims-Paying Ability
The Certificate Insurer's claims-paying ability is rated "Aaa" by
Moody's and "AAA" by each of Standard & Poor's. Such ratings reflect only the
views of the respective rating agencies, are not recommendations to buy, sell or
hold securities and are subject to revision or withdrawal at any time by such
rating agencies. See "Ratings" herein.
Capitalization
The following table sets forth the capitalization of the Certificate
Insurer and its wholly owned subsidiaries on the basis of generally accepted
accounting principles as of ____________, 199__ (in thousands):
(Unaudited)
Unearned Premium Reserve (net of
prepaid reinsurance premiums) $
Shareholder's Equity:
Common Stock
Additional Paid-In Capital
Unrealized Gain on Investments
(net of deferred income taxes)
Accumulated Earnings
Total Shareholder's Equity
Total Unearned Premium Reserve and
Shareholder's Equity $
For further information concerning the Certificate Insurer, see the
Consolidated Financial Statements of the Certificate Insurer and Subsidiaries,
and the notes thereto incorporated herein by reference. Copies of the statutory
quarterly and annual statements filed with the State of New York Insurance
Department by the Certificate Insurer are available upon request to the State of
New York Insurance Department.
Incorporation of Certain Documents by Reference
The consolidated financial statements of the Certificate Insurer
included in, or as exhibits to, the following documents, which have been filed
with the Securities and Exchange Commission are hereby incorporated by reference
in this Prospectus Supplement:
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(a) Annual Report on Form 10-K for the year ended _________________,
which report included as an exhibit the Certificate Insurer and Subsidiaries'
financial statements for the year ended _________________, and
(b) Quarterly Report on Form 10-Q for the period ended
__________________, which report included as an exhibit the Certificate Insurer
and Subsidiaries' unaudited financial statements for the quarter ended _________
- --------.
All financial statements of the Certificate Insurer and Subsidiaries
included in documents filed by the Certificate Insurer pursuant to Section
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), subsequent to the date of this Prospectus Supplement and
prior to the termination of the offering of the Certificates shall be deemed to
be incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing such documents.
Insurance Regulation
The Certificate Insurer is licensed and subject to regulation as a
financial guaranty insurance corporation under the laws of the State of New York
its state of domicile. In addition, the Certificate Insurer and its insurance
subsidiaries are subject to regulation by insurance laws of the various other
jurisdictions in which they are licensed to do business. As a financial guaranty
insurance corporation licensed to do business in the State of New York, the
Certificate Insurer is subject to Article 69 of the New York Insurance Law
which, among other things, limits the business of each such insurer to financial
guaranty insurance and related lines requires that each such insurer maintain a
minimum surplus to policyholders, establishes contingency, loss and unearned
premium reserve requirements for each such insurer, and limits the size of
individual transactions ("single risk") and the volume of transactions
("aggregate risks") that may be underwritten by each such insurer. Other
provisions of the New York Insurance Law, applicable to non-life insurance
companies such as the Certificate Insurer, regulate, among other things,
permitted investments, payment of dividends, transactions with affiliates,
mergers, consolidations, acquisitions or sales of assets and incurrence of
liability for borrowings.
The Insurance Policy is not covered by the Property/Casualty Insurance
Security Fund specified in Article 76 of New York Insurance Law. The Insurance
Policy is governed by the laws of the State of New York.
The Certificate Insurer does not accept any responsibility for the
accuracy or completeness of this Prospectus Supplement or any information or
disclosure contained herein, or omitted herefrom, other than with respect to the
accuracy of information regarding the Certificate Insurer set forth under the
heading "The Certificate Insurer."
CREDIT ENHANCEMENT
Insurance Policy
Simultaneously with the issuance of the Certificates, the Certificate
Insurer will issue the Insurance Policy to the Trustee for the benefit of the
Owners pursuant to which it will irrevocably and unconditionally guaranty
payment on each Payment Date to the Trustee for the benefit of the Owners of the
Class A Certificates of an amount equal to the Class A Distribution Amount for
such Payment Date calculated in accordance with the original terms of the Class
A Certificates when issued and without regard to any amendment or modification
of the Class A Certificates or the Pooling and Servicing Agreement except
amendments or modifications to which the Certificate Insurer has given its prior
written consent. The amount of the Insured Payment, if any, made by the
Certificate Insurer to the Owners of the Class A Certificates under the
Insurance Policy on each Payment Date is the sum of (i) any shortfall in the
amount required to pay the Subordination Deficit for such Payment Date from a
source other than the Insurance Policy, (ii) any shortfall in the amount
required to pay Class A Current Interest for such Payment Date from a source
other than the Insurance Policy and (iii) any shortfall in the amount required
to pay the Preference Amount from a source other than the Insurance Policy. The
Certificate Insurer's obligations under the Insurance Policy to make Insured
Payments shall be discharged to the extent funds are transferred to the Trustee
as provided in the Insurance Policy, whether or not such funds are properly
applied by the Trustee. The effect of the Insurance Policy is to guaranty the
timely payment of interest on, and the ultimate principal amount of, all Classes
of the Class A Certificates.
Payment of claims under the Insurance Policy will be made by the
Certificate Insurer following Receipt by the Certificate Insurer of the
appropriate notice for payment on the later to occur of (a) 12:00 noon, New York
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City time, on the second Business Day following Receipt of such notice for
payment, and (b) 12:00 noon, New York City time, on the relevant Payment Date.
If any payment of an amount guaranteed by the Certificate Insurer
pursuant to the Insurance Policy is avoided as a preference payment under
applicable bankruptcy, insolvency, receivership or similar law the Certificate
Insurer will pay such amount out of the funds of the Certificate Insurer on the
later of (a) the date when due to be paid pursuant to the Order referred to
below or (b) the first to occur of (i) the fourth Business Day following Receipt
by the Certificate Insurer from the Trustee of (A) a certified copy of the order
(the "Order") of the court or other governmental body which exercised
jurisdiction to the effect that an Owner of a Class A Certificate is required to
return principal or interest distributed with respect to a Class A Certificate
during the term of the Insurance Policy because such distributions were
avoidable preferences under applicable bankruptcy law, (B) a certificate of the
Owner of the Class A Certificate that the Order has been entered and is not
subject to any stay, and (C) an assignment duly executed and delivered by the
Owner of the Class A Certificate, in such form as is reasonably required by the
Certificate Insurer and provided to the Owner of the Class A Certificate by the
Certificate Insurer, irrevocably assigning to the Certificate Insurer all rights
and claims of the Owner of the Class A Certificate relating to or arising under
the Certificates against the debtor which made such preference payment or
otherwise with respect to such preference payment, or (ii) the date of Receipt
by the Certificate Insurer from the Trustee of the items referred to in clauses
(A), (B) and (C) above if, at least four Business Days prior to such date of
Receipt, the Certificate Insurer shall have Received written notice from the
Trustee that such items were to be delivered on such date and such date was
specified in such notice. Such payment shall be disbursed to the receiver,
conservator, debtor-in-possession or trustee in bankruptcy named in the Order
and not to the Trustee or any Owner of a Class A Certificate directly (unless an
Owner of a Class A Certificate has previously paid such amount to the receiver,
conservator, debtor-in-possession or trustee in bankruptcy named in the Order,
in which case such payment shall be disbursed to the Trustee for distribution to
such Owner of the Class A Certificate upon proof of such payment reasonably
satisfactory to the Certificate Insurer).
The terms "Receipt" and "Received," with respect to the Insurance
Policy, means actual delivery to the Certificate Insurer and to its fiscal agent
appointed by the Certificate Insurer at its option, if any, prior to 12:00 p.m.,
New York City time, on a Business Day; delivery either on a day that is not a
Business Day or after 12:00 p.m., New York City time, shall be deemed to be
Receipt on the next succeeding Business Day. If any notice or certificate given
under the Insurance Policy by the Trustee is not in proper form or is not
properly completed, executed or delivered, it shall be deemed not to have been
Received, and the Certificate Insurer or the fiscal agent shall promptly so
advise the Trustee and the Trustee may submit an amended notice.
Under the Insurance Policy, "Business Day" means any day other than (i)
a Saturday or Sunday or (ii) a day on which banking institutions in The City of
New York, New York are authorized or obligated by law or executive order to be
closed.
The Certificate Insurer's obligations under the Insurance Policy in
respect of Insured Payments shall be discharged to the extent funds are
transferred to the Trustee as provided in the Insurance Policy, whether or not
such funds are properly applied by the Trustee.
The Certificate Insurer shall be subrogated to the rights of each Owner
of a Class A Certificate to receive payments of principal and interest, as
applicable, with respect to distributions on the Class A Certificates to the
extent of any payment by the Certificate Insurer under the Insurance Policy. To
the extent the Certificate Insurer makes Insured Payments, either directly or
indirectly (as by paying through the Trustee), to the Owners of the Class A
Certificate, the Certificate Insurer will be subrogated to the rights of the
Owners of the Class A Certificates, as applicable, with respect to such Insured
Payment, shall be deemed to the extent of the payments so made to be a
registered Owner of a Class A Certificate for purposes of payment and shall
receive all future Class A Distribution Amounts until all such Insured Payments
by the Certificate Insurer have been fully reimbursed, provided that the Owners
of the Class A Certificate have received the full amount of the Class A
Distribution Amount.
Claims under the Insurance Policy will rank equally with any other
unsecured and unsubordinated obligations of the Certificate Insurer except for
certain obligations in respect of tax and other payments to which preference is
or may become afforded by statute. The terms of the Insurance Policy cannot be
modified, altered or affected by any other agreement or instrument, or by the
merger, consolidation or dissolution of the Seller. The Insurance Policy by its
terms may not be cancelled or revoked. The Insurance Policy is governed by the
laws of the State of New York.
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The Insurance Policy is not covered by the Property/Casualty Insurance
Security Fund specified in Article 76 of the New York Insurance Law. The
Insurance Policy is not covered by the Florida Insurance Guaranty Association
created under Part II of Chapter 631 of the Florida Insurance Code. In the event
the Certificate Insurer were to become insolvent, any claims arising under the
Insurance Policy are excluded from coverage by the California Insurance Guaranty
Association, established pursuant to Article 14.2 of Chapter 1 of part 2 of
Division 1 of the California Insurance Code.
Pursuant to the terms of the Pooling and Servicing Agreement, unless a
Certificate Insurer default exists, the Certificate Insurer shall be deemed to
be the Owner of Certificate for certain purposes (other than with respect to
payment on the Certificates), will be entitled to exercise all rights of the
Owners of the Class A Certificate thereunder, without the consent of such Owners
and the Owners of the Class A Certificate may exercise such rights only with the
prior written consent of the Certificate Insurer. In addition, the Certificate
Insurer will have certain additional rights as a third party beneficiary to the
Pooling and Servicing Agreement.
Overcollateralization Provisions
Overcollateralization Resulting from Cash Flow Structure. The Pooling
and Servicing Agreement requires that, on each Payment Date, Net Monthly Excess
Cashflow with respect to a Home Equity Loan Group be applied on such Payment
Date as an accelerated payment of principal on the related Classes of Class A
Certificates, but only to the limited extent hereafter described. Net Monthly
Excess Cashflow equals the excess of (i) the excess, if any of (x) the interest
which is collected on the Home Equity Loans in such Home Equity Loan Group
during a Remittance Period (net of the Servicing Fee and of certain
miscellaneous administrative amounts with respect to such Home Equity Loan
Group) plus any Delinquency Advances and Compensating Interest over (y) the sum
of the Class A Current Interest plus the Class S Current Interest (as defined in
the Pooling and Servicing Agreement) (the difference between (x) and (y) is, the
"Total Monthly Excess Spread" with respect to such Home Equity Loan Group), over
(ii) the portion of the Total Monthly Excess Cashflow that is used to cover
shortfalls in Available Funds on such Payment Date in the related Home Equity
Loan Group; provided, however, that with respect to the Fixed Rate Group for any
Payment Date during the Funding Period, the sum obtained in (ii) above shall be
multiplied by a fraction the numerator of which is the weighted average of the
aggregate Loan Balances (weighted by the number of days such Loan Balances are
held by the Trust) during the preceding Remittance Period and the denominator of
which is the Maximum Collateral Amount as reduced by any actual payments of
principal received on the Home Equity Loans prior to the related Remittance
Date.
This has the effect of accelerating the amortization of the Class A
Certificates relative to the amortization of the Home Equity Loans in the
related Home Equity Loan Group. To the extent that any Net Monthly Excess
Cashflow is not so used (and is not required to satisfy requirements with
respect to the other Home Equity Loan Group), the Pooling and Servicing
Agreement provides that it will be used to reimburse the Servicer with respect
to any amounts owing to it, and, thereafter, paid to the Owners of the Class R
Certificates.
Pursuant to the Pooling and Servicing Agreement, each Home Equity Loan
Group's Net Monthly Excess Cashflow will be applied as an accelerated payment of
principal on the Class A Certificates until the Subordinated Amount has
increased to the level required. "Subordinated Amount" means, with respect to
each Home Equity Loan Group and Payment Date, the excess, if any, of (x) the sum
of (i) the aggregate Loan Balances of the Home Equity Loans in such Home Equity
Loan Group as of the close of business on the last day of the preceding
Remittance Period and (ii) with respect to the Fixed Rate Group only any amount
on deposit in the Pre-Funding Account at such time exclusive of any Pre-Funding
Account Earnings (as defined in the Agreement) over (y) the related Class A
Certificate Principal Balance as of such Payment Date (after taking into account
the payment of the Class A Principal Distribution Amount (except for any
Subordination Deficit or Subordination Increase Amount with respect to such Home
Equity Loan Group) on such Payment Date). With respect to each Home Equity Loan
Group any amount of Net Monthly Excess Cashflow actually applied as an
accelerated payment of principal is a "Subordination Increase Amount." The
required level of the Subordinated Amount for each Home Equity Loan Group with
respect to a Payment Date is the "Specified Subordinated Amount." The Pooling
and Servicing Agreement generally provides that the Specified Subordinated
Amount may, over time, decrease, or increase, subject to certain floors, caps
and triggers including triggers that allow the Specified Subordinated Amount to
decrease or "step down" based on the performance on the Home Equity Loans in the
related Home Equity Loan Group with respect to certain tests specified in the
Pooling and Servicing Agreement based on delinquency rates and cumulative
losses. In addition, Net Monthly Excess Cashflow will be applied to the payment
in reduction of principal of the
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Class A Certificates during the period that the Home Equity Loan Pool is unable
to meet certain tests specified in the Pooling and Servicing Agreement based on
delinquency rates and cumulative losses.
In the event that the Specified Subordinated Amount with respect to a
Home Equity Loan Group is permitted to decrease or "step down" on a Payment Date
in the future, the Pooling and Servicing Agreement provides that a portion of
the principal which would otherwise be distributed to the Owners of the related
Class A Certificates on such Payment Date shall be distributed to the Owners of
the Class R Certificates over the period specified in the Pooling and Servicing
Agreement. This has the effect of decelerating the amortization of Class A
Certificates relative to the amortization of the Home Equity Loans and of
reducing the related Subordinated Amount. With respect to any Home Equity Loan
Group and Payment Date, the excess, if any, of (x) the Subordinated Amount on
such Payment Date after taking into account all distributions to be made on such
Payment Date (except for any distributions of related Subordination Reduction
Amounts as described in this sentence) over (y) the Specified Subordinated
Amount is the "Excess Subordinated Amount" for such Home Equity Loan Group and
Payment Date. If, on any Payment Date, the Excess Subordinated Amount is, or,
after taking into account all other distributions to be made on such Payment
Date would be, greater than zero (i.e., the Subordinated Amount is or would be
greater than the related Specified Subordinated Amount), then any amounts
relating to principal which would otherwise be distributed to the Owners of the
Class A Certificates on such Payment Date shall instead be distributed to the
Owners of the Class R Certificates (to the extent available therefor) in an
amount equal to the lesser of (x) the Excess Subordinated Amount and (y) the
amount available for distribution on account of principal with respect to the
Class A Certificates on such Payment Date; such amount being the "Subordination
Reduction Amount" with respect to the related Home Equity Loan Group and Payment
Date. As a result of the cash flow structure of the Trust, Subordination
Reduction Amounts may result even prior to the occurrence of any decrease or
"step down" in the related Specified Subordinated Amount. This is because the
Owners of the Class A Certificates will generally be entitled to receive 100% of
collected principal with respect to the related Home Equity Loan Group, even
though the Class A Certificate Principal Balance will, following the accelerated
amortization resulting from the application of the Net Monthly Excess Cashflow,
represent less than 100% of the related Home Equity Loan Group's aggregate Loan
Balance. Accordingly, in the absence of the provisions relating to Subordination
Reduction Amounts, the Subordinated Amount would increase above the Specified
Subordinated Amount requirements even without the further application of any Net
Monthly Excess Cashflow.
The Pooling and Servicing Agreement provides generally that, on any
Payment Date all amounts collected on account of principal (other than any such
amount applied to the payment of a Subordination Reduction Amount) with respect
to a Home Equity Loan Group during the prior Remittance Period will be
distributed to the Owners of the related Class A Certificates on such Payment
Date. If any Home Equity Loan became a Liquidated Loan during such prior
Remittance Period, the Net Liquidation Proceeds related thereto and allocated to
principal may be less than the principal balance of the related Home Equity
Loan; the amount of any such insufficiency is a "Realized Loss." In addition,
the Pooling and Servicing Agreement provides that the principal balance of any
Home Equity Loan which becomes a Liquidated Loan shall thenceforth equal zero.
The Pooling and Servicing Agreement does not contain any requirement that the
amount of any Realized Loss be distributed to the Owners of the related Class A
Certificates on the Payment Date which immediately follows the event of loss;
i.e., the Pooling and Servicing Agreement does not require the current recovery
of losses. However, the occurrence of a Realized Loss will reduce the
Subordinated Amount with respect to the related Home Equity Loan Group, which to
the extent that such reduction causes the Subordinated Amount to be less than
the related Specified Subordinated Amount applicable to the related Payment
Date, will require the payment of a Subordination Increase Amount on such
Payment Date (or, if insufficient funds are available on such Payment Dates, on
subsequent Payment Dates, until the Subordinated Amount equals the related
Specified Subordinated Amount). The effect of the foregoing is to allocate
losses to the Owners of the Class R Certificates by reducing, or eliminating
entirely, payments of Total Monthly Excess Spread and of Subordination Reduction
Amounts which such Owners would otherwise receive.
Overcollateralization and the Insurance Policy. The Pooling and
Servicing Agreement defines a "Subordination Deficit" with respect to a Home
Equity Loan Group and Payment Date to be the amount, if any, by which (x) the
aggregate of the Class A Certificate Principal Balances with respect to a
Payment Date, after taking into account all distributions to be made on such
Payment Date (except for any Subordination Deficit and Subordination Increase
Amount), exceeds (y) the sum of (a) the aggregate Loan Balances of the Home
Equity Loans in the related Home Equity Loan Group as of the close of business
on the last day of the prior Remittance Period and (b) with respect to the Fixed
Rate Group only, the amount, if any, on deposit in the Pre-Funding Account on
such Payment Date exclusive of Pre-Funding Account Earnings. The Pooling and
Servicing Agreement requires the Trustee to make a claim for an Insured Payment
under the Insurance Policy not later than the third Business Day
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prior to any Payment Date as to which the Trustee has determined that a
Subordination Deficit will occur for the purpose of applying the proceeds of
such Insured Payment as a payment of principal to the Owners of the related
Class A Certificates on such Payment Date. The Insurance Policy is thus similar
to the subordination provisions described above insofar as the Insurance Policy
guarantees ultimate, rather than current, payment of the amounts of any Realized
Losses to the Owners of the Class A Certificates. Investors in the Class A
Certificates should realize that, under extreme loss or delinquency scenarios
applicable to the related Home Equity Loan Pool, they may temporarily receive no
distributions of principal when they would otherwise be entitled thereto under
the principal allocation provisions described herein. Nevertheless, the exposure
to risk of loss of principal of the Owners of the Class A Certificates depends
in part on the ability of the Certificate Insurer to satisfy its obligations
under the Insurance Policy. In that respect and to the extent that the
Certificate Insurer satisfies such obligations, the Owners of the Class A
Certificates are insulated from shortfalls in Available Funds that may arise.
Crosscollateralization Provisions. In addition to the use of Total
Monthly Excess Spread and Net Monthly Excess Cashflow with respect to a Home
Equity Loan Group to cover related Subordination Increase Amounts, Available
Funds Shortfalls and Subordination Deficits, such Total Monthly Excess Spread
and Net Monthly Excess Cashflow will be available to cover such requirements for
the other Home Equity Loan Group as described under the caption "Description of
the Class A Certificates -- Distributions" herein.
THE POOLING AND SERVICING AGREEMENT
In addition to the provisions of the Pooling and Servicing Agreement
summarized elsewhere in the Prospectus and this Prospectus Supplement there is
set forth below a summary of certain other provisions of the Pooling and
Servicing Agreement.
Covenant of the Seller to Take Certain Actions with Respect to the Home Equity
Loans in Certain Situations
Pursuant to the Pooling and Servicing Agreement, upon the discovery by
the Depositor, the Seller, the Certificate Insurer, any Sub-Servicer, any Owner,
the Custodian or the Trustee that the representations and warranties set forth
below are untrue in any material respect as of the Closing Date with the result
that the interests of the Owners or of the Certificate Insurer are materially
and adversely affected, the party discovering such breach is required to give
prompt written notice to the other parties.
Upon the earliest to occur of the Seller's discovery, its receipt of
notice of breach from any of the other parties or such time as a situation
resulting from an existing statement which is untrue materially and adversely
affects the interests of the Owners or the Certificate Insurer, the Seller will
be required promptly to cure such breach in all material respects or the Seller
shall on the second Monthly Remittance Date next succeeding such discovery, such
receipt of notice or such time (i) substitute in lieu of each Home Equity Loan
which has given rise to the requirement for action by the Seller a "Qualified
Replacement Mortgage" (as such is defined in the Pooling and Servicing
Agreement) and deliver an amount equal to such difference (the "Substitution
Amount") to the Trustee on behalf of the Trust as part of the Monthly Remittance
remitted by the Servicer on such Monthly Remittance Date or (ii) purchase such
Home Equity Loan from the Trust at a purchase price equal to the Loan Purchase
Price (as defined below) thereof. Notwithstanding any provision of the Pooling
and Servicing Agreement to the contrary, with respect to any Home Equity Loan
which is not in default or as to which no default is imminent, no such
repurchase or substitution will be made unless the Seller obtains for the
Trustee and the Certificate Insurer an opinion of counsel experienced in federal
income tax matters and acceptable to the Trustee and the Certificate Insurer to
the effect that such a repurchase or substitution would not constitute a
Prohibited Transaction for the Trust or otherwise subject the Trust to tax and
would not jeopardize the status of the Trust as a REMIC (a "REMIC Opinion")
addressed to the Trustee and the Certificate Insurer and acceptable to the
Trustee and the Certificate Insurer. The Seller shall also deliver an Officer's
Certificate to the Trustee and the Certificate Insurer concurrently with the
delivery of a Qualified Replacement Mortgage stating that such Home Equity Loan
meets the requirements of a Qualified Replacement Mortgage and that all other
conditions to the substitution thereof have been satisfied. Any Home Equity Loan
as to which repurchase or substitution was delayed pursuant to the Pooling and
Servicing Agreement shall be repurchased or substituted for (subject to
compliance with the provisions of the Pooling and Servicing Agreement) upon the
earlier of (a) the occurrence of a default or imminent default with respect to
such Home Equity Loan and (b) receipt by the Trustee and the Certificate Insurer
of a REMIC Opinion. In connection with any breach of a representation, warranty
or covenant or defect in documentation giving rise to such repurchase or
substitution obligation, the Seller agrees that it shall, at its expense,
furnish the Trustee and the Certificate Insurer either a REMIC Opinion or an
opinion of counsel rendered by independent counsel that the effects described in
a
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REMIC Opinion may occur as a result of any such repurchase or substitution. The
obligation of the Seller to so substitute or repurchase any Home Equity Loan as
to which such a statement set forth below is untrue in any material respect and
has not been remedied constitutes the sole remedy respecting a discovery of any
such statement which is untrue in any material respect available to the Owners,
the Trustee and the Certificate Insurer.
"Loan Purchase Price" means an amount equal to the Loan Balance of such
Home Equity Loan as of the date of purchase (assuming that the Monthly
Remittance Amount remitted by the Servicer on such Monthly Remittance Date has
already been remitted), plus all accrued and unpaid interest on such Home Equity
Loan at the Coupon Rate to but not including the Monthly Remittance Date in the
Remittance Period of such purchase together with (without duplication) the
aggregate amount of (i) all unreimbursed Delinquency Advances and Servicing
Advances theretofore made with respect to such Home Equity Loan, (ii) all
Delinquency Advances which the Servicer has theretofore failed to remit with
respect to such Home Equity Loan and (iii) all reimbursed Delinquency Advances
to the extent that such reimbursement is not made from the Mortgagor or from
Liquidation Proceeds from the respective Home Equity Loan.
Assignment of Home Equity Loans
Pursuant to the Pooling and Servicing Agreement, the Seller on the
Closing Date will transfer, assign, set over and otherwise convey without
recourse to the Depositor and the Depositor will transfer, assign, set over and
otherwise convey without recourse to the Trustee in trust for the benefit of the
Owners all right, title and interest of the Seller in and to each Initial Home
Equity Loan and all its right, title and interest in and to principal and
interest due on each such Initial Home Equity Loan after the Cut-Off Date;
provided, however, that the Seller will reserve and retain all its right, title
and interest in and to principal (including Prepayments) and interest due on
each Initial Home Equity Loan on or prior to the Cut-Off Date (whether or not
received on or prior to the Cut-Off Date). Purely as a protective measure and
not to be construed as contrary to the parties intent that the transfer on the
Closing Date is a sale, the Seller has also been deemed to have granted to the
Depositor and the Depositor has also been deemed to have granted to the Trustee
a security interest in the Trust Estate in the event that the transfer of the
Trust Estate is deemed to be a loan and not a sale.
In connection with the transfer and assignment of the Initial Home
Equity Loans on the Closing Date and the Subsequent Home Equity Loans on each
Subsequent Transfer Date, the Seller will be required to:
(i) deliver without recourse to ______________________ (the
"Custodian") on behalf of the Trustee on the Closing Date with respect
to each Initial Home Equity Loan or on each Subsequent Transfer Date
with respect to each Subsequent Home Equity Loan identified in the
related Schedule of Home Equity Loans (A) the original Notes, endorsed
in blank or to the order of the Trustee, (B) (I) the original title
insurance commitment or a copy thereof certified as a true copy by the
closing agent or the Seller, or if available, the original title
insurance policy or a copy certified by the issuer of the title
insurance policy or (II) the attorney's opinion of title, (C) originals
or copies of all intervening assignments certified as true copies by
the closing agent or the Seller, showing a complete chain of title from
origination to the Trustee, if any, including warehousing assignments,
if recorded, (D) originals of all assumption and modification
agreements, if any and (E) either: (1) the original Mortgage, with
evidence of recording thereon (if such original Mortgage has been
returned to Seller from the applicable recording office) or a copy (if
such original Mortgage has not been returned to Seller from the
applicable recording office) of the Mortgage certified as a true copy
by the closing agent or the Seller or (2) a copy of the Mortgage
certified by the public recording office in those instances where the
original recorded Mortgage has been lost or retained by the recording
office;
(ii) cause, within 60 days following the Closing Date with
respect to the Initial Home Equity Loans, or Subsequent Transfer Date
with respect to Subsequent Home Equity Loans, assignments of the
Mortgages to "____________________, as Trustee of IMC Home Equity Loan
Trust 199_-__ under the Pooling and Servicing Agreement dated as of
__________, 199__" to be submitted for recording in the appropriate
jurisdictions; provided, however, that the Seller shall not be required
to prepare any assignment of Mortgage for a Mortgage with respect to
which the original recording information has not yet been received from
the recording office; provided, further, that the Seller shall not be
required to record an assignment of a Mortgage if the Seller furnishes
to the Trustee, the Certificate Insurer and the Rating Agencies, on or
before the Closing Date with respect to the Initial Home Equity Loans
or on each Subsequent Transfer Date with respect to the Subsequent Home
Equity Loans, at the Seller's expense, an
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opinion of counsel with respect to the relevant jurisdiction that such
recording is not required to perfect the Trustee's interests in the
related Mortgages Loans (in form satisfactory to the Trustee, the
Certificate Insurer and the Rating Agencies);
(iii) deliver the title insurance policy, the original
Mortgages and such recorded assignments, together with originals or
duly certified copies of any and all prior assignments (other than
unrecorded warehouse assignments), to the Custodian on behalf of the
Trustee within 15 days of receipt thereof by the Seller (but in any
event, with respect to any Mortgage as to which original recording
information has been made available to the Seller, within one year
after the Closing Date with respect to the Initial Home Equity Loans,
or each Subsequent Transfer Date with respect to the Subsequent Home
Equity Loans); and
(iv) furnish to the Trustee, the Certificate Insurer and the
Rating Agencies, at the Seller's expense, an opinion of counsel with
respect to the sale and perfection of all Subsequent Home Equity Loans
delivered to the Trust in form and substance satisfactory to the
Trustee, the Certificate Insurer and the Rating Agencies.
The Trustee will agree, for the benefit of the Owners, to cause the
Custodian to review each File within 45 days after the Closing Date or
Subsequent Transfer Date (or the date of receipt of any documents delivered to
the Trustee after the Closing Date or Subsequent Transfer Date) to ascertain
that all required documents (or certified copies of documents) have been
executed and received.
If the Custodian on behalf of the Trustee during such 45-day period
finds any document constituting a part of a File which is not properly executed,
has not been received, is unrelated to the Home Equity Loans or that any Home
Equity Loan does not conform in a material respect to the description thereof as
set forth in the Schedule of Home Equity Loans, the Custodian on behalf of the
Trustee will be required to promptly notify the Depositor, the Seller, the
Owners and the Certificate Insurer. The Seller will agree in the Pooling and
Servicing Agreement to use reasonable efforts to remedy a material defect in a
document constituting part of a File of which it is so notified by the Custodian
on behalf of the Trustee. If, however, within 90 days after such notice to it
respecting such defect the Seller shall not have remedied the defect and the
defect materially and adversely affects the interest in the related Home Equity
Loan of the Owners or the Certificate Insurer, the Seller will be required on
the next succeeding Monthly Remittance Date to (or will cause an affiliate of
the Seller to) (i) substitute in lieu of such Home Equity Loan a Qualified
Replacement Mortgage and deliver the Substitution Amount to the Trustee on
behalf of the Trust as part of the Monthly Remittance remitted by the Servicer
on such Monthly Remittance Date or (ii) purchase such Home Equity Loan at a
purchase price equal to the Loan Purchase Price thereof, which purchase price
shall be delivered to the Trust along with the Monthly Remittance remitted by
the Servicer on such Remittance Date.
In addition to the foregoing, the Custodian on behalf of the Trustee
has agreed to make a review during the 12th month after the Closing Date
indicating the current status of the exceptions previously indicated on the Pool
Certification (the "Final Certification"). After delivery of the Final
Certification, the Custodian, on behalf of the Trustee and the Servicer shall
provide to Certificate Insurer no less frequently than monthly updated
certifications indicating the then current status of exceptions, until all such
exceptions have been eliminated.
Servicing and Sub-Servicing
The Servicer is required to service the Home Equity Loans in accordance
with the Pooling and Servicing Agreement, the terms of the respective Home
Equity Loans, and the servicing standards set forth in FNMA's Servicing Guide
(the "FNMA Guide"); provided, however, that to the extent such standards, such
obligations or the FNMA Guide is amended by FNMA after the date of the Pooling
and Servicing Agreement and the effect of such amendment would be to impose upon
the Servicer any material additional costs or other burdens relating to such
servicing obligations, the Servicer may, at its option, determine not to comply
with such amendment in accordance with the servicing standards set forth in the
Pooling and Servicing Agreement.
The Servicer may retain from the interest portion of each monthly
payment, the Servicing Fee. In addition, the Servicer will be entitled to retain
additional servicing compensation in the form of prepayment charges, release
fees, bad check charges, assumption fees, late payment charges, prepayment
penalties, or any other servicing-related fees, Net Liquidation Proceeds not
required to be deposited in the Principal and Interest Account pursuant to the
Pooling and Servicing Agreement, and similar items.
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The Servicer is required to make reasonable efforts to collect all
payments called for under the terms and provisions of the Home Equity Loans,
and, to the extent such procedures are consistent with the Pooling and Servicing
Agreement and the terms and provisions of any applicable insurance policy, to
follow collection procedures for all Home Equity Loans at least as rigorous as
those described in the FNMA Guide. Consistent with the foregoing, the Servicer
may in its discretion waive or permit to be waived any late payment charge,
prepayment charge, assumption fee or any penalty interest in connection with the
prepayment of a Home Equity Loan or any other fee or charge which the Servicer
would be entitled to retain as additional servicing compensation. In the event
the Servicer consents to the deferment of the due dates for payments due on a
Note, the Servicer will nonetheless be required to make payment of any required
Delinquency Advances with respect to the interest payments so extended to the
same extent as if the interest portion of such installment were due, owing and
delinquent and had not been deferred.
The Servicer is required to create, or cause to be created, in the name
of the Trustee, at one or more depository institutions a principal and interest
account maintained as a trust account in the trust department of such
institution (the "Principal and Interest Account"). All funds in the Principal
and Interest Account are required to be held (i) uninvested, or (ii) invested in
Eligible Investments (as defined in the Pooling and Servicing Agreement). Any
investment of funds in the Principal and Interest Account must mature or be
withdrawable at par on or prior to the immediately succeeding Monthly Remittance
Date. Any investment earnings on funds held in the Principal and Interest
Account are for the account of, and any losses therein are also for the account
of, and must be promptly replenished by, the Servicer.
The Servicer is required to deposit to the Principal and Interest
Account, within one business day following receipt, all principal and interest
due on the Home Equity Loans after the Cut-Off Date, including any Prepayments,
the proceeds of any liquidation of a Home Equity Loan net of expenses and
unreimbursed Delinquency Advances ("Net Liquidation Proceeds"), any income from
REO Properties and Delinquency Advances, but net of (i) Net Liquidation Proceeds
to the extent that such Net Liquidation Proceeds exceed the sum of (I) the Loan
Balance of the related Home Equity Loan immediately prior to liquidation, plus
(II) accrued and unpaid interest on such Home Equity Loan (net of the Servicing
Fee) to the date of such liquidation and (III) any Realized Losses during the
related Remittance Period, (ii) principal (including Prepayments) collected and
interest due on the Home Equity Loans on or prior to the Cut-Off Date, (iii)
reimbursements for Delinquency Advances, and (iv) reimbursement for amounts
deposited in the Principal and Interest Account representing payments of
principal and/or interest on a Note by a Mortgagor which are subsequently
returned by a depository institution as unpaid (all such net amounts being
referred to herein as the "Daily Collections").
The Servicer may make withdrawals for its own account from the
Principal and Interest Account with respect to each Home Equity Loan Group in
the following order and only for the following purposes:
(i) on each Monthly Remittance Date, to pay itself the
Servicing Fee;
(ii) to withdraw investment earnings on amounts on deposit in
the Principal and Interest Account;
(iii) to withdraw amounts that have been deposited to the
Principal and Interest Account in error;
(iv) to reimburse itself for unrecovered Delinquency Advances
and to retain any excess Compensating Interest; and
(v) to clear and terminate the Principal and Interest
Account following the termination of the Trust.
The Servicer will remit to the Trustee for deposit in the Certificate
Account the Daily Collections allocable to a Remittance Period not later than
the related Monthly Remittance Date, and Loan Purchase Prices and Substitution
Amounts two Business Days following the related repurchase or substitution, as
the case may be.
On each Monthly Remittance Date, the Servicer shall be required to
remit to the Trustee for deposit to the Certificate Account out of the
Servicer's own funds any Delinquent payment of interest with respect to each
Delinquent Home Equity Loan, which payment was not received on or prior to the
related Remittance Date and was not theretofore advanced by the Servicer. Such
amounts of the Servicer's own funds so deposited are "Delinquency
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Advances." The Servicer may reimburse itself on any Business Day for any
Delinquency Advances paid from the Servicer's own funds, from collections on any
Home Equity Loan that are not required to be distributed on the Payment Date
occurring during the month in which such reimbursement is made or from the
Certificate Account out of Net Monthly Excess Cashflow.
Notwithstanding the foregoing, in the event that the Servicer
determines in its reasonable business judgment in accordance with the servicing
standards of the Pooling and Servicing Agreement that any proposed Delinquency
Advance if made would not be recoverable, the Servicer shall not be required to
make such Delinquency Advances with respect to such Home Equity Loan. To the
extent that the Servicer previously has made Delinquency Advances with respect
to a Home Equity Loan that the Servicer subsequently determines to be
nonrecoverable, the Servicer shall be entitled to reimbursement for such
aggregate unreimbursed Delinquency Advances as provided above. The Servicer
shall give written notice of such determination as to why such amount is or
would be nonrecoverable to the Trustee and the Certificate Insurer.
The Servicer will be required to pay all "out of pocket" costs and
expenses incurred in the performance of its servicing obligations, including,
but not limited to, (i) expenditures in connection with a foreclosed Home Equity
Loan prior to the liquidation thereof, including, without limitation,
expenditures for real estate property taxes, hazard insurance premiums, property
restoration or preservation ("Preservation Expenses"), (ii) the cost of any
enforcement or judicial proceedings, including foreclosures and (iii) the cost
of the management and liquidation of Property acquired in satisfaction of the
related Mortgage, except to the extent that such amounts are determined by the
Servicer in its reasonable business judgement that any proposed Servicing
Advance would not be recoverable. Such costs and expenses will constitute
"Servicing Advances". The Servicer may recover a Servicing Advance to the extent
permitted by the Home Equity Loans or, if not theretofore recovered from the
Mortgagor on whose behalf such Servicing Advance was made, from Liquidation
Proceeds realized upon the liquidation of the related Home Equity Loan or from
certain amounts on deposit in the Certificate Account as provided in the
Agreement. Except as provided above, in no case may the Servicer recover
Servicing Advances from the principal and interest payments on any other Home
Equity Loan.
A full month's interest at the Coupon Rate will be due on the
outstanding Loan Balance of each Home Equity Loan as of the beginning of each
Remittance Period. If a prepayment in full of a Home Equity Loan or a Prepayment
of at least six times a Mortgagor's Monthly Payment occurs during any calendar
month, any difference between the interest collected from the Mortgagor in
connection with such payoff and the full month's interest at the Coupon Rate
that would be due on the related due date for such Home Equity Loan (such
difference, the "Compensating Interest") (but not in excess of the aggregate
Servicing Fee for the related Remittance Period), will be required to be
deposited to the Principal and Interest Account (or if such difference is an
excess, the Servicer shall retain such excess) on the next succeeding Monthly
Remittance Date by the Servicer and shall be included in the Monthly Remittance
Amount to be made available to the Trustee on the next succeeding Monthly
Remittance Date.
The Servicer, and in the absence of the exercise thereof by the
Servicer, the Certificate Insurer will have the right and the option, but not
the obligation, to purchase for its own account any Home Equity Loan which
becomes delinquent as to three consecutive monthly installments or any Home
Equity Loan as to which enforcement proceedings have been brought by the
Servicer; provided, however, that the Servicer may not purchase any such Home
Equity Loan unless the Servicer has delivered to the Certificate Insurer and the
Trustee, at the Servicer's expense, an opinion of counsel acceptable to the
Certificate Insurer and the Trustee to the effect that such a purchase would not
constitute a Prohibited Transaction for the Trust or otherwise subject the Trust
to tax and would not jeopardize the status of the Base REMIC or the Upper-Tier
REMIC as a REMIC. The purchase price for any such Home Equity Loan is equal to
the Loan Purchase Price thereof, which purchase price shall be deposited in the
Principal and Interest Account.
The Servicer is required to cause to be liquidated any Home Equity Loan
relating to a Property as to which ownership has been effected in the name of
the Servicer on behalf of the Trust and which has not been liquidated within __
months of such effecting of ownership at such price as the Servicer deems
necessary to comply with this requirement, or within such period of time as may,
in the opinion of counsel nationally recognized in federal income tax matters,
be permitted under the Code.
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If so required by the terms of any Home Equity Loan, the Servicer will
be required to cause hazard insurance to be maintained with respect to the
related Property and to advance sums on account of the premiums therefor if not
paid by the Mortgagor if permitted by the terms of such Home Equity Loan.
The Servicer will have the right under the Pooling and Servicing
Agreement (upon receiving the consent of the Certificate Insurer) to accept
applications of Mortgagors for consent to (i) partial releases of Mortgages,
(ii) alterations and (iii) removal, demolition or division of Properties. No
application for approval may be considered by the Servicer unless: (i) the
provisions of the related Note and Mortgage have been complied with; (ii) the
loan-to-value ratio and debt-to-income ratio after any release does not exceed
the loan-to-value ratio and debt-to- income ratio of such Note on the Cut-Off
Date and any increase in the loan-to-value shall not exceed __% unless approved
in writing by the Certificate Insurer; and (iii) the lien priority of the
related Mortgage is not affected.
The Servicer shall not agree to any modification, waiver or amendment
of any provision of any Home Equity Loan unless, in the Servicer's good faith
judgment, such modification, waiver or amendment would minimize the loss that
might otherwise be experienced with respect to such Home Equity Loan and only in
the event of a payment default with respect to such Home Equity Loan or in the
event that a payment default with respect to such Home Equity Loan is reasonably
foreseeable by the Servicer; provided, however, that no such modification,
waiver or amendment shall extend the maturity date of such Home Equity Loan
beyond __________. Notwithstanding anything set forth in the Pooling and
Servicing Agreement to the contrary, the Servicer shall be permitted to modify,
waive or amend any provision of a Home Equity Loan if required by statute or a
court of competent jurisdiction to do so.
The Servicer shall provide written notice to the Trustee and the
Certificate Insurer prior to the execution of any modification, waiver or
amendment of any provision of any Home Equity Loan; provided that if the
Certificate Insurer does not object in writing to the modification, waiver or
amendment specified in such notice within 5 Business Days after its receipt
thereof, the Servicer may effectuate such modification, waiver or amendment and
shall deliver to the Custodian, on behalf of the Trustee for deposit in the
related File, an original counterpart of the agreement relating to such
modification, waiver or amendment, promptly following the execution thereof.
As noted under "The Seller and Servicer -- General" herein, the
Servicer, with the consent of the Certificate Insurer, will be permitted under
the Pooling and Servicing Agreement to enter into Sub-Servicing Agreements for
any servicing and administration of Home Equity Loans with any institution that
(x) is in compliance with the laws of each state necessary to enable it to
perform its obligations under such Sub-Servicing Agreement, (y) has experience
servicing home equity loans that are similar to the Home Equity Loans and (z)
has equity of not less than $5,000,000 (as determined in accordance with
generally accepted accounting principles).
With the consent of the Certificate Insurer, the Servicer may enter
into Sub-Servicing Agreements with Sub-Servicers with respect to the servicing
of the Home Equity Loans. No Sub-Servicing arrangements discharge the Servicer
from its servicing obligations. Notwithstanding any Sub-Servicing Agreement, the
Servicer will not be relieved of its obligations under the Pooling and Servicing
Agreement and the Servicer will be obligated to the same extent and under the
same terms and conditions as if it alone were servicing and administering the
Home Equity Loans. The Servicer shall be entitled to enter into any agreement
with a Sub-Servicer for indemnification of the Servicer by such Sub-Servicer and
nothing contained in such Sub-Servicing Agreement shall be deemed to limit or
modify the Pooling and Servicing Agreement.
The Servicer (except the Trustee if it is required to succeed the
Servicer under the Pooling and Servicing Agreement) has agreed to indemnify and
hold the Trustee, the Certificate Insurer, and each Owner harmless against any
and all claims, losses, penalties, fines, forfeitures, legal fees and related
costs, judgments, and any other costs, fees and expenses that the Trustee, the
Certificate Insurer, and any Owner may sustain in any way related to the failure
of the Servicer to perform its duties and service the Home Equity Loans in
compliance with the terms of the Pooling and Servicing Agreement. The Servicer
shall immediately notify the Trustee, the Certificate Insurer and each Owner if
a claim is made by a third party with respect to the Pooling and Servicing
Agreement, and the Servicer shall assume the defense of any such claim and pay
all expenses in connection therewith, including reasonable counsel fees, and
promptly pay, discharge and satisfy any judgment or decree which may be entered
against the Servicer, the Trustee, the Certificate Insurer and/or Owner in
respect of such claim. The Trustee shall reimburse the Servicer from amounts
otherwise distributable on the Class R Certificates for all amounts advanced by
it pursuant to the preceding sentence, except when a final nonappealable
adjudication determines that the claim relates directly to the failure of the
Servicer to perform its duties in compliance with the Pooling and Servicing
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Agreement. The indemnification provisions shall survive the termination of the
Pooling and Servicing Agreement and the payment of the outstanding Certificates.
The Servicer will be required to deliver to the Trustee, the
Certificate Insurer, and the Rating Agencies on or before __________ of each
year, commencing in 199__: (1) an officers' certificate stating, as to each
signer thereof, that (i) a review of the activities of the Servicer during such
preceding calendar year and of performance under the Pooling and Servicing
Agreement has been made under such officers' supervision, and (ii) to the best
of such officers' knowledge, based on such review, the Servicer has fulfilled
all its obligations under the Pooling and Servicing Agreement for such year, or,
if there has been a default in the fulfillment of all such obligation,
specifying each such default known to such officers and the nature and status
thereof including the steps being taken by the Servicer to remedy such default
and (2) a letter or letters of a firm of independent, nationally recognized
certified public accountants reasonably acceptable to the Certificate Insurer
stating that such firm has examined the Servicer's overall servicing operations
in accordance with the requirements of the Uniform Single Audit Procedure for
Mortgage Bankers, and stating such firm's conclusions relating thereto.
Removal and Resignation of Servicer
The Certificate Insurer (or, the Owners, with the consent of the
Certificate Insurer) will have the right to, pursuant to the Pooling and
Servicing Agreement, remove the Servicer upon the occurrence of certain events
(collectively, the "Servicer Termination Events") including, without limitation:
(a) certain acts of bankruptcy or insolvency on the part of the Servicer; (b)
certain failures on the part of the Servicer to perform its obligations under
the Pooling and Servicing Agreement (including certain performance tests related
to the delinquency rate and cumulative losses of the Home Equity Loan Pool); (c)
the failure to cure material breaches of the Servicer's representations in the
Pooling and Servicing Agreement; or (d) certain mergers or other combinations of
the Servicer with another entity.
The Servicer is not permitted to resign from the obligations and duties
imposed on it under the Pooling and Servicing Agreement except upon
determination that its duties thereunder are no longer permissible under
applicable law or are in material conflict by reason of applicable law with any
other activities carried on by it, the other activities of the Servicer so
causing such conflict being of a type and nature carried on by the Servicer on
the date of the Pooling and Servicing Agreement. Any such determination
permitting the resignation of the Servicer is required to be evidenced by an
opinion of counsel to such effect which shall be delivered, and reasonably
acceptable, to the Trustee and the Certificate Insurer.
Upon removal or resignation of the Servicer, the Trustee may (A)
solicit bids for a successor servicer as described in the Pooling and Servicing
Agreement or (B) shall appoint the Backup Servicer as Servicer. The Trustee, if
it is unable to obtain a qualifying bid and is prevented by law from acting as
servicer, will be required to appoint, or petition a court of competent
jurisdiction to appoint, any housing and home finance institution, bank or
mortgage servicing institution designated as an approved seller-servicer by
FHLMC or FNMA, having equity of not less than $5,000,000, and acceptable to the
Certificate Insurer and a majority of the Owners of the Class R Certificates
(provided that if the Certificate Insurer and such Owners cannot agree as to the
acceptability of such successor Servicer, the decision of the Certificate
Insurer shall control) as the successor to the Servicer in the assumption of all
or any part of the responsibilities, duties or liabilities of the Servicer.
No removal or resignation of the Servicer will become effective until
the Backup Servicer, the Trustee or a successor servicer shall have assumed the
Servicer's responsibilities and obligations in accordance with the Pooling and
Servicing Agreement.
The Trustee
____________________, having its principal corporate trust office at
_______________________________________________, will be named as Trustee under
the Pooling and Servicing Agreement.
Reporting Requirements
On each Payment Date the Trustee will be required to report in writing
(based on information provided to the Trustee by the Servicer) to each Owner,
the Rating Agencies and the Certificate Insurer:
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(i) the amount of the distribution with respect to the Class A
Certificates, the Class S Certificates and the Class R Certificates
(based on a Certificate in the original principal amount of $1,000);
(ii) the amount of such distributions allocable to principal
on the Home Equity Loans, separately identifying the aggregate amount
of any prepayments in full or Prepayments or other recoveries of
principal included therein and, with respect to the Fixed Rate Group
only, any Pre-Funded Amounts distributed as a prepayment (based on a
Certificate in the original principal amount of $1,000) and any
Subordination Increase Amount with respect to each Home Equity Loan
Group;
(iii) the amount of such distribution allocable to interest on
the Home Equity Loans in each Group (based on a Certificate in the
original principal amount of $1,000);
(iv) if the distribution (net of any Insured Payment) to the
Owners of any Class of the Class A Certificates on such Payment Date
was less than the related Class A Distribution Amounts on such Payment
Date and the related Class A Carry-Forward Amount resulting therefrom;
(v) the amount of any Insured Payment included in the amounts
distributed to the Owners of Class A Certificates on such Payment Date;
(vi) the principal amount of each Class of Class A Certificate
(based on a Certificate in the original principal amount of $1,000)
which will be Outstanding after giving effect to any payment of
principal on such Payment Date;
(vii) the Subordinated Amount and Subordination Deficit for
each Group, if any, remaining after giving effect to all distributions
and transfers on such Payment Date;
(viii) the aggregate Loan Balance of all Home Equity Loans,
the aggregate Loan Balance of the Home Equity Loans in each Group and,
in the case of the Fixed Rate Group only, the aggregate Loan Balance of
the Initial Home Equity Loans and the Subsequent Home Equity Loans, in
each case after giving effect to any payment of principal on such
Payment Date;
(ix) based upon information furnished by the Seller such
information as may be required by Section 6049(d)(7)(C) of the Code and
the regulations promulgated thereunder to assist the Owners in
computing their market discount;
(x) the total of any Substitution Amounts or Loan Purchase
Price amounts included in such distribution with respect to each Group;
(xi) the weighted average Coupon Rate of the Home Equity
Loans;
(xii) such other information as the Certificate Insurer or any
Owner may reasonably request with respect to delinquent Home Equity
Loans;
(xiii) the largest Home Equity Loan balance outstanding; and
(xiv) for Payment Dates during the Funding Period, the
remaining Pre-Funded Amount.
Certain obligations of the Trustee to provide information to the Owners
are conditioned upon such information being received from the Servicer.
In addition, on the Business Day preceding each Payment Date the
Trustee will be required to distribute to each Owner, the Certificate Insurer
and the Rating Agencies, together with the information described above, the
following information prepared by the Servicer and furnished to the Trustee for
such purpose and with respect to each Home Equity Loan Group;
(a) the number and aggregate principal balances of Home Equity
Loans (i) 30-59 days delinquent, (ii) 60-89 days delinquent, (iii) 90
or more days delinquent, as of the close of business on the last day of
the Remittance Period immediately preceding the Payment Date, (iv) the
numbers and aggregate Loan Balances of all Home Equity Loans as of such
Payment Date and (v) the percentage that each of the
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<PAGE>
amounts represented by clauses (i), (ii) and (iii) represent as a
percentage of the respective amounts in clause (iv);
(b) the status and the number and dollar amounts of all Home
Equity Loans in foreclosure proceedings as of the close of business on
the last day of the Remittance Period immediately preceding such
Payment Date;
(c) the number of Mortgagors and the Loan Balances of (i) the
related Mortgages involved in bankruptcy proceedings as of the close of
business on the last day of the Remittance Period immediately preceding
such Payment Date and (ii) Home Equity Loans that are "balloon" loans;
(d) the existence and status of any Properties as to which
title has been taken in the name of, or on behalf of the Trustee, as of
the close of business of the last day of the Remittance Period
immediately preceding the Payment Date;
(e) the book value of any real estate acquired through
foreclosure or grant of a deed in lieu of foreclosure as of the close
of business on the last day of the Remittance Period immediately
preceding the Payment Date;
(f) the Cumulative Loss Percentage, the amount of cumulative
Realized Losses, the current period Realized Losses and the Annual Loss
Percentage (Rolling Twelve Month) (each as defined in the Pooling and
Servicing Agreement); and
(g) the 60+ Delinquency Percentage and the amount of 60-Day
Delinquent Loans (each as defined in the Pooling and Servicing
Agreement).
Removal of Trustee for Cause
The Trustee may be removed upon the occurrence of any one of the
following events (whatever the reason for such event and whether it shall be
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment, decree or order of any court or any order, rule or regulation of any
administrative or governmental body) on the part of the Trustee: (1) failure to
make distributions of available amounts; (2) certain breaches of covenants and
representations by the Trustee; (3) certain acts of bankruptcy or insolvency on
the part of the Trustee; and (4) failure to meet the standards of Trustee
eligibility as set forth in the Pooling and Servicing Agreement.
If any such event occurs and is continuing, then and in every such case
(i) the Certificate Insurer or (ii) with the prior written consent of the
Certificate Insurer (which is required not to be unreasonably withheld), the
Depositor and the Owners of a majority of the Percentage Interests represented
by the Class A Certificates or, if there are no Class A Certificates then
Outstanding, by a majority of the Percentage Interests represented by the Class
R Certificates, may appoint a successor trustee.
Governing Law
The Pooling and Servicing 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.
Amendments
The Trustee, the Depositor, the Seller and the Servicer with the
consent of the Certificate Insurer may, at any time and from time to time and
without notice to or the consent of the Owners, amend the Pooling and Servicing
Agreement, and the Trustee will be required to consent to such amendment, for
the purposes of (i) if accompanied by an approving opinion of counsel
experienced in federal income tax matters, removing the restriction against the
transfer of a Class R Certificate to a Disqualified Organization (as such term
is defined in the Code), (ii) complying with the requirements of the Code
including any amendments necessary to maintain REMIC status, (iii) curing any
ambiguity, (iv) correcting or supplementing any provisions therein which are
inconsistent with any other provisions therein, or (v) for any other purpose,
provided that in the case of clause (v), (A) the Seller delivers an opinion of
counsel acceptable to the Trustee that such amendment will not adversely affect
in any material respect the interest of the Owners and (B) such amendment will
not result in a withdrawal or reduction of the rating of the
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<PAGE>
Class A Certificates without regard to the Certificate Insurance Policy.
Notwithstanding anything to the contrary, no such amendment shall (a) change in
any manner the amount of, or delay the timing of, payments which are required to
be distributed to any Owner without the consent of the Owner of such
Certificate, (b) change the percentages of Percentage Interest which are
required to consent to any such amendments, without the consent of the Owners of
all Certificates of the Class or Classes affected then Outstanding or (c) which
affects in any manner the terms or provisions of the Certificate Insurance
Policy.
The Trustee will be required to furnish written notification of the
substance of any such amendment to each Owner in the manner set forth in the
Pooling and Servicing Agreement.
Termination of the Trust
The Pooling and Servicing Agreement will provide that the Trust will
terminate upon the payment to the Owners of all Certificates from amounts other
than those available under the Certificate Insurance Policy of all amounts
required to be paid to such Owners upon the later to occur of (a) the final
payment or other liquidation (or any advance made with respect thereto) of the
last Home Equity Loan, (b) the disposition of all property acquired in respect
of any Home Equity Loan remaining in the Trust Estate and (c) at any time when a
Qualified Liquidation of the Trust Estate is effected as described below. To
effect a termination pursuant to clause (c) above, the Owners of all
Certificates then outstanding will be required to furnish to the Trustee an
opinion of counsel experienced in federal income tax matters acceptable to the
Certificate Insurer and the Trustee to the effect that such liquidation
constitutes a Qualified Liquidation.
Optional Termination
By Owners of Class R Certificates. At their option, the Owners of a
majority of the Percentage Interest represented by the Class R Certificates then
Outstanding may on any Monthly Remittance Date when the aggregate outstanding
Loan Balances of the Home Equity Loans is __% or less of the Maximum Collateral
Amount purchase from the Trust all (but not fewer than all) remaining Home
Equity Loans, in whole only, and other property acquired by foreclosure, deed in
lieu of foreclosure, or otherwise then constituting the Trust Estate, and
thereby effect early retirement of the Certificates.
Termination Upon Loss of REMIC Status. Following a final determination
by the Internal Revenue Service or by a court of competent jurisdiction, in
either case from which no appeal is taken within the permitted time for such
appeal, or if any appeal is taken, following a final determination of such
appeal from which no further appeal can be taken, to the effect that either the
Base REMIC or the Upper-Tier REMIC does not and will no longer qualify as a
"REMIC" pursuant to Section 860D of the Code (the "Final Determination"), at any
time on or after the date which is 30 calendar days following such Final
Determination the Certificate Insurer or the Owners of a majority in Percentage
Interests represented by the Class A Certificates then Outstanding with the
consent of the Certificate Insurer may direct the Trustee on behalf of the Trust
to adopt a plan of complete liquidation, as contemplated by Section 860F(a)(4)
of the Code.
FEDERAL INCOME TAX CONSEQUENCES
The following section discusses certain of the material anticipated
federal income tax consequences of the purchase, ownership and disposition of
the Class A Certificates. Such section must be considered only in connection
with "Federal Income Tax Consequences" in the Prospectus. The discussion herein
and in the Prospectus is based upon laws, regulations, rulings and decisions now
in effect, all of which are subject to change. The discussion below and in the
Prospectus does not purport to deal with all federal tax consequences applicable
to all categories of investors, some of which may be subject to special rules.
Investors should consult their own tax advisors in determining the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of the Class A Certificates.
REMIC Elections
Pursuant to the Pooling and Servicing Agreement, the Trustee will elect
to treat the Trust Estate (other than the Pre-Funding Account and the
Capitalized Interest Account) as two segregated asset pools with respect to
which elections will be made to treat each as a separate REMIC for federal
income tax purposes. The Base REMIC will issue several uncertificated subclasses
of non-voting interests (the "Base REMIC Regular Interests"), which will be
designated as the regular interests in the Base REMIC and the uncertificated
Base REMIC Residual Class, which
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<PAGE>
will be designated as the residual interest in the Base REMIC. The assets of the
Base REMIC will consist of the Home Equity Loans and all other property in the
Trust Estate except for the property in the Trust Estate allocated to the
Upper-Tier REMIC, the Pre-Funding Account and the Capitalized Interest Account.
The Upper-Tier REMIC will issue the Class A Certificates all of which will be
designated as the regular interests in the Upper-Tier REMIC, and the Class R
Certificate which will be designated as the residual interest in the Upper-Tier
REMIC. The assets of the Upper-Tier REMIC will consist of the Base REMIC Regular
Interests. Aggregate distributions on the Base REMIC Regular Interests will
equal the aggregate distributions on the Class A Certificates and Class S
Certificates. See "Formation of the Trust and Trust Property" herein.
Qualification as a REMIC requires ongoing compliance with certain
conditions. Arter & Hadden, special tax counsel, is of the opinion that for
federal income tax purposes, assuming (i) the REMIC elections are made and (ii)
compliance with the Pooling and Servicing Agreement, each of the Upper-Tier
REMIC and the Base REMIC will be treated as a REMIC, the Class A Certificates
will be treated as "regular interests" in the Upper-Tier REMIC, the Class R
Certificates will be the sole "residual interest" in the Upper-Tier REMIC, the
Base REMIC Regular Interests will be treated as "regular interests" in the Base
REMIC and the uncertificated Base REMIC Residual Class will be the sole
"residual" in the Base REMIC. Except as indicated below and in the Prospectus,
for federal income tax purposes, regular interests in a REMIC are treated as
debt instruments issued by the REMIC on the date on which those interests are
created, and not as ownership interests in the REMIC or its assets. Owners of
the Class A Certificates that otherwise report income under a cash method of
accounting will be required to report income with respect to such Class A
Certificates under an accrual method.
The prepayment assumption for each Class of the Class A Certificates
for calculating original issue discount is ___% of the applicable Prepayment
Assumption. See "Prepayment and Yield Considerations -- Projected Prepayment and
Yield for Class A Certificates" herein.
As a result of the qualification of the Base REMIC and the Upper-Tier
REMIC as REMICs, the Trust will not be subject to federal income tax except with
respect to (i) income from prohibited transactions, (ii) "net income from
foreclosure property" and (iii) certain contributions to the Trust after the
Closing Date (see "Federal Income Tax Consequences" in the Prospectus). The
total income of the Trust (exclusive of any income that is taxed at the REMIC
level) will be taxable to the Beneficial Owners of the Certificates.
Under the laws of New York State and New York City, an entity that is
treated for federal income tax purposes as a REMIC generally is exempt from
entity level taxes imposed by those jurisdictions. This exemption does not
apply, however, to the income on the Class A Certificates.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain restrictions on employee benefit plans subject to
ERISA ("Plans") and on persons who are parties in interest or disqualified
persons ("parties in interest") with respect to such Plans. Certain employee
benefit plans, such as governmental plans and church plans (if no election has
been made under section 410(d) of the Code), are not subject to the restrictions
of ERISA, and assets of such plans may be invested in the Certificates without
regard to the ERISA considerations described below, subject to other applicable
federal and state law. However, any such governmental or church plan which is
qualified under section 401(a) of the Code and exempt from taxation under
section 501(a) of the Code is subject to the prohibited transaction rules set
forth in section 503 of the Code.
Investments by Plans are subject to ERISA's general fiduciary
requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan.
Section 406 of ERISA prohibits parties in interest with respect to a
Plan from engaging in certain transactions ("prohibited transactions") involving
a Plan and its assets unless a statutory or administrative exemption applies to
the transaction. Section 4975 of the Code imposes certain excise taxes (or, in
some cases, a civil penalty may be assessed pursuant to section 502(i) of ERISA)
on parties in interest which engage in non-exempt prohibited transactions.
The United States Department of Labor ("DOL") has issued a final
regulation (29 C.F.R. Section 2510.3- 101) containing rules for determining what
constitutes the assets of a Plan. This regulation provides that, as a general
rule, the underlying assets and properties of corporations, partnerships, trusts
and certain other entities in
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which a Plan makes an "equity investment" will be deemed for purposes of ERISA
to be assets of the Plan unless certain exceptions apply.
Under the terms of the regulation, the Trust may be deemed to hold plan
assets by reason of a Plan's investment in a Certificate; such plan assets would
include an undivided interest in the Home Equity Loans and any other assets held
by the Trust. In such an event, persons providing services with respect to the
assets of the Trust, may be parties in interest, subject to the fiduciary
responsibility provisions of Title I of ERISA, including the prohibited
transaction provisions of Section 406 of ERISA (and of Section 4975 of the
Code), with respect to transactions involving such assets unless such
transactions are subject to a statutory or administrative exemption.
One such exception applies if the class of equity interests in question
is (i) "widely held", (ii) freely transferable, and (iii) sold as part of an
offering pursuant to (A) an effective registration statement under the
Securities Act of 1933, and then subsequently registered under the Securities
Exchange Act of 1934 or (B) an effective registration statement under Section
12(b) or 12(g) of the Securities Exchange Act of 1934 ("Publicly Offered
Securities"). In addition the regulation provides that if at all times more than
75% of the value of classes of equity interests in the Trust are held by
investors other than benefit plan investors (which is defined as including plans
subject to ERISA, government plans and individual retirement accounts), the
investing Plan's assets will not include any of the underlying assets of the
Trust.
The DOL has issued to ____________________ an individual prohibited
transaction exemption from certain of the prohibited transaction rules of ERISA
(the "Exemption"), with respect to the initial purchase, the holding and the
subsequent resale by Plans of certificates in pass-through trusts that consist
of certain receivables, loans and other obligations that meet the conditions and
requirements of the Exemption. The loans covered by the Exemption include home
equity loans such as the Home Equity Loans.
Among the conditions that must be satisfied for the Exemption to apply
are the following:
(1) the acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least as
favorable to the Plan as they would be in an arms-length transaction
with an unrelated party;
(2) the rights and interests evidenced by the certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the trust;
(3) the certificates acquired by the Plan have received a
rating at the time of such acquisition that is one of the three highest
generic rating categories from either Standard & Poor's, Moody's, Duff
& Phelps Credit Rating Co. ("D&P") or Fitch Investors Service, Inc.
("Fitch");
(4) the Trustee is not an affiliate of any other member of the
Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the
Underwriters in connection with the distribution of the certificates
represents not more than reasonable compensation for underwriting the
certificates; the sum of all payments made to and retained by the
Depositor pursuant to the assignment of the loans to the Trust Estate
represents not more than the fair market value of such loans; the sum
of all payments made to and retained by the Trustee and the Servicer
represents not more than reasonable compensation for such person's
services under the Agreement and reimbursement of such person's
reasonable expenses in connection therewith; and
(6) the Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933.
Moreover, the Exemption provides relief from certain
self-dealing/conflict of interest prohibited transactions only if, among other
requirements, (i) in the case of an acquisition in connection with the initial
issuance of certificates, at least fifty percent of each class of certificates
in which Plans have invested is acquired by persons independent of the
Restricted Group; (ii) the Plan's investment in certificates of any class does
not exceed twenty-five percent of all of the certificates of that class
outstanding at the time of the acquisition; and (iii) immediately after the
acquisition, no more than twenty-five percent of the assets of the Plan with
respect to which such person is a fiduciary are invested in certificates
representing an interest in one or more trusts containing
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<PAGE>
assets sold or serviced by the same entity. The Exemption does not apply to
Plans sponsored by the Depositor, the Certificate Insurer, the Underwriters, the
Trustee, the Servicer, any obligor with respect to Home Equity Loans included in
the Trust Estate constituting more than five percent of the aggregate
unamortized principal balance of the assets in the Trust Estate, or any
affiliate of such parties (the "Restricted Group").
In addition, as of the date hereof, there is no single Home Equity Loan
included in the Trust Estate that constitutes more than five percent of the
aggregate unamortized principal balance of the assets of the Trust Estate.
Before purchasing a Class A Certificate based on the Exemption, however, a
fiduciary of a Plan should itself confirm (1) that such Certificate constitutes
a "certificate" for purposes of the Exemption and (2) that the specific
conditions and other requirements set forth in the Exemption would be satisfied.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of the Exemption,
and the potential consequences in their specific circumstances, prior to making
an investment in the Class A Certificates. Moreover, each Plan fiduciary should
determine whether under the general fiduciary standards of investment procedure
and diversification an investment in the Class A Certificates is appropriate for
the Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
RATINGS
It is a condition of the issuance of the Class A Certificates that the
Class A Certificates receive ratings of "AAA" by Standard & Poor's and "Aaa" by
Moody's. The ratings assigned to the Class A Certificates will be based
primarily on the claims-paying ability of the Certificate Insurer. Explanations
of the significance of such ratings may be obtained from Moody's, 99 Church
Street, New York, New York and Standard & Poor's, 25 Broadway, New York, New
York 10004. Such ratings will be the views only of such rating agencies. There
is no assurance that any such ratings will continue for any period of time or
that such ratings will not be revised or withdrawn. Any such revision or
withdrawal of such ratings may have an adverse effect on the market price of the
Class A Certificates. A security rating is not a recommendation to buy, sell or
hold securities.
LEGAL INVESTMENT CONSIDERATIONS
Although the [Fixed Rate] Certificates are expected to be rated "AAA"
by Standard & Poor's and "Aaa" by Moody's, the [Fixed Rate] Certificates will
not constitute "mortgage related securities" for purposes of SMMEA because a
portion of the Home Equity Loans represent second liens. Accordingly, many
institutions with legal authority to invest in comparably rated securities based
on first home equity loans may not be legally authorized to invest in the [Fixed
Rate] Certificates.
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<PAGE>
[The Class A-8 Certificates will constitute "mortgage related
securities" for purposes of SMMEA for so long as they are rated in one of the
two highest rating categories by one or more nationally recognized statistical
rating organizations. As such, such Classes of Certificates 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. In addition,
institutions whose 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.]
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement relating to the Certificates (the "Underwriting Agreement"), the
Depositor has agreed to cause the Trust to sell to each of the Underwriters
named below (the "Underwriters"), and each of the Underwriters has severally
agreed to purchase, the principal amount or Percentage Interest of the Class A
Certificates set forth opposite its name below:
Class A-1 Certificates
Underwriters Principal Amount
-------------------- $
-------------------- $
-------------------- $
Total $
Class A-2 Certificates
Underwriters Principal Amount
-------------------- $
-------------------- $
Total $
Class A-3 Certificates
Underwriters Principal Amount
-------------------- $
-------------------- $
Total $
Class A-4 Certificates
Underwriters Principal Amount
-------------------- $
-------------------- $
Total $
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<PAGE>
Class A-5 Certificates
Underwriters Principal Amount
-------------------- $
-------------------- $
Total $
Class A-6 Certificates
Underwriters Principal Amount
-------------------- $
-------------------- $
Total $
Class A-7 Certificates
Underwriters Principal Amount
-------------------- $
-------------------- $
Total $
Class A-8 Certificates
Underwriters Principal Amount
-------------------- $
-------------------- $
Total $
The Seller has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or to
contribute to payments which the Underwriters may be required to make in respect
thereof.
In the Underwriting Agreement, the Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all of the Certificates
offered hereby, if any are purchased. The Depositor has been advised by the
Underwriters that they propose initially to offer the Class A Certificates to
the public at the respective offering prices set forth on the cover page hereof
and to certain dealers at such price less a concession not in excess of the
respective amounts set forth in the table below (expressed as a percentage of
the relative Certificate Principal Balance). The Underwriters may allow and such
dealers may reallow a discount not in excess of the respective amounts set forth
in the table below to certain other dealers.
Selling Reallowance
Class Concession Discount
- ----- ---------- --------
A-1..................................... % %
A-2..................................... % %
A-3..................................... % %
A-4..................................... % %
A-5..................................... % %
A-6..................................... % %
A-7..................................... % %
A-8..................................... % %
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<PAGE>
After the initial public offering, such prices and discounts may be
changed.
The Depositor has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or contribute
to payments which the Underwriters may be required to make in respect thereof.
REPORT OF EXPERTS
The consolidated balance sheets of ____________________ and
Subsidiaries as of ___________, 199__ and 199__ and the related consolidated
statements of income, changes in shareholder's equity, and cash flows for each
of the three years in the period ended ___________, 199__, incorporated by
reference in this Prospectus Supplement, have been incorporated herein in
reliance on the report of ________________________, independent accountants,
given on the authority of that firm as experts in accounting and auditing.
CERTAIN LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Depositor and the Seller by Arter &
Hadden, Washington, D.C. Certain legal matters relating to insolvency issues and
certain federal income tax matters concerning the Certificates will be passed
upon by Arter & Hadden. Certain legal matters relating to the validity of the
issuance of the Certificates will be passed upon for the Underwriters by
- --------------------------------.
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<PAGE>
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
Page
----
5/25 Loans...............................................................S-4
Agreement................................................................S-2
Appraised Values........................................................S-21
Available Funds.........................................................S-42
Backup Servicer.........................................................S-17
Balloon Loans...........................................................S-16
Base REMIC..............................................................S-12
Base REMIC Regular Interests............................................S-60
Beneficial Owners.......................................................S-11
Book-Entry Certificates.................................................S-43
Capitalized Interest Account............................................S-10
Carry-Forward Amount....................................................S-42
Cede....................................................................S-11
Certificate Account.....................................................S-39
Certificate Insurer......................................................S-9
Certificate Insurer Default..............................................S-9
Class....................................................................S-1
Class A Certificate Principal Balance...................................S-34
Class A Certificates.....................................................S-1
Class A Distribution Amount..............................................S-5
Class A Principal Distribution Amount....................................S-6
Class A-1 Certificates...................................................S-1
Class A-2 Certificates...................................................S-1
Class A-3 Certificates...................................................S-1
Class A-4 Certificates...................................................S-1
Class A-5 Certificates...................................................S-1
Class A-6 Certificates...................................................S-1
Class A-7 Certificates...................................................S-1
Class R Certificates.....................................................S-2
Class S Certificates.....................................................S-2
Closing Date.............................................................S-1
CMT Loans................................................................S-3
Code....................................................................S-12
Combined Loan-to-Value Ratios...........................................S-23
Compensating Interest...................................................S-55
Coupon Rate..............................................................S-3
CPR.....................................................................S-35
Current Interest........................................................S-42
Custodian...............................................................S-52
Cut-Off Date.............................................................S-1
D&P.....................................................................S-62
Daily Collections.......................................................S-54
Definitive Certificate..................................................S-43
Delinquency Advances....................................................S-54
Depositor................................................................S-1
DOL.....................................................................S-61
DTC.....................................................................S-11
DTC Participants........................................................S-44
ERISA...................................................................S-61
Excess Subordinated Amount..............................................S-50
Exemption...............................................................S-62
FHLMC...................................................................S-18
Final Determination.....................................................S-60
Financial Intermediary..................................................S-44
Fitch...................................................................S-62
Fixed Rate Certificates..................................................S-1
FNMA....................................................................S-18
FNMA Guide..............................................................S-53
Funding Period..........................................................S-10
Home Equity Loans........................................................S-2
Initial Home Equity Loans................................................S-3
Insurance Policy.........................................................S-9
Insured Payment..........................................................S-9
Loan Balance.............................................................S-7
Loan Purchase Price.....................................................S-52
Loan-to-Value Ratios....................................................S-23
Maximum Collateral Amount...............................................S-12
Monthly Remittance Date..................................................S-8
Moody's.................................................................S-10
Mortgagor...............................................................S-33
Net Liquidation Proceeds................................................S-54
Notes...................................................................S-21
Original Aggregate Loan Balance.........................................S-21
Participants............................................................S-43
Payment Date.............................................................S-5
Percentage Interest.....................................................S-39
Plans...................................................................S-61
Preference Amount........................................................S-8
Pre-Funded Amount.......................................................S-10
Pre-Funding Account......................................................S-2
Premium Amount..........................................................S-11
Prepayment Assumption...................................................S-35
Prepayments.............................................................S-14
Preservation Expenses...................................................S-55
Principal and Interest Account..........................................S-54
Properties...............................................................S-2
Qualified Replacement Mortgage..........................................S-51
Rating Agencies.........................................................S-12
Realized Loss...........................................................S-50
Record Date..............................................................S-5
Reference Banks.........................................................S-43
Register................................................................S-39
Registrar...............................................................S-39
REMIC...................................................................S-12
REMIC Opinion...........................................................S-51
Remittance Period........................................................S-8
Restricted Group........................................................S-63
Rules...................................................................S-44
Seller...................................................................S-1
Servicer.................................................................S-1
Servicer Termination Events.............................................S-57
Servicing Advance.......................................................S-55
Servicing Fee............................................................S-8
Six Month LIBOR..........................................................S-3
SMMEA...................................................................S-13
Specified Subordinated Amount...........................................S-49
Subordinated Amount.....................................................S-49
Subordination Deficit...................................................S-50
Subordination Increase Amount...........................................S-49
Subordination Reduction Amount..........................................S-50
Subsequent Cut-Off Date.................................................S-15
Subsequent Mortgage Loans................................................S-2
Subsequent Transfer Agreement...........................................S-15
Subsequent Transfer Date................................................S-10
Sub-Servicers...........................................................S-17
Sub-Servicing Agreements................................................S-17
Substitution Amount.....................................................S-51
Telerate Page 3750......................................................S-43
Total Available Funds...................................................S-42
Total Monthly Excess Spread.............................................S-49
Trust....................................................................S-1
Trust Estate............................................................S-38
Trustee..................................................................S-1
Underwriters............................................................S-64
Upper Tier REMIC........................................................S-12
Weighted average life...................................................S-34
A-i
<PAGE>
================================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representation not contained in this Prospectus
Supplement or the Prospectus and, if given or made, such information or
representation must not be relied upon as having been authorized by the
Depositor or by the Underwriters. This Prospectus Supplement and the Prospectus
do not constitute an offer to sell, or a solicitation of an offer to buy any of
the securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer in such jurisdiction. Neither the delivery of this
Prospectus Supplement or the Prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that information herein is correct as
of any time subsequent to the date hereof or that there has been no change in
the affairs of the Depositor since such date.
----------
TABLE OF CONTENTS
Page
----
PROSPECTUS SUPPLEMENT
Summary................................................................S-
Risk Factors ..........................................................S-
The Seller and Servicer................................................S-
Use of Proceeds........................................................S-
The Depositor..........................................................S-
The Home Equity Loan Pool..............................................S-
Prepayment and Yield Considerations....................................S-
Formation of the Trust and Trust Property..............................S-
Additional Information.................................................S-
Description of the Class A Certificates................................S-
The Certificate Insurer................................................S-
Credit Enhancement.....................................................S-
The Pooling and Servicing Agreement....................................S-
Federal Income Tax Consequences........................................S-
ERISA Considerations...................................................S-
Ratings................................................................S-
Legal Investment Considerations........................................S-
Underwriting...........................................................S-
Report of Experts......................................................S-
Certain Legal Matters..................................................S-
Index to Location of Principal Defined Terms..........................A-1
PROSPECTUS
Summary of Prospectus...................................................1
Risk Factors............................................................6
Description of the Certificates.........................................9
The Trusts.............................................................14
Credit Enhancement.....................................................17
Servicing of the Home Equity Loans and
Contracts............................................................21
Administration.........................................................27
Use of Proceeds........................................................34
The Depositor..........................................................34
Certain Legal Aspects of the Mortgage Assets...........................34
Legal Investment Matters...............................................47
ERISA Considerations...................................................48
Federal Income Tax Consequences........................................49
Plan of Distribution...................................................73
Legal Matters..........................................................73
Financial Information..................................................73
Index to Location of Principal Defined Terms..........................A-1
================================================================================
<PAGE>
IMC HOME EQUITY
LOAN TRUST 199_-__
$-----------
$
Class A-1 Certificates
$
Class A-2 Certificates
$
Class A-3 Certificates
$
Class A-4 Certificates
$
Class A-5 Certificates
$
Class A-6 Certificates
$
Class A-7 Certificates
$
Class A-8 Certificates
IMC Home Equity Loan Trust
Series 199_-__
-----------
PROSPECTUS SUPPLEMENT
-----------
--------------------
--------------------
__________ __, 199__
<PAGE>
PROSPECTUS
Home Equity Loan Pass Through Certificates
(Issuable in Series)
IMC Securities, Inc.
(Depositor)
This Prospectus relates to Home Equity Loan Pass Through Certificates to
be issued from time to time in one or more series (and one or more classes
within a series), certain classes of which may be offered on terms determined at
the time of sale and described in this Prospectus and the related Prospectus
Supplement. Each series of Certificates will be issued by a separate trust
(each, a "Trust") and will evidence either a beneficial ownership interest in,
or the debt obligation of, such Trust. The assets of a Trust will include one or
more of the following: (i) single family residential mortgage loans, including
mortgage loans secured by junior liens on the related mortgaged properties, (ii)
mortgage backed securities and (iii) investment income, reserve funds, cash
accounts, insurance policies, guaranties, letters of credit or other types of
credit support or enhancement as described in the related Prospectus Supplement.
One or more classes of Certificates of a series may be (i) entitled to
receive distributions allocable to principal, principal prepayments, interest or
any combination thereof prior to one or more other classes of Certificates of
such series or after the occurrence of certain events or (ii) subordinated in
the right to receive such distributions to one or more senior classes of
Certificates of such series, in each case as specified in the related Prospectus
Supplement. Interest on each class of Certificates entitled to distributions
allocable to interest may accrue at a fixed rate or at a rate that is subject to
change from time to time as specified in the related Prospectus Supplement. The
Depositor or its affiliates may retain or hold for sale from time to time one or
more classes of a series of Certificates.
Distributions on the Certificates will be made at the intervals and on the
dates specified in the related Prospectus Supplement from the assets of the
related Trust and any other assets pledged for the benefit of the Certificates.
An affiliate of the Depositor may make or obtain for the benefit of the
Certificates limited representations and warranties with respect to mortgage
assets assigned to the related Trust. Neither the Depositor nor any affiliates
will have any other obligation with respect to the Certificates.
The yield on Certificates will be affected by the rate of payment of
principal (including prepayments) of mortgage assets in the related Trust. Each
series of Certificates will be subject to early termination under the
circumstances described herein and in the related Prospectus Supplement.
If specified in a Prospectus Supplement, an election may be made to treat
the Trust for the related series or specified portions thereof as a "real estate
mortgage investment conduit" ("REMIC") for federal income tax purposes. See
"Federal Income Tax Consequences" herein and in the related Prospectus
Supplement.
It is a condition to the issuance of the Certificates that the Certificates
be rated in not less than the fourth highest rating category by a nationally
recognized rating organization.
See "Risk Factors" beginning on page 6 herein and on page S-___ in the
related Prospectus Supplement for a discussion of significant matters affecting
investments in the Certificates.
See "ERISA Considerations" herein and in the related Prospectus Supplement
for a discussion of restrictions on the acquisition of Certificates by "plan
fiduciaries."
An investor should carefully review the information in the related
Prospectus Supplement concerning the risks associated with the different types
and classes of Certificates.
THE ASSETS OF A TRUST ARE THE SOLE SOURCE OF PAYMENTS ON THE RELATED
CERTIFICATES. THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF
THE DEPOSITOR, ANY SERVICER, ANY MASTER SERVICER, ANY ORIGINATOR, ANY TRUSTEE OR
ANY OF THEIR AFFILIATES, EXCEPT AS SET FORTH HEREIN AND IN THE RELATED
PROSPECTUS SUPPLEMENT. NEITHER THE CERTIFICATES NOR THE UNDERLYING MORTGAGE
ASSETS WILL BE GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OR BY THE DEPOSITOR, ANY SERVICER, ANY MASTER SERVICER, ANY
ORIGINATOR, ANY TRUSTEE OR ANY OF THEIR AFFILIATES, EXCEPT AS SET FORTH IN THE
RELATED PROSPECTUS SUPPLEMENT.
- --------------------------------------------------------------------------------
THESE CERTIFICATES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR ANY RELATED PROSPECTUS SUPPLEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
Offers of the Certificates may be made through one or more different
methods, including offerings through underwriters, as more fully described
herein and in the related Prospectus Supplement. See "Plan of Distribution"
herein and "Underwriting" in the related Prospectus Supplement.
Prior to their issuance there will have been no market for the Certificates
nor can there by any assurance that one will develop or if it does develop, that
it will provide the Owners of the Certificates with liquidity or will continue
for the life of the Certificates.
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of Certificates unless accompanied by a Prospectus
Supplement.
- --------------------------------------------------------------------------------
The date of this Prospectus is _________ __, 199_.
<PAGE>
TABLE OF CONTENTS
Page
----
SUMMARY OF PROSPECTUS..................................................... 1
RISK FACTORS.............................................................. 6
DESCRIPTION OF THE CERTIFICATES........................................... 8
General.............................................................. 9
Classes of Certificates.............................................. 9
Distributions of Principal and Interest.............................. 11
Book Entry Registration.............................................. 12
List of Owners of Certificates....................................... 12
THE TRUSTS................................................................ 13
Mortgage Loans....................................................... 13
Mortgage-Backed Securities........................................... 15
Other Mortgage Securities............................................ 15
CREDIT ENHANCEMENT........................................................ 16
SERVICING OF MORTGAGE LOANS............................................... 20
Payments on Mortgage Loans........................................... 21
Advances............................................................. 21
Collection and Other Servicing Procedures............................ 22
Primary Mortgage Insurance........................................... 23
Standard Hazard Insurance............................................ 23
Title Insurance Policies............................................. 24
Claims Under Primary Mortgage Insurance Policies
and Standard Hazard Insurance Policies; Other
Realization Upon Defaulted Loan.................................. 24
Servicing Compensation and Payment of Expenses....................... 25
Master Servicer...................................................... 25
ADMINISTRATION............................................................ 25
Assignment of Mortgage Assets........................................ 25
Evidence as to Compliance............................................ 27
The Trustee.......................................................... 27
Administration of the Certificate Account............................ 28
Reports.............................................................. 29
Forward Commitments; Pre-Funding..................................... 29
Servicer Events of Default........................................... 30
Rights Upon Servicer Event of Default................................ 30
Amendment............................................................ 30
Termination.......................................................... 31
USE OF PROCEEDS........................................................... 31
THE DEPOSITOR............................................................. 31
CERTAIN LEGAL ASPECTS OF THE MORTGAGE
ASSETS............................................................... 31
General.............................................................. 32
Foreclosure.......................................................... 32
Soldiers' and Sailors' Civil Relief Act.............................. 37
LEGAL INVESTMENT MATTERS.................................................. 38
ERISA CONSIDERATIONS...................................................... 38
FEDERAL INCOME TAX CONSEQUENCES........................................... 40
Federal Income Tax Consequences For REMIC
Certificates..................................................... 40
Taxation of Regular Certificates..................................... 42
Taxation of Residual Certificates.................................... 47
Treatment of Certain Items of REMIC Income and
Expense.......................................................... 49
Tax-Related Restrictions on Transfer of Residual
Certificates..................................................... 51
Sale or Exchange of a Residual Certificate........................... 53
Taxes That May Be Imposed on the REMIC Pool.......................... 53
Liquidation of the REMIC Pool........................................ 54
Administrative Matters............................................... 54
Limitations on Deduction of Certain Expenses......................... 54
Taxation of Certain Foreign Investors................................ 55
Backup Withholding................................................... 56
Reporting Requirements............................................... 56
Federal Income Tax Consequences for Certificates as
to Which No REMIC Election Is Made............................... 57
Premium and Discount................................................. 58
Stripped Certificates................................................ 60
Reporting Requirements and Backup Withholding........................ 62
Taxation of Certain Foreign Investors................................ 62
Taxation of Securities Classified as Partnership
Interests........................................................ 63
PLAN OF DISTRIBUTION...................................................... 63
RATINGS................................................................... 63
LEGAL MATTERS............................................................. 63
FINANCIAL INFORMATION..................................................... 63
INDEX TO LOCATION OF PRINCIPAL DEFINED
TERMS................................................................A-1
<PAGE>
AVAILABLE INFORMATION
The Representative has filed a Registration Statement under the Securities
Act of 1933, as amended (the "1933 Act"), with the Securities and Exchange
Commission (the "Commission") with respect to the Certificates. The Registration
Statement and amendments thereof and to the exhibits thereto, as well as such
reports and other information, are available for inspection without charge at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549; 7 World Trade Center, 13th Floor, New
York, New York 10048; and Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of the Registration Statement
and amendments thereof and exhibits thereto may be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Certificates
offered hereby and thereby nor an offer of the Certificates to any person in any
state or other jurisdiction in which such offer would be unlawful. The delivery
of this Prospectus at any time does not imply that information herein is correct
as of any time subsequent to its date.
REPORTS TO CERTIFICATEHOLDERS
Periodic and annual reports concerning any Certificates and the related
Trust will be provided to the Certificateholders. See "Administration--Reports"
herein. If specified in the related Prospectus Supplement, a Series of
Certificates may be issuable in book-entry form. In such event, the related
Certificates will be registered in the name of a Clearing Agency (as defined
herein). All reports will be provided to the Clearing Agency, which in turn will
provide such reports to its Clearing Agency Participants (as defined herein).
Such Clearing Agency Participants will then forward such reports to the
beneficial owners of Certificates. See "Description of the
Certificates--Book-Entry Registration." The Depositor will file or cause to be
filed with the Commission such periodic reports with respect to each Trust as
are required under the Exchange Act and the rules and regulations of the
Commission thereunder. It is the Depositior's intent to suspend filing such
reports as soon as such reports are no longer statutorily required.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed with respect to each respective Trust pursuant to
Sections 13(a), 13(c), 14 and 15(d) of the Securities Exchange Act of 1934
subsequent to the date of this Prospectus and prior to the termination of the
offering of the securities of such Trust offered hereby shall be deemed to be
incorporated by reference into this Prospectus when delivered with respect to
such Trust. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
Any person receiving a copy of this Prospectus may obtain, without charge,
upon written or oral request, a copy of any of the documents incorporated by
reference herein, except for the exhibits to such documents (other than the
documents expressly incorporated therein by reference). Requests should be
directed to IMC Securities, Inc., 3450 Buschwood Park Drive, Tampa, Florida
33618 (telephone number (813) 932-2211).
<PAGE>
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the Prospectus Supplement relating to a particular series of Certificates and to
the related Agreement which will be prepared in connection with each series of
Certificates. Unless otherwise specified, capitalized terms used and not defined
in this Summary of Prospectus have the meanings given to them in this Prospectus
and in the related Prospectus Supplement.
Securities................... Home Equity Loan Pass Through Certificates,
issuable in series, in fully registered form or
book entry only form, in authorized
denominations, as described in the Prospectus
Supplement (the "Certificates"). Each Certificate
will represent a beneficial ownership interest in
a trust (a "Trust") created from time to time
pursuant to a pooling and servicing agreement or
trust agreement (each, an "Agreement").
The Depositor................ IMC Securities, Inc. (the "Depositor") is a
Delaware corporation. The Depositor's principal
executive offices are located at 3450 Buschwood
Park Drive, Tampa, Florida 33618; telephone
number (813) 932-2211. See "The Depositor"
herein. The Depositor or its affiliates may
retain or hold for sale from time to time one or
more classes of a series of Certificates.
The Servicer................. The entity or entities named as the Servicer in
the Prospectus Supplement (the "Servicer"), will
act as servicer, with respect to the Mortgage
Loans included in the related Trust. The Servicer
may be an affiliate of the Depositor and may be
the seller of Mortgage Assets to the Depositor
(each, a "Seller").
The Master Servicer.......... A "Master Servicer" may be specified in the
related Prospectus Supplement for the related
series of Certificates.
The Trustee.................. The trustee (the "Trustee") for each series of
Certificates will be specified in the related
Prospectus Supplement.
Trust Assets................. The assets of a Trust will be mortgage-related
assets (the "Mortgage Assets") consisting of one
or more of the following types of assets:
A. The Mortgage Loans....... "Mortgage Loans" may include: (i) conventional
(i.e., not insured or guaranteed by any
governmental agency) Mortgage Loans secured by
one-to-four family residential properties; (ii)
Mortgage Loans secured by security interests in
shares issued by private, non-profit, cooperative
housing corporations ("Cooperatives") and in the
related proprietary leases or occupancy
agreements granting exclusive rights to occupy
specific dwelling units in such Cooperatives'
buildings; and, (iii) Mortgage Loans secured by
junior liens on the related mortgaged properties,
including home improvement retail installment
contracts. See "The Trusts - Mortgage Loans"
herein.
B. Mortgage-
Backed Securities...... "Mortgage-Backed Securities" (or "MBS") may
include (i) private (that is, not guaranteed or
insured by the United States or any agency or
instrumentality thereof) mortgage participations,
mortgage pass-through certificates or other
mortgage-backed securities or (ii) certificates
insured
1
<PAGE>
or guaranteed by Federal Home Loan Mortgage
Corporation ("FHLMC") or Federal National
Mortgage Association ("FNMA") or Government
National Mortgage Association ("GNMA"). See "The
Trusts - Mortgage-Backed Securities" herein.
C. Other Mortgage Assets..... Trust assets may also include reinvestment
income, reserve funds, cash accounts, insurance
policies, guaranties, letters of credit or other
assets as described in the related Prospectus
Supplement.
The related Prospectus Supplement for a series of
Certificates will describe the Mortgage Assets to
be included in the Trust for such series.
The Certificates.............. The Certificates of any series may be issued in
one or more classes, as specified in the
Prospectus Supplement. One or more classes of
Certificates of each series (i) may be entitled
to receive distributions allocable only to
principal, only to interest or to any combination
thereof; (ii) may be entitled to receive
distributions only of prepayments of principal
throughout the lives of the Certificates or
during specified periods; (iii) may be
subordinated in the right to receive
distributions of scheduled payments of principal,
prepayments of principal, interest or any
combination thereof to one or more other classes
of Certificates of such series throughout the
lives of the Certificates or during specified
periods; (iv) may be entitled to receive such
distributions only after the occurrence of events
specified in the Prospectus Supplement; (v) may
be entitled to receive distributions in
accordance with a schedule or formula or on the
basis of collections from designated portions of
the assets in the related Trust; (vi) as to
Certificates entitled to distributions allocable
to interest, may be entitled to receive interest
at a fixed rate or a rate that is subject to
change from time to time; (vii) may accrue
interest, with such accrued interest added to the
principal or notional amount of the Certificates,
and no payments being made thereon until certain
other classes of the series have been paid in
full; and (viii) as to Certificates entitled to
distributions allocable to interest, may be
entitled to distributions allocable to interest
only after the occurrence of events specified in
the Prospectus Supplement and may accrue interest
until such events occur, in each case as
specified in the related Prospectus Supplement.
The timing and amounts of such distributions may
vary among classes, over time, or otherwise as
specified in the related Prospectus Supplement.
Distributions on
the Certificates............ The related Prospectus Supplement will specify
(i) whether distributions on the Certificates
entitled thereto will be made monthly, quarterly,
semi-annually or at other intervals and dates out
of the payments received in respect of the
Mortgage Assets included in the related Trust and
other assets, if any, pledged for the benefit of
the related Owners of Certificates; (ii) the
amount allocable to payments of principal and
interest on any Payment Date; and (iii) whether
all distributions will be made pro rata to Owners
of Certificates of the class entitled thereto.
The aggregate original principal balance of the
Certificates will equal the aggregate
distributions allocable to principal that such
Certificates will be entitled to receive; the
Certificates will have an aggregate original
principal
2
<PAGE>
balance equal to or less than the aggregate
unpaid principal balance of the related Mortgage
Assets (plus amounts held in a Pre-Funding
Account, if any) as of the first day of the month
of creation of the Trust; and the Certificates
will bear interest in the aggregate at a rate
(the "Pass-Through Rate") equal to the interest
rate borne by the related Mortgage Assets net of
servicing fees and any other specified amounts.
Pre-Funding Account.......... A Trust may enter into an agreement (each, a
"Pre-Funding Agreement") with the Depositor
whereby the Depositor will agree to transfer
additional Mortgage Assets to such Trust
following the date on which such Trust is
established and the related Certificates are
issued. Any Pre-Funding Agreement will require
that any Mortgage Loans so transferred conform to
the requirements specified in such Pre-Funding
Agreement. If a Pre- Funding Agreement is to be
utilized, the related Trustee will be required to
deposit in a segregated account (each, a
"Pre-Funding Account") all or a portion of the
proceeds received by the Trustee in connection
with the sale of one or more classes of
Certificates of the related series; subsequently,
the additional Mortgage Assets will be
transferred to the related Trust in exchange for
money released to the Depositor from the related
Pre-Funding Account. The maximum amount deposited
in the Pre- Funding Account to acquire Mortgage
Loans for transfer to a Trust will not exceed 40%
of the aggregate principal amount of the
Certificates offered pursuant to the related
Prospectus Supplement. Each Pre-Funding Agreement
will set a specified period during which any such
transfers must occur, which period will not
exceed 90 days from the date the Trust is
established. If all moneys originally deposited
to such Pre-Funding Account are not used by the
end of such specified period, then any remaining
moneys will be applied as a mandatory prepayment
of a class or classes of Certificates as
specified in the related Prospectus Supplement.
Optional Termination......... The Servicer, the Seller, the Depositor, or, if
specified in the related Prospectus Supplement,
the Owners of a related class of Certificates or
a credit enhancer may at their respective options
effect early retirement of a series of
Certificates through the purchase of the Mortgage
Assets in the related Trust. See "Administration
- Termination" herein.
Mandatory Termination........ The Trustee, the Servicer or certain other
entities specified in the related Prospectus
Supplement may be required to effect early
retirement of a series of Certificates by
soliciting competitive bids for the purchase of
the assets of the related Trust or otherwise. See
"Administration -- Termination" herein.
Advances..................... The Servicer of the Mortgage Loans will be
obligated (but only to the extent set forth in
the related Prospectus Supplement) to advance
delinquent installments of principal and/or
interest (less applicable servicing fees) on the
Mortgage Loans in a Trust. Any such obligation to
make advances may be limited to amounts due to
the Owners of Certificates of the related series,
to amounts deemed to be recoverable from late
payments or liquidation proceeds, to specified
periods or to any
3
<PAGE>
combination thereof, in each case as specified in
the related Prospectus Supplement. Any such
advance will be recoverable as specified in the
related Prospectus Supplement. See "Servicing of
Mortgage Loans and Contracts" herein.
Credit Enhancement........... If specified in the related Prospectus
Supplement, a series of Certificates, or certain
classes within such series, may have the benefit
of one or more types of credit enhancement
("Credit Enhancement") including but not limited
to subordination, cross support, mortgage pool
insurance, special hazard insurance, financial
guaranty insurance policies, a bankruptcy bond,
reserve funds, other insurance, guaranties and
similar instruments and arrangements. The
protection against losses afforded by any such
Credit Enhancement will be limited. If Owners of
Certificates are materially dependent upon
Credit Enhancement for timely payments of
interest and/or principal on their Certificates,
the related Prospectus Supplement will include
information, including financial information,
concerning the provider of such Credit
Enhancement. See "Credit Enhancement" herein.
Book Entry Registration...... Certificates of one or more classes of a series
may be issued in book entry form ("Book Entry
Certificates") in the name of a clearing agency
(a "Clearing Agency") registered with the
Securities and Exchange Commission, or its
nominee. Transfers and pledges of Book Entry
Certificates may be made only through entries on
the books of the Clearing Agency in the name of
brokers, dealers, banks and other organizations
eligible to maintain accounts with the Clearing
Agency ("Clearing Agency Participants") or their
nominees. Transfers and pledges by purchasers and
other beneficial owners of Book Entry
Certificates ("Beneficial Owners") other than
Clearing Agency Participants may be effected only
through Clearing Agency Participants. All
references to the Owners of Certificates shall
mean Beneficial Owners to the extent Beneficial
Owners may exercise their rights through a
Clearing Agency. Except as otherwise specified in
this Prospectus or a related Prospectus
Supplement, the term "Owners" shall be deemed to
include Beneficial Owners. See "Risk Factors -
Book Entry Registration" and "Description of the
Certificates - Book Entry Registration" herein.
Federal Income Tax
Consequences............. Federal income tax consequences will depend on,
among other factors, whether one or more
elections are made to treat a Trust or specified
portions thereof as a "real estate mortgage
investment conduit" ("REMIC") under the Internal
Revenue Code of 1986, as amended (the "Code"),
or, if no REMIC election is made, whether the
Certificates are considered to be Standard
Certificates, Stripped Certificates or
Partnership Interests. The related Prospectus
Supplement for each series of Certificates will
specify whether a REMIC election will be made.
See "Federal Income Tax Consequences" herein
and in the related Prospectus Supplement.
ERISA Considerations......... A fiduciary of any employee benefit plan subject
to the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or the Code should
carefully review with its own legal advisors
whether the purchase or holding of Certificates
could give rise to a transaction prohibited or
otherwise impermissible under ERISA or the Code.
Certain classes of Certificates may not be
transferred unless the Trustee and the Depositor
are furnished with a letter of representation or
an opinion of counsel to the effect that such
transfer will not result in a violation of the
4
<PAGE>
prohibited transaction provisions of ERISA and
the Code and will not subject the Trustee, the
Depositor or the Servicer to additional
obligations. See "Description of the Certificates
- General" herein and "ERISA Considerations"
herein and in the related Prospectus Supplement.
Legal Investment Matters..... Certificates that constitute "mortgage related
securities" under the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") will be so
described in the related Prospectus Supplement.
Certificates that are not so qualified may not be
legal investments for certain types of
institutional investors, subject, in any case, to
any other regulations which may govern
investments by such institutional investors. See
"Legal Investment Matters" herein and in the
related Prospectus Supplement.
Use of Proceeds.............. Substantially all the net proceeds from the sale
of a series of Certificates will be applied to
the simultaneous purchase of the Mortgage Assets
included in the related Trust (or to reimburse
the amounts previously used to effect such
purchase), the costs of carrying the Mortgage
Assets until sale of the Certificates and to pay
other expenses. See "Use of Proceeds" herein.
Rating....................... It is a condition to the issuance of each Class
of Certificates that each Class of the
Certificates be rated by one or more of Moody's
Investors Service, Inc., ("Moody's"), Standard &
Poor's Ratings Services ("S&P") and Fitch
Investors Service, Inc. ("Fitch" and each of
Fitch, Moody's and S&P, a "Rating Agency") in one
of their four highest rating categories;
provided, however, that one or more classes of
Subordinated Certificates and Residual
Certificates need not be so rated. A security
rating is not a recommendation to buy, sell or
hold securities and may be subject to revision or
withdrawal at any time. No person is obligated to
maintain any rating on any Certificate, and,
accordingly, there can be no assurance that the
ratings assigned to any Class of Certificates
upon initial issuance thereof will not be lowered
or withdrawn by a Rating Agency at any time
thereafter. If a rating of any Class of
Certificates of a Class is revised or withdrawn,
the liquidity of such Class of Certificates may
be adversely affected. In general, the ratings
address credit risk and do not represent any
assessment of the likelihood or rate of principal
prepayments. See "Risk Factors" herein and
"Ratings" in the related Prospectus Supplement.
Risk Factors................. Investment in the Certificates will be subject to
one or more risk factors, including declines in
the value of Mortgaged Properties, prepayment of
Mortgage Loans, higher risks of defaults on
particular types of Mortgage Loans, limitations
on security for the Mortgage Loans, limitations
on credit enhancement and various other factors.
See "Risk Factors" herein and in the related
Prospectus Supplement.
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RISK FACTORS
Prospective investors should consider, among other things, the
following risk factors in connection with the purchase of the Certificates:
Declining Real Estate Market; Geographic Concentration. If the
residential real estate market in general or a regional or local area where
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. See "The Trusts -
Mortgage Loans" herein.
Limited Obligations. The Certificates will not represent an interest in
or obligation of the Depositor. The Certificates of each series will not be
insured or guaranteed by any government agency or instrumentality, the
Depositor, any Servicer or the Seller.
Prepayment Considerations; Optional Termination. The prepayment
experience on Mortgage Loans constituting or underlying the Mortgage Assets will
affect the average life of each class of Certificates relating to a Trust.
Prepayments may be influenced by a variety of economic, geographic, 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. Other factors affecting prepayment of mortgage
loans include changes in housing needs, job transfers, unemployment and
servicing decisions. See "Prepayment and Yield Considerations" in the related
Prospectus Supplement. In addition, investors in the Certificates should be
aware that the Servicer, the Seller, or, if specified in the related Prospectus
Supplement, the Owner of a Class of Certificates or a credit enhancer may at
their respective options effect early retirement of a series of Certificates
through the purchase of Mortgage Assets from the related Trust. See
"Administration--Termination" herein.
Risk of Higher Default Rates for Mortgage Loans with Balloon Payments.
A portion of the aggregate principal balance of the Mortgage Loans at any time
may be "balloon loans" that provide for the payment of the unamortized principal
balance of such Mortgage Loan in a single payment at maturity ("Balloon Loans").
Such Balloon Loans provide for equal monthly payments, consisting of principal
and interest, generally based on a 30- year amortization schedule, and a single
payment of the remaining balance of the Balloon Loan generally 5, 7, 10, or 15
years after origination. Amortization of a Balloon Loan based on a scheduled
period that is longer than the term of the loan results in a remaining principal
balance at maturity that is substantially larger than the regular scheduled
payments. The Depositor does not have any information regarding the default
history or prepayment history of payments on Balloon Loans. Because borrowers of
Balloon Loans are required to make substantial single payments upon maturity, it
is possible that the default risk associated with the Balloon Loans is greater
than that associated with fully-amortizing Mortgage Loans.
Limited Liquidity. There will be no market for the Certificates of any
series prior to the issuance thereof, and there can be no assurance that a
secondary market will develop or, if it does develop, that it will provide
liquidity of investment or will continue for the life of the Certificates of
such series. The market value of the Certificates will fluctuate with changes in
prevailing rates of interest. Consequently, the sale of Certificates in any
market that may develop may be at a discount from the Certificates' par value or
purchase price. Owners of Certificates generally have no right to request
redemption of Certificates, and the Certificates are subject to redemption only
under the limited circumstances described in the related Prospectus Supplement.
In addition, the Certificates will not be listed on any securities exchange.
Limited Assets. Owners of Certificates of each series must rely upon
distributions on the related Mortgage Assets, together with the other specific
assets pledged for the benefit of such series (which assets may be subject to
release from such pledge prior to payment in full of the Certificates), for the
payment of principal of, and interest on, that series of Certificates. If the
assets comprising the Trust are insufficient to make payments on such
Certificates, no other assets of the Depositor will be available for payment of
the deficiency. Because payments of principal will be applied to classes of
outstanding Certificates of a series in the priority specified in the related
Prospectus Supplement, a deficiency may have a disproportionately greater effect
on the Certificates of classes having lower priority in payment. In addition,
due to the priority of payments and the allocation of losses, defaults
experienced on the assets comprising a Trust may have a disproportionate effect
on a specified class or classes within such series.
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Limitations, Reduction and Substitution of Credit Enhancement. Credit
Enhancement may be provided in one or more of the forms described in the related
Prospectus Supplement, including, but not limited to, prioritization as to
payments of one or more classes of such series, a Mortgage Pool Insurance
Policy, a Financial Guaranty Insurance Policy, a Special Hazard Insurance
Policy, a bankruptcy bond, one or more Reserve Funds, other insurance,
guaranties and similar instruments and agreements, or any combination thereof.
Regardless of the Credit Enhancement provided, the amount of coverage may be
limited in amount and in most cases will be subject to periodic reduction in
accordance with a schedule or formula. Furthermore, such Credit Enhancement may
provide only very limited coverage as to certain types of losses and may provide
no coverage as to certain other types of losses. The Trustee may be permitted to
reduce, terminate or substitute all or a portion of the Credit Enhancement for
any series of Certificates, if the applicable rating agencies indicate that the
then-current rating thereof will not be adversely affected.
Original Issue Discount. All the Compound Interest Certificates and
Stripped Certificates that are entitled only to interest distributions will be,
and certain of the other Certificates may be, issued with original issue
discount for federal income tax purposes. An Owner of a Certificate issued with
original issue discount will be required to include original issue discount in
ordinary gross income for federal income tax purposes as it accrues, in advance
of receipt of the cash attributable to such income. Accrued but unpaid interest
on such Certificates generally will be treated as original issue discount for
this purpose. Moreover, the calculation of original issue discount on REMIC
Certificates (as defined herein) is subject to uncertainties because of the lack
of guidance from the Internal Revenue Service under applicable statutory
provisions. See "Federal Income Tax Consequences - Federal Income Tax
Consequences for REMIC Certificates," "- Taxation of Regular Certificates -
Variable Rate Regular Certificates," "Federal Income Tax Consequences - Federal
Income Tax Consequences for Certificates as to Which No REMIC Election Is Made -
Standard Certificates," and "Federal Income Tax Consequences - Premium and
Discount" and "- Stripped Certificates" herein.
Book Entry Registration. Because transfers and pledges of Book Entry
Certificates may be effected only through book entries at a Clearing Agency
through Clearing Agency Participants, the liquidity of the secondary market for
Book Entry Certificates may be reduced to the extent that some investors are
unwilling to hold Certificates in book entry form in the name of Clearing Agency
Participants and the ability to pledge Book Entry Certificates may be limited
due to lack of a physical certificate. Beneficial Owners of Book Entry
Certificates may, in certain cases, experience delay in the receipt of payments
of principal and interest because such payments will be forwarded by the Trustee
to the Clearing Agency who will then forward payment to the Clearing Agency
Participants who will thereafter forward payment to Beneficial Owners. In the
event of the insolvency of the Clearing Agency or of a Clearing Agency
Participant in whose name Certificates are recorded, the ability of Beneficial
Owners to obtain timely payment and (if the limits of applicable insurance
coverage by the Securities Investor Protection Corporation are exceeded, or if
such coverage is otherwise unavailable) ultimate payment of principal and
interest on Book Entry Certificates may be impaired.
Certain Matters Relating to Insolvency. The Sellers of the Mortgage
Assets to the Depositor and the Depositor intend that the transfers of such
Mortgage Assets to the Depositor, and in turn to the applicable Trust,
constitute sales rather than pledges to secure indebtedness for insolvency
purposes. If, however, a seller of Mortgage Assets were to become a debtor under
the federal bankruptcy code, it is possible that a creditor,
trustee-in-bankruptcy or receiver of such seller may argue that the sale thereof
by such Seller is a pledge rather than a sale. This position, if argued or
accepted by a court, could result in a delay in or reduction of distributions on
the related Certificates.
Junior Lien Mortgage Loans. Because Mortgage Loans secured by junior
(i.e., second, third, etc.) liens are subordinate to the rights of the
beneficiaries under the related senior deeds of trust or senior mortgages, a
decline in the residential real estate market would adversely affect the
position of the related Trust as a junior beneficiary or junior mortgagee before
having such an effect on the position of the related senior beneficiaries or
senior mortgagees. A rise in interest rates over a period of time, the general
condition of a Mortgaged Property and other factors may also have the effect of
reducing the value of the Mortgaged Property from the value at the time the
junior lien Mortgage Loan was originated and, as a result, may reduce the
likelihood that, in the event of a default by the borrower, liquidation or other
proceeds will be sufficient to satisfy the junior lien Mortgage Loan after
satisfaction of any senior liens and the payment of any liquidation expenses.
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<PAGE>
Liquidation expenses with respect to defaulted Mortgage Loans do not
vary directly with the outstanding principal balance of the Mortgage Loans at
the time of default. Therefore, assuming that a Servicer took the same steps in
realizing upon defaulted Mortgage Loans having small remaining principal
balances as in the case of defaulted Mortgage Loans having larger principal
balances, the amount realized after expenses of liquidation would be smaller as
a percentage of the outstanding principal balance of the smaller Mortgage Loans.
To the extent the average outstanding principal balances of the Mortgage Loans
in a Trust are relatively small, realizations net of liquidation expenses may
also be relatively small as a percentage of the principal amount of the Mortgage
Loans.
Limitations on Interest Payments and Foreclosures. Generally, under the
terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the
"Relief Act"), or similar state legislation, a Mortgagor who enters military
service after the origination of the related Mortgage Loan (including a
Mortgagor who is a member of the National Guard or is in reserve status at the
time of the origination of the Mortgage Loan and is later called to active duty)
may not be charged interest (including fees and charges) above an annual rate of
6% during the period of such Mortgagor's active duty status, unless a court
orders otherwise upon application of the lender. It is possible that such action
could have an effect, for an indeterminate period of time, on the ability of the
related Servicer to collect full amounts of interest on certain of the Mortgage
Loans. In addition, the Relief Act imposes limitations that would impair the
ability of the related Servicer to foreclose on an affected Mortgage Loan during
the Mortgagor's period of active duty status. Thus, in the event that such a
Mortgage Loan goes into default, there may be delays and losses occasioned by
the inability to realize upon the Mortgaged Property in a timely fashion.
Security Ratings. It is a condition to the issuance of the Certificates
that each class of Certificates be rated in one of the four highest rating
categories by one or more of Moody's S&P or Fitch. See "Summary of
Prospectus--Ratings" herein. A security rating is not a recommendation to buy,
sell or hold securities and may be subject to revision or withdrawal at any
time. No person is obligated to maintain the rating on any Certificate and,
accordingly, there can be no assurance that the ratings assigned to any class of
Certificates on the date on which such Certificates are initially issued will
not be lowered or withdrawn by a Rating Agency at any time thereafter. In the
event any rating is revised or withdrawn, the liquidity of the related
Certificates may be adversely affected.
Issuance of any of the Certificates in book-entry form may reduce the
liquidity of such Certificates in the secondary trading market because investors
may be unwilling to purchase Certificates for which they connot obtain physical
certificate.
The rating of Certificates credit enhanced through external credit
enhancement such as a letter of credit, financial guaranty insurance policy or
mortgage pool insurance will depend primarily on the creditworthiness of the
issuer of such external credit enhancement device (a "Credit Enhancer"). Any
reduction in the rating assigned to the claims-paying ability of the related
Credit Enhancer below the rating initially given to the related Certificates
would likely result in a reduction in the rating of the Certificates. See
"Ratings" in the Prospectus Supplement.
Other Legal Considerations. Applicable federal and state laws generally
regulate interest rates and other charges, require certain disclosures, prohibit
unfair and deceptive practices, regulate debt collection, and require licensing
of the originators of the mortgage loans and contracts. Depending on the
provisions of the applicable law and the specified facts and circumstances
involved, violations of those laws, policies and principles may limit the
ability to collect all or part of the principal of or interest on the Mortgage
Loans and may entitle the borrower to a refund of amounts previously paid. See
"Certain Legal Aspects of the Mortgage Assets" herein.
DESCRIPTION OF THE CERTIFICATES
Each Trust will be created pursuant to an Agreement entered into among
the Depositor, the Trustee, the Master Servicer, if any, and the Servicer. The
provisions of each Agreement will vary depending upon the nature of the
Certificates to be issued thereunder and the nature of the related Trust.
Certificates which represent beneficial interests in the Trust will be issued
pursuant to the Agreement. The following summaries and the summaries set forth
under "Administration" describe certain provisions relating to each series of
Certificates. The Prospectus Supplement for a series of Certificates will
describe the specific provisions relating to such series. The Depositor will
provide Owners of Certificates, without charge, on written request a copy of the
Agreement for the related series. Requests should be addressed to IMC
Securities, Inc., 3450 Buschwood Park Drive, Tampa, Florida 33618. The Agreement
relating to a series of Certificates will be filed with the Securities and
Exchange Commission within 15 days after the date of issuance of such series of
Certificates (the "Delivery Date").
The Certificates of a series will be entitled to payment only from the
assets of the Trust and any other assets pledged for the benefit of the
Certificates and will not be entitled to payments in respect of the assets
included in any other trust fund established by the Depositor. The Certificates
will not represent obligations of the Depositor, the Trustee, the Master
Servicer, if any, any Servicer or any affiliate thereof and will not be
guaranteed by any governmental agency. See "The Trusts" herein.
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The Mortgage Assets relating to a series of Certificates will not be
insured or guaranteed by any governmental entity and, to the extent that
delinquent payments on or losses in respect of defaulted Mortgage Assets, are
not advanced or paid from any applicable Credit Enhancement, such delinquencies
may result in delays in the distribution of payments on, or losses allocated to
one or more classes of Certificates of such series.
General
The Certificates of each series will be issued either in book entry
form or in fully registered form. The minimum original denomination of each
class of Certificates will be specified in the related Prospectus Supplement.
The original "Certificate Principal Balance" of each Certificate will equal the
aggregate distributions or payments allocable to principal to which such
Certificate is entitled and distributions allocable to interest on each
Certificate that is not entitled to distributions allocable to principal will be
calculated based on the "Notional Principal Balance" of such Certificate. The
Notional Principal Balance of a Certificate will not evidence an interest in or
entitlement to distributions allocable to principal but will be used solely for
convenience in expressing the calculation of interest and for certain other
purposes.
Except as described below under "Book Entry Registration" with respect
to Book Entry Certificates, the Certificates of each series will be transferable
and exchangeable on a "Certificate Register" to be maintained at the corporate
trust office or such other office or agency maintained for such purposes by the
Trustee. The Trustee will be appointed initially as the "Certificate Registrar"
and no service charge will be made for any registration of transfer or exchange
of Certificates, but payment of a sum sufficient to cover any tax or other
governmental charge may be required.
Under current law the purchase and holding of certain classes of
Certificates may result in "prohibited transactions" within the meaning of ERISA
and the Code. See "ERISA Considerations" herein and in the related Prospectus
Supplement. Transfer of Certificates of such a class will not be registered
unless the transferee (i) executes a representation letter stating that it is
not, and is not purchasing on behalf of, any such plan, account or arrangement
or (ii) provides an opinion of counsel satisfactory to the Trustee and the
Depositor that the purchase of Certificates of such a class by or on behalf of
such plan, account or arrangement is permissible under applicable law and will
not subject the Trustee, the Servicer or the Depositor to any obligation or
liability in addition to those undertaken in the Agreement.
As to each series, one or more elections may be made to treat the
related Trust or designated portions thereof as a REMIC for federal income tax
purposes. The related Prospectus Supplement will specify whether a REMIC
election is to be made. Alternatively, the Agreement for a series may provide
that a REMIC election may be made at the discretion of the Depositor or the
Servicer and may only be made if certain conditions are satisfied. See "Federal
Income Tax Considerations" herein. As to any such series, the terms and
provisions applicable to the making of a REMIC election, as well as any material
federal income tax consequences to Owners of Certificates not otherwise
described herein, will be set forth in the related Prospectus Supplement. If
such an election is made with respect to a series, one of the classes will be
designated as evidencing the "residual interests" in the related REMIC, as
defined in the Code. All other classes of Certificates in such a series will
constitute "regular interests" in the related REMIC, as defined in the Code. As
to each series with respect to which a REMIC election is to be made, the
Servicer, the Trustee, an Owner of Residual Certificates or another person as
specified in the related Prospectus Supplement will be obligated to take all
actions required in order to comply with applicable laws and regulations and
will be obligated to pay any prohibited transaction taxes. The person so
specified will be entitled to reimbursement for any such payment.
Classes of Certificates
Each series of Certificates will be issued in one or more classes which
will evidence the beneficial ownership in the assets of the Trust that are
allocable to (i) principal of such class of Certificates and (ii) interest on
such Certificates. If specified in the Prospectus Supplement, one or more
classes of a series of Certificates may evidence beneficial ownership interests
in separate groups of assets included in the related Trust.
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The Certificates will have an aggregate original Certificate Principal
Balance equal to the aggregate unpaid principal balance of the Mortgage Assets
(plus, amounts held in a Pre-Funding Account, if any) as of the time and day
prior to creation of the Trust specified in the related Prospectus Supplement
(the "Cut-Off Date") after deducting payments of principal due before the
Cut-Off Date and will bear interest at rates which, on a weighted basis, will be
equal to the Pass-Through Rate. The Pass-Through Rate will equal the weighted
average rate of interest borne by the related Mortgage Assets, net of the
aggregate servicing fees, amounts allocated to the residual interests and any
other amounts as are specified in the Prospectus Supplement. The original
Certificate Principal Balance (or Notional Principal Balance) of the
Certificates of a series and the interest rate on the classes of such
Certificates will be determined in the manner specified in the Prospectus
Supplement.
Each class of Certificates that is entitled to distributions allocable
to interest will bear interest at a fixed rate or a rate that is subject to
change from time to time (a) in accordance with a schedule, (b) by reference to
an index, or (c) otherwise (each, a "Certificate Interest Rate"). One or more
classes of Certificates may provide for interest that accrues but is not
currently payable ("Compound Interest Certificates"). With respect to any class
of Compound Interest Certificates, any interest that has accrued but is not paid
on a given Payment Date will be added to the aggregate Certificate Principal
Balance of such class of Certificates on that Payment Date.
A series of Certificates may include one or more classes entitled only
to distributions or payments (i) allocable to interest, (ii) allocable to
principal (and allocable as between scheduled payments of principal and
Principal Prepayments, as defined below), or (iii) allocable to both principal
(and allocable as between scheduled payments of principal and Principal
Prepayments) and interest. A series of Certificates may consist of one or more
classes as to which distributions or payments will be allocated (i) on the basis
of collections from designated portions of the assets of the Trust, (ii) in
accordance with a schedule or formula, (iii) in relation to the occurrence of
events, or (iv) otherwise. The timing and amounts of such distributions or
payments may vary among classes, over time or otherwise.
A series of Certificates may include one or more Classes of Scheduled
Amortization Certificates and Companion Certificates. "Scheduled Amortization
Certificates" are Certificates with respect to which payments of principal are
to be made in specified amounts on specified Payment Dates, to the extent of
funds available on such Payment Date. "Companion Certificates" are Certificates
which receive payments of all or a portion of any funds available on a given
Payment Date which are in excess of amounts required to be applied to payments
on Scheduled Amortization Certificates on such Payment Date. Because of the
manner of application of payments of principal to Companion Certificates, the
weighted average lives of Companion Certificates of a series may be expected to
be more sensitive to the actual rate of prepayments on the Mortgage Assets in
the related Trust than will the Scheduled Amortization Certificates of such
series.
One or more series of Certificates may constitute series of "Special
Allocation Certificates", which may include Senior Certificates, Subordinated
Certificates, Priority Certificates and Non-Priority Certificates. As specified
in the related Prospectus Supplement for a series of Special Allocation
Certificates, the timing and/or priority of payments of principal and/or
interest may favor one or more classes of Certificates over one or more other
classes of Certificates. Such timing and/or priority may be modified or
reordered upon the occurrence of one or more specified events. Losses on Trust
assets for such series may be disproportionately borne by one or more classes of
such series, and the proceeds and distributions from such assets may be applied
to the payment in full of one or more classes within such series before the
balance, if any, of such proceeds are applied to one or more other classes
within such series. For example, Special Allocation Certificates in a series may
be comprised of one or more classes of Senior Certificates having a priority in
right to distributions of principal and interest over one or more classes of
Subordinated Certificates, as a form of Credit Enhancement. See "Credit
Enhancement Subordination" herein. Typically, the Subordinated Certificates will
carry a rating by the rating agencies lower than that of the Senior
Certificates. In addition, one or more classes of Certificates ("Priority
Certificates") may be entitled to a priority of distributions of principal or
interest from assets in the Trust over another class of Certificates
("Non-Priority Certificates"), but only after the exhaustion of other Credit
Enhancement applicable to such series. The Priority Certificates and
Non-Priority Certificates nonetheless may be within the same rating category.
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Distributions of Principal and Interest
General. Distributions of principal and interest will be made to the
extent of funds available therefor, on the dates specified in the Prospectus
Supplement (each, a "Payment Date") to the persons in whose names the
Certificates are registered (the "Owners") at the close of business on the dates
specified in the Prospectus Supplement (each, a "Record Date"). With respect to
Certificates other than Book Entry Certificates, distributions will be made by
check or money order mailed to the person entitled thereto at the address
appearing in the Certificate Register or, if specified in the Prospectus
Supplement, in the case of Certificates that are of a certain minimum
denomination as specified in the Prospectus Supplement, upon written request by
the Owner of a Certificate, by wire transfer or by such other means as are
agreed upon with the person entitled thereto; provided, however, that the final
distribution in retirement of the Certificates (other than Book Entry
Certificates) will be made only upon presentation and surrender of the
Certificates at the office or agency of the Trustee specified in the notice of
such final distribution. With respect to Book Entry Certificates, such payments
will be made as described below under "Book Entry Registration".
Distributions will be made out of, and only to the extent of, funds in
a separate account established and maintained for the benefit of the
Certificates of the related series (the "Certificate Account" with respect to
such series), including any funds transferred from any related Reserve Fund.
Amounts may be invested in the Eligible Investments specified herein and in the
Prospectus Supplement, and all income or other gain from such investments will
be deposited in the related Certificate Account and may be available to make
payments on the Certificates of the applicable series on the next succeeding
Payment Date or pay after amounts owed by the Trust.
Distributions of Interest. Interest will accrue on the aggregate
Certificate Principal Balance (or, in the case of Certificates entitled only to
distributions allocable to interest, the aggregate Notional Principal Balance
(as defined below)) of each class of Certificates entitled to interest from the
date, at the applicable Certificate Interest Rate and for the periods (each, an
"Interest Accrual Period") specified in the Prospectus Supplement. The aggregate
Certificate Principal Balance of any class of Certificates entitled to
distributions of principal will be the aggregate original Certificate Principal
Balance of such class of Certificates, reduced by all distributions allocable to
principal, and, in the case of Compound Interest Certificates, increased by all
interest accrued but not then distributable on such Compound Interest
Certificates. With respect to a class of Certificates entitled only to
distributions allocable to interest, such interest will accrue on a notional
principal balance (the "Notional Principal Balance") of such class, computed
solely for purposes of determining the amount of interest accrued and payable on
such class of Certificates.
To the extent funds are available therefor, interest accrued during
each Interest Accrual Period on each class of Certificates entitled to interest
(other than a class of Compound Interest Certificates) will be distributable on
the Payment Dates specified in the Prospectus Supplement until the aggregate
Certificate Principal Balance of the Certificates of such class has been
distributed in full or, in the case of Certificates entitled only to
distributions allocable to interest, until the aggregate Notional Principal
Balance of such Certificates is reduced to zero or for the period of time
designated in the Prospectus Supplement. Distributions of interest on each class
of Compound Interest Certificates will commence only after the occurrence of the
events specified in the Prospectus Supplement and, prior to such time, the
aggregate Certificate Principal Balance (or Notional Principal Balance) of such
class of Compound Interest Certificates, will increase on each Payment Date by
the amount of interest that accrued on such class of Compound Interest
Certificates during the preceding Interest Accrual Period but that was not
required to be distributed to such class on such Payment Date. Any such class of
Compound Interest Certificates will thereafter accrue interest on its
outstanding Certificate Principal Balance (or Notional Principal Balance) as so
adjusted.
Distributions of Principal. The Prospectus Supplement will specify the
method by which the amount of principal to be distributed on the Certificates on
each Payment Date will be calculated and the manner in which such amount will be
allocated among the classes of Certificates entitled to distributions of
principal.
One or more classes of Certificates may be entitled to receive all or a
disproportionate percentage of the payments of principal which are received on
the related Mortgage Assets in advance of their scheduled due dates
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and are not accompanied by amounts representing scheduled interest due after the
month of such payments ("Principal Prepayments"). Any such allocation may have
the effect of accelerating the amortization of such Certificates relative to the
interests evidenced by the other Certificates.
Unscheduled Distributions. The Certificates of a series may be subject
to receipt of distributions before the next scheduled Payment Date under the
circumstances and in the manner described below and in the related Prospectus
Supplement. If applicable, such unscheduled distributions will be made on the
Certificates of a series on the date and in the amount specified in the related
Prospectus Supplement if, due to substantial payments of principal (including
Principal Prepayments) on the related Mortgage Assets, low rates then available
for reinvestment of such payments or both, it is determined, based on specified
assumptions, that the amount anticipated to be on deposit in the Certificate
Account for such series on the next related Payment Date, together with, if
applicable, any amounts available to be withdrawn from any related Reserve Fund
or from any other Credit Enhancement provided for such series, may be
insufficient to make required distributions on the Certificates on such Payment
Date. The amount of any such unscheduled distribution that is allocable to
principal will not exceed the amount that would otherwise have been required to
be distributed as principal on the Certificates on the next Payment Date and
will include interest at the applicable Certificate Interest Rate (if any) on
the amount of the unscheduled distribution allocable to principal for the period
and to the date specified in the Prospectus Supplement.
All distributions allocable to principal in any unscheduled
distribution will be made in the same priority and manner as distributions of
principal on the Certificates would have been made on the next Payment Date
except as otherwise stated in the related Prospectus Supplement, and, with
respect to Certificates of the same class, unscheduled distributions of
principal will be made on a pro rata basis. Notice of any unscheduled
distribution will be given by the Trustee prior to the date of such
distribution.
Book Entry Registration
Certificates may be issued as Book Entry Certificates and held in the
name of a Clearing Agency registered with the Securities and Exchange Commission
or its nominee. Transfers and pledges of Book Entry Certificates may be made
only through entries on the books of the Clearing Agency in the name of Clearing
Agency Participants or their nominees. Clearing Agency Participants may also be
Beneficial Owners of Book Entry Certificates.
Purchasers and other Beneficial Owners may not hold Book Entry
Certificates directly but may hold, transfer or pledge their ownership interest
in the Certificates only through Clearing Agency Participants. Furthermore,
Beneficial Owners will receive all payments of principal and interest with
respect to the Certificates and, if applicable, may request redemption of
Certificates, only through the Clearing Agency and the Clearing Agency
Participants. Beneficial Owners will not be registered Owners of Certificates or
be entitled to receive definitive certificates representing their ownership
interest in the Certificates except under the limited circumstances, if any,
described in the related Prospectus Supplement. See "Risk Factors - Book Entry
Registration" herein.
If Certificates of a series are issued as Book Entry Certificates, the
Clearing Agency will be required to make book entry transfers among Clearing
Agency Participants, to receive and transmit payments of principal and interest
with respect to the Certificates of such series, and to receive and transmit
requests for redemption with respect to such Certificates. Clearing Agency
Participants with whom Beneficial Owners have accounts with respect to such Book
Entry Certificates will be similarly required to make book entry transfers and
receive and transmit payments and redemption requests on behalf of their
respective Beneficial Owners. Accordingly, although Beneficial Owners will not
be registered Owners of Certificates and will not possess physical certificates,
a method will be provided whereby Beneficial Owners may receive payments,
transfer their interests, and submit redemption requests.
List of Owners of Certificates
Upon written request of a specified number or percentage interests of
Owners of Certificates of record of a series of Certificates for purposes of
communicating with other Owners of Certificates with respect to their rights as
Owners of Certificates, the Trustee will afford such Owners access during
business hours to the most recent list
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of Owners of Certificates of that series held by the Trustee. With respect to
Book Entry Certificates, the only named Owner on the Certificate Register will
be the Clearing Agency.
The Agreement will not provide for the holding of any annual or other
meetings of Owners of Certificates.
THE TRUSTS
The Trust for a series of Certificates will consist of: (i) the
Mortgage Assets (subject, if specified in the Prospectus Supplement, to certain
exclusions) received on and after the related Cut-Off Date; (ii) all payments
(subject, if specified in the Prospectus Supplement, to certain exclusions) in
respect of such Mortgage Assets, which may be adjusted, to the extent specified
in the related Prospectus Supplement, in the case of interest payments on
Mortgage Assets, to the Pass-Through Rate; (iii) if specified in the Prospectus
Supplement, reinvestment income on such payments; (iv) with respect to a Trust
that includes Mortgage Loans all property acquired by foreclosure or deed in
lieu of foreclosure with respect to any such Mortgage Loan; (v) certain rights
of the Trustee, the Depositor and the Servicer under any insurance policies,
hazard insurance or surety bonds required to be maintained in respect of the
related Mortgage Assets; and (vi) if so specified in the Prospectus Supplement,
one or more forms of Credit Enhancement.
The Certificates of each series will be entitled to payment only from
the assets of the related Trust and any other assets pledged therefor and will
not be entitled to payments in respect of the assets of any other trust
established by the Depositor.
Mortgage Assets may be acquired by the Depositor from affiliated or
unaffiliated originators. 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
initially are offered, more general information of the nature described below
will be provided in the related Prospectus Supplement, and specific information
will be set forth in a report on Form 8-K to be filed with the Securities and
Exchange Commission within fifteen days after the initial issuance of such
Certificates. A copy of the Agreement with respect to each series of
Certificates will be attached to the Form 8-K and will be available for
inspection at the corporate trust office of the Trustee specified in the related
Prospectus Supplement. A schedule of the Mortgage Assets relating to each series
of Certificates, will be attached to the related Agreement delivered to the
Trustee upon delivery of such Certificates.
Mortgage Loans
The Mortgage Loans will be evidenced by promissory notes (the "Mortgage
Notes") secured by mortgages or deeds of trust (the "Mortgages") creating liens
on residential properties (the "Mortgaged Properties"). Such Mortgage Loans will
be within the broad classification of single family mortgage loans, defined
generally as loans on residences containing one to four dwelling units. If
specified in the Prospectus Supplement, the Mortgage Loans may include
cooperative apartment loans ("Cooperative Loans") secured by security interests
in shares issued by Cooperatives and in the related proprietary leases or
occupancy agreements granting exclusive rights to occupy specific dwelling units
in such Cooperatives' buildings, or the Mortgage Loans may be secured by junior
liens on the related mortgaged properties, including home improvement retail
installment contracts. The Mortgaged Properties securing the Mortgage Loans may
include investment properties and vacation and second homes. Each Mortgage Loan
will be selected by the Depositor for inclusion in the Trust from among those
acquired by the Depositor or originated or acquired by one or more affiliated or
unaffiliated originators, including newly originated loans.
The Mortgage Loans will be "conventional" mortgage loans, that is they
will not be insured or guaranteed by any governmental agency, the principal and
interest on the Mortgage Loans included in the Trust for a series of
Certificates will be payable either on the first day of each month or on
different scheduled days throughout each month, and the interest will be
calculated either on a simple-interest or accrual method as described in the
related Prospectus Supplement. When a full principal amount is paid on a
Mortgage Loan during a month, the mortgagor
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is generally charged interest only on the days of the month actually elapsed up
to the date of such prepayment, at a daily interest rate that is applied to the
principal amount of the Mortgage Loan so prepaid.
The payment terms of the Mortgage Loans to be included in a Trust for a
series will be described in the related Prospectus Supplement and may include
any of the following features or combinations thereof or other features
described in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable
from time to time in relation to an index, a rate that is fixed for a
period of time or under certain circumstances and followed by an
adjustable rate, a rate that otherwise varies from time to time, or a
rate that is convertible from an adjustable rate to a fixed rate.
Changes to an adjustable rate may be subject to periodic limitations,
maximum rates, minimum rates or a combination of such limitations.
Accrued interest may be deferred and added to the principal of a
Mortgage Loan for such periods and under such circumstances as may be
specified in the related Prospectus Supplement. Mortgage Loans may
provide for the payment of interest at a rate lower than the specified
mortgage rate for a period of time or for the life of the Mortgage Loan
with the amount of any difference contributed from funds supplied by
the seller of the Mortgaged Property or another source.
(b) Principal may be payable on a level debt service basis to
fully amortize the Mortgage Loan over its term, may be calculated on
the basis of an amortization schedule that is longer than the original
term to maturity or on an interest rate that is different from the
interest rate on the Mortgage Loan or may not be amortized during all
or a portion of the original term. Payment of all or a substantial
portion of the principal may be due on maturity. Principal may include
interest that has been deferred and added to the principal balance of
the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed
for the life of the Mortgage Loan, may increase over a specified period
of time or may change from period to period. Mortgage Loans may include
limits on periodic increases or decreases in the amount of monthly
payments and may include maximum or minimum amounts of monthly
payments.
(d) Prepayments of principal may be subject to a prepayment
fee, which may be fixed for the life of the Mortgage Loan or may
decline over time, and may be prohibited for the life of the Mortgage
Loan or for certain periods ("lockout periods"). Certain Mortgage Loans
may permit prepayments after expiration of the applicable lockout
period and may require the payment of a prepayment fee in connection
with any such subsequent prepayment. Other Mortgage Loans may permit
prepayments without payment of a fee unless the prepayment occurs
during specified time periods. The Mortgage Loans may include
"due-on-sale" clauses which permit the mortgagee to demand payment of
the entire Mortgage Loan in connection with the sale or certain
transfers of the related mortgaged property. Other Mortgage Loans may
be assumable by persons meeting the then applicable underwriting
standards of the Servicer, or as may be required by any applicable
government program.
With respect to a series for which the related Trust includes Mortgage
Loans, the related Prospectus Supplement may specify, among other things,
information regarding the interest rates (the "Mortgage Rates"), the average
Principal Balance and the aggregate Principal Balance, the years of origination
and original principal balances and the original loan-to-value ratios. The
"Principal Balance" of any Mortgage Loan will be the unpaid principal balance of
such Mortgage Loan as of the Cut-Off Date, after deducting any principal
payments due before the Cut-Off Date, reduced by all principal payments,
including principal payments advanced pursuant to the related Agreement,
previously distributed with respect to such Mortgage Loan and reported as
allocable to principal.
The "Loan-to-Value Ratio" of any Mortgage Loan will be determined by
dividing the amount of the Mortgage Loan by the Original Value (defined below)
of the related Mortgaged Property. The "principal amount" of the Mortgage Loan,
for purposes of computation of the Loan-to-Value Ratio of any Mortgage Loan,
will include any part of an origination fee that has been financed. In some
instances, it may also include amounts which the seller or some other party to
the transaction has paid to the mortgagee, such as minor reductions in the
purchase price made at the closing. The "Original Value" of a Mortgage Loan is
(a) in the case of any purchase money
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Mortgage Loan, the lesser of (i) the value of the mortgaged property, based on
an appraisal thereof and (ii) the selling price, and (b) otherwise the value of
the mortgaged property, based on an appraisal thereof.
There can be no assurance that the Original Value will reflect actual
real estate values during the term of a Mortgage Loan. If the residential real
estate market should experience an overall decline in property values such that
the outstanding principal balances of the Mortgage Loans become equal to or
greater than the values of the Mortgaged Properties, the actual rates of
delinquencies, foreclosures and losses could be significantly higher than those
now generally experienced in the mortgage lending industry. In addition, adverse
economic conditions (which may or may not affect real estate values) may affect
the timely and ultimate payment by mortgagors of scheduled payments of principal
and interest on the Mortgage Loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to the Mortgage Loans.
Mortgage-Backed Securities
"Mortgage-Backed Securities" (or "MBS") may include (i) private (that
is, not guaranteed or insured by the United States or any agency or
instrumentality thereof) mortgage participations, mortgage pass-through
certificates or other mortgage-backed securities or (ii) certificates insured or
guaranteed by FHLMC or FNMA or GNMA.
Any MBS will have been issued pursuant to a participation and servicing
agreement, a pooling and servicing agreement, an indenture or similar agreement
(an "MBS Agreement"). A seller (the "MBS Issuer") and/or servicer (the "MBS
Servicer") of the underlying mortgage loans will have entered into the MBS
Agreement with a trustee or a custodian under the MBS Agreement (the "MBS
Trustee"), if any, or with the original purchaser or purchasers of the MBS.
The MBS may have been issued in one or more classes with
characteristics similar to the classes of Certificates described herein.
Distributions in respect of the MBS will be made by the MBS Servicer or the MBS
Trustee on the dates specified in the related Prospectus Supplement. The MBS
Issuer or the MBS Servicer or another person specified in the related Prospectus
Supplement may have the right or obligation to repurchase or substitute assets
underlying the MBS after a certain date or under other circumstances specified
in the related Prospectus Supplement.
Reserve funds, subordination, cross-support or other credit enhancement
similar to that described for the Certificates under "Credit Enhancement" may
have been provided with respect to the MBS. The type, characteristics and amount
of such credit enhancement, if any, will be a function of the characteristics of
the underlying mortgage loans and other factors and generally will have been
established on the basis of the requirements of any rating agency that may have
assigned a rating to the MBS, or by the initial purchasers of the MBS.
The Prospectus Supplement for a series of Certificates that evidence
interests in MBS will specify, to the extent available, (i) the aggregate
approximate initial and outstanding principal amount and type of the MBS to be
included in the Trust, (ii) the original and remaining term to stated maturity
of the MBS, if applicable, (iii) the pass-through or bond rate of the MBS or the
formula for determining such rates, (iv) the payment characteristics of the MBS,
(v) the MBS Issuer, MBS Servicer and MBS Trustee, as applicable, (vi) a
description of the credit support, if any, (vii) the circumstances under which
the stated underlying mortgage loans, or the MBS themselves may be purchased
prior to their maturity, (viii) the terms on which mortgage loans may be
substituted for those originally underlying the MBS, (ix) the servicing fees
payable under the MBS Agreement, (x) to the extent available to the Depositor,
information in respect of the underlying mortgage loans, and (xi) the
characteristics of any cash flow agreements that relate to the MBS.
Other Mortgage Securities
Other Mortgage Securities include other securities that directly or
indirectly represent an ownership interest in, or are secured by and payable
from, single-family mortgage loans on real property or mortgage-backed
securities, including residual interests in issuances of collateralized mortgage
obligations or mortgage pass-through certificates. Any
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Other Mortgage Securities that are privately placed securities will not be
included in a Trust until such time as such privately placed securities would be
freely transferrable pursuant to Rule 144A of the Securities Act of 1933, as
amended. Further (i) such privately placed securities will have been acquired in
the secondary market and not pursuant to an initial offering thereof and (ii)
the underlying issuer of such securities will not be affiliated with the
Depositor and will not have an interest in the Trust. The Prospectus Supplement
for a series of Certificates will describe any Other Mortgage Securities to be
included in the Trust for such series.
CREDIT ENHANCEMENT
General. Various forms of Credit Enhancement may be provided with
respect to one or more classes of a series of Certificates or with respect to
the assets in the related Trust. Credit Enhancement may be in the form of the
subordination of one or more classes of the Certificates of such series, the
establishment of one or more Reserve Funds, the use of a cross-support feature,
use of a Mortgage Pool Insurance Policy, Special Hazard Insurance Policy,
bankruptcy bond, or another form of Credit Enhancement described in the related
Prospectus Supplement, or any combination of the foregoing. Credit Enhancement
may not provide protection against all risks of loss and may not guarantee
repayment of the entire principal balance of the Certificates and interest
thereon. If losses occur which exceed the amount covered by Credit Enhancement
or which are not covered by the Credit Enhancement, Owners of Certificates will
bear their allocable share of deficiencies.
Financial Guaranty Insurance Policies. If so specified in the related
Prospectus Supplement, a financial guaranty insurance policy or surety bond
("Financial Guaranty Insurance Policy") may be obtained and maintained for each
class or series of Certificates. The issuer of any Financial Guaranty Insurance
Policy (a "Financial Guaranty Insurer") will be described in the related
Prospectus Supplement. Such description will include financial information on
the Financial Guaranty Insurer. In addition, the audited financial statements of
a Financial Guaranty Insurer and an auditors consent to use such financial
statements will be filed with the Securities and Exchange Commission on Form 8-K
or will be incorporated by reference to financial statements already on file
with the Securities and Exchange Commission.
Unless otherwise specified in the related Prospectus Supplement, a
Financial Guaranty Insurance Policy will unconditionally and irrevocably
guarantee to Certificateholders that an amount equal to each full and completed
insured payment will be received by an agent of the Trustee (an "Insurance
Paying Agent") on behalf of Certificateholders, for distribution by the Trustee
to each Certificateholder. The "insured payment" will be defined in the related
Prospectus Supplement, and will generally equal the full amount of the
distributions of principal and interest to which Certificateholders are entitled
under the related Agreement plus any other amounts specified therein or in the
related Prospectus Supplement (the "Insured Payment").
Financial Guaranty Insurance Policies may apply only to certain
specified classes, or may apply at the Mortgage Asset level and only to
specified Mortgage Assets.
The specific terms of any Financial Guaranty Insurance Policy will be
as set forth in the related Prospectus Supplement. Financial Guaranty Insurance
Policies may have limitations including (but not limited to) limitations on the
insurer's obligation to guarantee the obligations of the Seller or Depositor to
repurchase or substitute for any Mortgage Loans. Financial Guaranty Insurance
Policies will not guarantee any specified rate of prepayments and/or to provide
funds to redeem Certificates on any specified date.
Subject to the terms of the related Agreement, the Financial Guaranty
Insurer may be subrogated to the rights of Certificateholder to receive payments
under the Certificates to the extent of any payment by such Financial Guaranty
Insurer under the related Financial Guaranty Insurance Policy.
Subordination. Distributions in respect of scheduled principal,
interest or any combination thereof otherwise payable to one or more classes of
Certificates of a series (the "Subordinated Certificates") may be paid to one or
more other classes of such series (the "Senior Certificates") under the
circumstances and to the extent provided in the Prospectus Supplement. If
specified in the Prospectus Supplement, delays in receipt of scheduled
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payments on the Mortgage Assets and losses on defaulted Mortgage Assets will be
borne first by the various classes of Subordinated Certificates and thereafter
by the various classes of Senior Certificates, in each case under the
circumstances and subject to the limitations specified in the 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 in respect of defaulted Mortgage Assets which must be borne by the
Subordinated Certificates by virtue of subordination and the amount of the
distributions otherwise distributable to the Subordinated Certificates that will
be distributable to Owners of Senior Certificates on any Payment 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 in
respect of such Mortgage Assets were to exceed the total amounts payable and
available for distribution to Owners of Subordinated Certificates or, if
applicable, were to exceed the specified maximum amount, Owners of Senior
Certificates could experience losses on the Certificates.
In addition to or in lieu of the foregoing, all or any portion of
distributions otherwise payable to Subordinated Certificates on any Payment Date
may instead be deposited into one or more Reserve Funds (as defined below)
established by the Trustee. If so specified in the Prospectus Supplement, such
deposits may be made on each Payment Date, on each Payment Date for specified
periods, or on each Payment Date until the balance in the Reserve Fund has
reached a specified amount and, following payments from the Reserve Fund to
Owners of Senior Certificates or otherwise, thereafter to the extent necessary
to restore the balance in the Reserve Fund to required levels, in each case as
specified in the Prospectus Supplement. If so specified in the Prospectus
Supplement, amounts on deposit in the Reserve Fund may be released to the
Depositor or the Owners of any class of Certificates at the times and under the
circumstances specified in the Prospectus Supplement.
If specified in the Prospectus Supplement, various classes of
Subordinate Certificates and Subordinated Certificates may themselves be
subordinate in their right to receive certain distributions to other classes of
Senior and Subordinated Certificates, respectively, through a cross-support
mechanism or otherwise.
As between classes of Senior Certificates and as between classes of
Subordinated Certificates, distributions may be allocated among such classes (i)
in the order of their scheduled final distribution dates, (ii) in accordance
with a schedule or formula, (iii) in relation to the occurrence of events, or
(iv) otherwise, in each case as specified in the Prospectus Supplement. As
between classes of Subordinated Certificates, payments with respect to Senior
Certificates on account of delinquencies or losses and payments to any Reserve
Fund will be allocated as specified in the Prospectus Supplement.
Overcollateralization. If specified in the Prospectus Supplement,
subordination provisions of a Trust may be used to accelerate to a limited
extent the amortization of one or more classes of Certificates relative to the
amortization of the related Mortgage Loans. The accelerated amortization is
achieved by the application of certain excess interest to the payment of
principal of one or more classes of Certificates. This acceleration feature
creates, with respect to the Mortgage Loans or groups thereof,
overcollateralization which results from the excess of the aggregate principal
balance of the related Mortgage Loans, or a group thereof, over the principal
balance of the related class of Certificates. Such acceleration may continue for
the life of the related 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,
such limited acceleration feature may cease, unless necessary to maintain the
required level of overcollateralization.
Cross-Support. If specified in the related Prospectus Supplement, the
beneficial ownership of separate groups of assets included in the Trust for a
series may be evidenced by separate classes of related series of Certificates.
In such case, Credit Enhancement may be provided by a cross-support feature
which may require that distributions be made with respect to Certificates
evidencing beneficial ownership of one or more asset groups prior to
distributions to Subordinated Certificates evidencing a beneficial ownership
interest in other asset groups within the same Trust. The Prospectus Supplement
for a series which includes a cross-support feature will describe the manner and
conditions for applying such cross-support feature.
If specified in the Prospectus Supplement, the coverage provided by one
or more forms of Credit Enhancement may apply concurrently to two or more
separate Trusts for a separate series of Certificates. If
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applicable, the Prospectus Supplement will identify the Trusts to which such
credit support relates and the manner of determining the amount of the coverage
provided thereby and of the application of such coverage to the identified
Trusts.
Pool Insurance. If specified in the related Prospectus Supplement, one
or more mortgage pool insurance policies (each, a "Mortgage Pool Insurance
Policy") will be obtained.
Any such Mortgage Pool Insurance Policy will, subject to the
limitations described below and in the Prospectus Supplement, cover loss by
reason of default in payments on such Mortgage Loans up to the amounts specified
in the Prospectus Supplement or report on Form 8-K and for the periods specified
in the Prospectus Supplement. The Trustee under the related Agreement will agree
to use its best reasonable efforts to cause to be maintained in effect any such
Mortgage Pool Insurance Policy and to supervise the filing of claims thereunder
to the issuer of such Mortgage Pool Insurance Policy (the "Pool Insurer") for
the period of time specified in the related Prospectus Supplement. A Mortgage
Pool Insurance Policy, however, is not a blanket policy against loss, because
claims thereunder may only be made respecting particular defaulted Mortgage
Loans and only upon satisfaction of certain conditions precedent set forth in
such policy as described in the related Prospectus Supplement. The Mortgage Pool
Insurance Policies, if any, will not cover loss due to a failure to pay or
denial of a claim under a primary mortgage insurance policy, irrespective of the
reason therefor. The related Prospectus Supplement will describe the terms of
any applicable Mortgage Pool Insurance Policy and will set forth certain
information with respect to the related Pool Insurer.
In general, a Mortgage Pool Insurance Policy may not insure against
loss sustained by reason of a default arising from, among other things, (i)
fraud or negligence in the origination or servicing of a Mortgage Loan,
including misrepresentation by the Mortgagor or persons involved in the
origination thereof or (ii) failure to construct a Mortgaged Property in
accordance with plans and specifications. If so specified in the related
Prospectus Supplement, a failure of coverage attributable to one of the
foregoing events might result in a breach of a representation of the Seller and
in such event might give rise to an obligation on the part of the Seller to
purchase the defaulted Mortgage Loan if the breach materially and adversely
affects the interests of the Owners of the Certificates and cannot be cured by
the Seller.
The original amount of coverage under any Mortgage Pool Insurance
Policy will be reduced over the life of such Certificates 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 properties. The amount of
claims paid will generally include certain expenses incurred with respect to the
applicable Mortgage Loans as well as accrued interest on delinquent Mortgage
Loans to the date of payment of the claim. See "Certain Legal Aspects of the
Mortgage Assets - Foreclosure" herein. Accordingly, if aggregate net claims paid
under any Mortgage Pool Insurance Policy reach the original policy limit,
coverage under that Mortgage Pool Insurance Policy will be exhausted and any
further losses will be borne by one or more classes of Certificates unless
otherwise covered by another form of Credit Enhancement, as specified in the
Prospectus Supplement.
Since any Mortgage Pool Insurance Policy may require that the Mortgaged
Property subject to a defaulted Mortgage Loan be restored to its original
condition prior to claiming against the Pool Insurer, such policy may not
provide coverage against hazard losses. As set forth under "Servicing of
Mortgage Loans -- Standard Hazard Insurance", the hazard policies concerning the
Mortgage Loans typically exclude from coverage physical damage resulting from a
number of causes and even when the damage is covered, may afford recoveries
which are significantly less than the full replacement cost of such losses. Even
if special hazard insurance is applicable as specified in the Prospectus
Supplement, no coverage in respect of special hazard losses will cover all
risks, and the amount of any such coverage will be limited. See "Special Hazard
Insurance" below. As a result, certain hazard risks will not be insured against
and will therefore be borne by Owners of the Certificates, unless otherwise
covered by another form of Credit Enhancement, as specified in the Prospectus
Supplement.
Special Hazard Insurance. If specified in the related Prospectus
Supplement, one or more special hazard insurance policies (each, a "Special
Hazard Insurance Policy") will be obtained.
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Any such Special Hazard Insurance Policy will, subject to limitations
described below and in the Prospectus Supplement, cover (i) loss by reason of
damage to Mortgaged Properties caused by certain hazards (including earthquakes
and, to a limited extent, tidal waves and related water damage) not covered by
the standard form of hazard insurance policy for the respective states in which
the Mortgaged Properties are located or under flood insurance policies, if any,
covering the Mortgaged Properties, and (ii) loss caused by reason of the
application of the coinsurance clause contained in hazard insurance policies.
See "Servicing of Mortgage Loans -- Standard Hazard Insurance." Any Special
Hazard Insurance Policy may not cover losses occasioned by war, civil
insurrection, certain governmental actions, errors in design, faulty workmanship
or materials (except under certain circumstances), nuclear reaction, flood (if
the Mortgaged Property is located in a federally designated flood area),
chemical contamination and certain other risks. Aggregate claims under each
Special Hazard Insurance Policy will be limited as described in the related
Prospectus Supplement. Any Special Hazard Insurance Policy may also provide that
no claim may be paid unless hazard and, if applicable, flood insurance on the
Mortgaged Property has been kept in force and other protection and preservation
expenses have been paid.
Subject to the foregoing limitations, any Special Hazard Insurance
Policy generally will provide that, where there has been damage to property
securing a foreclosed Mortgage Loan (title to which has been acquired by the
insured) and to the extent such damage is not covered by the hazard insurance
policy or flood insurance policy, if any, maintained with respect to such
Mortgage Loan, the issuer of the Special Hazard Insurance Policy (the "Special
Hazard Insurer") will pay the lesser of (i) the cost of repair or replacement of
such property or (ii) upon transfer of the property to the special hazard
insurer, the unpaid principal balance of such Mortgage Loan at the time of
acquisition of such property by foreclosure or deed in lieu of foreclosure, plus
accrued interest to the date of claim settlement and certain expenses incurred
with respect to such property. If the unpaid principal balance plus accrued
interest and certain expenses is paid by the Special Hazard Insurer, the amount
of further coverage under the related Special Hazard Insurance Policy will be
reduced by such amount less any net proceeds from the sale of the property. Any
amount paid as the cost of repair or replacement of the property will also
reduce coverage by such amount. Restoration of the property with the proceeds
described under (i) above will satisfy the condition under any applicable
Mortgage Pool Insurance Policy that the property be restored before a claim
under such Mortgage Pool Insurance Policy may be validly presented with respect
to the defaulted Mortgage Loan secured by such property. The payment described
under (ii) above will render unnecessary presentation of a claim in respect of
such Mortgage Loan under any related Mortgage Pool Insurance Policy. Therefore,
so long as a Mortgage Pool Insurance Policy remains in effect, the payment by
the Special Hazard Insurer under a Special Hazard Insurance Policy of the cost
of repair or replacement or the unpaid principal balance of the Mortgage Loan
plus accrued interest and certain expenses will not affect the total insurance
proceeds but will affect the relative amounts of coverage remaining under any
related Special Hazard Insurance Policy and any related Mortgage Pool Insurance
Policy.
Bankruptcy Bond. In the event of a bankruptcy of a borrower, the
bankruptcy court may establish the value of the property securing the related
Mortgage Loan at an amount less than the then outstanding principal balance of
such Mortgage Loan. The amount of the secured debt could be reduced to such
value and the holder of such Mortgage Loan thus would become an unsecured
creditor to the extent the outstanding principal balance of such Mortgage Loan
exceeds the value so assigned to the property by the bankruptcy court. In
addition, certain other modifications of the terms of a Mortgage Loan can result
from a bankruptcy proceeding, including the reduction in monthly payments
required to be made by the borrower. See "Certain Legal Aspects of the Mortgage
Assets" herein. If so provided in the related Prospectus Supplement, the
Depositor will obtain a bankruptcy bond or similar insurance contract (the
"bankruptcy bond") for proceedings with respect to borrowers under the
Bankruptcy Code. The bankruptcy bond will cover certain losses resulting from a
reduction by a bankruptcy court of scheduled payments of principal of and
interest on a Mortgage Loan or a reduction by such court of the principal amount
of a Mortgage Loan and will cover certain unpaid interest on the amount of such
a principal reduction from the date of the filing of a bankruptcy petition.
The bankruptcy bond will provide coverage in the aggregate amount
specified in the related Prospectus Supplement. Such amount will be reduced by
payments made under such bankruptcy bond in respect of the related Mortgage
Loans and will not be restored.
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If specified in the related Prospectus Supplement, other forms of
Credit Enhancement may be provided to cover such bankruptcy-related losses. Any
bankruptcy bond or other form of Credit Enhancement provided to cover
bankruptcy-related losses will be described in the related Prospectus
Supplement.
Reserve Funds. If specified in the 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 on the Delivery Date in
one or more accounts (each, a "Reserve Fund") established and maintained with
the Trustee. Such cash and the principal and interest payments on such other
investments will be used to enhance the likelihood of timely payment of
principal of, and interest on, or, if so specified in 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 such other purposes
specified in the Prospectus Supplement. Whether or not the Depositor has any
obligation to make such a deposit, certain amounts to which the Owners of
Subordinated Certificates, if any, would otherwise be entitled may instead be
deposited into the Reserve Fund from time to time and in the amounts as
specified in the Prospectus Supplement. Any cash in any Reserve Fund and the
proceeds of any other instrument upon maturity will be invested in Eligible
Investments. If a letter of credit is deposited with the Trustee, such letter of
credit will be irrevocable. Any instrument deposited therein will name the
Trustee as a beneficiary and will be issued by an entity acceptable to each
rating agency that rates the Certificates. Additional information with respect
to such instruments deposited in the Reserve Funds may be set forth in the
Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will
be available for withdrawal from the Reserve Fund for distribution with respect
to the Certificates for the purposes, in the manner and at the times specified
in the Prospectus Supplement.
Other Insurance, Guaranties and Similar Instruments or Agreements. If
specified in the Prospectus Supplement, the related Trust may also include
insurance, guaranties, surety bonds, letters of credit, guaranteed investment
contracts or similar arrangements for the purpose of (i) maintaining timely
payments or providing additional protection against losses on the assets
included in such Trust, (ii) paying administrative expenses, (iii) establishing
a minimum reinvestment rate on the payments made in respect of such assets or
principal payment rate on such assets, (iv) guaranteeing timely payment of
principal and interest under the Certificates, or for such other purpose as is
specified in such Prospectus Supplement. Such arrangements may include
agreements under which Owners of Certificates are entitled to receive amounts
deposited in various accounts held by the Trustee upon the terms specified in
the Prospectus Supplement. Such arrangements may be in lieu of any obligation of
the Servicer or the Seller to advance delinquent installments in respect of the
Mortgage Loans. See "Servicing of Mortgage Loans - Advances" herein.
SERVICING OF MORTGAGE LOANS
With respect to each series of Certificates, the related Mortgage Loans
will be serviced by a sole servicer or by a master servicer with various
sub-servicers pursuant to, or as provided for in, the Agreement. The Prospectus
Supplement for each series will specify the servicer and the master servicer, if
any, for such series.
The Depositor will require that the Servicer have adequate servicing
experience, where appropriate, and financial stability, generally including a
net worth requirement of no less than $10,000,000 (to be specified in the
Agreement) as well as satisfaction of certain other criteria. The Servicer is
required to be a FNMA-approved servicer of conventional mortgage loans.
Each Servicer will be required to perform the customary functions of a
mortgage loan servicer, including collection of payments from borrowers (the
"Mortgagors") and remittance of such collections to the Trustee, maintenance of
applicable standard hazard insurance or primary mortgage insurance policies,
attempting to cure delinquencies, supervising foreclosures, management of
Mortgaged Properties under certain circumstances, and maintaining accounting
records relating to the Mortgage Loans and, if specified in the related
Prospectus
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Supplement, maintenance of escrow or impoundment accounts of Mortgagors for
payment of taxes, insurance, and other items required to be paid by the
Mortgagor pursuant to the Mortgage Loan. Each Servicer will also be obligated to
make advances in respect of delinquent installments on Mortgage Loans as
described more fully under " - Payments on Mortgage Loans" and " - Advances"
below and in respect of certain taxes and insurance premiums not paid on a
timely basis by Mortgagors.
Each Servicer will be entitled to a monthly servicing fee as specified
in the related Prospectus Supplement. Each Servicer will also generally be
entitled to collect and retain, as part of its servicing compensation, late
payment charges and assumption underwriting fees. Each Servicer will be
reimbursed from proceeds of one or more of the insurance policies described
herein ("Insurance Proceeds") or from proceeds received in connection with the
liquidation of defaulted Mortgage Loans ("Liquidation Proceeds") for certain
expenditures pursuant to the Agreement. See " - Advances" and " - Servicing
Compensation and Payment of Expenses" below.
Each Servicer will be required to service each Mortgage Loan pursuant
to the terms of the Agreement for the entire term of such Mortgage Loan unless
such Agreement is earlier terminated. Upon termination, a replacement for the
Servicer will be appointed.
Payments on Mortgage Loans
Each Servicer will establish and maintain a separate account (each, a
"Custodial Account"). Subject to the following paragraph, each Custodial Account
must be an account the deposits in which are fully insured by either the Federal
Deposit Insurance Corporation ("FDIC") or the National Credit Union
Administration ("NCUA") or are, to the extent such deposits are in excess of the
coverage provided by such insurance, continuously secured by certain obligations
issued or guaranteed by the United States of America. If at any time the amount
on deposit in such Custodial Account shall exceed the amount so insured or
secured, the applicable Servicer must remit to the Trustee the amount on deposit
in such Custodial Account which exceeds the amount so insured or secured, less
any amount such Servicer may retain for its own account pursuant to its
Servicing Agreement.
Notwithstanding the foregoing, the deposits in a Servicer's Custodial
Account will not be required to be fully insured or secured as described above,
and such Servicer will not be required to remit amounts on deposit therein in
excess of the amount so insured or secured, so long as such Servicer meets
certain requirements established by the rating agencies requested to rate the
Certificates.
Each Servicer is required to deposit into its Custodial Account on a
daily basis all amounts in respect of each Mortgage Loan received by such
Servicer, with interest adjusted to a rate (the "Remittance Rate") equal to the
related Mortgage Rate less the Servicer's servicing fee rate. On the day of each
month specified in the related Prospectus Supplement (the "Remittance Date"),
each Servicer of the Mortgage Loans will remit to the Trustee all funds held in
its Custodial Account with respect to each Mortgage Loan; provided, however,
that Principal Prepayments may be remitted on the Remittance Date in the month
following the month of such prepayment. Each Servicer will be required pursuant
to the terms of the Agreement and as specified in the related Prospectus
Supplement, to remit with each Principal Prepayment interest thereon at the
Remittance Rate through the last day of the month in which such Principal
Prepayment is made. Each Servicer may also be required to advance its own funds
as described below.
Advances
With respect to a delinquent Mortgage Loan, the Servicer may be
obligated (but only to the extent set forth in the related Prospectus
Supplement) to advance its own funds or funds from its Custodial Account equal
to the aggregate amount of payments of principal and interest (adjusted to the
applicable Remittance Rate) which were due on a due date and which are
delinquent as of the close of business on the business day preceding the
Remittance Date ("Monthly Advance"). Generally, such advances will be required
to be made by the Servicer unless the Servicer determines that such advances
ultimately would not be recoverable under any applicable insurance policy, from
the proceeds of liquidation of the related Mortgaged Properties, or from any
other source (any amount not so reimbursable being referred to herein as a
"Nonrecoverable Advance"). Such advance obligation generally will
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continue through the month following the month of final liquidation of such
Mortgage Loan. Any Servicer funds thus advanced will be reimbursable to such
Servicer out of recoveries on the Mortgage Loans with respect to which such
amounts were advanced. Each Servicer will also be obligated to make advances
with respect to certain taxes and insurance premiums not paid by Mortgagors on a
timely basis. Funds so advanced are reimbursable to the Servicers out of
recoveries on the related Mortgage Loans. Each Servicer's right of reimbursement
for any advance will be prior to the rights of the Trust to receive any related
Insurance Proceeds or Liquidation Proceeds. Failure by a Servicer to make a
required Monthly Advance will be grounds for termination under the related
Agreement.
Collection and Other Servicing Procedures
Each Servicer will service the Mortgage Loans pursuant to guidelines
established in the related Agreement.
The Servicer will be responsible for making reasonable efforts to
collect all payments called for under the Mortgage Loans. The Servicer will be
obligated to follow such normal practices and procedures as it deems necessary
or advisable to realize upon a defaulted Mortgage Loan. In this regard, the
Servicer may (directly or through a local assignee) sell the property at a
foreclosure or trustee's sale, negotiate with the Mortgagor for a deed in lieu
of foreclosure or, in the event a deficiency judgment is available against the
Mortgagor or other person (see "Certain Legal Aspects of the Mortgage Assets --
Foreclosure - Anti-Deficiency Legislation and Other Limitations on Lenders" for
a description of the limited availability of deficiency judgments), foreclose
against such property and proceed for the deficiency against the appropriate
person. The amount of the ultimate net recovery (including the proceeds of any
Mortgage Pool Insurance Policy or other applicable Credit Enhancement), after
reimbursement to the Servicer of its expenses incurred in connection with the
liquidation of any such defaulted Mortgage Loan and prior unreimbursed advances
of principal and interest with respect thereto will be deposited in the
Certificate Account when realized and will be distributed to Owners of
Certificates on the next Payment Date following the month of receipt.
With respect to Cooperative Loans, any prospective purchaser will
generally have to obtain the approval of the board of directors of the relevant
Cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. See "Certain Legal Aspects of the
Mortgage Assets" herein. This approval is usually based on the purchaser's
income and net worth and numerous other factors. Although the Cooperative's
approval is unlikely to be unreasonably withheld or delayed, the necessity of
acquiring such approval could limit the number of potential purchasers for those
shares and otherwise limit the Trust's ability to sell and realize the value of
those shares.
In general, a "tenant-stockholder" (as defined in Code Section 216(b)
(2)) of a corporation that qualifies as a "cooperative housing corporation"
within the meaning of Code Section 216(b)(1) is allowed a deduction for amounts
paid or accrued within his taxable year to the corporation representing his
proportionate share of certain interest expenses and certain real estate taxes
allowable as a deduction under Code Section 216(a) to the corporation under Code
Sections 163 and 164. In order for a corporation to qualify under Code Section
216(b)(1) for its taxable year in which such items are allowable as a deduction
to the corporation, such Section requires, among other things, that at least 80%
of the gross income of the corporation be derived from its tenant-stockholders.
By virtue of this requirement, the status of a corporation for purposes of Code
Section 216(b)(1) must be determined on a year-to-year basis. Consequently,
there can be no assurance that Cooperatives relating to the Cooperative Loans
will qualify under such Section for any particular year. In the event that such
a Cooperative fails to qualify for one or more years, the value of the
collateral securing any related Cooperative Loans could be significantly
impaired because no deduction would be allowable to its tenant-stockholders
under Code Section 216(a) with respect to those years. In view of the
significance of the tax benefits accorded tenant-stockholders of a corporation
that qualifies as a cooperative housing corporation, however, the likelihood
that such a failure would be permitted to continue over a period of years
appears remote.
The Servicer will expend its own funds to restore property securing a
Mortgage Loan which has sustained uninsured damage only if it determines that
such restoration will increase the proceeds to the Trust of liquidation of the
Mortgage Loan after the reimbursement to the Servicer of its expenses.
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If a Mortgaged Property has been or is about to be conveyed by the
Mortgagor, the Servicer will be obligated (to the extent it has knowledge of
such conveyance) to accelerate the maturity of the Mortgage Loan, unless it
reasonably believes it is unable to enforce that Mortgage Loan's "due-on-sale"
clause under the applicable law. If it reasonably believes it may be restricted
by law, for any reason, from enforcing such a "due-on-sale" clause, the Servicer
may enter into an assumption and modification agreement with the person to whom
such property has been or is about to be conveyed, pursuant to which such person
becomes liable under the Mortgage Note, provided such person satisfies the
criteria required to maintain the coverage provided by applicable insurance
policies (unless otherwise restricted by applicable law). Any fee collected by
the Servicer for entering into an assumption agreement will be retained by the
Servicer as additional servicing compensation. For a description of
circumstances in which the Servicer may be unable to enforce "due-on-sale"
clauses, see "Certain Legal Aspects of the Mortgage Assets - Foreclosure -
Enforceability of Certain Provisions" herein. In connection with any such
assumption, the Mortgage Rate borne by the related Mortgage Note may not be
decreased.
If specified in the related Prospectus Supplement, the Servicer will
maintain with one or more depository institutions one or more accounts into
which it will deposit all payments of taxes, insurance premiums, assessments or
comparable items received for the account of the Mortgagors. Withdrawals from
such account or accounts may be made only to effect payment of taxes, insurance
premiums, assessments or comparable items, to reimburse the Servicer out of
related collections for any cost incurred in paying taxes, insurance premiums
and assessments or otherwise preserving or protecting the value of the
Mortgages, to refund to mortgagors any amounts determined to be overages and to
pay interest to Mortgagors on balances in such account or accounts to the extent
required by law.
So long as it acts as servicer of the Mortgage Loans, the Servicer will
be required to maintain certain insurance covering errors and omissions in the
performance of its obligations as servicer and certain fidelity bond coverage
ensuring against losses through wrongdoing of its officers, employees and
agents.
Primary Mortgage Insurance
Mortgage Loans that the Depositor acquires will generally not have
primary mortgage insurance. If obtained, the primary mortgage insurance policies
will not insure against certain losses which may be sustained in the event of a
personal bankruptcy of the mortgagor under a Mortgage Loan.
Standard Hazard Insurance
The Servicer will be required to cause to be maintained for each
Mortgage Loan a standard hazard insurance policy. The coverage of such policy is
required to be in an amount not less than the maximum insurable value of the
improvements securing such Mortgage Loan from time to time or the principal
balance owing on such Mortgage Loan from time to time, whichever is less. In all
events, such coverage shall be in an amount sufficient to ensure avoidance of
the applicability of the co-insurance provisions under the terms and conditions
of the applicable policy. The ability of each Servicer to assure that hazard
insurance proceeds are appropriately applied may be dependent on its being named
as an additional insured under any standard hazard insurance policy and under
any flood insurance policy referred to below, or upon the extent to which
information in this regard is furnished to such Servicer by Mortgagors. Each
Agreement may provide that the related Servicer may satisfy its obligation to
cause hazard insurance policies to be maintained by maintaining a blanket policy
insuring against hazard losses on the Mortgage Loans serviced by such Servicer.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, wind-storm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Mortgage Loans will be
underwritten by different insurers and, therefore, will not contain identical
terms and conditions, the basic terms thereof are dictated by state law. Such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mud flow), nuclear
reactions, wet or dry rot, vermin, rodents, insects or domestic animals, theft
and, in certain cases, vandalism. The foregoing list is merely indicative of
certain kinds of uninsured risks and is not intended to be all-inclusive. If the
property securing a Mortgage Loan is located in a federally designated flood
area, flood insurance will be required to be maintained in such amounts
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as would be required by FNMA in connection with its mortgage loan purchase
program. The Depositor may also purchase special hazard insurance against
certain of the uninsured risks described above. See "Credit Enhancement -
Special Hazard Insurance".
Since the amount of hazard insurance the Servicer is required to cause
to be maintained on the improvements securing the Mortgage Loans declines as the
principal balances owing thereon decrease, if the residential properties
securing the Mortgage Loans appreciate in value over time, the effect of
coinsurance in the event of partial loss may be that hazard insurance proceeds
will be insufficient to restore fully the damaged property.
The Depositor will not require that a standard hazard or flood
insurance policy be maintained on the cooperative dwelling relating to any
Cooperative Loan. Generally, the Cooperative itself is responsible for
maintenance of hazard insurance for the property owned by the Cooperative and
the tenant-stockholders of that Cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a Cooperative and the related
borrower on a Cooperative Loan do not maintain such insurance or do not maintain
adequate coverage or any insurance proceeds are not applied to the restoration
of damaged property, any damage to such borrower's cooperative dwelling or such
Cooperative's building could significantly reduce the value of the collateral
securing such Cooperative Loan to the extent not covered by other credit
support.
Title Insurance Policies
The Agreements will generally require that a title insurance policy be
in effect on each of the Mortgaged Properties and that such title insurance
policy contain no coverage exceptions, except customary exceptions generally
accepted in the mortgage banking industry.
Claims Under Primary Mortgage Insurance Policies and Standard Hazard Insurance
Policies; Other Realization Upon Defaulted Loan
Each Servicer will present claims to any primary insurer under any
related primary mortgage insurance policy and to the hazard insurer under any
related standard hazard insurance policy. All collections under any related
primary mortgage insurance policy or any related standard hazard insurance
policy (less any proceeds to be applied to the restoration or repair of the
related Mortgaged Property or to the reimbursement of Advances by the Servicer)
will be remitted to the Trustee.
If any Mortgaged Property securing a defaulted Mortgage Loan is damaged
and proceeds, if any, from the related standard hazard insurance policy are
insufficient to restore the damaged property to a condition sufficient to permit
recovery under any applicable Mortgage Pool Insurance Policy or any related
primary mortgage insurance policy, each Servicer may be required to expend its
own finds to restore the damaged property to the extent specified in the related
Prospectus Supplement, but only to the extent it determines such expenditures
are recoverable from Insurance Proceeds or Liquidation Proceeds.
If recovery under any applicable Mortgage Pool Insurance Policy or any
related primary mortgage insurance policy is not available, the Servicer will
nevertheless be obligated to attempt to realize upon the defaulted Mortgage
Loan. Foreclosure proceedings will be conducted by the Servicer in accordance
with the Agreement. If the proceeds of any liquidation of the Mortgaged Property
securing the defaulted Mortgage Loan are less than the Principal Balance of the
defaulted Mortgage Loan plus interest accrued thereon, a loss will be realized
on such Mortgage Loan, to the extent the applicable Credit Enhancement is not
sufficient, in the amount of such difference plus the aggregate of expenses
which are incurred by the Servicer in connection with such proceedings and are
reimbursable under the Agreement. In such case there will be a reduction in the
value of the Mortgage Loans and Trust may be unable to recover the full amount
of principal and interest due thereon.
In addition, where a Mortgaged Property securing a defaulted Mortgage
Loan can be resold for an amount exceeding the principal balance of the related
Mortgage Loan together with accrued interest and expenses, it may be expected
that, where retention of any such amount is legally permissible, the Pool
Insurer will exercise its right under the related Mortgage Pool Insurance
Policy, if any, to purchase such Mortgaged Property and realize for itself
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any excess proceeds. Any amounts remaining in the Certificate Account after such
foreclosure or liquidation and attributable to such Mortgage Loan will be
distributed to Owners of the Certificates.
Servicing Compensation and Payment of Expenses
As compensation for its servicing duties, each Servicer will be
entitled to a monthly servicing fee in the amount specified in the related
Prospectus Supplement. In addition to the primary compensation, a Servicer may
be permitted to retain all assumption underwriting fees and late payment
charges, to the extent collected from Mortgagors.
As set forth above, each Servicer will be entitled to reimbursement for
certain expenses incurred by it in connection with the liquidation of defaulted
Mortgage Loans and in connection with advancing delinquent payments. No loss
will be suffered on the Certificates by reason of such expenses to the extent
claims for such expenses are paid directly under any applicable Mortgage Pool
Insurance Policy, a primary mortgage insurance policy, the special hazard
insurance policy or from other forms of Credit Enhancement. In the event,
however, that the defaulted Mortgage Loans are not covered by a Mortgage Pool
Insurance Policy, primary mortgage insurance policies, the Special Hazard
Insurance Policy or another form of Credit Enhancement, or claims are either not
made or paid under such policies or Credit Enhancement, or if coverage
thereunder has ceased, such a loss will occur to the extent that the proceeds
from the liquidation of a defaulted Mortgage Loan or Contract, after
reimbursement of the Servicer's expenses, are less than the Principal Balance of
such defaulted Mortgage Loan.
Master Servicer
A Master Servicer may be specified in the related Prospectus Supplement
for the related series of Certificates. Customary servicing functions with
respect to Mortgage Loans constituting the Mortgage Pool will be provided by the
Servicer directly or through one or more Sub-Servicers subject to supervision by
the Master Servicer. If the Master Servicer is not directly servicing the
Mortgage Loans, then the Master Servicer will (i) administer and supervise the
performance by the Servicer of its servicing responsibilities under the
Agreement with the Master Servicer, (ii) maintain a current data base with the
payment histories of each Mortgagor, (iii) review monthly servicing reports and
data relating to the Mortgage Pool for discrepancies and errors, and (iv) act as
back-up Servicer during the term of the transaction unless the Servicer is
terminated or resigns in such case the Master Servicer shall assume the
obligations of the Servicer.
The Master Servicer will be a party to the Agreement for any series for
which Mortgage Loans comprise the assets of a Trust. The Master Servicer will be
required to satisfy the standard established for the qualification of the Master
Servicer in the related Agreement. The Master Servicer will be compensated for
the performance of its services and duties under each Agreement as specified in
the related Prospectus Supplement.
ADMINISTRATION
The following summary describes certain provisions which will be common
to each Agreement. The summary does not purport to be complete and is subject to
the provisions of a particular Agreement. Material terms of a specific Agreement
will be further described in the related Prospectus Supplement.
Assignment of Mortgage Assets
Assignment of the Mortgage Loans. At the time of issuance of the
Certificates, the Depositor will assign the Mortgage Loans to the Trustee,
together with all principal and interest adjusted to the Remittance Rate,
subject to exclusions specified in the Prospectus Supplement, due on or with
respect to such Mortgage Loans on or after the Cut-Off Date. The Trustee will,
concurrently with such assignment, execute, countersign and deliver the
Certificates to the Depositor in exchange for the Mortgage Loans. Each Mortgage
Loan will be identified in a schedule appearing as an exhibit to the Agreement.
Such schedule may include information as to the Principal Balance of each
Mortgage Loan as of the Cut-Off Date, as well as information respecting the
Mortgage Rate, the
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scheduled monthly payment of principal and interest as of the Cut-Off Date and
the maturity date of each Mortgage Note.
In addition, as to each Mortgage Loan, the Depositor will deliver to
the Trustee the Mortgage Note and Mortgage, any assumption and modification
agreement, an assignment of the Mortgage in recordable form (but not necessarily
recorded), evidence of title insurance, if obtained, and, if applicable, the
certificate of private mortgage insurance. In instances where recorded documents
cannot be delivered due to delays in connection with recording, the Depositor
may deliver copies thereof and deliver the original recorded documents promptly
upon receipt.
With respect to any Mortgage Loans which are Cooperative Loans, the
Depositor will cause to be delivered to the Trustee, the related original
Cooperative note endorsed to the order of the Trustee, the original security
agreement, the proprietary lease or occupancy agreement, the recognition
agreement, an executed financing agreement and the relevant stock certificate
and related blank stock powers. The Depositor will file in the appropriate
office an assignment and a financing statement evidencing the Trustee's security
interest in each Cooperative Loan.
Each Seller generally will represent and warrant to the Depositor with
respect to the Mortgage Loans sold by it, among other things, that (i) the
information set forth in the schedule of Mortgage Loans attached thereto is
correct in all material respects: (ii) a lender's title insurance policy or
binder for each Mortgage Loan subject to the Agreement was issued on the date of
origination thereof and each such policy or binder assurance is valid and
remains in full force and effect or a legal opinion concerning title or title
search was obtained or conducted in connection with the origination of the
Mortgage Loans; (iii) at the date of initial issuance of the Certificates, the
Seller has good title to the Mortgage Loans and the Mortgage Loans are free of
offsets, defenses or counterclaims; (iv) at the date of initial issuance of the
Certificates, each Mortgage is a valid first lien on the property securing the
Mortgage Note (subject only to (a) the lien of current real property taxes and
assessments, (b) covenants, conditions, and restrictions, rights of way,
easements and other matters of public record as of the date of the recording of
such Mortgage, such exceptions appearing of record being acceptable to mortgage
lending institutions generally in the area wherein the property subject to the
Mortgage is located or specifically reflected in the appraisal obtained by the
Depositor and (c) other matters to which like properties are commonly subject
which do not materially interfere with the benefits of the security intended to
be provided by such Mortgage) and such property is free of material damage and
is in good repair or, with respect to a junior lien Mortgage Loan, that such
Mortgage is a valid junior lien Mortgage, as the case may be and specifying the
percentage of the Mortgage Loan Pool comprised of junior lien Mortgage Loans;
(v) at the date of initial issuance of the Certificates, no Mortgage Loan is 31
or more days delinquent (with such exceptions as may be specified in the related
Prospectus Supplement) and there are no delinquent tax or assessment liens
against the property covered by the related Mortgage; (vi) at the date of
initial issuance of the Certificates, the portion of each Mortgage Loan, if any,
which in the circumstances set forth below under "Servicing of Mortgage Loans -
Primary Mortgage Insurance" should be insured with a private mortgage insurer is
so insured; and (vii) each Mortgage Loan at the time it was made complied in all
material respects with applicable state and federal laws, including, with out
limitation, usury, equal credit opportunity and disclosure laws. The Depositor's
rights against the Seller in the event of a breach of its representations will
be assigned to the Trustee for the benefit of the Certificates of such series.
Assignment of Mortgage-Backed Securities and Other Mortgage Securities.
With respect to each series, the Depositor will cause any Mortgage-Backed
Securities and Other Mortgage Securities included in the related Trust to be
registered in the name of the Trustee (directly or through a participant in a
depository). The Trustee (or its custodian) will have possession of any
certificated Mortgage-Backed Securities and Other Mortgage Securities. The
Trustee will not be in possession of or be assignee of record of any underlying
assets for a Mortgage-Backed Security or Other Mortgage Security. Each
Mortgage-Backed Security and Other Mortgage Security will be identified in a
schedule appearing as an exhibit to the related Agreement which may specify
certain information with respect to such security, including, as applicable, the
original principal amount, outstanding principal balance as of the Cut-Off Date,
annual pass-through rate or interest rate and maturity date and certain other
pertinent information for each such security. The Depositor will represent and
warrant to the Trustee, among other things, the information contained in such
schedule is true and correct and that immediately prior to the transfer of the
related securities to the Trustee, the Depositor had good title to, and was the
sole owner of, each such security.
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Repurchase or Substitution of Mortgage Loans. The Trustee will review
the documents delivered to it with respect to the Mortgage Loans included in the
related Trust. If any document is not delivered or is found to be defective in
any material respect and the Depositor or the related Seller, if so required
cannot deliver such document or cure such defect within the period specified in
the related Prospectus Supplement after notice thereof (which the Trustee will
undertake to give within the period specified in the related Prospectus
Supplement), and if any other party obligated to deliver such document or cure
such defect has not done so and has not substituted or repurchased the affected
Mortgage Loan or Contract then the Depositor will cause the Seller, not later
than the first date designated for the deposit of payments into the Certificate
Account (a "Deposit Date") which is more than a specified number of days after
such period, (a) if so provided in the Prospectus Supplement to remove the
affected Mortgage Loan from the Trust and substitute one or more other Mortgage
Loans therefor or (b) repurchase the Mortgage Loan from the Trustee for a price
equal to 100% of its Principal Balance plus one month's interest thereon at the
applicable Remittance Rate. This repurchase and, if applicable, substitution
obligation will generally constitute the sole remedy available to the Trustee
for a material defect in a document relating to a Mortgage Loan.
The Depositor is required to cause the Seller to do either of the
following (a) cure any breach of any representation or warranty that materially
and adversely affects the interests of the Owners of the Certificates in a
Mortgage Loan (each, a "Defective Mortgage Loan") within a specified number of
days of its discovery by the Depositor or its receipt of notice thereof from the
Trustee, (b) repurchase such Defective Mortgage Loan not later than the first
Deposit Date which is more than a specified number of days after such period for
a price equal to 100% of its Principal Balance plus one month's interest thereon
at the applicable Remittance Rate, or (c) if so specified in the Prospectus
Supplement, remove the affected Mortgage Loan from the Trust and substitute one
or more other mortgage loans or contracts therefor. This repurchase and, if
applicable, substitution obligation will generally constitute the sole remedies
available to the Trustee for any such breach.
If the related Prospectus Supplement so provides, the Depositor or a
designated affiliate may be obligated to repurchase or substitute Mortgage Loans
as described above, whether or not the Depositor obtains such an agreement from
the Seller which sold such Mortgage Loans.
In the case of Certificates representing debt obligations of a Trust
all assets of the Trust will be pledged to the Indenture Trustee.
If a REMIC election is to be made with respect to all or a portion of a
Trust, there may be federal income tax limitations on the right to substitute
Mortgage Loans.
Evidence as to Compliance
The Agreement will provide that on or before a specified date in each
year, beginning the first such date that is at least a specified number of
months on and after the Cut-Off Date, a firm of independent public accountants
will furnish a statement to the Trustee to the effect that, based on an
examination of certain specified documents and records relating to the servicing
of the Depositor's mortgage loan portfolio conducted substantially in compliance
with the audit program for mortgages serviced for FNMA or FHLMC, the United
States Department of Housing and Urban Development Mortgage Audit Standards or
the Uniform Single Audit Program for Mortgage Bankers or in accordance with
other standards specified in the Agreement (the "Applicable Accounting
Standards"), such firm is of the opinion that such servicing has been conducted
in compliance with the Applicable Accounting Standards except for (a) such
exceptions as such firm shall believe to be immaterial and (b) such other
exceptions as shall be set forth in such statement.
The Trustee
Any commercial bank or trust company serving as Trustee may have normal
banking relationships with the Depositor. In addition, the Depositor and the
Trustee acting jointly will have the power and the responsibility for appointing
co-trustees or separate trustees of all or any part of the Trust relating to a
particular series of Certificates. In the event of such appointment, all rights,
powers, duties and obligations conferred or imposed upon the Trustee by the
Agreement shall be conferred or imposed upon the Trustee and such separate
trustee or co-trustee
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jointly, or, in any jurisdiction in which the Trustee shall be incompetent or
unqualified to perform certain acts, singly upon such separate trustee or
co-trustee who shall exercise and perform such rights, powers, duties and
obligations solely at the direction of the Trustee.
The Trustee will make no representations as to the validity or
sufficiency of the Agreement, the Certificates or of any Mortgage Asset or
related document, and will not be accountable for the use or application by the
Depositor of any funds paid to the Depositor in respect of the Certificates or
the related assets, or amounts deposited in the Certificate Account or deposited
into the Distribution Account. If no Event of Default has occurred, the Trustee
will be required to perform only those duties specifically required of it under
the Agreement. However, upon receipt of the various certificates, reports or
other instruments required to be furnished to it, the Trustee will be required
to examine them to determine whether they conform to the requirements of the
Agreement.
The Trustee may resign at any time, and the Depositor may remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Agreement, if the Trustee becomes insolvent or in such other instances, if any,
as are set forth in the Agreement. Following any resignation or removal of the
Trustee, the Depositor will be obligated to appoint a successor Trustee. 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 the Certificate Account
The Agreement will require that the Certificate Account be either (i)
maintained with a depository institution the debt obligations of which (or, in
the case of a depository institution which is a part of a holding company
structure, the debt obligations of the holding company of which) have a rating
acceptable to each rating agency that was requested to rate the Certificates, or
(ii) an account or accounts the deposits in which are fully insured by either
the Bank Insurance Fund (the "BIF") of the FDIC or the Savings Association
Insurance Fund (as successor to the Federal Savings and Loan Insurance
Corporation) ("SAIF") of the FDIC. The collateral eligible to secure amounts in
the Certificate Account is limited to United States government securities and
other investments acceptable to the rating agencies rating such series of
Certificates, and may include one or more Certificates of a series ("Eligible
Investments"). If so specified in the related Prospectus Supplement, a
Certificate Account may be maintained as an interest bearing account, or the
funds held therein may be invested pending each succeeding Payment Date in
Eligible Investments. If so specified in the related Prospectus Supplement, the
Servicer or its designee will be entitled to receive any such interest or other
income earned on funds in the Certificate Account as additional compensation.
The Servicer will deposit in the Certificate Account from amounts previously
deposited by it into the Servicer's Custodial Account on the related Remittance
Date the following payments and collections received or made by it on and after
the Cut-Off Date (including scheduled payments of principal and interest due on
and after the Cut-Off Date but received before the Cut-Off Date):
(i) all Mortgagor payments on account of principal, including
Principal Prepayments and, if specified in the related Prospectus
Supplement, prepayment penalties:
(ii) all Mortgagor payments on account of interest, adjusted
to the Remittance Rate;
(iii) all Liquidation Proceeds net of certain amounts
reimbursed to the Servicer or other person entitled thereto, as
described above;
(iv) all Insurance Proceeds, other than proceeds to be applied
to the restoration or repair of the related property or released to the
Mortgagor and net of certain amounts reimbursed to the Servicer or
other person entitled thereto, as described above;
(v) all condemnation awards or settlements which are not
released to the Mortgagor in accordance with normal servicing
procedures;
(vi) any Advances made as described under "Servicing of
Mortgage Loans - Advances" herein and certain other amounts required
under the Agreement to be deposited in the Certificate Account;
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(vii) all proceeds of any Mortgage Loan or property acquired
in respect thereof repurchased by the Depositor, the Seller or
otherwise as described above or under "Termination" below;
(viii) all amounts, if any, required to be deposited in the
Certificate Account from any Credit Enhancement for the related
series; and
(ix) all other amounts required to be deposited in the
Certificate Account pursuant to the related Agreement.
Reports
Concurrently with each distribution on the Certificates, there will be
mailed to Owners a statement generally setting forth, to the extent applicable
to any series, among other things:
(i) the aggregate amount of such distribution allocable to
principal, separately identifying the amount allocable to each class;
(ii) the amount of such distribution allocable to interest,
separately identifying the amount allocable to each class;
(iii) the aggregate Certificate Principal Balance of each
class of the Certificates after giving effect to distributions on such
Payment Date;
(iv) the aggregate Certificate Principal Balance of any class
of Compound Interest Certificates after giving effect to any increase
in such Principal Balance that results from the accrual of interest
that is not yet distributable thereon;
(v) if applicable, the amount otherwise distributable to any
class of Certificates that was distributed to other classes of
Certificates;
(vi) 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;
(vii) the aggregate Principal Balance and number of Mortgage
Loans which were delinquent as to a total of two installments of
principal and interest; and
(viii) the aggregate Principal Balances of Mortgage Loans
which (a) were delinquent 30-59 days, 60-89 days, and 90 days or more,
and (b) were in foreclosure.
Customary information deemed necessary for Owners to prepare their tax
returns will be furnished annually.
Forward Commitments; Pre-Funding
The Trustee of a Trust may enter into a Pre-Funding Agreement for the
transfer of additional Mortgage Loans to such Trust following the date on which
such Trust is established and the related Certificates are issued. The Trustee
of a Trust may enter into Pre-Funding Agreements to permit the acquisition of
additional Mortgage Loans that could not be delivered by the Depositor or have
not formally completed the origination process, in each case prior to the
Delivery Date. Any Pre-Funding Agreement will require that any Mortgage Loans so
transferred to a Trust conform to the requirements specified in such Pre-Funding
Agreement. If a Pre-Funding Agreement is to be utilized, the related Trustee
will be required to deposit in the Purchase Account all or a portion of the
proceeds received by the Trustee in connection with the sale of one or more
classes of Certificates of the related series; the additional Mortgage Loans
will be transferred to the related Trust in exchange for money released from the
related Pre-Funding Account. The maximum amount deposited in the Pre-Funding
Account to acquire Mortgage Loans for transfer to a Trust will not exceed 40% of
the aggregate principal amount of the Certificates offered pursuant
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to the related Prospectus Supplement. Each Pre-Funding Agreement will set a
specified period during which any such transfers must occur, which period will
not exceed 90 days from the date the Trust is established. The Pre- Funding
Agreement or the related Agreement will require that, if all moneys originally
deposited to such Pre- Funding Account are not so used by the end of such
specified period, then any remaining moneys will be applied as a mandatory
prepayment of the related class or classes of Certificates as specified in the
related Prospectus Supplement.
Servicer Events of Default
"Events of Default" under the Agreement will consist of (i) any failure
by the Servicer to duly observe or perform in any material respect any other of
its covenants or agreements in the Agreement materially affecting the rights of
Owners which continues unremedied for a specified number of days after the
giving of written notice of such failure to the Depositor by the Trustee or to
the Servicer and the Trustee by the Owners of Certificates evidencing interests
aggregating not less than 25% of the affected class of Certificates; and (ii)
certain events of insolvency, readjustment of debt, marshaling of assets and
liabilities or similar proceedings and certain actions by the Servicer
indicating its insolvency, reorganization or inability to pay its obligations.
Rights Upon Servicer Event of Default
As long as an Event of Default under the Agreement remains unremedied
by the Servicer, the Trustee, or Owners of Certificates may terminate all the
rights and obligations of the Servicer under the Agreement, whereupon the
Trustee or Master Servicer, if any, or a new Servicer appointed pursuant to the
Agreement, will succeed to all the responsibilities, duties and liabilities of
the Servicer under the Agreement and will be entitled to similar compensation
arrangements. Following such termination, the Depositor shall appoint any
established mortgage loan servicer satisfying the qualification standards
established in the Agreement to act as successor to the Servicer under the
Agreement. If no such successor shall have been appointed within a specified
number of days following such termination, then either the Depositor or the
Trustee may petition a court of competent jurisdiction for the appointment of a
successor Servicer. Pending the appointment of a successor Servicer, the Trustee
or the Master Servicer, if any, shall act as Servicer.
The Owners of Certificates will not have any right under the Agreement
to institute any proceeding with respect to the Agreement, unless they
previously have given to the Trustee written notice of default and unless the
Owners of the percentage of the Certificates specified in the Prospectus
Supplement have made written request to the Trustee to institute such proceeding
in its own name as Trustee thereunder and have offered to the Trustee reasonable
indemnity and the Trustee for a specified number of days has neglected or
refused to institute any such proceedings. However, the Trustee is under no
obligation to exercise any of the trusts or powers vested in it by the Agreement
or to make any investigation of matters arising thereunder or to institute,
conduct or defend any litigation thereunder or in relation thereto at the
request, order or direction of any of the Owners, unless such Owners have
offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred therein or thereby.
Amendment
An Agreement generally may be amended by the Depositor, the Servicer
and the Trustee, without the consent of the Owners of the Certificates, to cure
any ambiguity, to correct or supplement any provision therein which may be
defective or inconsistent with any other provision therein, to take any action
necessary to maintain REMIC status of any Trust as to which a REMIC election has
been made, to add any other provisions with respect to matters or questions
arising under the Agreement which are not materially inconsistent with the
provisions of the Agreement or for any other purpose, provided that with respect
to amendments for any other purpose (A) the Depositor shall deliver an opinion
of counsel satisfactory to the Trustee, that such amendment will not adversely
affect in any material respect the interests of any Owners of Certificates of
that series and (B) such amendment will not result in a withdrawal or reduction
of the rating of any rated Certificate. Notwithstanding the foregoing, no such
amendment may (i) reduce in any manner the amount of, or delay the timing of,
collections of payments received on the related Mortgage Assets or distributions
which are required to be made on any Certificate without the consent
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of the Owner of such Certificate, (ii) adversely affect in any material respect
the interests of the Owners of any class of Certificates in any manner other
than as described in (i), without the consent of the Owners of Certificates of
such class evidencing not less than a majority of the interests of such class or
(iii) reduce the aforesaid percentage of Certificates of any class required to
consent to any such amendment, without the consent of the Owners of all
Certificates of such class then outstanding. Any other amendment provisions
inconsistent with the foregoing shall be specified in the related Prospectus
Supplement.
Termination
The obligations of the Depositor, the Servicer, and the Trustee created
by the Agreement will terminate upon the payment as required by the Agreement of
all amounts held by the Servicer or in the Certificate Account and required to
be paid to them pursuant to the Agreement after the later of (i) the maturity or
other liquidation of the last Mortgage Asset subject thereto or the disposition
of all property acquired upon foreclosure of any such Mortgage Loan or (ii) the
repurchase by the Depositor from the Trust of all the outstanding Certificates
or all remaining assets in the Trust. The Agreement will establish the
repurchase price for the assets in the Trust and the allocation of such purchase
price among the classes of Certificates. The exercise of such right will effect
early retirement of the Certificates of that series, but the Depositor's right
so to repurchase will be subject to the conditions described in the related
Prospectus Supplement. If a REMIC election is to be made with respect to all or
a portion of a Trust, there may be additional conditions to the termination of
such Trust which will be described in the related Prospectus Supplement. In no
event, however, will the trust created by the Agreement continue beyond the
expiration of 21 years from the death of the survivor of certain persons named
in the Agreement. The Trustee will give written notice of termination of the
Agreement to each Owner, and the final distribution will be made only upon
surrender and cancellation of the Certificates at an office or agency of the
Trustee specified in such notice of termination.
USE OF PROCEEDS
Substantially all the net proceeds to be received from the sale of each
series of Certificates will be applied to the simultaneous purchase of the
Mortgage Assets related to such series (or to reimburse the amounts previously
used to effect such a purchase), the costs of carrying such Mortgage Assets
until sale of the Certificates and to pay other expenses.
THE DEPOSITOR
The Depositor will have no ongoing servicing obligations or
responsibilities with respect to any Mortgage Pool. The Depositor does not have,
nor is it expected in the future to have, any significant net worth.
The Depositor anticipates that it will acquire Mortgage Assets in the
open market or in privately negotiated transactions, which may be through or
from an affiliate. The Depositor will not receive any fees or other commissions
in connection with its acquisition of Mortgage Assets or its sale of such
Mortgage Assets to the Trust.
Neither the Depositor nor any of its affiliates will insure or
guarantee the Certificates of any series.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS
The following discussion contains summaries of certain legal aspects of
mortgage loans and manufactured housing contracts which are general in nature.
Because such legal aspects are governed primarily 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 summaries
are qualified by reference to the applicable federal and state laws governing
the Mortgage Loans.
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General
Mortgages. The Mortgage Loans will be secured either by deeds of trust
or mortgages. A mortgage creates a lien upon the real property encumbered by the
mortgage. It is not prior to liens for real estate taxes and assessments.
Priority between mortgages depends on their terms and generally on the order of
filing with a state or county office. There are two parties to a mortgage: the
mortgagor, who is the borrower and homeowner or the land trustee (as described
below), and the mortgagee, who is the lender. Under the mortgage instrument, 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 formally has three
parties, the borrower-homeowner called the trustor (similar to a mortgager), a
lender (similar to a mortgagee) called the beneficiary, and a third-party
grantee called the trustee. Under a deed of trust, the borrower grants the
property, irrevocably until the debt is paid, in trust and generally with a
power of sale, to the trustee to secure payment of the obligation. The trustee's
authority under a deed of trust and the mortgagee's authority under a mortgage
are governed by law, the express provisions of the deed of trust or mortgage
and, in some cases, the directions of the beneficiary.
Cooperatives. Certain of the Mortgage Loans may be Cooperative Loans.
The private, non-profit, cooperative apartment corporation owns all the real
property that comprises the project, including the land, separate dwelling units
and all common areas. 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 apartment
building and or underlying land, as is generally the case, the cooperative, as
project mortgagor, is also responsible for meeting these mortgage obligations. A
blanket mortgage is ordinarily incurred by the cooperative in connection with
the construction or purchase of the cooperative's apartment building. The
interest of the occupant under proprietary leases or occupancy agreements to
which that 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 and its consequent inability to make such
final payment could lead to foreclosure by the mortgagee providing the
financing. A foreclosure in either event by the holder of the blanket mortgage
could eliminate or significantly diminish the value of any collateral held by
the lender who financed the purchase by an individual tenant-stockholder of
cooperative shares or in the case of a Trust including Cooperative Loans, the
collateral securing the Cooperative Loans.
The 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 units. Generally, a tenant-stockholder of a cooperative must
make a monthly payment to the cooperative representing such tenant-stockholder's
pro rata share of the cooperative's payments for its blanket mortgage, real
property taxes, maintenance expenses and other capital or ordinary expenses. An
ownership interest in a cooperative and accompanying occupancy rights is
financed through a cooperative share loan evidenced by a promissory note and
secured by a security interest in the occupancy agreement or proprietary lease
and in the related cooperative shares. The lender takes possession of the share
certificate and a counterpart of the proprietary lease or occupancy agreement
and a financing statement covering the proprietary lease or occupancy agreement
and the cooperative shares is filed in the appropriate state and local offices
to perfect the lenders 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 cooperative
shares.
Foreclosure
Mortgages. 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 property to a third party upon any
default by the borrower under the terms of the note or deed of trust. In some
states, the trustee must record a
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notice of default and send a copy to the borrower-trustor or and 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 individual
having an interest in the real property, including any junior lienholders. The
borrower, or any other person having a junior encumbrance on the real estate,
may, during a reinstatement period, cure the default by paying the entire amount
in arrears plus the costs and expenses incurred in enforcing the obligation.
Generally, state law controls the amount of foreclosure expenses and costs,
including attorney's fees' which may be recovered by a lender. If the deed of
trust is not reinstated, a notice of sale must be posted in a public place and,
in most states, published for a specific period of time in one or more
newspapers. In addition, some state laws require that a copy of the notice of
sale be posted on the property and sent to all parties having an interest in the
real property.
Foreclosure of a mortgage is generally accomplished by judicial action.
The action is initiated by the service of legal pleadings upon all parties
having an interest in the real property. Delays in completion of the foreclosure
may occasionally result from difficulties in locating necessary parties
defendant. Judicial foreclosure proceedings are often not protested by any of
the parties defendant. However, when the mortgagee's right to foreclose is
contested, the legal proceedings necessary to resolve the issue can be time
consuming. After the completion of judicial foreclosure, the court generally
issues a judgment of foreclosure and appoints a referee or other court officer
to conduct the sale of the property.
In case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, 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 property may have deteriorated during foreclosure proceedings, it is
uncommon for a third party to purchase the property at the foreclosure sale.
Rather it is common for the lender to purchase the property from the trustee or
referee for an amount equal to the principal amount of the mortgage or deed of
trust, accrued and unpaid interest and expenses of foreclosure. Thereafter, the
lender will assume the burdens of ownership, including paying real estate taxes,
obtaining casualty insurance and making such repairs at its own expense as are
necessary to render the property suitable for sale. The lender will commonly
obtain the services of a real estate broker and pay the broker's commission in
connection with the sale of the property. Depending upon market conditions, the
ultimate proceeds of the sale of the property may not equal the lender's
investment in the property. Any loss may be reduced by the receipt of any
mortgage insurance proceeds.
When the junior mortgagee or beneficiary under a junior deed of trust
cures the default and state law allows it to reinstate or redeem by paying the
full amount of the senior mortgage or deed of trust, then in those states the
amount paid so to cure or redeem generally becomes a part of the indebtedness
secured by the junior mortgage or deed of trust. See "Junior Liens; Rights of
Senior Mortgagors or Beneficiaries" below.
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 trustee
confers, in most states, legal title to the real property to the purchaser, free
of all junior mortgages or deeds of trust and free of all other liens and claims
subordinate to the mortgage or deed of trust under which the sale is made (with
the exception of certain governmental liens). The purchaser's title is, however,
subject to all senior liens, encumbrances and mortgages and may be subject to
mechanic's and materialman's liens in some states. Thus, if the mortgage or deed
of trust being foreclosed is a junior mortgage or deed of trust, the sheriff or
trustee will convey title to the purchaser of the real property, subject to any
existing first mortgage or deed of trust and any other prior liens and claims.
The foreclosure of a junior mortgage or deed of trust, generally, will have an
effect on the first mortgage or deed of trust, if the senior mortgage or deed of
trust grants to the senior mortgagee or beneficiary the right to accelerate its
indebtedness under a "due-on-sale" clause or "due on further encumbrance" clause
contained in the senior mortgage or deed of trust. See "Anti-Deficiency
Legislation and Other Limitations on Lenders" below.
The proceeds received by the sheriff or trustee from the sale are
applied pursuant to the terms of the deed of trust, which may require
application first to the costs, fees and expenses of sale and then in
satisfaction of the indebtedness secured by the mortgage or deed of trust under
which the sale was conducted. In some states, any surplus money remaining may be
available to satisfy claims of the holders of junior mortgages or deeds of trust
and other junior liens and claims in order of their priority, whether or not the
mortgagor or trustee is in default, while
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in some states, any surplus money remaining may be payable directly to the
mortgagor or trustor. Any balance remaining is generally payable to the
mortgagor or trustor. Following the sale, in some states the mortgagee or
beneficiary following a foreclosure of a mortgage or deed of trust may not
obtain a deficiency judgment against the mortgagor or trustor. A junior
lienholder whose rights in the property are terminated by the foreclosure by a
senior lienholder will not share in the proceeds from the subsequent disposition
of the property.
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 Certificate of
Incorporation and Bylaws, 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 owned by such
tenant-stockholder, including mechanics' liens against the cooperative apartment
building incurred by such tenant-stockholder. The proprietary lease or occupancy
agreement generally permits the cooperative to terminate such lease or agreement
in the event an obligor fails to make payments or defaults in the performance of
covenants required thereunder. Typically, the lender and the cooperative enter
into a recognition agreement which establishes the rights and obligations of
both parties in the event of a default by the tenant-stockholder on its
obligations under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from a 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. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the cooperative shares is accomplished
by a sale in accordance with the provisions of Article 9 of the Uniform
Commercial Code (the "UCC") and the security agreement relating to those shares.
Article 9 of the UCC requires that a sale be conducted in a "commercially
reasonable" manner. Whether a foreclosure sale has been conducted in a
"commercially reasonable" manner will depend on the facts in each case. In
determining commercial reasonableness, a court will look to the notice given the
debtor and the method, manner, time, place and terms of the foreclosure.
Generally, a sale conducted according to the usual practice of banks selling
similar collateral will be considered reasonably conducted. Article 9 of the UCC
provides that the proceeds of the sale will be applied first to pay the costs
and expenses of the sale and then to satisfy the indebtedness secured by the
lender's security interest. The recognition agreement, however, generally
provides that the lender's right to reimbursement is subject to the right of the
cooperative corporation to receive sums due under the proprietary lease or
occupancy agreement. If there are proceeds remaining, the lender must account to
the tenant-stockholder for the surplus. Conversely, if a portion of the
indebtedness remains unpaid, the tenant-stockholder is generally responsible for
the deficiency. See "Anti-Deficiency Legislation and Other Limitations on
Lenders" below.
Junior Liens; Rights of Senior Mortgagees or Beneficiaries. Certain of
the Mortgage Loans may be secured by mortgages or deeds of trust providing for
junior (i.e., second, third, etc.) liens on the related Mortgaged Properties
which are junior to the other mortgages or deeds of trust held by other lenders
or institutional investors. The rights of the beneficiary under a junior deed of
trust or as mortgagee under a junior mortgage are subordinate to those of the
mortgagee or beneficiary under the senior mortgage or deed of trust, including
the prior rights of the senior mortgagee or beneficiary to receive hazard
insurance and condemnation proceeds and to cause the
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property securing the Mortgage Loans to be sold upon default of the mortgagor or
trustor. As discussed more fully below, a junior mortgagee or beneficiary in
some states may satisfy a defaulted senior loan in full and in some states may
cure such default and bring the senior loan current, in either event adding the
amounts expended to the balance due on the junior loan. In most states, absent a
provision in the senior mortgage or deed of trust, no notice of default is
required to be given to a junior mortgagee or beneficiary.
The forms of the mortgage or deed of trust used by most institutional
lenders generally confer on the mortgagee or beneficiary the right both to
receive all proceeds collected under any hazard insurance policy and all awards
made in connection with any condemnation proceedings, and to apply such proceeds
and awards to any indebtedness secured by the mortgage or deed of trust, in such
order as the mortgagee or beneficiary may determine. Thus, in the event
improvements on the property are damaged or destroyed by fire or other casualty,
or in the event the bankruptcy is taken by condemnation, the mortgagee or
beneficiary under the underlying first mortgage or deed of trust may have the
prior right to collect any insurance proceeds payable under a hazard insurance
policy and any award of damages in connection with the condemnation and to apply
the same to the indebtedness secured by the first mortgage or deed of trust. In
those situations, proceeds in excess of the amount of first mortgage
indebtedness generally may be applied to the indebtedness of a junior mortgage
or trust deed.
Other provisions typically found in the form of the mortgagee or deed
of trust generally used by most 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 typically is given the
right under the mortgage or deed 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 trustor. All sums so expended by the mortgagee or beneficiary generally
become part of the indebtedness secured by the mortgage or deed of trust
Right of Redemption. In some states, after sale pursuant to a deed of
trust or foreclosure of a mortgage, the borrower and foreclosed junior lienors
are given a statutory period in which to redeem the property following
foreclosure. In some states, redemption may occur only upon payment of the
entire principal balance of the loan, accrued interest and expenses of
foreclosure. In other states, redemption may be authorized if the former
borrower pays only a portion of the sums due. The effect of a statutory right of
redemption is to diminish the ability of the lender to sell the foreclosed
property. The rights of redemption would defeat the title of any purchaser from
the lender subsequent to foreclosure or sale under a deed of trust.
Consequently, the practical effect of the redemption right is to force the
lender to retain the property and pay the expenses of ownership until the
redemption period has run.
Anti-Deficiency Legislation and Other Limitations on Lenders. Certain
states have imposed statutory prohibitions that limit the remedies of a
beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment would be a personal judgment against the
former borrower equal in most cases to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. Other statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
Finally, other statutory provisions limit any deficiency judgment against the
former borrower following a judicial sale to the excess of the outstanding debt
over the fair market value of the property at the time of the public sale. The
purpose of these statutes is generally to prevent a beneficiary or a mortgagee
from obtaining a large deficiency judgment against the former borrower as a
result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including the federal bankruptcy laws and
state laws affording relief to debtors, may interfere with or affect the
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ability of the secured mortgage lender to realize upon collateral and/or enforce
a deficiency judgment. For example, with respect to federal bankruptcy law, a
court with federal bankruptcy jurisdiction may permit a debtor through his or
her Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary default in
respect of a mortgage loan on a debtor's residence by paying arrearages within a
reasonable time period and reinstating the original mortgage loan payment
schedule even though the lender accelerated the mortgage loan and final judgment
of foreclosure had been entered in state court (provided no sale of the
residence had yet occurred) prior to the filing of the debtor's petition. Some
courts with federal bankruptcy jurisdiction have approved plans, based on the
particular fact of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that
the terms of a mortgage loan secured by property of the debtor may be modified.
These courts have suggested that such modifications may include reducing the
amount of each monthly payment, changing the rate of interest, altering the
repayment schedule and reducing the lender's security interest to the value of
the residence, thus leaving the lender a general unsecured creditor for the
difference between the value of the residence and the outstanding balance of the
loan. Federal bankruptcy law and limited case law indicate that the foregoing
modifications could not be applied to the terms of a loan secured by property
that is the principal residence of the debtor.
The Code provides priority to certain tax liens over the lien of the
mortgage. In addition, substantive requirements are imposed upon mortgage
lenders in connection with the origination and the servicing of mortgage loans
by numerous federal and some state consumer protection laws. 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. These federal laws impose specific statutory liabilities upon
lenders who originate mortgage loans and who fail to comply with the provisions
of the law. In some cases, this liability may affect assignees of the mortgage
loans.
Generally, Article 9 of the UCC governs foreclosure on cooperative
shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted section 9-504 of the UCC to prohibit a deficiency award unless
the creditor establishes that the sale of the collateral (which, in the case of
a Cooperative Loan, would be the shares of the cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
Enforceability of Certain Provisions. Certain of the Mortgage Loans
will contain due-on-sale clauses. These clauses permit the lender to accelerate
the maturity of a loan if the borrower sells, transfers, or conveys the
property. The enforceability of these clauses was the subject of legislation or
litigation in many states, and in some cases the enforceability of these clauses
was limited or denied. However, the Garn-St. Germain Depository Institutions Act
of 1982 (the "Garn-St. Germain Act") preempts state constitutional, statutory
and case law prohibiting the enforcement of due-on-sale clauses and permits
lenders to enforce these clauses in accordance with their terms, subject to
certain limited exceptions. The Garn-St. Germain Act does "encourage" lenders to
permit assumption of loans at the original rate of interest or at some other
rate less than the average of the original rate and the market rate.
The Garn-St. Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the Garn-St. Germain Act (including federal
savings and loan associations and federal savings banks) may not exercise a
due-on-sale clause, notwithstanding the fact that a transfer of the property may
have occurred. These include intra-family transfers, certain transfers by
operation of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St. Germain Act by the
Federal Home Loan Bank Board as succeeded by the Office of Thrift Supervision
(the "OTS"), also prohibit the imposition of a prepayment penalty upon the
acceleration of a loan pursuant to a due-on-sale clause. Any inability of the
Depositor to enforce due-on-sale clauses may affect the average life of the
Mortgage Loans and the number of Mortgage Loans that may be outstanding until
maturity.
Upon foreclosure, courts have imposed general equitable principles.
These equitable principles are generally designed to relieve the borrower from
the legal effect of his defaults under the loan documents. Examples
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of judicial remedies that have been fashioned include 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 that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right of
the lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower falling to adequately maintain the property or
the borrower executing a second mortgage or deed of trust affecting the
property. Finally, some courts have been faced with the issue of whether or not
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under deeds of trust or mortgages receive
notices in addition to the statutory-prescribed minimum. For the most part,
these cases have upheld the notice provisions as being reasonable or have found
that the sale by a trustee under a deed of trust, or under a mortgage having a
power of sale, does not involve sufficient state action to afford constitutional
protections to the borrower.
The standard forms of note, mortgage and deed of trust generally
contain provisions obligating the borrower to pay a late charge if payments are
not timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon late charges which a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that a lender may collect from a borrower as an additional charge if the loan is
prepaid. Under the Agreement, late charges (to the extent permitted by law and
not waived by the Servicer) will be retained by the Servicer as additional
servicing compensation.
Adjustable Rate Loans. The laws of certain states may provide that
mortgage notes relating to adjustable rate loans are not negotiable instruments
under the UCC. In such event, the Trustee will not be deemed to be a "holder in
due course," within the meaning of the UCC and may take such a mortgage note
subject to certain restrictions on its ability to foreclose and to certain
contractual defenses available to a mortgagor.
Environmental Legislation. Certain states impose a statutory lien for
associated costs on property that is the subject of a cleanup action by the
state on account of hazardous wastes or hazardous substances released or
disposed of on the property. Such a lien will generally have priority over all
subsequent liens on the property and, in certain of these states, will have
priority over prior recorded liens including the lien of a mortgage. In
addition, under federal environmental legislation and under state law in a
number of states, a secured party which takes a deed in lieu of foreclosure or
acquires a mortgaged property at a foreclosure sale or assumes active control
over the operation or management of a property so as to be deemed an "owner" or
"operator" of the property may be liable for the costs of cleaning up a
contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a secured lender (such as a Trust) to
homeowners. In the event that title to a Mortgaged Property securing a Mortgage
Loan in a Trust was acquired by the Trust and cleanup costs were incurred in
respect of the Mortgaged Property, the Trust might realize a loss if such costs
were required to be paid by the Trust.
Soldiers' and Sailors' Civil Relief Act
Generally, under the terms of the Relief Act, a borrower who enters
military service after the origination of a Mortgage Loan by such borrower
(including a borrower who is a member of the National Guard or is in reserve
status at the time of the origination of the Mortgage Loan and is later called
to active duty) may not be charged interest above an annual rate of 6% during
the period of such borrower's active duty status, unless a court orders
otherwise upon application of the lender. It is possible that such interest rate
limitation or similar limitations under state law could have an effect, for an
indeterminate period of time, on the ability of the Servicer to collect full
amounts of interest on certain of the Mortgage Loans. In addition, the Relief
Act imposes limitations which would impair the ability of the Servicer to
foreclose on an affected Mortgage Loan during the borrower's period of active
duty status. Thus, in the event that such a Mortgage Loan goes into default
there may be delays and losses occasioned by the inability to realize upon the
Mortgaged Property in a timely fashion.
Any shortfalls in interest collections resulting from application of
the Relief Act could adversely affect Certificates.
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LEGAL INVESTMENT MATTERS
The Certificates may constitute "mortgage related securities" for
purposes of SMMEA, so long as they are rated in one of the two highest rating
categories by the Rating Agency or Agencies identified in the related Prospectus
Supplement and, as such, would 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,
saving 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 (including the District of
Columbia and 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. Under
SMMEA, in all States which enacted legislation prior to October 4, 1991
specifically limiting the legal investment authority of any of such entities
with respect to "mortgage related securities," the Certificates will constitute
legal investments for entities subject to such legislation only to the extent
provided in such legislation SMMEA provides, however, that in no event will the
enactment of any such legislation affect the validity of any contractual
commitment to purchase, bold or invest in any securities or require the sale or
over disposition of any securities, so long as such contractual commitment was
made or such securities were acquired prior to the enactment of such
legislation. Alaska, Arkansas, Colorado, Connecticut, Delaware, Florida,
Georgia, Illinois, Kansas, Louisiana, Maryland, Michigan, Missouri, Nebraska,
New Hampshire, New York, North Carolina, Ohio, South Dakota, Utah, Virginia and
West Virginia each enacted legislation overriding the exemption afforded by
SMMEA prior to the October 4, 1991 deadline.
Institutions whose investment activities are subject to legal
investment laws or regulations or review by certain regulatory authorities may
be subject to restrictions on investment in certain classes of the Certificates.
Any financial institution which is subject to the jurisdiction of the
Comptroller of the Currency, the Board of Governors of the Federal Reserve
System, the FDIC, the OTS, the NCUA or other federal or state agencies with
similar authority should review any applicable rules, guidelines and regulations
prior to purchasing the certificates. The Federal Financial Institutions
Examination Council, for example, has issued a Supervisory Policy Statement on
Securities Activities effective February 10, 1992 (the "Policy Statement"). The
Policy Statement has been adopted by the Comptroller of the Currency, the
Federal Reserve Board, the FDIC and the OTS with respect to the depository
institutions that they regulate. The Policy Statement prohibits depository
institutions from investing in certain "high-risk mortgage securities" except
under limited circumstances, and sets forth certain investment practices deemed
to be unsuitable for regulated institutions. The NCUA issued final regulations
effective December 2, 1991 that restrict and in some instances prohibit the
investment by federal credit unions in certain types of mortgage related
securities.
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 and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying," or in securities which are issued in book-entry
form.
Investors should consult their own legal advisors in determining
whether and to what extent the Certificates constitute legal investments for
such investors.
ERISA CONSIDERATIONS
ERISA imposes requirements on employee benefit plans (and on certain
other retirement plans and arrangements, including individual retirement
accounts and annuities, Keogh plans and collective investment funds and separate
accounts in which such plans, accounts or arrangements are invested)
(collectively, "Plans") subject to ERISA and on persons who are fiduciaries with
respect to such Plans. Among other things, ERISA requires that the assets of
Plans be held in trust and that the trustee, or other duly authorized fiduciary,
have exclusive authority and discretion to manage and control the assets of such
Plans. ERISA also imposes certain duties on persons who
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are fiduciaries of Plans. Under ERISA, any person who exercises any authority or
control respecting the management or disposition of the assets of a Plan is
considered to be a fiduciary of such Plan (subject to certain exceptions not
here relevant). In addition to the imposition of general fiduciary standards of
investment prudence and diversification, ERISA prohibits a broad range of
transactions involving Plan assets and persons ("Parties in Interest") having
certain specified relationships to a Plan and imposes additional prohibitions
where Parties in Interest are fiduciaries with respect to such Plan.
The United States Department of Labor (the "DOL") has issued
regulations concerning the definition of what constitutes the assets of a Plan.
(DOL Reg Section 2510.3-101). Under this regulation, the underlying assets and
properties of corporations, partnerships and certain other entities in which a
Plan makes an "equity" investment could be deemed for purposes of ERISA to be
assets of the investing Plan in certain circumstances. In such case, the
fiduciary making such an investment for the Plan could be deemed to have
delegated his or her asset management responsibility, and the underlying assets
and properties could be subject to ERISA reporting and disclosure. Certain
exceptions to the regulation may apply in the case of a Plan's investment in the
Certificates, but the Depositor cannot predict in advance whether such
exceptions apply due to the factual nature of the conditions to be met.
Accordingly, because the Mortgage Loans may be deemed Plan assets of each Plan
that purchases Certificates, an investment in the Certificates by a Plan might
give rise to a prohibited transaction under ERISA Sections 406 and 407 and be
subject to an excise tax under Code Section 4975 unless a statutory or
administrative exemption applies.
DOL Prohibited Transaction Exemption 83-1 ("PTE 83-1") exempts from
ERISA's prohibited transaction rules certain transactions relating to the
operation of residential mortgage investment trusts and the purchase, sale and
holding of "mortgage pool pass-through certificates" in the initial issuance of
such certificates. PTE 83-1 permits, subject to certain conditions, transactions
which might otherwise be prohibited between Plans and Parties in Interest with
respect to those Plans involving the origination, maintenance and termination of
mortgage pools consisting of mortgage loans secured by first or second mortgages
or deeds of trust on single-family residential property, and the acquisition and
holding of certain mortgage pool pass-through certificates representing an
interest in such mortgage pools by PTE.
PTE 83-1 sets forth three general conditions which must be satisfied
for any transaction to be eligible for exemption: (i) the maintenance of a
system of insurance or other protection for the pooled mortgage loans and
property securing such loans, and for indemnifying Owners against reductions in
pass-through payments due to property damage or defaults in loan payments in an
amount not less than the greater of one percent of the aggregate principal
balance of all covered pooled mortgage loans or the principal balance of the
largest covered pooled mortgage loan, (ii) the existence of a pool trustee who
is not an affiliate of the sponsor, and (iii) a limitation on the amount of the
payments retained by the pool sponsor, together with other funds inuring to its
benefit, to not more than adequate consideration for selling the mortgage loans
plus reasonable compensation for services provided by the pool sponsor.
Although the Trustee for any series of Certificates will be
unaffiliated with the Depositor, there can be no assurance that the system of
insurance or subordination will meet the general or specific conditions referred
to above. In addition, the nature of a Trust's assets or the characteristics of
one or more classes of the related series of Certificates may not be included
within the scope of PTE 83-1 or any other class exemption under ERISA. The
Prospectus Supplement will provide additional information with respect to the
application of ERISA and the Code to the related Certificates.
Several underwriters of mortgage-backed securities have applied for and
obtained ERISA prohibited transactions exemptions which are in some respects
broader than PTE 83-1. Such exemptions can only apply to mortgage-backed
securities which, among other conditions, are sold in an offering with respect
to which such underwriter serves as the sole or a managing underwriter, or as a
selling or placement agent. Several other underwriters have applied for similar
exemptions. If such an exemption might be applicable to a series of
Certificates, the related Prospectus Supplement will refer to such possibility.
Each Plan fiduciary who is responsible for making the investment
decisions whether to purchase or commit to purchase and to hold Certificates
must make its own determination as to whether the general and the specific
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conditions of PTE 83-1 have been satisfied or as to the availability of any
other prohibited transaction exemptions Each Plan fiduciary should also
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.
Any Plan proposing to invest in Certificates should consult with its
counsel to confirm that such investment will not result in a prohibited trans
action and will satisfy the other requirements of ERISA and the Code.
FEDERAL INCOME TAX CONSEQUENCES
The following is based upon the opinion of Arter & Hadden, special
counsel to the Depositor with respect to the material federal income tax
consequences of the purchase, ownership and disposition of Certificates. The
discussion below does not purport to address all federal income tax consequences
that may be applicable to particular categories of investors, some of which may
be subject to special rules. The authorities on which this discussion is based
are subject to change or differing interpretations, and any such change or
interpretation could apply retroactively. This discussion reflects the
applicable provisions of the Code including recent amendments under the Omnibus
Budget Reconciliation Act of 1993 ("OBRA"), as well as final regulations
concerning REMICs (the "REMIC Regulations") promulgated on December 23, 1992,
and final regulations under Sections 1271 through 1273 and 1275 of the Code
concerning debt instruments promulgated on January 27, 1994 (the "OID
Regulations"). The Depositor intends to rely on the OID Regulations for all
Certificates offered pursuant to this Prospectus; however, investors should be
aware that the OID Regulations do not adequately address certain issues relevant
to prepayable securities, such as the Certificates. Investors should consult
their own tax advisors in determining the federal, state, local and any other
tax consequences to them of the purchase, ownership and disposition of
Certificates. The Prospectus Supplement for each series of Certificates will
discuss any special tax consideration applicable to any class of Certificates of
such series, and the discussion below is qualified by any such discussion in the
related Prospectus Supplement.
For purposes of this opinion, where the applicable Prospectus
Supplement provides for a fixed retained yield with respect to the Mortgage
Assets underlying a series of Certificates, references to the Mortgage Assets
will be deemed to refer to that portion of the Mortgage Assets held by the Trust
which does not include the fixed retained yield.
Federal Income Tax Consequences For REMIC 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 REMICs within the meaning of Code Section
860D. A Trust or a portion or portions thereof as to which one or more REMIC
elections will be made will be referred to as a "REMIC Pool." For purposes of
this discussion, Certificates of a series as to which one or more REMIC
elections are made are referred to as "REMIC Certificates" and will consist of
one or more classes of "Regular Certificates" and one class of "Residual
Certificates" in the case of each REMIC Pool. Qualification as a REMIC requires
ongoing compliance with certain conditions. With respect to each series of REMIC
Certificates, Arter & Hadden, special counsel to the Depositor, has advised the
Depositor that in their opinion, assuming (i) the making of an appropriate
election, (ii) compliance with the Agreement and (iii) compliance with any
changes in the law, including any amendments to the Code or applicable Treasury
regulations thereunder, each REMIC Pool will qualify as a REMIC and that if a
Trust qualifies as a REMIC, the tax consequences to the Owners will be as
described below. In such case, the Regular Certificates will be considered to be
"regular interests" in the REMIC Pool and generally will be treated for federal
income tax purposes as if they were newly originated debt instruments, and the
Residual Certificates will be considered to be "residual interests" in the REMIC
Pool. The Prospectus Supplement for each series of Certificates will indicate
whether one or more REMIC elections with respect to the related Trust will be
made, in which event references to "REMIC" or "REMIC Pool" herein shall be
deemed to refer to each such REMIC Pool.
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Status of REMIC Certificates. REMIC Certificates held by a mutual
savings bank or a domestic building and loan association (a "Thrift
Institution") will constitute "qualifying real property loans" within the
meaning of Code Section 593(d)(1) in the same proportion that the assets of the
REMIC Pool would be so treated. REMIC Certificates held by a domestic building
and loan association will constitute "a regular or residual interest in a REMIC"
within the meaning of Code Section 7701(a) (19)(C) (xi) in the same proportion
that the assets of the REMIC Pool would be treated as "loans secured by an
interest in real property" within the meaning of Code Section 7701(a)(19)(C)(v)
or as other assets described in Code Section 7701(a)(19)(C). REMIC Certificates
held by a real estate investment trust (a "REIT") will constitute "real estate
assets" within the meaning of Code Section 856(c)(5)(A), and interest on the
REMIC Certificates will be considered "interest on obligations secured by
mortgages on real property or on interests in real property" within the meaning
of Code Section 856(c)(3)(B) in the same proportion that, for both purposes, the
assets of the REMIC Pool would be so treated. If at all times 95% or more of the
assets of the REMIC Pool constitute qualifying assets for Thrift Institutions
and REITs, the REMIC Certificates will be treated entirely as qualifying assets
for such entities. Moreover, the REMIC Regulations provide that, for purposes of
Code Sections 593(d)(1) and 856(c)(5)(A), payments of principal and interest on
the Mortgage Assets that are reinvested pending distribution to holders of REMIC
Certificates, constitute qualifying assets for such entities. Where two REMIC
Pools are part of a tiered structure they will be treated as one REMIC for
purposes of the tests described above respecting asset ownership of more or less
than 95%. Notwithstanding the foregoing, however, REMIC income received by a
REIT owning a residual interest in a REMIC Pool could be treated in part as
non-qualifying REIT income if the REMIC Pool holds Mortgage Assets with respect
to which income is contingent on mortgagor profits or property appreciation. In
addition, if the assets of the REMIC include buy-down Mortgage Assets, it is
possible that the percentage of such assets constituting "qualifying real
property loans" or "loans secured by an interest in real property" for purposes
of Code Sections 593(d)(1) and 7701(a)(19)(C)(v), respectively, may be required
to be reduced by the amount of the related buy-down funds. REMIC Certificates
held by a regulated investment company will not constitute "government
securities" within the meaning of Code Section 851(b)(4)(A)(i). REMIC
Certificates held by certain financial institutions will constitute an "evidence
of indebtedness" within the meaning of Code Section 582(c)(i). REMIC
Certificates representing interests in obligations secured by manufactured
housing treated as single family residences under Code Section 25(e)(10) will be
considered interests in "qualified mortgages" as defined in Code Section
860E(a)(3).
Qualification as a REMIC. In order for the REMIC Pool to qualify as a
REMIC, there must be ongoing compliance on the part of the REMIC Pool with the
requirements set forth in the Code. The REMIC Pool must fulfill an asset test,
which requires that no more than a de minimis amount of the assets of the REMIC
Pool, as of the close of the third calendar month beginning after the Delivery
Date (which for purposes of this discussion is the date of issuance of the REMIC
Certificates) and at all times thereafter, may consist of assets other than
"qualified mortgages" and "permitted investments." The REMIC Regulations provide
a "safe harbor" pursuant to which the de minimis requirement will be met if at
all times the aggregate adjusted basis of any nonqualified assets (i.e., assets
other than qualified mortgages and permitted investments) is less than 1% of the
aggregate adjusted basis of all the REMIC Pool's assets.
If a REMIC Pool fails to comply with one or more of the requirements of
the Code for REMIC status during any taxable year, the REMIC Pool will not be
treated as a REMIC for such year and thereafter. In this event, the
classification of the REMIC Pool for federal income tax purposes is uncertain.
The REMIC Pool might be entitled to treatment as a grantor trust under the rules
described in "Federal Income Tax Consequences for Certificates as to Which No
REMIC Election Is Made." In that case, no entity-level tax would be imposed on
the REMIC Pool. Alternatively, the Regular Certificates may continue to be
treated as debt instruments for federal income tax purposes; but the REMIC Pool
could be treated as a taxable mortgage pool (a "TMP"). If the REMIC Pool is
treated as a TMP, any residual income of the REMIC Pool (income from the
Mortgage Assets less interest and original issue discount expense allocable to
the Regular Certificates and any administrative expenses of the REMIC Pool)
would be subject to corporate income tax at the REMIC Pool level. On the other
hand, an entity with multiple classes of ownership interests may be treated as a
separate association taxable as a corporation under Treasury regulations, and
the Regular Certificates may be treated as equity interests therein. The Code,
however, authorizes the Treasury Department to issue regulations that address
situations where failure to meet one or more of the requirements for REMIC
status occurs inadvertently and in good faith, and disqualification of the REMIC
Pool would occur absent regulatory relief. Investors should be aware, however,
that the Conference Committee
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Report to the Tax Reform Act of 1986 (the "1986 Act") indicates that the relief
may be accompanied by sanctions, such as the imposition of a corporate tax on
all or a portion of the REMIC Pool's income for the period of time in which the
requirements for REMIC status are not satisfied.
Taxation of Regular Certificates
General. Payments received by holders of Regular Certificates generally
should be accorded the same tax treatment under the Code as payments received on
ordinary taxable corporate debt instruments. In general, interest, original
issue discount and market discount on a Regular Certificate will be treated as
ordinary income to a holder of the Regular Certificate (the "Regular
Certificateholder") as they accrue, and principal payments on a Regular
Certificate will be treated as a return of capital to the extent of the Regular
Certificateholder's basis in the Regular Certificate allocable thereto. Regular
Certificateholders must use the accrual method of accounting with regard to
Regular Certificates, regardless of the method of accounting otherwise used by
such Regular Certificateholders.
Original Issue Discount. Regular Certificates may be issued with
"original issue discount" within the meaning of Code Section 1273(a). Holders of
any class of Regular Certificates having original issue discount generally must
include original issue discount in ordinary income for federal income tax
purposes as it accrues, in accordance with a constant interest method that takes
into account the compounding of interest, in advance of receipt of the cash
attributable to such income. The Depositor anticipates that the amount of
original issue discount required to be included in a Regular Certificateholder's
income in any taxable year will be computed as described below.
Each Regular Certificate (except to the extent described below with
respect to a Regular Certificate on which distributions of principal are made in
a single installment or upon an earlier distribution by lot of a specified
principal amount upon the request of a Regular Certificateholder or by random
lot (a "Retail Class Certificate")) will be treated as a single installment
obligation for purposes of determining the original issue discount includible in
a Regular Certificateholder's income. The total amount of original issue
discount on a Regular Certificate is the excess of the "stated redemption price
at maturity" of the Regular Certificate over its "issue price." The issue price
of a Regular Certificate is the first price at which a substantial amount of
Regular Certificates of that class are first sold to the public. The Depositor
will determine original issue discount by including the amount paid by an
initial Regular Certificateholder for accrued interest that relates to a period
prior to the issue date of the Regular Certificate in the issue price of a
Regular Certificate and will include in the stated redemption price at maturity
any interest paid on the first Payment Date to the extent such interest is
attributable to a period in excess of the number of days between the issue date
and such first Payment Date. The stated redemption price at maturity of a
Regular Certificate always includes the original principal amount of the Regular
Certificate, but generally will not include distributions of stated interest if
such interest distributions constitute "qualified stated interest." Qualified
stated interest generally means stated interest that is unconditionally payable
in cash or in property (other than debt instruments of the issuer) at least
annually at (i) a single fixed rate, (ii) one or more qualified floating rates
(as described below), (iii) a fixed rate followed by one or more qualified
floating rates, (iv) a single objective rate (as described below) or (v) a fixed
rate and an objective rate that is a qualified inverse floating rate. The OID
Regulations state that interest payments are unconditionally payable only if a
late payment or nonpayment is expected to be penalized or reasonable remedies
exist to compel payment. Certain debt securities may provide for default
remedies in the event of late payment or nonpayment of interest. The interest on
such debt securities will be unconditionally payable and constitute qualified
stated interest, not OID. However, absent clarification of the OID Regulations,
where debt securities do not provide for default remedies, the interest payments
will be included in the debt security's stated redemption price at maturity and
taxed as OID. Any stated interest in excess of the qualified stated interest is
included in the stated redemption price at maturity. If the amount of original
issue discount is "de minimis" as described below, the amount of original issue
discount is treated as zero, and all stated interest is treated as qualified
stated interest. Distributions of interest on Regular Certificates with respect
to which deferred interest will accrue may not constitute qualified stated
interest, in which case the stated redemption price at maturity of such Regular
Certificates includes all distributions of interest as well as principal
thereon. Moreover, if the interval between the issue date and the first Payment
Date on a Regular Certificate is longer than the interval between subsequent
Payment Dates (and interest paid on the first Payment Date is less than would
have been earned if the stated interest rate were applied to outstanding
principal during each day in such interval), the stated interest distributions
on such Regular Certificate technically do not constitute qualified stated
interest. In such case a special
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rule, applying solely for the purpose of determining whether original issue
discount is de minimis, provides that the interest shortfall for the long first
period (i.e., the interest that would have been earned if interest had been paid
on the first Payment Date for each day the Regular Certificate was outstanding)
is treated as made at a fixed rate if the value of the rate on which the payment
is based is adjusted in a reasonable manner to take into account the length of
the interval. Regular Certificateholders should consult their own tax advisors
to determine the issue price and stated redemption price at maturity of a
Regular Certificate.
Under a de minimis rule, original issue discount on a Regular
Certificate will be considered to be zero if such original issue discount is
less than 0.25% of the stated redemption price at maturity of the Regular
Certificate multiplied by the weighted average maturity of the Regular
Certificate. For this purpose, the weighted maturity of the Regular Certificate
is computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled to
be made by a fraction, the numerator of which is the amount of each distribution
included in the stated redemption price at maturity of the Regular Certificate
and the denominator of which is the stated redemption price at maturity of the
Regular Certificate. Although currently unclear, it appears that the schedule of
such distributions should be determined in accordance with the assumed rate of
prepayment of the Mortgage Assets and the anticipated reinvestment rate, if any,
relating to the Regular Certificates (the "Prepayment Assumption"). The
Prepayment Assumption with respect to a series of Regular Certificates will be
set forth in the related Prospectus Supplement. The holder of a debt instrument
includes any de minimis original issue discount in income pro rata as stated
principal payments are received.
Of the total amount of original issue discount on a Regular
Certificate, the Regular Certificateholder generally must include in gross
income for any taxable year the sum of the "daily portions," as defined below,
of the original issue discount on the Regular Certificate accrued during an
accrual period for each day on which he holds the Regular Certificate, including
the date of purchase but excluding the date of disposition. Although not free
from doubt, the Depositor intends to treat the monthly period ending on the day
before each Payment Date as the accrual period, rather than the monthly period
corresponding to the prior calendar month. With respect to each Regular
Certificate, a calculation will be made of the original issue discount that
accrues during each successive full accrual period (or shorter period from the
date of original issue) that ends on the day before the related Payment Date on
the Regular Certificate. For a Regular Certificate, original issue discount is
to be calculated initially based on a schedule of maturity dates that takes into
account the level of prepayments and an anticipated reinvestment rate that are
most likely to occur, which is expected to be based on the Prepayment
Assumption. The original issue discount accruing in a full accrual period would
be the excess, if any, of (i) the sum of (a) the present value of all of the
remaining distributions to be made on the Regular Certificate as of the end of
that accrual period that are included in the Regular Certificate's stated
redemption price at maturity and (b) the distributions made on the Regular
Certificate during the accrual period that are included in the Regular
Certificate's stated redemption price at maturity over (ii) the adjusted issue
price of the Regular Certificate at the beginning of the accrual period. The
present value of the remaining distributions referred to in the preceding
sentence is calculated based on (i) the yield to maturity of the Regular
Certificate at the issue date, (ii) events (including actual prepayments) that
have occurred prior to the end of the accrual period and (iii) the Prepayment
Assumption. For these purposes, the adjusted issue price of a Regular
Certificate at the beginning of any accrual period equals the issue price of the
Regular Certificate, increased by the aggregate amount of original issue
discount with respect to the Regular Certificate that accrued in all prior
accrual periods and reduced by the amount of distributions included in the
Regular Certificate's stated redemption price at maturity that were made on the
Regular Certificate in such prior period. The original issue discount accruing
during any accrual period (as determined in this paragraph) will then be divided
by the number of days in the period to determine the daily portion of original
issue discount for each day in the period.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Certificateholder
generally will increase to take into account prepayments on the Regular
Certificates as a result of prepayments on the Mortgage Assets or that exceed
the Prepayment Assumption, and generally will decrease (but not below zero for
any period) if the prepayments are slower than the Prepayment Assumption. In the
event of a change in circumstances that does not result in a substantially
contemporaneous pro rata prepayment, the yield and maturity of the Regular
Certificates are redetermined by treating the Regular Certificates as reissued
on the date of the change for an amount equal to the adjusted issue price of the
Regular
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Certificates. To the extent specified in the applicable Prospectus Supplement,
an increase in prepayments on the Mortgage Assets with respect to a series of
Regular Certificates can result in both a change in the priority of principal
payments with respect to certain classes of Regular Certificates and either an
increase or decrease in the daily portions of original issue discount with
respect to such Regular Certificates.
A purchaser of a Regular Certificate at a price greater than the issue
price also will be required to include in gross income the daily portions of the
original issue discount on the Regular Certificate. With respect to such a
purchaser, the daily portion for any day is reduced by the amount that would be
the daily portion for such day (computed in accordance with the rules set forth
above) multiplied by a fraction, the numerator of which is the amount, if any,
by which the price paid by such purchaser for the Regular Certificate exceeds
the sum of the issue price and the aggregate amount of original issue discount
that would have been includible in the gross income of an original holder of the
Regular Certificate who purchased the Regular Certificate at its issue price,
less any prior distributions included in the stated redemption price at
maturity, and the denominator of which is the sum of the daily portions for such
Regular Certificate (computed in accordance with the rules set forth above) for
all days after the date of purchase and ending on the date on which the
remaining principal amount of such Regular Certificate is expected to be reduced
to zero under the Prepayment Assumption.
A Certificateholder may elect to include in gross income all stated
interest, original issue discount, de minimis original issue discount, market
discount (as described below under "Market Discount"), de minimis market
discount and unstated interest (as adjusted for any amortizable bond premium or
acquisition premium) currently as it accrues using the constant yield to
maturity method. If this election is made, the holder is treated as satisfying
the requirements for making the elections with respect to amortization of
premium and current inclusion of market discount, each as described under
"Premium" and "Market Discount" below.
Variable Rate Regular Certificates. Regular Certificates may provide
for interest based on a variable rate. The OID Regulations provide special rules
for variable rate instruments that meet three requirements. First, the
noncontingent principal payments may not exceed the instrument's issue price by
more than a specified amount equal to the lesser of (i) .015 multiplied by the
product of the total noncontingent payments and the weighted average maturity or
(ii) 15% of the total noncontingent principal payments. Second, the instrument
must provide for stated interest (compounded or paid at least annually) at (i)
one or more qualified floating rates, (ii) a single fixed rate followed by one
or more qualified floating rates, (iii) a single objective rate or (iv) a single
fixed rate and a single objective rate that is a qualified inverse floating
rate. Third, the instrument must provide that each qualified floating rate or
objective rate in effect during an accrual period is set at a current value of
that rate (one occurring in the interval beginning three months before and
ending one year after the rate is first in effect on the Regular Certificate). A
rate is a qualified floating rate if variations in the rate can reasonably be
expected to measure contemporaneous variations in the cost of newly borrowed
funds. Generally, neither (i) a multiple of a qualified floating rate in excess
of a fixed multiple that is greater than zero but not more than 1.35 (and
increased or decreased by a fixed rate) nor (ii) a cap or floor that is likely
to cause the interest rate on a Regular Certificate to be significantly less or
more than the overall expected return on the Regular Certificate is considered a
qualified floating rate. An objective rate is a rate based on changes in the
price of actively traded property or an index of such prices or is a rate based
on (including multiples of) one or more qualified floating rates. An objective
rate is a qualified inverse floating rate if the rate is equal to a fixed rate
minus a qualified floating rate and variations in such rate can reasonably be
expected to reflect inversely contemporaneous variations in the cost of newly
borrowed funds. A rate will not be an objective rate if it is reasonably
expected that the average rate during the first half of the instrument's term
will be significantly more or less than the average rate in the final term. An
objective rate must be determined according to a single formula that is fixed
throughout the term of the Regular Certificate. Stated interest on a variable
rate debt instrument is qualified stated interest if the interest is
unconditionally payable in cash or property at least annually.
In general, the determination of original issue discount and qualified
stated interest on a variable rate debt instrument is made by converting the
debt instrument into a fixed rate debt instrument and then applying the general
original issue discount rules described above to the instrument. If a variable
rate debt instrument provides for stated interest at a single qualified floating
rate or objective rate, all stated interest is qualified stated interest and the
amount of original issue discount, if any, is determined by assuming the
variable rate is a fixed rate equal to (a)
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in the case of a qualified floating or inverse floating rate, the value, as of
the issue date, of the qualified floating inverse floating rate or (b) in the
case of an objective rate (other than a qualified inverse floating rate), a
fixed rate that reflects the yield that is reasonably expected for the debt
instrument. For all other variable rate debt instruments, the amount of interest
and original issue discount accruals are determined using the following steps.
First, a fixed rate substitute for each variable rate under the debt instrument
is determined. In general, the fixed rate substitute is a fixed rate equal to
the rate of the applicable type of variable rate as of the issue date. Second,
an equivalent fixed rate debt instrument is constructed using the fixed rate
substitute(s) in lieu of the variable rates and keeping all other terms
identical. Third, the amount of qualified stated interest and original issue
discount with respect to the equivalent fixed rate debt instrument are
determined under the rules for fixed rate debt instruments. Finally, appropriate
adjustments for actual variable rates are made during the term by increasing or
decreasing the qualified stated interest to reflect the amount actually paid
during the applicable accrual period as compared to the interest assumed to be
accrued or paid under the equivalent fixed rate debt instrument. If there is no
qualified stated interest under the equivalent fixed rate debt instrument, the
adjustment is made to the original issue discount for the period.
Where the issue price of a Regular Certificate exceeds the original
principal amount of the Regular Certificate, it appears appropriate to reduce
the ordinary income reportable for an accrual period by a portion of such excess
in a manner similar to the amortization of premium on the constant yield method.
Under proposed regulations (the "contingent payment rules"), a Regular
Certificate that provides for (i) non-contingent payments greater than or equal
to its issue price and (ii) one or more contingent payments determined by
reference to the value of publicly traded stock, securities, commodities, or
other publicly traded property must be divided into its component parts for
purposes of performing original issue discount calculations (and possibly for
other federal income tax purposes as well). The non-contingent portion of the
Regular Certificate would be treated as a debt instrument, and the original
issue discount accruals on that portion would be computed in the same manner as
with any non-contingent debt instrument. The issue price of the non-contingent
portion would be that portion of the issue price of the Regular Certificate that
reflects the right to receive the non-contingent payments, determined in the
same manner as if the separate non-contingent debt instrument were a debt
instrument issued as part of an investment unit. The contingent components of
the Regular Certificate would constitute options or other property rights and
would be taxed as if issued as a separate instrument. No accrual of original
issue discount generally would be required with respect to such components under
the contingent payment rules. Accordingly, the rate at which income is accrued
by a Certificateholder may vary depending on whether the original issue discount
rules or the contingent payment rules apply to certain variable rate debt
instruments.
Market Discount. A purchaser of a Regular Certificate also may be
subject to the market discount rules of Code Sections 1276 through 1278. Under
these sections and the principles applied by the OID Regulations in the context
of original issue discount, "market discount" is the amount by which a
subsequent purchaser's initial basis in the Regular Certificate (i) is exceeded
by the stated redemption price at maturity of the Regular Certificate or (ii) in
the case of a Regular Certificate having original issue discount, is exceed by
the sum of the issue price of such Regular Certificate plus any original issue
discount that would have previously accrued thereon if held by an original
Regular Certificateholder (who purchased the Regular Certificate at its issue
price), in either case less any prior distributions included in the stated
redemption price at maturity of such Regular Certificate. Such purchaser
generally will be required to recognize accrued market discount as ordinary
income as distributions includible in the stated redemption price at maturity of
such Regular Certificate are received in an amount not exceeding any such
distribution. That recognition rule would apply regardless of whether the
purchaser is a cash-basis or accrual-basis taxpayer. Such market discount would
accrue in a manner to be provided in Treasury regulations and should take into
account the Prepayment Assumption. The Conference Committee Report to the 1986
Act provides that until such regulations are issued, such market discount would
accrue either (i) on the basis of a constant interest rate or (ii) in the ratio
of stated interest allocable to the relevant period to the sum of the interest
for such period plus the remaining interest as of the end of such period, or in
the case of a Regular Certificate issued with original issue discount, in the
ratio of original issue discount accrued for the relevant period to the sum of
the original issue discount accrued for such period plus the remaining original
issue discount as of the end of such period. Such purchaser also generally will
be required to treat a portion of any gain on a sale or exchange of the 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 any accrued
market discount previously reported as ordinary
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income as partial distributions in reduction of the stated redemption price at
maturity were received. Such purchaser will be required to defer deduction of a
portion of the excess of the interest paid or accrued on indebtedness incurred
to purchase or carry a Regular Certificate over the interest distributable
thereon. The deferred portion of such interest expense in any taxable year
generally will not exceed the accrued market discount on the Regular Certificate
for such year. Any such deferred interest expense is, in general, allowed as a
deduction not later than the year in which the related market discount income is
recognized or the Regular Certificate is disposed of. As an alternative to the
inclusion of market discount in income on the foregoing basis, the Regular
Certificateholder may elect to include market discount in income currently as it
accrues in all market discount instruments acquired by such Regular
Certificateholder in that taxable year or thereafter, in which case the interest
deferral rule will not apply. In Revenue Procedure 92-67, the Internal Revenue
Service set forth procedures for taxpayers (1) electing under Code Section
1278(b) to include market discount in income currently, (2) electing under rules
of Code Section 1276(b) to use a constant interest rate to determine accrued
market discount on a bond where the holder of the bond is required to determine
the amount of accrued market discount at a time prior to the holder's
disposition of the bond, and (3) requesting consent to revoke an election under
Code Section 1278(b).
By analogy to the OID Regulations, market discount with respect to a
Regular Certificate will be considered to be zero if such market discount is
less than 0.25% of the remaining stated redemption price at maturity of such
Regular Certificate multiplied by the weighted average maturity of the Regular
Certificate (determined as described above under "Original Issue Discount")
remaining after the date of purchase. Treasury regulations implementing the
market discount rules have not yet been issued, and therefore investors should
consult their own tax advisors regarding the application of these rules as well
as the advisability of making any of the elections with respect thereto.
Premium. A Regular Certificate purchased at a cost greater than its
remaining stated redemption price at maturity generally is considered to be
purchased at a premium. If the Regular Certificateholder holds such Regular
Certificate as a "capital asset" within the meaning of Code Section 1221, the
Regular Certificateholder may elect under Code Section 171 to amortize such
premium under a constant yield method that reflects compounding based on the
interval between payments on the Regular Certificates. This election, once made,
applies to all obligations held by the taxpayer at the beginning of the first
taxable year to which such section applies and to all taxable debt obligations
thereafter acquired and is binding on such taxpayer in all subsequent years. The
Conference Committee Report to the 1986 Act indicates a Congressional intent
that the same rules that apply to the accrual of market discount on installment
obligations will also apply to amortizing bond premium under Code Section 171 on
installment obligations such as the Regular Certificates, although it is unclear
whether the alternatives to the constant interest method described above under
"Market Discount" are available. Except as otherwise provided in Treasury
regulations yet to be issued amortizable bond premium will be treated as an
offset to interest income on a Regular Certificate rather than as a separate
deduction item. Purchasers who pay a premium for their Regular Certificates
should consult their tax advisors regarding the election to amortize premium and
the method to be employed.
Sale or Exchange of Regular Certificates. If a Regular
Certificateholder sells or exchanges a Regular Certificate, the Regular
Certificateholder will recognize gain or loss equal to the difference, if any,
between the amount received and his adjusted basis in the Regular Certificate.
The adjusted basis of a Regular Certificate generally will equal the cost of the
Regular Certificate to the seller, increased by any original issue discount or
market discount previously included in the seller's gross income with respect to
the Regular Certificate and reduced by amounts included in the stated redemption
price at maturity of the Regular Certificate that were previously received by
the seller and by any amortized premium.
Except as described above with respect to market discount, and except
as provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Certificate realized by an investor who holds the Regular Certificate as
a capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Certificate has been held for the long-term
capital gain holding period (currently more than one year). Gain from the
disposition of a Regular Certificate that might otherwise be capital gain will
be treated as ordinary income to the extent that such gain does not exceed the
excess, if any, of (i) the amount that would have been includible in the gross
income of the holder if his yield on such Regular Certificate were 110% of the
applicable Federal rate under Code Section 1274(d) as of the date of purchase
over (ii) the amount of income actually
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includible in the gross income of such holder with respect to the Regular
Certificate. In addition, gain or loss recognized from the sale of a Regular
Certificate by certain banks or thrift institutions will be treated as ordinary
income or loss pursuant to Code Section 582(c). The maximum tax rate for
individuals on the excess of net long-term capital gain over net short-term
capital loss is 28%.
Taxation of Residual Certificates
Taxation of REMIC Income. Generally, the "daily portions" of REMIC
taxable income or net loss will be includible as ordinary income or loss in
determining the federal taxable income of holders of Residual Certificates
("Residual Certificateholders") and will not be taxed separately to the REMIC
Pool. The daily portions of REMIC taxable income or net loss of a Residual
Certificateholder are determined by allocating the REMIC Pool's taxable income
or net loss for each calendar quarter ratably to each day in such quarter and by
allocating such daily portion among the Residual Certificateholders in
proportion to their respective holdings of Residual Certificates in the REMIC
Pool on such day. REMIC taxable income is generally determined in the same
manner as the taxable income of an individual using a calendar year and the
accrual method of accounting, except that (i) the limitation on deductibility of
investment interest expense and expenses for the production of income do not
apply, (ii) all bad loans will be deductible as business bad debts and (iii) the
limitation on the deductibility of interest and expenses related to tax-exempt
income will apply. REMIC taxable income generally means the REMIC Pool's gross
income, including interest, original issue discount income and market discount
income, if any, on the Mortgage Assets, plus income on reinvestment of cashflows
and reserve assets, minus deductions, including interest and original issue
discount expense on the Regular Certificates, servicing fees on the Mortgage
Assets and other administrative expenses of the REMIC Pool, amortization of
premium, if any, with respect to the Mortgage Assets, and any tax imposed on the
REMIC's income from foreclosure property. The requirement that Residual
Certificateholders report their pro rata share of taxable income or net loss of
the REMIC Pool will continue until there are no Certificates of any class of the
related series outstanding.
The taxable income recognized by a Residual Certificateholder in any
taxable year will be affected by, among other factors, the relationship between
the timing of recognition of interest and original issue discount or market
discount income or amortization of premium with respect to the Mortgage Assets,
on the one hand, and the timing of deductions for interest (including original
issue discount) on the Regular Certificates, on the other hand. Because of the
way REMIC taxable income is calculated, a Residual Certificateholder may
recognize "phantom" income (i.e., income recognized for tax purposes in excess
of income as determined under financial accounting or economic principles) which
will be matched in later years by a corresponding tax loss or reduction in
taxable income, but which could lower the yield to Residual Certificateholders
due to the lower present value of such future loss or reduction. For example, if
an interest in the Mortgage Assets is acquired by the REMIC Pool at a discount,
and one or more of such Mortgage Assets is prepaid, the Residual
Certificateholder may recognize taxable income without being entitled to receive
a corresponding amount of cash because (i) the prepayment may be used in whole
or in part to make distributions in reduction of principal on the Regular
Certificates and (ii) the discount income on the Mortgage Loan which is
includible in the REMIC's taxable income may exceed the discount deduction
allowed to the REMIC upon such distributions on the Regular Certificates. When
there is more than one class of Regular Certificates that distribute principal
sequentially, this mismatching of income and deductions is particularly likely
to occur in the early years following issuance of the Regular Certificates when
distributions in reduction of principal are being made in respect of earlier
maturing classes of Certificates to the extent that such classes are not issued
with substantial discount. If taxable income attributable to such a mismatching
is realized in general, losses would be allowed in later years as distributions
on the later classes of Regular Certificates are made. Taxable income may also
be greater in earlier years than in later years as a result of the fact that
interest expense deductions, expressed as a percentage of the outstanding
principal amount of such a series of Regular Certificates, may increase over
time as distributions in reduction of principal are made on the lower yielding
classes of Regular Certificates, where interest income with respect to any given
Mortgage Loan will remain constant over time as a percentage of the outstanding
principal amount of that loan. Consequently, Residual Certificateholders must
have sufficient other sources of cash to pay any federal, state or local income
taxes due as a result of such mismatching or unrelated deductions against which
to offset such income. Prospective investors should be aware, however, that a
portion of such income may be ineligible for offset by such investor's unrelated
deductions. See the discussion of "excess inclusions" below under "Limitations
on Offset or Exemption of REMIC Income; Excess Inclusions." The timing
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of such mismatching of income and deductions described in this paragraph, if
present with respect to a series of Certificates, may have a significant adverse
effect upon the Residual Certificateholders after-tax rate of return. In
addition, a Residual Certificateholder's taxable income during certain periods
may exceed the income reflected by such Certificateholder for such periods in
accordance with generally accepted accounting principles. Investors should
consult their own advisors concerning the proper tax and accounting treatment of
their investment in Residual Certificates.
Basis and Losses. The amount of any net loss of the REMIC Pool that may
be taken into account by the Residual Certificateholder is limited to the
adjusted basis of the Residual Certificate as of the close of the quarter (or
time of disposition of the Residual Certificate if earlier), determined without
taking into account the net loss for the quarter. The initial adjusted basis of
a purchaser of a Residual Certificate is the amount paid for such Residual
Certificate. Such adjusted basis will be increased by the amount of taxable
income of the REMIC Pool reportable by the Residual Certificateholder and
decreased by the amount of loss of the REMIC Pool reportable by the Residual
Certificateholder. A cash distribution from the REMIC Pool also will reduce such
adjusted basis (but not below zero). Any loss that is disallowed on account of
this limitation may be carried over indefinitely with respect to the Residual
Certificateholder as to whom such loss was disallowed and may be used by such
Residual Certificateholder only to offset any income generated by the same REMIC
Pool. Residual Certificateholders should consult their tax advisors about other
limitations on the deductibility of net losses that may apply to them.
A Residual Certificateholder will not be permitted to amortize directly
the cost of its Residual Certificate as an offset to its share of the taxable
income of the related REMIC Pool. However, such taxable income will not include
cash received by the REMIC Pool that represents a recovery of the REMIC Pool's
basis in its assets. Such recovery of basis by the REMIC Pool will have the
effect of amortization of the issue price of the Residual Certificates over
their life. However, in view of the possible acceleration of the income of
Residual Certificateholders described above under "Taxation of REMIC Income,"
the period of time over which such issue price is effectively amortized may be
longer than the economic life of the Residual Certificates.
If a Residual Certificate has a negative value, it is not clear whether
its issue price would be considered to be zero or such negative amount for
purposes of determining the REMIC Pool's basis in its assets. The REMIC
Regulations do not address whether residual interests could have a negative
basis and a negative issue price. The Depositor does not intend to treat a class
of Residual Certificates as having a value of less than zero for purposes of
determining the bases of the related REMIC Pool in its assets.
Further, to the extent that the initial adjusted basis of Residual
Certificateholder (other than an original holder) in the Residual Certificate is
greater than the corresponding portion of the REMIC Pool's basis in the Mortgage
Assets, the Residual Certificateholder will not recover a portion of such basis
until termination of the REMIC Pool unless Treasury regulations yet to be issued
provide for periodic adjustments to the REMIC income otherwise reportable by
such holder. The REMIC Regulations do not so provide. See "Treatment of Certain
Items of REMIC Income and Expense - Market Discount" below regarding the basis
of Mortgage Assets to the REMIC Pool and "Sale or Exchange of Residual
Certificates" below regarding possible treatment of a loss upon termination of
the REMIC Pool as a capital loss.
Mark to Market Rules
Prospective purchasers of a Residual Certificate should be aware that
on December 18, 1993, the Internal Revenue Service released temporary
regulations (the "Temporary Regulations") relating to the requirement that a
securities dealer mark to market securities held for sale to customers. This
mark-to-market requirement applies to all securities of a dealer, except to the
extent that the dealer has specifically identified a security as held for
investment. The Temporary Regulations provide that for purposes of this
mark-to-market requirement, a "negative value" Residual Certificate is not
treated as a security and thus may not be marked to market. In general, a
Residual Certificate has negative value if, as of the date a taxpayer acquires
the Residual Certificate, the present value of the tax liabilities associated
with holding the Residual Certificate exceeds the sum of (i) the present value
of the expected future distributions on the Residual Certificate, and (ii) the
present value of the anticipated tax savings associated with holding the
Residual Certificate as the REMIC generates losses. The amounts and present
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values of the anticipated tax liabilities, expected future distributions and
anticipated tax savings are all to be determined using (i) the prepayment and
reinvestment assumptions adopted under Section 1272(a)(6), or that would have
been adopted had the REMIC's regular interests been issued with original issue
discount, (ii) any required or permitted clean up calls, or required qualified
liquidation, provided for in the REMIC's organizational documents and (iii) a
discount rate equal to the "applicable Federal rate" instrument issued on the
date of acquisition of the Residual Certificate ending on or after December 31,
1993. Prospective purchasers of a Residual Certificate should consult their tax
advisors regarding the possible application of the Temporary Regulations.
Treatment of Certain Items of REMIC Income and Expense
Original Issue Discount. Generally, the REMIC Pool's deductions for
original issue discount will be determined in the same manner as original issue
discount income on Regular Certificates as described above under "Taxation of
Regular Certificates - Original Issue Discount" and "Variable Rate Regular
Certificates," without regard to the de minimis rule described therein.
Market Discount. The REMIC Pool will have market discount income in
respect of Mortgage Assets if, in general, the basis of the REMIC Pool in such
Mortgage Assets is exceeded by their unpaid principal balances. The REMIC Pool's
basis in such Mortgage Assets is generally the fair market value of the Mortgage
Assets immediately after the transfer thereof to the REMIC Pool. The REMIC
Regulations provide that such basis is equal in the aggregate to the issue
prices of all regular and residual interests in the REMIC Pool. In respect of
Mortgage Assets that have market discount to which Code Section 1276 applies,
the accrued portion of such market discount would be recognized currently by the
REMIC as an item of ordinary income. Market discount income generally should
accrue in the manner described above under "Taxation of Regular Certificates -
Market Discount." However, the rules of Code Section 1276 concerning market
discount income will not apply in the case of Mortgage Assets originated on or
prior to July 18, 1984, if any. With respect to such Mortgage Assets market
discount is generally includible in REMIC taxable income or ordinary gross
income pro rata as principal payments are received. Under another interpretation
of the Code and relevant legislative history, market discount on such Mortgage
Assets might be required to be recognized currently by the REMIC, in the same
manner that market discount would be recognized with respect to Mortgage Assets
originated after July 18, 1984. Under that method, a REMIC would tend to
recognize market discount more rapidly than it would otherwise. In either case,
the deduction of a portion of the interest expense on the Regular Certificates
allocable to such discount may be deferred until such discount is included in
income, and any gain on the sale or exchange thereof will be treated as ordinary
income to the extent of the deferred interest deductible at that time.
Premium. Generally, if the basis of the REMIC Pool in the Mortgage
Assets exceeds the unpaid principal balances thereof, the REMIC Pool will be
considered to have acquired such Mortgage Assets at a premium equal to the
amount of such excess. As stated above,the REMIC Pool's basis in the Mortgage
Assets is the fair market value of the Mortgage Assets, based on the aggregate
of the issue prices of the regular and residual interests in the REMIC Pool
immediately after the transfer thereof to the REMIC Pool. In a manner analogous
to the discussion above under "Taxation of Regular Certificates - Premium," a
person that holds a Mortgage Loan as a capital asset under Code Section 1221 may
elect under Code Section 171 to amortize premium on Mortgage Assets originated
after September 27, 1985 under a constant yield method. Amortizable bond premium
will be treated as an offset to interest income on the Mortgage Assets, rather
than as a separate deduction item. Because substantially all the mortgagors with
respect to the Mortgage Assets are expected to be individuals, Code Section 171
will not be available. Premium on Mortgage Assets may be deductible in
accordance with a reasonable method regularly employed by the holder thereof.
The allocation of such premium pro rata among principal payments should be
considered a reasonable method; however, the Internal Revenue Service may argue
that such premium should be allocated in a different manner, such as allocating
such premium entirely to the final payment of principal.
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Limitations on Offset or Exemption of REMIC Income; Excess Inclusions.
A portion of the income allocable to a Residual Certificate (referred to in the
Code as an "excess inclusion") for any calendar quarter, with an exception
discussed below for certain thrift institutions, will be subject to federal
income tax in all events. Thus, for example, an excess inclusion (i) cannot,
except as described below, be offset by any unrelated losses or loss carryovers
of a Residual Certificateholder, (ii) will be treated as "unrelated business
taxable income" within the meaning of Code Section 512 if the Residual
Certificateholder is a pension fund or any other organization that is subject to
tax only on its unrelated business taxable income and (iii) is not eligible for
any reduction in the rate of withholding tax in the case of a Residual
Certificateholder that is a foreign investor, as further discussed in "Taxation
of Certain Foreign Investors - Residual Certificates" below. Except as discussed
below with respect to excess inclusions from Residual Certificates without
"significant value," this general rule does not apply to thrift institutions to
which Code Section 593 applies. For this purpose a thrift institution and its
qualified subsidiary are considered a single corporation. A qualified subsidiary
is one all the stock of which, and substantially all the debt of which, is held
by the thrift institution and which is organized and operating exclusively in
connection with the organization and operation of one or more REMICs. Except in
the case of a thrift institution (including qualified subsidiaries) members of
an affiliated group are treated as one corporation for purposes of applying the
limitation on offset of excess inclusion income.
Except as discussed in the following paragraph, with respect to excess
inclusions from Residual Certificates without "significant value," for any
Residual Certificateholder, the excess inclusion for any calendar quarter is the
excess, if any, of (i) the income of such Residual Certificateholder for that
calendar quarter from its Residual Certificate over (ii) the sum of the "daily
accruals" (as defined below) for all days during the calendar quarter on which
the Residual Certificateholder holds such Residual Certificate. For this
purpose, the daily accruals with respect to a Residual Certificate are
determined by allocating to each day in the calendar quarter its ratable portion
of the product of the "adjusted issue price" (as defined below) of the Residual
Certificate at the beginning of the calendar quarter and 120 percent of the
"Federal long-term rate" in effect at the time the Residual Certificate is
issued. For this purposes the "adjusted issue price" of a Residual Certificate
at the beginning of any calendar quarter equals the issue price of the Residual
Certificate (adjusted for contributions), increased by the amount of daily
accruals for all prior quarters, and decreased (but not below zero) by the
aggregate amount of payments made on the Residual Certificate before the
beginning of such quarter. The Federal long-term rate is an average of current
yields on Treasury securities with a remaining term of greater than nine years,
computed and published monthly by the IRS.
The Code provides that to the extent provided in regulations, as an
exception to the general rule described above, the entire amount of income
accruing on a Residual Certificate will be treated as an excess inclusion if the
Residual Certificates in the aggregate are considered not to have "significant
value." The Treasury Department has not yet provided regulations in this respect
and the REMIC Regulations did not adopt this rule. However, the exception from
the excess inclusion rules applicable to thrift institutions does not apply if
the Residual Certificates do not have significant value. Under the REMIC
Regulations, the Residual Certificates will have significant value if: (i) the
aggregate of the issue prices of the Residual Certificates is at least two
percent of the aggregate issue prices of all Regular Certificates and Residual
Certificates in the REMIC and (ii) the anticipated weighted average life of the
Residual Certificates is at least 20 percent of the REMIC's anticipated weighted
average life based on the prepayment and reinvestment assumptions used in
pricing the transaction and any recognized or permitted clean up calls or any
required qualified liquidation. Although not entirely clear, the REMIC
Regulations indicate that the significant value determination is made only on
the Startup Day. The anticipated weighted average life of a Residual Certificate
with a principal balance and a market rate of interest is computed by
multiplying the amount of each expected principal payment by the number of years
(or portions thereof) from the Startup Day, adding these sums and dividing by
the total principal expected to be paid on such Residual Certificate based on
the relevant prepayment assumption and expected reinvestment income. The
anticipated weighted average life of a Residual Certificate with either no
specified principal balance or a principal balance and rights to interest
payments disproportionate to such principal balance, would be computed under the
formula described above but would include all payments expected on the Residual
Certificate instead of only the principal payments. The anticipated weighted
average life of a REMIC is a weighted average of the anticipated weighted
average lives of all classes of interest in the REMIC.
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Under Treasury regulations to be promulgated, a portion of the
dividends paid by a REIT which owns a Residual Certificate are to be designated
as excess inclusions in an amount corresponding to the Residual Certificate's
allocable share of the excess inclusions. Similar rules apply in the case of
regulated investment companies, common trust funds and cooperatives. Thus,
investors in such entities which own a Residual Certificate will be subject to
the limitations on excess inclusions described above. The REMIC Regulations do
not provide guidance on this issue.
Tax-Related Restrictions on Transfer of Residual Certificates
Disqualified Organizations. If legal title or beneficial interest in a
Residual Certificate is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (i) the
present value of the total anticipated excess inclusions with respect to such
Residual Certificate for periods after the transfer and (ii) the highest
marginal federal corporate income tax rate. The REMIC Regulations provide that
the anticipated excess inclusion are based on actual prepayment experience to
the date of the transfer and projected payments based on the Prepayment
Assumption. The present value discount rate equals the applicable Federal rate
under Code Section 1274(d) that would apply to a debt instrument that was issued
on the date the Disqualified Organization acquired the Residual Certificate and
whose term ended on the close of the last quarter in which excess inclusion was
expected to accrue with respect to the Residual Certificate. Such a tax
generally would be imposed on the transferor of the Residual Certificate, except
that where such transfer is through an agent (including a broker, nominee, or
other middleman) for a Disqualified Organization, the tax would instead be
imposed on such agent. However, a transferor of a Residual Certificate would in
no event be liable for such tax with respect to a transfer if the transferee
furnishes to the transferor an affidavit that the transferee is not a
Disqualified Organization and, as of the time of the transfer, the transferor
does not have actual knowledge that such affidavit is false. The tax also may be
waived by the Treasury Department if the Disqualified Organization promptly
disposes of the Residual Certificate and the transferor pays income tax at the
highest corporate rate on the excess inclusion for the period the Residual
Certificate is actually held by the Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period such interest is held by such Disqualified
Organization and (ii) the highest marginal federal corporate income tax rate.
Such tax would be deductible from the ordinary gross income of the Pass-Through
Entity for the taxable year. The Pass-Through Entity would not be liable for
such tax if it has received an affidavit from such record holder that (i) states
under penalty of perjury that it is not a Disqualified Organization or (ii)
furnishes a social security number and states under penalties of perjury that
the social security number is that of the transferee, provided that during the
period such person is the record holder of the Residual Certificate, the
Pass-Through Entity does not have actual knowledge that such affidavit is false.
For these purposes, (i) "Disqualified Organization" means the United
States, any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
its activities are subject to tax and a majority of its board of directors is
not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 521) that is exempt from
taxation under the Code unless such organization is subject to the tax on
unrelated business income imposed by Code Section 511 and (ii) "Pass-Through
Entity" means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust or estate and certain corporations
operating on a cooperative basis. Except as may be provided in Treasury
regulations yet to be issued, any person holding an interest in a Pass- Through
Entity as a nominee for another will, with respect to such interest, be treated
as a Pass-Through Entity.
The Agreement with respect to a series of Certificates will provide
that neither legal title nor beneficial interest in a Residual Certificate may
be transferred or registered unless (i) the proposed transferee provides to the
Depositor and the Trustee an affidavit to the effect that such transferee is not
a Disqualified Organization, is not
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purchasing such Residual Certificates on behalf of a Disqualified Organization
(i.e., as a broker, nominee or middleman thereof) and is not an entity that
holds REMIC residual securities as nominee to facilitate the clearance and
settlement of such securities through electronic book-entry changes in accounts
of participating organizations and (ii) the transferor provides a statement in
writing to the Depositor and the Trustee that it has no actual knowledge that
such affidavit is false. Moreover, the Agreement will provide that any attempted
or purported transfer in violation of these transfer restrictions will be null
and void and will vest no rights in any purported transferee. Each Residual
Certificate with respect to a series will have a legend referring to such
restrictions on transfer, and each Residual Certificateholder will be deemed to
have agreed, as a condition of ownership thereof, to any amendments to the
related Agreement required under the Code or applicable Treasury regulations to
effectuate the foregoing restrictions. Information necessary to compute an
applicable excise tax must be furnished to the Internal Revenue Service and to
the requesting party within 60 days of the request, and the Depositor or the
Trustee may charge a fee for computing and providing such information.
Noneconomic Residual Interests. Under the REMIC Regulations certain
transfers of Residual Certificates are disregarded, in which case the transferor
continues to be treated as the owner of the Residual Certificates and thus
continues to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the Final REMIC Regulations, a transfer of a Noneconomic
Residual Interest (defined below) to a Residual Certificateholder (other than a
Residual Certificateholder who is not a U.S. Person, as defined below under
"Foreign Investors") is disregarded for all federal income tax purposes unless
no significant purpose of the transfer is to impede the assessment or collection
of tax. A residual interest in a REMIC (including a residual interest with a
positive value at issuance) is a "Noneconomic Residual Interest" unless, at the
time of the transfer, (i) the present value of the expected future distributions
on the residual interest at least equals the product of the present value of the
anticipated excess inclusions and the highest federal corporate income tax rate
in effect for the year in which the transfer occurs, and (ii) the transferor
reasonably expects that the transferee will receive distributions from the REMIC
at or after the time at which taxes accrue on the anticipated excess inclusions
in an amount sufficient to satisfy the accrued taxes. The anticipated excess
inclusions and the present value rate are determined in the same manner as set
forth above under "Disqualified Organizations." A significant purpose to impede
the assessment or collection of tax exists if the transferor, at the time of the
transfer, either knew or should have known (had "improper knowledge") that the
transferor would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC. Under the REMIC Regulations, a transferor is
presumed not to have improper knowledge if (i) the transferor conducted, at the
time of the transfer, a reasonable investigation of the financial condition of
the transferee and, as a result of the investigation, the transferor found that
the transferee had historically paid its debts as they came due and found no
significant evidence to indicate that the transferor will not continue to pay
its debts as they come due in the future; and (ii) the transferee represents to
the transferor that it understands that, as the holder of the Noneconomic
Residual Interest, the transferee may incur tax liabilities in excess of any
cash flows generated by the residual interest and that the transferee intends to
pay taxes associated with holding of residual interest as they become due. The
Agreement will require the transferee of a Residual Certificate to state as part
of the affidavit described above under the heading "Disqualified Organizations"
that such transferee (i) has historically paid its debts as they come due, (ii)
intends to continue to pay its debts as they come due in the future, (iii)
understands that, as the holder of a Noneconomic Residual Interest, it may incur
tax liabilities in excess of any cash flows generated by the Residual
Certificate, and (iv) intends to pay any and all taxes associated with holding
the Residual Certificate as they become due. The transferor must have no reason
to believe that such statement is untrue.
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Certificate that has "tax avoidance potential" to a "foreign person"
will be disregarded for all federal tax purposes. This rule appears intended to
apply to a transferee who is not a "U.S. Person" (as defined below), unless such
transferee's income is effectively connected with the conduct of a trade or
business within the United States. A Residual Certificate is deemed to have tax
avoidance potential unless, at the time of the transfer, the transferor
reasonably expects that, for each excess inclusion, (i) the REMIC Pool will
distribute to the transferee residual interest holder an amount that will equal
at least 30% of the excess inclusions and (ii) that each such amount 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. If the non-U.S. Person transfers the Residual Certificate back to a
U.S. Person, the transfer will
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be disregarded and the foreign transferor will continue to be treated as the
owner unless arrangements are made so that the transfer does not have the effect
of allowing the transferor to avoid tax on accrued excess inclusions.
The Prospectus Supplement relating to a series of Certificates may
provide that a Residual Certificate may not be purchased by or transferred to
any person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which such a transfer may be made. The term "U.S.
Person" means a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof or an estate or trust that is
subject to U.S. federal income tax regardless of the source of its income.
Sale or Exchange of a Residual Certificate
Upon the sale or exchange of a Residual Certificate, the Residual
Certificateholder will recognize gain or loss equal to the excess, if any, of
the amount realized over the adjusted basis (as described above under "Taxation
of Residual Certificates - Basis and Losses") of such Residual Certificateholder
in such Residual Certificate at the time of the sale or exchange. In addition to
reporting the taxable income of the REMIC Pool, a Residual Certificateholder
will have taxable income to the extent that any cash distribution to him from
the REMIC Pool exceeds such adjusted basis on that Payment Date. Such income
will be treated as gain from the sale or exchange of the Residual Certificate.
It is possible that the termination of the REMIC Pool may be treated as a sale
or exchange of a Residual Certificateholder's Residual Certificate, in which
case, if the Residual Certificateholder has an adjusted basis in his Residual
Certificate remaining when his interest in the REMIC Pool terminates, and if he
holds such Residual Certificate as a capital asset under Code Section 1221, then
he will recognize a capital loss at that time in the amount of such remaining
adjusted basis.
The Conference Committee Report to the 1986 Act provides that, except
as provided in Treasury regulations yet to be issued the wash sale rules of Code
Section 1091 will apply to disposition of Residual Certificates. Consequently,
losses on dispositions of Residual Certificates will be disallowed where the
seller of the Residual Certificate, during the period beginning six months
before the sale or disposition of the Residual Certificate and ending six months
after such sale or disposition, acquires (or enters into any other transaction
that results in the application of Code Section 1091) any residual interest in
any REMIC or any interest in a "taxable mortgage pool" (such as a non-REMIC
owner trust) that is economically comparable to a Residual Certificate.
Taxes That May Be Imposed on the REMIC Pool
Prohibited Transactions. Net income from certain transactions by the
REMIC Pool, called prohibited transactions, will not be part of the calculation
of income or loss includible in the federal income tax returns of Residual
Certificateholders, but rather will be taxed directly to the REMIC Pool at a
100% rate. Prohibited transactions generally include (i) the disposition of a
qualified mortgage other than for (a) substitution within two years of the
Startup Day for a defective (including a defaulted) obligation (or repurchase in
lieu of substitution of a defective (including a defaulted) obligation at any
time) or for any qualified mortgage within three months of the Startup Day, (b)
foreclosure, default or imminent default of a qualified mortgage, (c) bankruptcy
or insolvency of the REMIC Pool or (d) a qualified (complete) liquidation, (ii)
the receipt of income from assets that are not the type of mortgages or
investments that the REMIC Pool is permitted to hold, (iii) the receipt of
compensation for services or (iv) the receipt of gain from disposition of cash
flow investments other than pursuant to a qualified liquidation. Notwithstanding
(i) and (iv), it is not a prohibited transaction to sell REMIC Pool property to
prevent a default on Regular Certificates as a result of a default on qualified
mortgages or to facilitate a clean-up call (generally, an optional termination
to save administrative costs when no more than a small percentage of the
Certificates is outstanding). The REMIC Regulations indicate that the
modification of a Mortgage Loan generally will not be treated as a disposition
if it is occasioned by a default or reasonably foreseeable default, an
assumption of the Mortgage Loan, the waiver of a due-on-sale or encumbrance
clause or the conversion of an interest rate by a mortgagor pursuant to the
terms of a convertible adjustable rate Mortgage Loan. The REMIC Regulations also
provide that the modification of mortgage loans underlying Mortgage-Backed
Securities will not be treated as a modification of the Mortgage-Backed
Securities, provided that the trust including the was not created to avoid
prohibited transaction rules.
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Contributions to the REMIC Pool After the Startup Day. In general, the
REMIC Pool will be subject to a tax at a 100% rate on the value of any property
contributed to the REMIC Pool after the Startup Day. Exceptions are provided for
cash contributions to the REMIC Pool (i) during the three months following the
Startup Day, (ii) made to a qualified reserve fund by a Residual
Certificateholder, (iii) in the nature of a guarantee, (iv) made to facilitate a
qualified liquidation or clean-up call and (v) as otherwise permitted in
Treasury regulations yet to be issued.
Net Income from Foreclosure Property. The REMIC Pool will be subject to
federal income tax at the highest corporate rate on "net income from foreclosure
property," determined by reference to the rules applicable to real estate
investment trusts. Generally, property acquired by the REMIC Pool through
foreclosure or deed in lieu of foreclosure would be treated as "foreclosure
property" for a period of two years, with possible extensions. Net income from
foreclosure property generally means (i) gain from the sale of a foreclosure
property that is inventory property and (ii) gross income from foreclosure
property other than qualifying rents and other qualifying income for a real
estate investment trust.
Liquidation of the REMIC Pool
If a REMIC Pool and the Trustee adopt a plan of complete liquidation,
within the meaning of Code Section 860F(a)(4)(A)(i) and sell all of the REMIC
Pool's assets (other than cash) within a 90-day period beginning on the date of
the adoption of the plan of liquidation, the REMIC Pool will recognize no gain
or loss on the sale of its assets, provided that the REMIC Pool credits or
distributes in liquidation all of the sale proceeds plus its cash (other than
amounts retained to meet claims against the REMIC Pool) to holders of Regular
Certificates and Residual Certificateholders within the 90-day period.
Administrative Matters
The REMIC Pool will be required to maintain its books on a calendar
year basis and to file federal income tax returns for federal income tax
purposes in a manner similar to a partnership. The form for such income tax
return is Form 1066, U.S. Real Estate Mortgage Investment Conduit Income Tax
Return. The Trustee will be required to sign the REMIC Pool's returns. Treasury
regulations provide that, except where there is a single Residual
Certificateholder for an entire taxable year, the REMIC Pool generally will be
subject to the procedural and administrative rules of the Code applicable to
partnerships, including the determination by the Internal Revenue Service of any
adjustments to, among other things, items of REMIC income, gain, loss, deduction
or credit in a unified administrative proceeding. The Depositor or other
designated Residual Certificateholders will be obligated to act as "tax matters
person," as defined in applicable Treasury regulations, with respect to the
REMIC Pool. If the Code or applicable Treasury regulations do not permit the
Depositor to act as tax matters person in its capacity as agent of the Residual
Certificateholders, the Residual Certificateholder chosen by the Residual
Certificateholders or such other person specified pursuant to Treasury
regulations will be required to act as tax matters person.
Treasury regulations provide that a holder of a Residual Certificate is
not required to treat items on its return consistently with their treatment on
the REMIC Pool's return if a holder owns 100% of the Residual Certificates for
the entire calendar year. Otherwise, each holder of a Residual Certificate is
required to treat items on its return consistently with their treatment on the
REMIC Pool's return, unless the holder of a Residual Certificate either files a
statement identifying the inconsistency or establishes that the inconsistency
resulted from incorrect information received from the REMIC Pool. The Service
may assess a deficiency resulting from a failure to comply with the consistency
requirement without instituting an administrative proceeding at the REMIC Pool
level.
Limitations on Deduction of Certain Expenses
An investor who is an individual, estate or trust will be subject to
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that such itemized deductions, in the aggregate, do not exceed
2% of the investor's adjusted gross income. In addition, Code Section 68
provides that itemized deductions otherwise allowable for a taxable year of an
individual taxpayer will be reduced by the lesser of (i) 3% of the
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excess, if any, of adjusted gross income over $100,000, adjusted yearly for
inflation ($50,000, adjusted yearly for inflation, in the case of a married
individual filing a separate return), or (ii) 80% of the amount of itemized
deductions otherwise allowable for such year. In the case of a REMIC Pool, such
deductions may include deductions under Code Section 212 for servicing fees and
all administrative and other expenses relating to the REMIC Pool or any similar
expenses allocated to the REMIC Pool with respect to a regular interest it holds
in another REMIC. Such investors who hold REMIC Certificates either directly or
indirectly through certain pass-through entities may have their pro rata share
of such expenses allocated to them as additional gross income, but may be
subject to such limitation on deductions. In addition, such expenses are not
deductible at all for purposes of computing the alternative minimum tax, and may
cause such investors to be subject to significant additional tax liability.
Treasury regulations provide that the additional gross income and corresponding
amount of expenses generally are to be allocated entirely to the holders of
Residual Certificates in the case of a REMIC Pool that would not qualify as a
fixed investment trust in the absence of a REMIC election. However, such
additional gross income and limitation on deductions will apply to the allocable
portion of such expenses to holders of Regular Certificates, as well as holders
of Residual Certificates, where such Regular Certificates are issued in a manner
that is similar to pass-through certificates in a fixed investment trust. In
general, such allocable portion will be determined based on the ratio that a
REMIC Certificateholder's income, determined on a daily basis, bears to the
income of all holders of Regular Certificates and Residual Certificates with
respect to a REMIC Pool. As a result, individuals, estates or trusts holding
REMIC Certificates (either directly or indirectly through a grantor trust,
partnership, S corporation, REMIC, or certain other pass-through entities
described in the foregoing Treasury regulations) may have taxable income in
excess of the interest income at the pass-through rate on Regular Certificates
that are issued in a single class or otherwise consistently with fixed
investment trust status or in excess of cash distributions for the related
period on Residual Certificates.
Taxation of Certain Foreign Investors
Regular Certificates. Interest, including original issue discount,
distributable to Regular Certificateholders who are nonresident aliens, foreign
corporations, or other Non-U.S. Persons (as defined below), will be considered
"portfolio interest" and therefore, generally will not be subject to 30% United
States withholding tax, provided that such Non-U.S. Person (i) is not a
"10-percent shareholder" within the meaning of Code Section 871(h)(3)(B) or a
controlled foreign corporation described in Code Section 881(c)(3)(C) and (ii)
provides the Trustee, or the person who would otherwise be required to withhold
tax from such distributions under Code Sections 1441 or 1442, with an
appropriate statement, signed under penalties of perjury, identifying the
beneficial owner and stating, among other things, that the beneficial owner of
the Regular Certificate is a Non-U.S. Person. If such statement, or any other
required statement, is not provided, 30% withholding will apply unless reduced
or eliminated pursuant to an applicable tax treaty or unless the interest on the
Regular Certificate is effectively connected with the conduct of a trade or
business within the United States by such Non-U.S. Person. In the latter case,
such Non-U.S. Person will be subject to United States federal income tax at
regular rates. Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning a Regular
Certificate. The term "Non-U.S. Person" means any person who is not a U.S.
Person.
Residual Certificates. The Conference Committee Report to the 1986 Act
indicates that amounts paid to Residual Certificateholders who are Non-U.S.
Persons are treated as interest for purposes of the 30% (or lower treaty rate)
United States withholding tax. Treasury regulations provide that amounts
distributed to Residual Certificateholders qualify as "portfolio interest,"
subject to the conditions described in "Regular Certificates" above, but only to
the extent that (i) the Mortgage Assets were issued after July 18, 1984 and (ii)
the Trust fund or segregated pool of assets therein (as to which a separate
REMIC election will be made), to which the Residual Certificate relates,
consists of obligations issued in "registered form" within the meaning of Code
Section 163(f)(1). Generally, Mortgage Assets will not be, but regular interests
in another REMIC Pool will be, considered obligations issued in registered form.
Furthermore, a Residual Certificateholder will not be entitled to any exemption
from the 30% withholding tax (or lower treaty rate) to the extent of that
portion of REMIC taxable income that constitutes an "excess inclusion." See
"Taxation of Residual Certificates - Limitations on Offset or Exemption of REMIC
Income; Excess Inclusions." If the amounts paid to Residual Certificateholders
who are Non-U.S. Persons are effectively connected with the conduct of a trade
or business within the United States by such Non-U.S. Persons, 30% (or lower
treaty rate) withholding will not apply. Instead, the amounts paid to such
Non-U.S. Persons will
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be subject to United States federal income tax at regular rates. If 30% (or
lower treaty rate) withholding is applicable, such amounts generally will be
taken into account for purposes of withholding only when paid or otherwise
distributed (or when the Residual Certificate is disposed of) under rules
similar to withholding upon disposition of debt instruments that have original
issue discount. See "Tax-Related Restrictions on Transfer of Residual
Certificates - Foreign Investors" above concerning the disregard of certain
transfers having "tax avoidance potential." Investors who are Non-U.S. Persons
should consult their own tax advisors regarding the specific tax consequences to
them of owning Residual Certificates.
Backup Withholding
Distributions made on the Regular Certificates, and proceeds from the
sale of the Regular Certificates to or through certain brokers, may be subject
to a "backup" withholding tax under Code Section 3406 of 31% on "reportable
payments" (including interest distributions, original issue discount, and, under
certain circumstances, principal distributions) unless the Regular
Certificateholder complies with certain reporting and/or certification
procedures, including the provision of its taxpayer identification number to the
Trustee, its agent or the broker who effected the sale of the Regular
Certificate, or such Certificateholder is otherwise an exempt recipient under
applicable provisions of the Code. Any amounts to be withheld from distribution
on the Regular Certificates would be refunded by the Internal Revenue Service or
allowed as a credit against the Regular Certificateholder's federal income tax
liability.
Reporting Requirements
Reports of accrued interest and original issue discount will be made
annually to the Internal Revenue Service and to individuals, estates, non-exempt
and non-charitable trusts, and partnerships who are either holders of record of
Regular Certificates or beneficial owners who own Regular Certificates through a
broker or middleman as nominee. All brokers, nominees and all other non-exempt
holders of record of Regular Certificates (including corporations, non-calendar
year taxpayers, securities or commodities dealers, real estate investment
trusts, investment companies, common trust funds, thrift institutions and
charitable trusts) may request such information for any calendar quarter by
telephone or in writing by contacting the person designated in Internal Revenue
Service Publication 938 with respect to a particular series of Regular
Certificates. Holders through nominees must request such information from the
nominee. Treasury regulations provide that information necessary to compute the
accrual of any market discount on the Regular Certificates must be furnished for
calendar years beginning after 1990.
The Internal Revenue Service's Form 1066 has an accompanying Schedule
Q, Quarterly Notice to Residual Interest Holders of REMIC Taxable Income or Net
Loss Allocation. Treasury regulations require that Schedule Q be furnished by
the REMIC Pool to each Residual Certificateholder by the end of the month
following the close of each calendar quarter (41 days after the end of a quarter
under proposed Treasury regulations) in which the REMIC Pool is in existence.
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual
Certificateholders, furnished annually, if applicable, to holders of Regular
Certificates, and filed annually with the Internal Revenue Service concerning
Code Section 67 expenses (see "Limitations on Deduction of Certain Expenses"
above) allocable to such holders. Furthermore, under such regulations,
information must be furnished quarterly to Residual Certificateholders,
furnished annually to holders of Regular Certificates, and filed annually with
the Internal Revenue Service concerning the percentage of the REMIC Pool's
assets meeting the qualified asset tests described above under "Federal Income
Tax Consequences for REMIC Certificates," above."
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Federal Income Tax Consequences for Certificates as to Which No REMIC Election
Is Made
Arter & Hadden, special counsel to the Depositor, is of the opinion
that if a Trust does not elect REMIC status and is not treated as a partnership,
the tax consequences to the Owners will be as described below.
Standard Certificates
General. If no election is made to treat a Trust (or a segregated pool
of assets therein) with respect to a series of Certificates as a REMIC, the
Trust may be classified as a grantor trust under subparagraph E, Part 1 of
subchapter J of the Code and not as a partnership or an association taxable as a
corporation. Where there is no fixed retained yield with respect to the Mortgage
Assets underlying the Certificates of a series, and where such Certificates are
not designated as Stripped Certificates, as described below under "Stripped
Certificates" or as Partnership Interests described under "Taxation of
Securities Classified as Partnership Interests," the holder of each such
"Standard Certificate" in such series will be treated as the owner of a pro rata
undivided interest in the ordinary income and corpus portions of the Trust
represented by his Certificate and will be considered the beneficial owner of a
pro rata undivided interest in each of the Mortgage Assets, subject to the
discussion below under "Recharacterization of Servicing Fees." Accordingly, the
holder of a Certificate (a "Certificateholder") of a particular series will be
required to report on its federal income tax return its pro rata share of the
entire income from the Mortgage Assets, original issue discount (if any),
prepayment fees, assumption fees, and late payment charges received by or on
behalf of the Trust, in accordance with such Certificateholder's method of
accounting. A Certificateholder generally will be able to deduct its share of
servicing fees and all administrative and other expenses of the Trust in
accordance with his method of accounting, provided that such amounts are
reasonable compensation for services rendered to that Trust. However, investors
who are individuals, estates or trusts who own Certificates, either directly or
indirectly through certain pass-through entities, will be subject to limitation
with respect to certain itemized deductions described in Code Section 67,
including deductions under Code Section 212 for servicing fees and all such
administrative and other expenses of the Trust, to the extent that such
deductions, in the aggregate, do not exceed two percent of an investor's
adjusted gross income. In addition, Code Section 68 provides that itemized
deductions otherwise allowable for a taxable year of an individual taxpayer will
be reduced by the lesser of (i) 3% of the excess, if any, of adjusted gross
income over $100,000, adjusted yearly for inflation ($50,000, adjusted yearly
for inflation, in the case of a married individual filing a separate return), or
(ii) 80% of the amount of itemized deductions otherwise allowable for such year.
As a result such investors holding Certificates, directly or indirectly through
a pass-through entity, may have aggregate taxable income in excess of the
aggregate amount of cash received on such Certificates with respect to interest
at the pass-through rate on such Certificates or discount thereon. In addition,
such expenses are not deductible at all for purposes of computing the
alternative minimum tax and may cause such investors to be subject to
significant additional tax liability. Moreover, where there is fixed retained
yield with respect to the Mortgage Assets underlying a series of Certificates or
where the servicing fees are in excess of reasonable servicing compensation, the
transaction will be subject to the application of the "stripped bond" and
"stripped coupon" rules of the Code, as described below under "Stripped
Certificates" and "Premium and Discount - Recharacterization of Servicing Fees,"
respectively.
Tax Status. Subject to the discussion below, Arter & Hadden, special
counsel to the Depositor, is of the opinion that:
1. A Standard Certificate owned by a "domestic building and
loan association" within the meaning of Code Section 7701(a)(19) will
be considered to represent "loans . . . secured by an interest in real
property" within the meaning of Code Section 7701(a)(19)(C)(v),
provided that the real property securing the Mortgage Assets
represented by that Certificate is of the type described in such
section.
2. A Standard Certificate owned by a financial institution
described in Code Section 593(a) will be considered to represent
"qualifying real property loans" within the meaning of Code Section
592(d)(1), provided that the real property securing the Mortgage Assets
represented by that Certificate is of the type described in such
section.
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3. A Standard Certificate owned by a real estate investment
trust will be considered to represent "real estate assets" within the
meaning of Code Section 856(C) (5) (A) to the extent that the assets of
the related Trust consist of qualified assets, and interest income on
such assets will he considered "interest on obligations secured by
mortgages on real property" within the meaning of Code Section
856(c)(3)(B).
4. A Standard Certificate owned by a REMIC will be considered
to represent an "obligation (including any participation or certificate
of beneficial ownership therein) which is principally secured by an
interest in real property" within the meaning of Code Section
860G(a)(3)(A) to the extent that the assets of the related Trust
consist of "qualified mortgages" within the meaning of Code Section
860G(a)(3).
An issue arises as to whether buy-down Mortgage Assets may be
characterized in their entirety under the Code provisions cited in the
immediately preceding paragraph. Code Section 593(d)(l)(C) provides that the
term "qualifying real property loan" does not include a loan "to the extent
secured by a deposit in or share of the taxpayer." The application of this
provision to a buy-down fund with respect to a buy-down Mortgage Loan is
uncertain, but may require that a taxpayer's investment in a buy-down Mortgage
Loan be reduced by the buy-down fund. As to the treatment of buy-down Mortgage
Assets as "qualifying real property loans" under Code Section 593(d)(i) if the
exception of Code Section 593(d)(1)(C) is inapplicable, as "loans . . . secured
"by an interest in real property" under Code Section 7701(a)(19)(C)(v), as "real
estate assets" under Code Section 856(c)(5)(A), and as "obligation[s]
principally secured by an interest in real property" under Code Section
860G(a)(3)(A), there is indirect authority supporting treatment of an investment
in a buy-down Mortgage Loan as entirely secured by real property if the fair
market value of the real property securing the loan exceeds the principal amount
of the loan at the time of issuance or acquisition, as the case may be. There is
no assurance that the treatment described above is proper. Accordingly,
Certificateholders are urged to consult their own tax advisors concerning the
effects of such arrangements on the characterization of such Certificateholder's
investment for federal income tax purposes.
Premium and Discount
Certificateholders are advised to consult with their tax advisors as to
the federal income tax treatment of premium and discount arising either upon
initial acquisition of Certificates or thereafter.
Premium. The treatment of premium incurred upon the purchase of a
Certificate will be determined generally as described above under " - Taxation
of Regular Certificates - Premium."
Original Issue Discount. The Internal Revenue Service has stated in
published rulings that, in circumstances similar to those described herein, the
original issue discount rules will be applicable to a Certificateholder's
interest in those Mortgage Assets as to which the conditions for the application
of those sections are met. Rules regarding periodic inclusion of original issue
discount income are applicable to mortgages of corporations originated after May
27, 1969, mortgages of noncorporate mortgagors (other than individuals)
originated after July l, 1982, and mortgages of individuals originated after
March 2, 1984. Such original issue discount could arise by the charging of
points by the originator of the mortgages in an amount greater than a statutory
de minimis exception, to the extent that the points are not currently deductible
under applicable Code provisions or are not for services provided by the lender.
It is generally not anticipated that adjustable rate Mortgage Assets will be
treated as issued with original issue discount. However, the application of the
OID Regulations to adjustable rate mortgage loans with incentive interest rates
or annual or lifetime interest rate caps may result in original issue discount.
Original issue discount must generally be reported as ordinary gross
income as it accrues under a constant yield method that takes into account the
compounding of interest, in advance of the cash attributable to such income.
However, Code Section 1272 provide for a reduction in the amount of original
issue discount includible in the income of a holder of an obligation that
acquires the obligation after its initial issuance at a price greater than the
sum of the original issue price and the previously accrued original issue
discount, less prior payments of principal. Accordingly, if such Mortgage Assets
acquired by a Certificateholder are purchased at a price equal to the then
unpaid principal amount of such Mortgage Assets, no original issue discount
attributable to the difference between
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the issue price and the original principal amount of such Mortgage Assets (i.e.,
points) will be includible by such holder.
Market Discount. Certificateholders also will be subject to the market
discount rules to the extent that the conditions for application of those
sections are met. Market discount on the Mortgage Assets will be determined and
will be reported as ordinary income generally in the manner described above
under " - Taxation of Regular Certificates - Market Discount."
Recharacterization of Servicing Fees. If the servicing fees paid to
Servicers were deemed to exceed reasonable servicing compensation, the amount of
such excess would be nondeductible under Code Section 162 or 212. In this
regard,there are no authoritative guidelines for federal income tax purposes as
to either the maximum amount of servicing compensation that may be considered
reasonable in the context of this or similar transactions or whether, in the
case of the Certificates, the reasonableness of servicing compensation should be
determined on a weighted average or loan-by-loan basis. If a loan-by-loan basis
is appropriate, the likelihood that such amount would exceed reasonable
servicing compensation as to some of the Mortgage Assets would be increased.
Recently issued Internal Revenue Service guidance indicates that a servicing fee
in excess of reasonable compensation ("excess servicing") will cause the
Mortgage Assets to be treated under the "stripped bond" rules. Such guidance
provides safe harbors for servicing deemed to be reasonable and requires
taxpayers to demonstrate that the value of servicing fees in excess of such
amounts is not greater than the value of the services provided.
Accordingly, if the Internal Revenue Service's approach is upheld, a
servicer that receives excess servicing fees would be viewed as retaining an
ownership interest in a portion of the interest payments on the Mortgage Assets.
Under the rules of Code Section 1286, the separation of the right to receive
some or all of the interest payments on an obligation from the right to receive
some or all of the principal payments on the obligation would result in
treatment of such Mortgage Assets as "stripped coupons" and "stripped bonds."
While Certificateholders would still be treated as owners of beneficial
interests in a grantor trust for federal income tax purposes, the corpus of such
trust could be viewed as excluding the portion of the Mortgage Assets the
ownership of which is attributed to a servicer, or as including such portion as
a second class of equitable interest. Applicable Treasury regulations treat such
an arrangement as a fixed investment trust, since the multiple classes of trust
interests should be treated as merely facilitating direct investments in the
trust assets and the existence of multiple classes of ownership interests is
incidental to that purpose. In general, such a recharacterization should not
have any significant effect upon the timing or amount of income reported by a
Certificateholder, except that the income reported by a cash method holder may
be slightly accelerated. See "Stripped Certificates" below for a further
description of the federal income tax treatment of stripped bonds and stripped
coupons.
In the alternative, the amount, if any, by which the servicing fees
paid to the servicers are deemed to exceed reasonable compensation for servicing
could be treated as deferred payments of purchase price by the
Certificateholders to purchase an undivided interest in the Mortgage Assets. In
such event, the present value of such additional payments might be included in
the Certificateholder's basis in such undivided interests for purposes of
determining whether the Certificate was acquired at a discount, at par, or at a
premium. Under this alternative, Certificateholders may also be entitled to a
deduction for unstated interest with respect to each deferred payment. The
Internal Revenue Service may take the position that the specific statutory
provisions of Code Section 1286 described above override the alternative
described in this paragraph. Certificateholders are advised to consult their tax
advisors as to the proper treatment of the amounts paid to the servicers as set
forth herein as servicing compensation or under either of the alternatives set
forth above.
Sale or Exchange of Certificates. Upon sale or exchange of a
Certificate, a Certificateholder will recognize gain or loss equal to the
difference between the amount realized on the sale and its aggregate adjusted
basis in the Mortgage Assets and other assets represented by the Certificate. In
general, the aggregate adjusted basis will equal the Certificateholder's cost
for the Certificate, increased by the amount of any income previously reported
with respect to the Certificate and decreased by the amount of any losses
previously reported with respect to the Certificate and the amount of any
distributions received thereon. Except as provided above with respect to market
discount on any Mortgage Assets, and except for certain financial institutions
subject to the provisions of Code Section 582(c), any such gain or loss would be
capital gain or loss if the Certificate was held as a capital asset.
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Stripped Certificates
General. Pursuant to Code Section 1286, the separation of ownership of
the right to receive some or all of the principal payments on an obligation from
ownership of the right to receive some or all of the interest payments results
in the creation of "stripped bonds" with respect to principal payments and
"stripped coupons" with respect to interest payments. For purposes of this
discussion, Certificates that are subject to those rules will be referred to as
"Stripped Certificates." The Certificates will be subject to those rules if (i)
the Depositor or any of its affiliates retains (for its own account or for
purposes of resale), in the form of fixed retained yield or otherwise, an
ownership interest in a portion of the payments on the Mortgage Assets, (ii) the
Depositor, any of its affiliates or a servicer is treated as having an ownership
interest in the Mortgage Assets to the extent it is paid (or retains) servicing
compensation in an amount greater than reasonable consideration for servicing
the Mortgage Assets (see "Standard Certificates - Recharacterization of the
Servicing Fees" above) and (iii) a class of Certificates are issued in two or
more classes or subclasses representing the right to non pro rata percentages of
the interest and principal payments on the Mortgage Assets.
In general, a holder of a Stripped Certificate (a "Stripped
Certificateholder") will be considered to own "stripped bonds" with respect to
its pro rata share of all or a portion of the principal payments on each
Mortgage Loan and/or "stripped coupons" with respect to its pro rata share of
all or a portion of the interest payments on each Mortgage Loan, including the
Stripped Certificate's allocable share of the servicing fees paid, to the extent
that such fees represent reasonable compensation for services rendered. See
discussion above under "Standard Certificates - Recharacterization of Servicing
Fees." For this purpose the servicing fees will be allocated to the Stripped
Certificates in proportion to the respective offering price of each class (or
subclass) of Stripped Certificates. The holder of a Stripped Certificate
generally will be entitled to a deduction each year in respect of the servicing
fees, as described above under " - Federal Income Tax Consequences for
Certificates as to Which No REMIC Election is Made - Standard Certificates -
General," subject to the limitation described therein.
Code Section 1286 treats a stripped bond or a stripped coupon generally
as a new obligation issued (i) on the date that the stripped interest is
purchased and (ii) at a price equal to its purchase price or, if more than one
stripped interest is purchased, the share of the purchase price allocable to
such stripped interest. Each stripped interest generally will have original
issue discount equal to the excess of its stated redemption price at maturity
(or, in the case of a stripped coupon, the amount payable on the due date of
such coupon) over its issue price. Although the treatment of Stripped
Certificates for federal income tax purposes is not clear in certain respects at
this time, particularly where such Stripped Certificates are issued with respect
to a Trust containing variable-rate Mortgage Assets, the Depositor has been
advised by counsel that (i) the Trust will be treated as a grantor trust under
subpart E, Part 1 of subchapter J of the Code and not as an association taxable
as a corporation, and (ii) each Stripped Certificate should be treated as a
single installment obligation for purposes of calculating original issue
discount and gain or loss on disposition. This treatment is based on the
interrelationship of Code Section 1286 and the regulations thereunder, Code
Sections 1272 through 1275, and the OID Regulations. While under Code Section
1286 computations with respect to Stripped Certificates arguably should be made
in one of the ways described below, the OID Regulations state, in general, that
all debt instruments issued in connection with the same transaction must be
treated as a single debt instrument. The Trustee will make and report all
computations described below using this aggregate approach, unless substantial
legal authority requires otherwise.
Furthermore, the regulations under Code Section 1286 support the
treatment of a Stripped Certificate as a single debt instrument issued on the
date it is originated for purposes of calculating any original issue discount.
The preamble to such regulations state that such regulations are premised on the
assumption that an aggregation approach is appropriate in determining whether
original issue discount on a stripped bond or stripped coupon is de minimis. In
addition, under these regulations, a Stripped Certificate that represents a
right to payments of both interest and principal may be viewed either as issued
with original issue discount or market discount (as described below), at a de
minimis original issue discount, or presumably, at a premium. The preamble to
such regulations also provide that such regulations are premised on the
assumption that generally the interest component of such a Stripped Certificate
would be treated as stated interest under the original issue discount rules.
Further, the regulations provide that the purchaser of such a Stripped
Certificate may be required to account for any discount as market discount
rather than original issue discount if either (i) the initial discount with
respect to the Strip
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Certificate was treated as zero under the de minimis rule or (ii) no more than
100 basis points in excess of reasonable servicing is stripped off the related
Mortgage Assets. Any such market discount would be reportable as described above
under "Federal Income Tax Consequences for REMIC Certificates - Taxation of
Regular Certificates - Market Discount," without regard to the de minimis rule
therein.
Status of Stripped Certificates. No specific legal authority exists as
to whether the character of the Stripped Certificates, for federal income tax
purposes, will be the same as that of the Mortgage Assets. Although the issue is
not free from doubt, counsel has advised the Depositor that Stripped
Certificates owned by applicable holders should be considered to represent
"qualifying real property loans" within the meaning or Code Section 593(d)(1),
"real estate assets" within the meaning of Code Section 856(c)(A),
"obligations(s) . . . principally secured by an interest in real property"
within the meaning of Code Section 860G(a)(3)(A), and "loans . . . secured by an
interest in real property" within the meaning of Code Section 7701(a)(19)(C)(v),
and interest (including original issue discount) income attributable to Stripped
Certificates should be considered to represent "interest on obligations secured
by mortgages on real property" within the meaning or Code Section 856(c)(3)(B),
provided that in each case the Mortgage Assets and interest on such Mortgage
Assets qualify for such treatment. The application of such Code provisions to
buy-down Mortgage Assets is uncertain. See " - Federal Income Tax Consequences
for Certificates as to Which No REMIC Election is Made" and " - Standard
Certificates - Tax Status" above.
Original Issue Discount. Except as described above under " - General,"
each Stripped Certificate will be considered to have been issued (i) on the date
that the stripped interest is purchased and (ii) at a price equal to its
purchase price or, if more than one stripped interest is purchased, the share of
the purchase price allocable to such stripped interest. Each stripped interest
generally will have original issue discount equal to the excess of its stated
redemption price at maturity (or, in the case of a stripped coupon, the amount
payable on the due date of such coupon) over its issue price. Original issue
discount with respect to a Stripped Certificate must be included in ordinary
income as it accrues, in accordance with a constant yield method that takes into
account the compounding of interest, which may be prior to the receipt of the
cash attributable to such income. Counsel has advised the Depositor that the
amount of original issue discount required to be included in the income of a
Stripped Certificateholder in any taxable year likely will be computed generally
as described above under "Federal Income Tax Consequences for REMIC Certificates
- - Taxation of Regular Certificates - Original Issue Discount" and " - Variable
Rate Regular Certificates." However, with the apparent exception of a Stripped
Certificate issued with de minimis original issue discount, as described above
under " - General," the issue price of a Stripped Certificate will be the
purchase price paid by each holder thereof, and the stated redemption price at
maturity will include the aggregate amount of the payments to be made on the
Stripped Certificate to such Stripped Certificateholder, presumably under the
Prepayment Assumption, other than amounts treated as qualified stated interest.
If the Mortgage Assets prepay at a rate either faster or slower than
that under the Prepayment Assumption, a Stripped Certificateholder's recognition
of original issue discount will be either accelerated or decelerated and the
amount of such original issue discount will be either increased or decreased
depending on the relative interests in principal and interest on each Mortgage
Loan represented by such Stripped Certificateholder's Stripped Certificate.
While the matter is not free from doubt, the holder of a Stripped Certificate
should be entitled in the year that it becomes certain (assuming no further
prepayments) that the holder will not recover a portion of its adjusted basis in
such Stripped Certificate to recognize an ordinary loss equal to such portion of
unrecoverable basis.
As an alternative to the method described above, the fact that some of
or all the interest payments with respect to the Stripped Certificates will not
be made if the Mortgage Assets are prepaid could lead to the interpretation that
such interest payments are "contingent" within the meaning of the proposed
regulations issued under Code Section 1274 that address the treatment of
contingent payments. If the rules of those proposed regulations apply, treatment
of a Stripped Certificate under such rules depends on whether the aggregate
amount of principal payments, if any, to be made on the Stripped Certificate is
less than or greater than its issue price. If the aggregate principal payments
are greater than or equal to the issue price, the principal payments would be
treated as a separate installment obligation issued at a price equal to the
purchase price for the Stripped Certificate. In such case, original issue
discount would be calculated and accrued under the method described above
without consideration of the interest payments with respect to the Stripped
Certificate. Such payments of interest would be includible in the Stripped
Certificateholder's gross income in the taxable year in which the amounts become
fixed.
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If the aggregate amount of principal payments to be made on the Stripped
Certificate is less than its issue price, each payment of principal would be
treated as a return of basis. Each payment of interest would be treated as
includible in gross income to the extent of the applicable Federal rate under
Code Section 1274(d), as applied to the adjusted basis of the Stripped
Certificate, while amounts received in excess of the applicable Federal rate, as
applied to the adjusted basis of the Stripped Certificate, would be
characterized as a return of basis until the total amount of interest payments
treated as a return of basis equalled the excess of the purchase price over the
aggregate stated principal payments. Any additional interest payments thereafter
would be treated as ordinary income. While not free from doubt uncertainty as to
the payment of interest arising as a result of the possibility of prepayment of
the Mortgage Assets should not cause the rules under the proposed contingent
payment regulations to apply to interest with respect to the Stripped
Certificates.
Sale or Exchange of Stripped Certificates. Sale or exchange of a
Stripped Certificate prior to its maturity will result in gain or loss equal to
the difference, if any, between the amount received and the Stripped
Certificateholder's adjusted basis in such Stripped Certificate, as described
above under "Federal Income Tax Consequences for REMIC Certificates - Taxation
of Regular Certificates - Sale or Exchange of Regular Certificates." To the
extent that a subsequent purchaser's purchase price is exceeded by the remaining
payments on the Stripped Certificates, such subsequent purchaser will be
required for federal income tax purposes to accrue and report such excess as if
it were original issue discount in the manner described above. It is not clear
for this purpose whether the assumed prepayment rate that is to be used in the
case of a Stripped Certificateholder other than by original Stripped
Certificateholder should be the Prepayment Assumption or a new rate based on the
circumstances at the date of subsequent purchase.
Purchase of More Than One Class of Stripped Certificates. Where an
investor purchases more than one class of Stripped Certificates, it is currently
unclear whether for federal income tax purposes such classes of Stripped
Certificates should be treated separately or aggregated for purposes of the
rules described above.
Because of these possible varying characterizations of Stripped
Certificates and the resultant differing treatment of income recognition,
Stripped Certificateholders are urged to consult their own tax advisors
regarding the proper treatment of Stripped Certificates for federal income tax
purposes.
Reporting Requirements and Backup Withholding
The Trustee will furnish, within a reasonable time after the end of
each calendar year, to each Certificateholder or Stripped Certificateholder at
any time during such year, such information (prepared on the basis described
above) as the Trustee deems to be necessary or desirable to enable such
Certificateholders to prepare their federal income tax returns. Such information
will include the amount of original issue discount accrued on Certificates held
by persons other than Certificateholders exempted from the reporting
requirements. The amounts required to be reported by the Trustee may not be
equal to the proper amount of original issue discount required to be reported as
taxable income by a Certificateholder, other than an original Certificateholder.
The Trustee will also file such original issue discount information with the
Internal Revenue Service. If a Certificateholder fails to supply an accurate
taxpayer identification number or if the Secretary of the Treasury determines
that a Certificateholder has not reported all interest and dividend income
required to be shown on his federal income tax return, 31% backup withholding
may be required in respect of any reportable payments, as described above under
" - Backup Withholding."
Taxation of Certain Foreign Investors
To the extent that a Certificate evidences ownership in Mortgage Assets
that are issued on or before July 18, 1984, interest or original issue discount
paid by the person required to withhold tax under Code Section 1441 or 1442,
which apply to nonresident aliens, foreign corporations, or other Non-U.S.
Persons generally will be subject to 30% United States withholding tax, or such
lower rate as may be provided for interest by an applicable tax treaty. Accrued
original issue discount or market discount recognized by the Certificateholder
on the sale or exchange of such a Certificate also will be subject to federal
income tax at the same rate.
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Treasury regulations provide that interest or original issue discount
paid by the Trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in Mortgage Assets issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will be
subject to the same certification requirements described above under " -
Taxation of Certain Foreign Investors - Regular Certificates."
Taxation of Securities Classified as Partnership Interests
Certain Trusts may be treated as partnerships for Federal income tax
purposes. In such event, the Trusts may issue Certificates characterized as
"Partnership Interests" as discussed in the related Prospectus Supplement. With
respect to such series of Partnership Interests, Arter & Hadden, special counsel
to the Depositor, is of the opinion that (unless otherwise limited in the
related Prospectus Supplement) the Trust will be characterized as a partnership
and not an association taxable as a corporation for federal income tax purposes,
which will also cover any material federal income tax consequences applicable to
the Owners.
PLAN OF DISTRIBUTION
Certificates are being offered hereby in series through one or more
underwriters or groups of underwriters (the "Underwriters"). The Prospectus
Supplement will set forth the terms of offering of the series of Certificates,
including the public offering or purchase price of each class of Certificates of
such series being offered thereby or the method by which such price will be
determined and the net proceeds to the Depositor from the sale of each such
class. Such Certificates will be acquired by the Underwriters for their own
account or may be offered by the Underwriters on a best efforts basis. The
Underwriters may resell such Certificates from time to time in one or more
transactions including negotiated transactions, at fixed public offering prices
or at varying prices to be determined at the time of sale or at the time of
commitment therefor. The managing Underwriter or Underwriters with respect to
the offer and sale of a particular series of Certificates will be set forth on
the cover of the Prospectus Supplement relating to such series and the members
of the underwriting syndicate, if any, will be named in such Prospectus
Supplement
In connection with the sale of the Certificates, Underwriters may
receive compensation from the Depositor or from purchasers of the Certificates
in the form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the Certificates may be deemed to be
underwriters in connection with such Certificates, and any discounts or
commissions received by them from the Depositor and any profit on the resale of
Certificates by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended. The Prospectus Supplement will
describe any such compensation paid by the Depositor.
It is anticipated that the underwriting agreement pertaining to the
sale of any series of Certificates will provide that the obligations of the
Underwriters will be subject to certain conditions precedent, that the
Underwriters will be obligated to purchase all such Certificates if any are
purchased and that the Depositor will indemnify the Underwriters against certain
civil liabilities, including liabilities under the Securities Act of 1933, as
amended.
RATINGS
Each Class of Certificates of a Series will be rated at their initial
issuance in one of the four highest categories by at least one Rating Agency.
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 Agency. No person is obligated to maintain the rating on any
Certificate, and, accordingly, there can be no assurance that the ratings
assigned to a Certificate upon initial issuance will not be lowered or withdrawn
by a Rating Agency at any time thereafter. In general, ratings address credit
risk and do not represent any assessment of the likelihood or rate of principal
prepayments.
LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Depositor by Arter & Hadden,
Washington, D.C. Certain legal matters relating to insolvency issues and certain
federal income tax matters concerning the Certificates will be passed upon for
the Depositor by Arter & Hadden.
FINANCIAL INFORMATION
A Trust will be formed with respect to each series of Certificates. No
Trust will have any assets or obligations prior to the issuance of the related
series of Certificates. No Trust will engage in any activities other
63
<PAGE>
than those described herein or in the Prospectus Supplement. Accordingly, no
financial statement with respect to any Trust is included in this Prospectus or
will be included in the Prospectus Supplement.
The Depositor has determined that its financial statements are not
material to the offering made hereby.
A Prospectus Supplement and the related Form 8-K (which will be
incorporated by reference to the Registration Statement) may contain financial
statements of the related Credit Enhancer, if any.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
64
<PAGE>
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
Page
1986 Act...............................................................42
Agreement...............................................................1
Applicable Accounting Standards........................................27
Balloon Loans...........................................................6
Beneficial Owners.......................................................4
BIF....................................................................28
Book Entry Certificates.................................................4
Certificate Account....................................................11
Certificate Interest Rate..............................................10
Certificate Principal Balance...........................................9
Certificate Register....................................................9
Certificate Registrar...................................................9
Certificateholder......................................................57
Certificates............................................................1
Clearing Agency.........................................................4
Clearing Agency Participants............................................4
Code....................................................................4
Companion Certificates.................................................10
Compound Interest Certificates.........................................10
Cooperative Loans......................................................13
Cooperatives............................................................1
Credit Enhancement......................................................4
Credit Enhancer.........................................................8
Custodial Account......................................................21
Cut-Off Date...........................................................10
Defective Mortgage Loan................................................27
Delivery Date...........................................................8
Deposit Date...........................................................27
Depositor...............................................................1
Disqualified Organization..............................................51
Distribution Date......................................................11
DOL....................................................................39
Eligible Investments...................................................28
ERISA...................................................................4
Events of Default......................................................30
FDIC...................................................................21
FHLMC...................................................................2
Financial Guaranty Insurance Policy....................................16
Financial Guaranty Insurer.............................................16
Fitch...................................................................5
FNMA....................................................................2
Garn-St. Germain Act...................................................36
GNMA....................................................................2
Insurance Paying Agent.................................................16
Insurance Proceeds.....................................................21
Insured Payment........................................................16
Interest Accrual Period................................................11
Liquidation Proceeds...................................................21
Loan-to-Value Ratio....................................................14
Master Servicer.........................................................1
MBS.....................................................................1
MBS Agreement..........................................................15
MBS Issuer.............................................................15
MBS Servicer...........................................................15
MBS Trustee............................................................15
Monthly Advance........................................................21
Moody's.................................................................5
Mortgage Assets.........................................................1
Mortgage Loans..........................................................1
Mortgage Notes.........................................................13
Mortgage Pool Insurance Policy.........................................18
Mortgage Rates.........................................................14
Mortgage-Backed Securities..............................................1
Mortgaged Properties...................................................13
Mortgages..............................................................13
Mortgagors.............................................................20
NCUA...................................................................21
Non-Priority Certificates..............................................10
Non-U.S. Person........................................................55
Noneconomic Residual Interest..........................................52
Nonrecoverable Advance.................................................21
Notional Principal Balance.............................................11
OBRA...................................................................40
OID Regulations........................................................40
Original Value.........................................................14
OTS....................................................................36
Owners.................................................................11
Partnership Interests..................................................63
Pass-Through Entity....................................................51
Pass-Through Rate.......................................................3
Plans..................................................................38
Policy Statement.......................................................38
Pool Insurer...........................................................18
Pre-Funding Account.....................................................3
Pre-Funding Agreement...................................................3
Prepayment Assumption..................................................43
Principal Balance......................................................14
Principal Prepayments..................................................12
Priority Certificates..................................................10
PTE 83-1...............................................................39
Rating Agency...........................................................5
Record Date............................................................11
Regular Certificateholder..............................................42
Regular Certificates...................................................40
REIT...................................................................41
Relief Act..............................................................8
REMIC...................................................................4
REMIC Certificates.....................................................40
REMIC Pool.............................................................40
REMIC Regulations......................................................40
Remittance Date........................................................21
Remittance Rate........................................................21
Reserve Fund...........................................................20
Residual Certificateholders............................................47
Residual Certificates..................................................40
Retail Class Certificate...............................................42
S&P.....................................................................5
SAIF...................................................................28
Scheduled Amortization Certificates....................................10
Seller..................................................................1
Senior Certificates....................................................16
Servicer................................................................1
SMMEA...................................................................5
Special Allocation Certificates........................................10
Special Hazard Insurance Policy........................................18
Special Hazard Insurer.................................................19
Standard Certificate...................................................57
Stripped Certificateholder.............................................60
Stripped Certificates..................................................60
Subordinated Certificates..............................................16
Thrift Institution.....................................................41
TMP....................................................................41
Trust...................................................................1
Trustee.................................................................1
U.S. Person............................................................53
UCC....................................................................34
Underwriters...........................................................63
A-1
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses in connection
with the issuance and distribution of the Certificates, other than underwriting
discounts and commissions.*
Filing Fee for Registration Statement..................... $ 517,241.40
Legal Fees and Expenses*.................................. 300,000.00
Accounting Fees and Expenses*............................. 150,000.00
Trustee's Fees and Expenses *.............................. 17,500.00
Printing and Engraving Fees*.............................. 150,000.00
Blue Sky Fees and Expenses*............................... 12,500.00
Rating Agency Fees*....................................... 750,000.00
Financial Guaranty Insurer Fees*.......................... 225,000.00
Miscellaneous (includes bond analytics, due diligence,
counsel for accountants and Trustee)*.................. 230,000.00
Total............................................... $2,352,241.40
- ---------------------
* Estimated in accordance with Item 511 of Regulation S-K.
Item 16. Exhibits.
1.1 * -- Form of Underwriting Agreement.
3.1 * -- Certificate of Incorporation of IMC Securities Inc.
II-i
<PAGE>
3.2 * -- Bylaws of IMC Securities Inc..
4.1 * -- Form of Pooling and Servicing Agreement.
5.1 *** -- Opinion of Arter & Hadden regarding the legality of the
Certificates.
8.1 *** -- Opinion of Arter & Hadden regarding tax matters.
10.1 ** -- Representative Form(s) of Mortgage Note(s).
10.2 ** -- Representative Form of Mortgage.
23.1 *** -- Consent of Arter & Hadden (included as part of Exhibits 5.1
and 8.1).
24.1 * -- Powers of Attorney.
24.3 ** -- Consent of Independent Auditor of Certificate Insurer.
- -----------------
* Previously filed on May 31, 1996.
** To be filed by amendment.
*** Filed herewith.
II-ii
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant hereby certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-3 and has duly caused this
Amendment No. 1 to Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Tampa, State of Florida,
on the 9th day of July, 1996.
IMC SECURITIES INC.
By: /s/George Nicholas
-----------------------------------
George Nicholas
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/George Nicholas
- ----------------------
George Nicholas Chief Executive Officer and Director July 9, 1996
/s/Thomas Middleton Chief Financial Officer and Director July 9, 1996
- ----------------------
Thomas Middleton
/s/Timothy Griffin Director May 30, 1996
- ----------------------
Timothy Griffin
<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
EXHIBITS
To
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------
IMC SECURITIES, INC.
(Exact Name of registrant as specified in charter)
================================================================================
<PAGE>
EXHIBIT INDEX
-------------
Location of Exhibit
Exhibit in Sequential
Number Description of Document Numbering System
- ------ ----------------------- ----------------
5.1 Opinion of Arter & Hadden regarding the
legality of the Certificates
8.1 Opinion of Arter & Hadden regarding tax
matters
23.1 Consent of Arter & Hadden (included as part
of Exhibits 5.1 and 8.1)
<PAGE>
Exhibit 5.1
July 9, 1996
IMC Securities, Inc.
3450 Bushwood Park Drive
Tampa, FL 33618
Re: IMC Securities, Inc.
Home Equity Loan Asset-Backed Pass-Through Certificates
Registration Statement on Form S-3 -- No. 333-4911
----------------------------------
Ladies and Gentlemen:
We have acted as counsel to IMC Securities, Inc. (the "Depositor") in
connection with the preparation and filing of the registration statement on Form
S-3 (such registration statement, the "Registration Statement") being filed
today with the Securities and Exchange Commission pursuant to the Securities Act
of 1933, as amended (the "Act"), in respect of Home Equity Loan Asset-Backed
Pass-Through Certificates (the "Certificates") which you plan to offer in
series, each series to be issued under a separate pooling and servicing
agreement (a "Pooling and Servicing Agreement"), in substantially the form set
forth as an exhibit to the Registration Statement, among the Depositor, Industry
Mortgage Company, L.P. (the "Seller" and the "Servicer"), and a trustee (the
"Trustee") to be identified in the prospectus supplement for such series of
Certificates.
We have examined and relied on the originals or copies certified or
otherwise identified to our satisfaction of all such documents and records of
the Depositor and such other instruments and other certificates of public
officials, officers and representatives of the Depositor and such other persons,
and we have made such investigations of law, as we deemed appropriate as a basis
for the opinions expressed below.
The opinions expressed below are subject to bankruptcy, insolvency,
reorganization, moratorium and other laws relating to or affecting creditors'
rights generally and to general equity principles.
<PAGE>
This opinion is limited to matters involving the Federal laws of the
United States of America, the laws of the State of New York and, to the extent
relevent to the opinions expressed herein, the General Corporation Law of the
State of Delaware. All opinions expressed herein are based on laws, regulations
and policy guidelines currently in force and may be affected by future
regulations.
Based upon the foregoing, we are of the opinion that:
1. When, in respect of a series of Certificates, a Pooling and
Servicing Agreement has been duly authorized by all necessary action and duly
executed and delivered by the Depositor, the Seller, the Servicer and the
Trustee for such series, such Pooling and Servicing Agreement, will be a valid
and legally binding obligation of the Depositor; and
2. When a Pooling and Servicing Agreement for a series of Certificates
has been duly authorized by all necessary action and duly executed and delivered
by the Depositor, the Seller, the Servicer and the Trustee for such series, and
when the Certificates of such series have been duly executed and authenticated
in accordance with the provisions of the Pooling and Servicing Agreement, and
issued and sold as contemplated in the Registration Statement and the
prospectus, as amended or supplemented, delivered pursuant to Section 5 of the
Act in connection therewith, such Certificates will be legally and validly
issued, fully paid and nonassessable, and the holders of such Certificates will
be entitled to the benefits of such Pooling and Servicing Agreement.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to this firm in the Registration
Statement and the related prospectus under the heading "Legal Matters".
This opinion is furnished by us as counsel to the company and is solely
for the benefit of the addressee thereof. It may not be relied upon by any other
person or for any other purpose without our prior written consent.
Very truly yours,
/s/ Arter & Hadden
----------------------
Arter & Hadden
<PAGE>
[Letterhead of Arter & Hadden]
Exhibit 8.1
July 9, 1996
Re: IMC Securities Inc.
Home Equity Loan Asset-Backed Pass-Through Certificates
Registration Statement on Form S-3--No. 333-4911
----------------------------------
Ladies and Gentlemen:
We have acted as counsel to IMC Securities Inc. in connection with the
preparation and filing of the registration statement on Form S-3 (such
registration statement, the "Registration Statement") being filed today with the
Securities and Exchange Commission pursuant to the Securities Act of 1933, as
amended (the "Act"), in respect of Home Equity Loan Asset-Backed Pass-Through
Certificates, (the "Certificates") which you plan to offer in series. Our
opinions formed the basis for the description of federal income tax consequences
appearing under the heading "Federal Income Tax Consequences" in the prospectus
supplement contained in the Registration Statement. Assuming issuance of
Certificates of a series and assuming the federal income tax characterization of
these Certificates as REMIC interests or partnership interests at that time, we
confirm that the Description under "Federal Income Tax Consequences" in the
prospectus of the federal income tax consequences with respect to a series of
Certificates presents our opinion of the material federal income tax issues
relating to an investment in the Certificates.
We hereby consent to the filing of this letter as Exhibit 8.1 to the
Registration Statement and to the reference to this firm in the Registration
Statement and related prospectus supplement under the heading "Federal
Income Tax Consequences."
Very truly yours,
/s/ Arter & Hadden
-------------------
Arter & Hadden
