AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 31, 1997
Registration Statement No. 333-31197
================================================================================
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 charter)
DELAWARE 59-3284026
(State of Incorporation) (I.R.S. Employer Identification Number)
5901 East Fowler Avenue
Tampa, FL 33617-2362
(813) 984-8801
(Address and telephone number of
principal executive offices)
-------------------
Joseph V. Gatti, Esq.
Arter & Hadden
1801 K Street, N.W.
Suite 400K
Washington, DC 20006
(202) 775-4442
Fax: (202) 857-0172
(Name, address and telephone number
of agent for service)
-------------------
Please send copies of communications to:
-------------------
Thomas Middleton
Industry Mortgage Company, L.P.
5901 East Fowler Avenue
Tampa, FL 33617-2362
(813) 984-2533
Fax: (813) 984-2593
-------------------
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. [ ]
-------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
================================ ================== ===================== ======================= ==================
Title of Securities Amount Being Proposed Maximum Proposed Maximum Amount of
Being Registered Registered Offering Price Aggregate Offering Registration Fee
Per Unit* Price
- -------------------------------- ------------------ --------------------- ----------------------- ------------------
<S> <C> <C> <C> <C>
Home Equity Loan Asset Backed $3,000,000,000 100% $3,000,000,000 $909,090.90**
Certificates and Notes
================================ ================== ===================== ======================= ==================
</TABLE>
* Estimated solely for purposes of calculating the registration fee.
** $303.03 paid by wire transfer on July 11, 1997.
-------------------
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 $3,000,000,000 of home equity loan
asset backed certificates and notes 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 and notes. The
prospectus is accompanied by two forms of prospectus supplement describing each
of the structures that are expected to be employed by the Registrant for the
issuance of certificates and notes. 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
ITEMS AND CAPTION IN FORM S-3 LOCATION IN PROSPECTUS
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**; Risk
Factors**
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
- ----------
* Answer negative or item inapplicable.
** To be completed from time to time by Prospectus Supplement.
3
<PAGE>
CERTIFICATES
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 Asset Backed 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 7 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__
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This preliminary prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such State.
<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
Calculation of LIBOR ..................................................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-63
REPORT OF EXPERTS...........................................................S-65
CERTAIN LEGAL MATTERS.......................................................S-65
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS.................................A-1
<PAGE>
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.....................................................................
Mortgage Loans............................................................
Mortgage-Backed Securities................................................
Other Mortgage Securities.................................................
CREDIT ENHANCEMENT.............................................................
SERVICING OF HOME EQUITY LOANS.................................................
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...........................................................
THE POOLING AND SERVICING AGREEMENT............................................
Assignment of Mortgage Assets.............................................
Evidence as to Compliance.................................................
The Trustee...............................................................
Administration of the Security Account....................................
Reports...................................................................
Forward Commitments; Pre-Funding..........................................
Servicer Events of Default................................................
Rights Upon Servicer Event of Default.....................................
Amendment.................................................................
Termination...............................................................
INDENTURE .....................................................................
General ..................................................................
Modification of Indenture.................................................
Note Events of Default....................................................
Rights Upon Note Events of Default........................................
Annual Compliance Statements..............................................
Trustee's Annual Report ..................................................
Satisfaction and Discharge of Indenture...................................
Redemption of Notes.......................................................
Reports of Notes..........................................................
Reports by Trustee to Note Owners.........................................
Limitation Suits..........................................................
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 Securities......................
Taxation of Regular Securities............................................
Taxation of Residual Securities...........................................
Treatment of Certain Items of REMIC Income and Expense....................
Tax-Related Restrictions on Transfer of Residual Security.................
Sale or Exchange of a Residual Securities.................................
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 Securities as to
Which No REMIC Election Is Made.......................................
Standard Securities.......................................................
Premium and Discount......................................................
Stripped Securities.......................................................
Reporting Requirements and Backup Withholding.............................
Taxation of Certain Foreign Investors.....................................
Debt Certificates.........................................................
Notes.....................................................................
Taxation of Securities Classified as Partnership Interests................
PLAN OF DISTRIBUTION...........................................................
RATINGS........................................................................
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 Asset Backed
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 5901 East Fowler Avenue, Tampa,
Florida 33617-2362.
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.
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
S-2
<PAGE>
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 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
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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 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.
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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
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.
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(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 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:
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(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
(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
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<PAGE>
(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.
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
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<PAGE>
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 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.
S-9
<PAGE>
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 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
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<PAGE>
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 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
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<PAGE>
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 "Certain 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.
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
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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.
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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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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 the Initial Home Equity Loans in the [Fixed Rate] Group. See
"The Home Equity Loan Pool--Conveyance of Subsequent Home Equity Loans" herein.
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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.
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
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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 5901 East Fowler Avenue, Tampa, Florida 33617-2362 and its telephone number
is (813) 984-8801.
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 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
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(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.
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
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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.
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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 5901 East Fowler Avenue, Tampa,
Florida 31617-2362, None of the Depositor, the Seller or the Servicer nor any of
their affiliates will insure or guarantee distributions on the Certificates.
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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 guidelines. The purpose
S-21
<PAGE>
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 CutOff 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:
<TABLE>
<CAPTION>
PROPERTY TYPES NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
<S> <C> <C> <C>
Single Family Detached
Two-to-Four Family
Single Family Attached
Condominium
Planned Unit Development
Townhouse
Mixed Use
Multifamily Residential
Cooperative
</TABLE>
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:
<TABLE>
<CAPTION>
NUMBER OF MONTHS NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
SINCE ORIGINATION HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
<S> <C> <C> <C>
Total $
</TABLE>
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:
<TABLE>
<CAPTION>
MONTHS REMAINING NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
TO MATURITY HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
<S> <C> <C> <C>
Total $
</TABLE>
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 Cut-Off Date was as follows:
<TABLE>
<CAPTION>
NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
OCCUPANCY STATUS HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
<S> <C> <C> <C>
</TABLE>
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:
<TABLE>
<CAPTION>
Number of Aggregate % of Aggregate
STATE Home Equity Loans Loan Balance Loan Balance
<S> <C> <C> <C>
Total $
</TABLE>
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:
<TABLE>
<CAPTION>
RANGE OF NUMBER OF AGGREGATE % OF AGGREGATE
ORIGINAL LTVS HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
<S> <C> <C> <C>
Total $
</TABLE>
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 Cut-Off Date were distributed as follows as
of the Cut-Off Date:
<TABLE>
<CAPTION>
RANGE OF NUMBER OF AGGREGATE % OF AGGREGATE
COUPON RATES HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
<S> <C> <C> <C>
Total $
</TABLE>
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:
<TABLE>
<CAPTION>
RANGE OF NUMBER OF AGGREGATE % OF AGGREGATE
LOAN BALANCES HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
<S> <C> <C> <C>
Total $
</TABLE>
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:
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
PROPERTY TYPES HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
<S> <C> <C> <C>
Single Family Detached $ %
Condominium
Planned Unit Development
Two-to-Four Family
Townhouse
Total $
</TABLE>
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:
<TABLE>
<CAPTION>
NUMBER OF MONTHS NUMBER OF AGGREGATE % OF AGGREGATE
SINCE ORIGINATION HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
<S> <C> <C> <C>
Total
</TABLE>
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:
<TABLE>
<CAPTION>
MONTHS REMAINING NUMBER OF AGGREGATE % OF AGGREGATE
TO MATURITY HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
<S> <C> <C> <C>
Total $
</TABLE>
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:
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
OCCUPANCY STATUS HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
<S> <C> <C> <C>
Owner Occupied $ %
Investor Owned
Vacation/Second Home
Total $
</TABLE>
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
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
MARGINS HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
<S> <C> <C> <C> <C>
Total $
</TABLE>
[ONE YEAR CMT ARM]
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
MARGINS HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
<S> <C> <C> <C> <C>
Total $
</TABLE>
[5/25 LOANS]
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
MARGINS HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
<S> <C> <C> <C> <C>
Total $
</TABLE>
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
<TABLE>
<CAPTION>
MAXIMUM NUMBER OF AGGREGATE % OF AGGREGATE
COUPON RATES HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
<S> <C> <C> <C> <C>
Total $
</TABLE>
[ONE YEAR CMT ARM]
<TABLE>
<CAPTION>
MAXIMUM NUMBER OF AGGREGATE % OF AGGREGATE
COUPON RATES HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
<S> <C> <C> <C> <C>
Total $
</TABLE>
[5/25 LOANS]
<TABLE>
<CAPTION>
MAXIMUM NUMBER OF AGGREGATE % OF AGGREGATE
COUPON RATES HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
<S> <C> <C> <C> <C>
Total $
</TABLE>
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
<TABLE>
<CAPTION>
NUMBER OF MONTHS TO NUMBER OF AGGREGATE % OF AGGREGATE
NEXT COUPON RATE CHANGE HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
<S> <C> <C> <C>
1 $ %
2
3
4
5
6
Total $
</TABLE>
ONE YEAR CMT ARM
<TABLE>
<CAPTION>
NUMBERS OF MONTHS TO NUMBER OF AGGREGATE % OF AGGREGATE
NEXT COUPON RATE CHANGE HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
<S> <C> <C> <C>
1 $ %
3
4
5
6
7
8
9
10
11
Total $
</TABLE>
5/25 LOANS
<TABLE>
<CAPTION>
NUMBER OF MONTHS TO NUMBER OF AGGREGATE % OF AGGREGATE
NEXT COUPON RATE CHANGE HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
<S> <C> <C> <C>
43 $ %
49
50
51
52
53
Total $
</TABLE>
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>
HOME EQUITY LOANS FIXED RATE GROUP
<TABLE>
<CAPTION>
Original Remaining Original
Term to Term to Amortization
Pool Principal Gross Coupon Net Coupon Maturity Maturity Term
Number Balance Rate Rate (in months) (in months) (in months)
- -------------- ---------------------- ------------------ ------------------ --------------- --------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
Amortization
Method
------------------
ADJUSTABLE RATE GROUP
<TABLE>
<CAPTION>
Original
Months Maximum Term to
Pool Principal Gross Coupon Net Coupon to Rate Interest Maturity
Number Balance Rate Rate Change Margin Rate (in months)
- ------------- ---------------- ------------------ ---------------- ----------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
$
</TABLE>
Remaining Original
Term to Amortization
Maturity Term Amortization
(in months) (in months) Method
- -------------- ---------------- -----------------
Level
Level
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
<TABLE>
<CAPTION>
Class A-1 Class A-2 CLASS A-3
Payment Date
<S> <C> <C> <C>
</TABLE>
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 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.
S-38
<PAGE>
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 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.
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<PAGE>
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 any Reimbursement Amount owed to
the Certificate Insurer with respect to the other Home
Equity Loan Group;
S-40
<PAGE>
(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.
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.
S-41
<PAGE>
"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.
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.
S-42
<PAGE>
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., 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.
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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 and affecting the
Depository, and to the Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates of such Beneficial Owners are credited.
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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
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
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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:
(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
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(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
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
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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.
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
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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 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
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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 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
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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 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.
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"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 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
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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.
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
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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 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
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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.
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.
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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
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.
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<PAGE>
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:
(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;
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(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 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;
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(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 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.
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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 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.
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<PAGE>
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 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.
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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 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.
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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.
[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 $
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CLASS A-2 CERTIFICATES
UNDERWRITERS PRINCIPAL AMOUNT
-------------------- $
-------------------- $
TOTAL $
CLASS A-3 CERTIFICATES
UNDERWRITERS PRINCIPAL AMOUNT
-------------------- $
-------------------- $
TOTAL $
CLASS A-4 CERTIFICATES
UNDERWRITERS PRINCIPAL AMOUNT
-------------------- $
-------------------- $
TOTAL $
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 $
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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..................................... % %
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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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-2
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
81996.2D
A - 1
<PAGE>
===================================== ========================================
NO DEALER, SALESPERSON OR OTHER
PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY IMC HOME EQUITY
REPRESENTATION NOT CONTAINED IN THIS LOAN TRUST 199_-__
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 Class A-1 Certificates
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 Class A-2 Certificates
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 Class A-3 Certificates
DATE.
----------
TABLE OF CONTENTS
PAGE $
PROSPECTUS SUPPLEMENT Class A-4 Certificates
Summary......................... S-
Risk Factors ................... S-
The Seller and Servicer......... S-
Use of Proceeds................. S-
The Depositor................... S- $
The Home Equity Loan Pool....... S- Class A-5 Certificates
Prepayment and Yield
Considerations................ S-
Formation of the Trust and
Trust Property................ S-
Additional Information.......... S- $
Description of the Class A Class A-6 Certificates
Certificates.................. S-
The Certificate Insurer......... S-
Credit Enhancement.............. S-
The Pooling and Servicing
Agreement..................... S- $
Federal Income Tax Consequences. S- Class A-7 Certificates
ERISA Considerations............ S-
Ratings......................... S-
Legal Investment Considerations. S-
Underwriting.................... S-
Report of Experts............... S- $
Certain Legal Matters........... S- Class A-8 Certificates
Index to Location of Principal
Defined Terms................. A-1
PROSPECTUS
Summary of Prospectus........... 1
Risk Factors.................... 7 IMC Home Equity Loan Trust
Series 199_-__
Description of the Securities... 11
The Trusts...................... 15
Credit Enhancement.............. 19
Servicing of the Home Equity
Loans......................... 23
The Pooling and Servicing
Agreement.................... 28
The Indenture................... 34 -----------
Use of Proceeds................. 37 PROSPECTUS SUPPLEMENT
The Depositor................... 38 -----------
Certain Legal Aspects of the
Mortgage Assets............... 38 ____________________
Legal Investment Matters........ 44
ERISA Considerations............ 45 ____________________
Federal Income Tax Consequences. 46
Plan of Distribution............ 71 __________ __, 199__
Ratings......................... 72
Legal Matters................... 72
Financial Information........... 72
Index to Location of Principal
Defined Terms................. A-1
===================================== ========================================
<PAGE>
PROSPECTUS SUPPLEMENT NOTES
(TO PROSPECTUS DATED ______, 199__)
IMC HOME EQUITY LOAN OWNER TRUST 199__-__
INDUSTRY MORTGAGE COMPANY, L.P.
[LOGO] SELLER AND SERVICER
IMC SECURITIES, INC.
DEPOSITOR
$___________ IMC HOME EQUITY LOAN OWNER TRUST 199__-__
ASSET BACKED NOTES, SERIES 199__-__
DUE ___________, 20___
The IMC Home Equity Loan Owner Trust 199__-__ (the "Issuer") is hereby
offering $___________ aggregate principal amount of its Asset Backed Notes,
Series 199__-__ (the "Notes"). The Notes will be issued pursuant to an
indenture, dated as of __________, 199__ (the "Indenture"), between the Issuer
and ____________________, as trustee (the "Indenture Trustee"), and will be
secured by a trust estate (the "Trust Estate") consisting primarily of (i) a
pool (the "Pool") of adjustable rate home equity loans secured by liens on one-
to four-family residential properties, including units in condominium and
planned unit developments (the "Home Equity Loans"), (ii) funds on deposit in
the Pre-Funding Account and Capitalized Interest Account and (iii) the Insurance
Policy, as described herein. (continued on following page)
FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING INVESTMENT IN THE NOTES,
SEE "RISK FACTORS" BEGINNING ON PAGE S-__ HEREIN, "PREPAYMENT AND YIELD
CONSIDERATIONS" BEGINNING ON PAGE S-__ HEREIN AND "RISK FACTORS" BEGINNING ON
PAGE __ IN THE PROSPECTUS.
THE NOTES REPRESENT BENEFICIAL INTERESTS IN THE TRUST ONLY AND DO NOT REPRESENT
INTERESTS IN OR OBLIGATIONS OF THE ISSUER, THE DEPOSITOR, THE SELLER, THE
SERVICER, EXCEPT AS DESCRIBED HEREIN, OR ANY OF THEIR AFFILIATES. NEITHER THE
NOTES 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.
---------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
The Notes will be offered by the Underwriters named below (the
"Underwriters") from time to time to the public in negotiated transactions or
otherwise at varying prices to be determined at the time of the related sale.
Proceeds from the sale of the Notes are anticipated to be approximately
$__________, before deducting expenses payable by the Issuer, which are
estimated to be $__________. The Notes are offered by the Underwriters, when, as
and if issued and delivered to and accepted by them, subject to prior sale and
to approval of certain legal matters by counsel for the Underwrites. The
Underwriters reserve the right to withdraw, cancel or modify any offer and to
reject orders in whole or in part. It is expected that the Notes will be
delivered in book-entry form only through the Same-Day Funds Settlement System
of The Depository Trust Company, Cedel Bank, societe anonyme and the Euroclear
System on or about _______, 199__. The Notes will be offered in Europe and the
United States of America. ---------------------
[UNDERWRITERS]
---------------------
The date of this Prospectus Supplement is ___________, 199__
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PRELIMINARY PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
SUCH STATE.
<PAGE>
(cover continued from previous page)
The Original Aggregate Loan Balance of the Home Equity Loans as of the
Cut-Off Date was $______________ [all] of which are first liens. The Home Equity
Loans were originated or purchased by Industry Mortgage Company, L.P. (the
"Seller" and "Servicer").
The Indenture provides that additional Home Equity Loans (the "Subsequent
Home Equity Loans") may be pledged by the Issuer to the Trust from time to time
on or before ________, 199__ from funds on deposit in the Pre-Funding Account.
On the Closing Date (as defined below), an aggregate cash amount of
$_____________ will be deposited with the Indenture Trustee in the Pre-Funding
Account to be used to acquire Subsequent Home Equity Loans for the Trust.
Distributions of principal and interest will be made to holders (the
"Owners") of the Notes on the 20th day of each month (or, if such day is not a
business day, the next following business day) beginning _______, 199__ (each, a
"Payment Date"). Interest will be paid on each Payment Date to the Owners of the
Notes based on the Note Principal Balance (as defined herein) at the Note Rate
subject to the limitations described herein.
The Notes will constitute non-recourse obligations of the Issuer. The
Seller will have limited obligations arising in respect of certain
representations and warranties on the Home Equity Loans in connection with the
conveyance thereof to the Depositor. The Servicer will have limited obligations
that arise pursuant to certain representations and warranties and to its
contractual servicing obligations under Indenture, including any obligation it
may have to advance delinquent interest payments on the Home Equity Loans.
The Notes will be unconditionally and irrevocably guaranteed as to payment
of interest due to Owners and as to ultimate collection of the Note Principal
Balance, in each case pursuant to the terms of the Insurance Policy issued by
_______________. See "Description of the Notes -- The Insurance Policy" herein.
The stated maturity for the Notes (determined on the basis of the
assumptions described herein under "Prepayment and Yield considerations") is the
Payment Date occurring in __________ ____ (the "Final Scheduled Payment Date").
The yield to maturity on the Notes will be affected by, among other things,
the rate of payment of principal (including by reason of prepayments, defaults
and liquidations) of the Home Equity Loans and the timing and receipt of such
payments as described herein and in the Prospectus. See "Risk Factors" and
"Yield Prepayment and Maturity Considerations" in the Prospectus and "Prepayment
and Yield Considerations" herein.
The Notes are subject to optional redemption in full by the Issuer after
the Note Principal Balance is less than ___% of the Note Principal Balance as of
the Closing Date. In addition, the Servicer and the Note Insurer will have
rights, under the limited circumstances described herein, to acquire all of the
Home Equity Loans from the Indenture Trustee and thereby effect a redemption of
the Notes. See "Description of the Notes--Redemption of the Notes" herein.
No election will be made to treat the Trust as a "real estate mortgage
investment conduit" (a "REMIC") for federal income tax purposes.
There is currently no secondary market for the Notes. The Underwriters
intend to make a secondary market for the Notes, but has no obligation to do so.
There can be no assurance that a secondary market for the Notes will develop or,
if one does develop, that it will provide investors with a satisfactory level of
liquidity or that it will continue.
---------------------
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE NOTES, 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 NOTES OFFERED BY THIS PROSPECTUS SUPPLEMENT WILL BE PART OF A SEPARATE
SERIES OF NOTES 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.
---------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE NOTES OFFERED
HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT
COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING" HEREIN.
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Page
SUMMARY OF TERMS.............................................................S-1
RISK FACTORS.................................................................S-9
THE SELLER AND SERVICER.....................................................S-12
General................................................................S-12
Credit and Underwriting Guidelines.....................................S-13
Delinquency, Loan Loss and Foreclosure Information.....................S-14
THE DEPOSITOR...............................................................S-16
USE OF PROCEEDS.............................................................S-16
THE HOME EQUITY LOAN POOL...................................................S-16
General................................................................S-16
Conveyance of Subsequent Home Equity Loans.............................S-21
Interest Payments on the Home Equity Loans.............................S-22
PREPAYMENT AND YIELD CONSIDERATIONS.........................................S-22
General................................................................S-22
Mandatory Prepayment...................................................S-23
Prepayment and Yield Scenarios for Notes ..............................S-23
ADDITIONAL INFORMATION......................................................S-25
DESCRIPTION OF THE NOTES....................................................S-25
General................................................................S-25
Pre-Funding Account....................................................S-26
Capitalized Interest Account...........................................S-27
Book Entry Registration of the Notes...................................S-27
Assignment of Rights...................................................S-29
THE NOTE INSURER............................................................S-29
CREDIT ENHANCEMENT..........................................................S-29
Insurance Policy.......................................................S-29
Overcollateralization Provisions.......................................S-29
THE INDENTURE...............................................................S-31
Covenant of the Seller to Take Certain Actions with Respect to the
Home Equity Loans in Certain Situations............................S-31
Assignment of Home Equity Loans........................................S-31
Servicing and Sub-Servicing............................................S-33
Removal and Resignation of Servicer....................................S-35
Redemption of the Notes................................................S-36
Reporting Requirements.................................................S-37
Removal of Indenture Trustee for Cause.................................S-38
Governing Law..........................................................S-38
FEDERAL INCOME TAX CONSEQUENCES.............................................S-38
ERISA CONSIDERATIONS........................................................S-39
RATINGS.....................................................................S-39
LEGAL INVESTMENT CONSIDERATIONS.............................................S-40
UNDERWRITING................................................................S-40
CERTAIN LEGAL MATTERS.......................................................S-41
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS.................................A-1
PROSPECTUS
Page
SUMMARY OF PROSPECTUS..........................................................
RISK FACTORS...................................................................
DESCRIPTION OF THE SECURITIES..................................................
General...................................................................
Classes of Securities.....................................................
Distributions of Principal and Interest...................................
Book Entry Registration...................................................
List of Owners of Securities..............................................
THE TRUSTS.....................................................................
Mortgage Loans............................................................
Mortgage-Backed Securities................................................
Other Mortgage Securities.................................................
CREDIT ENHANCEMENT.............................................................
SERVICING OF MORTGAGE LOANS....................................................
Payments on Mortgage 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...........................................................
THE POOLING AND SERVICING AGREEMENT............................................
Assignment of Mortgage Assets.............................................
Evidence as to Compliance.................................................
The Indenture Trustee.....................................................
Administration of the Security Account....................................
Reports...................................................................
Forward Commitments; Pre-Funding..........................................
Servicer Events of Default................................................
Rights Upon Servicer Event of Default.....................................
Amendment.................................................................
Termination...............................................................
THE INDENTURE..................................................................
General...................................................................
Modification of Intenture.................................................
Note Events of Default....................................................
Rights Upon Note Events of Default........................................
List of Note Owners.......................................................
Annual Compliance Statement...............................................
Trustee's Annual Report...................................................
Satisfaction and Discharge of Indenture...................................
Redemption of Notes
Reports by Trustees to Noteholders........................................
Limitations on Suits......................................................
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 Securities............................................
Taxation of Residual Securities...........................................
Treatment of Certain Items of REMIC Income and Expense....................
Tax-Related Restrictions on Transfer of Residual Securities...............
Sale or Exchange of a Residual Security...................................
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 Securities as to Which
No REMIC Election Is Made.............................................
Standard Securities.......................................................
Premium and Discount......................................................
Stripped Securities.......................................................
Reporting Requirements and Backup Withholding.............................
Taxation of Certain Foreign Investors.....................................
Debt Certificate .........................................................
Notes.....................................................................
Taxation of Securities Classified as Partnership Interests................
PLAN OF DISTRIBUTION...........................................................
RATINGS........................................................................
LEGAL MATTERS..................................................................
FINANCIAL INFORMATION..........................................................
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS...................................
<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.
SECURITIES OFFERED: $___________ IMC Home Equity Loan Asset Backed
Notes, 199__-__, (the "Notes"). The Notes
represent non-recourse obligations of the Issuer.
Proceeds of the assets in the Trust Estate will
be the sole source of payments on the Notes.
NOTE ISSUER IMC Home Equity Loan Owner Trust 199__-__ (the
"Issuer"), a Delaware business trust established
by the Depositor pursuant to a trust agreement,
dated as of _________ __, 199__ (the "Trust
Agreement"), between the Depositor and __________
as owner trustee. After the Closing Date,
substantially all of the beneficial ownership
interest in the Issuer will be held by the
[Seller]. The [Depositor] will retain only a
negligible interest in the Issuer after the
Closing Date, but will have primary
responsibility for managing the affairs and
operations of the Issuer. The principal office of
the Issuer is located in Tampa, Florida. The
Issuer does not have, nor is it expected in the
future to have, any significant assets, other
than the assets included in the Trust Estate. See
"The Issuer" herein.
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 5901 East Fowler Avenue,
Tampa, Florida 33617-2362. The general partner of
the Seller and Servicer is Industry Mortgage
Corporation, a Delaware corporation.
INDENTURE TRUSTEE: ___________________, a ________ banking
corporation, as Indenture Trustee (the "Indenture
Trustee"). The Indenture Trustee shall receive a
fee (the "Indenture Trustee 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 _______ ___, 1997
(the "Cut-Off Date").
CLOSING DATE: On or about ___________ ___, 1997.
DESCRIPTION OF THE NOTES: The Notes represent non-recourse obligations of
the Issuer and will be issued pursuant to an
indenture to be dated as of __________ ____,
199__ (the "Indenture"), entered into between the
Depositor, the Seller, the Servicer, the Issuer
and the Indenture Trustee. The assets included in
the trust estate created by the Indenture (the
"Trust Estate") and pledged to secure the Notes
will be the sole source of payments on the Notes.
The Notes will be issued in a single class.
Initially, the assets of the Trust Estate will
consist of (i) a pool (the "Pool") of the Initial
Home Equity Loans, which are adjustable rate home
equity mortgage loans secured by [first] lien
mortgages or deeds of trust on one- to
four-family residential properties, including
units in condominium, planned unit developments
ad manufactured housing units (the "Properties"),
and including any note or other instrument of
indebtedness (each, a "Mortgage Note"); (ii) all
payments in respect of principal of the Initial
Home Equity Loans received on or after the
applicable Cut-Off Date; (iii) all payments in
respect of interest accrued on the Initial Home
S-1
<PAGE>
Equity Loans from and after the applicable
Cut-Off Date, irrespective of when received; (iv)
security interests in the Properties; (v) amounts
to be deposited in the Pre-Funding Account that
will be available for the acquisition of the
Subsequent Home Equity Loans during the Funding
Period; (vi) amounts to be deposited in the
Capitalized Interest Account; (vii) the insurance
policy (the "Note") issued by the Note Insurer;
and (viii) certain other property.
On the Closing Date, an aggregate cash amount of
$_____________ will be deposited in a trust
account in the name of the Indenture Trustee (the
"Pre-Funding Account"). It is intended that
additional Home Equity Loans satisfying the
criteria specified in the Indenture (the
"Subsequent Home Equity Loans") will be added to
the Trust Estate from time to time on or before
_______ __, 199__ from funds on deposit in the
Pre-Funding Account. As a result, the aggregate
principal balance of the Home Equity Loans 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 Indenture
Trustee in the Capitalized Interest Account (as
defined herein). Funds in the Capitalized
Interest Account will be applied by the Indenture
Trustee to cover shortfalls in interest during
the Funding Period (as described herein under
"Pre-Funding Account") on the Notes attributable
to the provisions allowing for purchase of
Subsequent Home Equity Loans after the Cut-Off
Date.
OTHER SECURITIES: [In addition to the Notes, the Trust will issue,
pursuant to the Indenture, a class of security
(the "Issuer's Certificate") which will represent
an undivided ownership interest in the Trust. The
Notes and the Issuer's Certificates are herein
referred to as the "Securities." Only the Notes
are offered hereby.]
DENOMINATIONS: The Notes are issuable in minimum denominations
of an original principal amount of $1,000 and
multiples of $1 in excess thereof.
THE HOME EQUITY LOANS: The Home Equity Loans to be pledged to the Owners
of the Notes by the Issuer on the Closing Date
(the "Initial Home Equity Loans") consist of
adjustable rate conventional home equity loans
and the Mortgage Notes relating thereto.
The 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 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 100%. 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. The Home
Equity Loans are not guaranteed by the Issuer,
the Depositor, the Seller, the Servicer, the
Indenture Trustee 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 FannieMae
for FannieMae mortgage-backed securities and in
accordance with the terms of the Indenture.
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As of the Cut-Off Date, the average Loan Balance
of the Initial Home Equity Loans was $_________.
The minimum and maximum Loan Balances of the
Initial Home Equity Loans as of the Cut-Off Date
were $______ and $__________, respectively. The
weighted average interest rate (the "Coupon
Rate") of the Initial Home Equity Loans was
_____%; the Coupon Rates of the Initial Home
Equity Loans ranged from ____% to _____%; the
weighted average combined Loan-to-Value Ratio of
the Initial Home Equity Loans was _____%; the
weighted average remaining term to maturity of
the Initial Home Equity Loans was ___ months; and
the remaining terms to maturity of the Initial
Home Equity Loans ranged from ___ months to 360
months. As of the Cut-Off Date _____% of the
aggregate Loan Balances of the Initial Home
Equity Loans were secured by first mortgages and
_____% of the aggregate Loan Balances of the
Initial Home Equity Loans were secured by second
mortgages. Initial Home Equity Loans containing
"balloon" payments represented not more than
_____% of the Initial Home Equity Loans. No
Initial Home Equity Loan will mature later than
______ ___ 202__. See "The Home Equity Loan Pool"
herein.
FINAL SCHEDULED PAYMENT
DATE: The Final Scheduled Payment Date for the Notes is
__________, 202__ although it is anticipated that
the actual final Payment Date for the Notes will
occur significantly earlier than the Final
Scheduled Payment Date. See "Prepayment and Yield
Considerations" herein.
DISTRIBUTIONS--GENERAL: On the 20th 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
Indenture Trustee will be required, subject to
the availability of amounts therefor, pursuant to
the cashflow priorities hereinafter described, to
make payments on the Notes to the Owners thereof
of record as of the last Business Day preceding
such Payment Date (the "Record Date").
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, Tampa, Florida or the
city in which the corporate trust office of the
Indenture Trustee is located are authorized or
obligated by law or executive order to be closed.
INTEREST: On each Payment Date, the Notes will be entitled
to payments in respect of Current Interest on the
Notes.
"Current Interest" means, with respect to any
Payment Date (i) the aggregate amount of interest
accrued during the calendar month immediately
preceding the month in which such Payment Date
occurs (the "Accrual Period") at the Note Rate on
the Note Principal Balance plus (ii) the
Preference Amount as it relates to interest
previously paid on such Note prior to such
Payment Date; provided, however, that Current
Interest will be reduced by the amount of any
Civil Relief Interest Shortfalls (as defined in
the Indenture). All calculations of interest on
the Notes will be made on the basis the actual
number of days elapsed in the related Accrual
Period and a year of 360 days.
"Interest Remittance Amount" means as of any
Monthly Remittance Date, the sum, without
duplication, of (i) all interest due during the
related Remittance Period on the Home Equity
Loans (less the Servicing Fee), (ii) all
Compensating Interest paid by the Servicer on
such Monthly Remittance Date, (iii) the portion
of any Substitution Amount relating to interest,
(iv) the portion of any purchase price
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relating to interest on any Home Equity Loan
repurchased during the related Remittance Period
and (v) the portion of Net Liquidation Proceeds
relating to interest.
The "Interest Carry Forward Amount" for any
Payment Date is the sum of (x) the amount, if
any, by which (i) the sum of the Current Interest
as of the immediately preceding Payment Date and
all prior unpaid Interest Carry Forward Amounts
exceeded (ii) the amount of the actual
distribution with respect to interest made on
such immediately preceding Payment Date plus (y)
30 days' interest on such amount, calculated at
the Note Rate.
On each Payment Date, the "Note Rate" will be
equal to the lesser of (x) with respect to any
Payment Date which occurs on or prior to the
Redemption Date (as defined herein), One-Month
LIBOR plus ___% per annum and for any Payment
Date thereafter, One-Month LIBOR plus ____% per
annum, and (y) the weighted average of the Coupon
Rates on the Home Equity Loans, less ___% per
annum (the rate described in this clause (y), the
"Available Funds Cap").
PRINCIPAL: On each Payment Date, Notes will be entitled to
the Principal Distribution Amount in reduction of
the Note Principal Balance.
The "Principal Distribution Amount" with respect
to any Payment Date will be equal to the
Principal Remittance Amount for the related
Remittance Period.
"Principal Remittance Amount" means as of any
Monthly Remittance Date, the sum, without
duplication, of (i) the principal actually
collected by the Servicer on the Home Equity
Loans during the related Remittance Period, (ii)
the Loan Balance of each Home Equity Loan that
was repurchased from the Trust during the related
Remittance Period, (iii) any Substitution Amount
relating to principal delivered by the Seller in
connection with a substitution of a Home Equity
Loan during the related Remittance Period, and
(iv) all Net Liquidation Proceeds actually
collected by the Servicer during the related
Remittance Period (to the extent such Net
Liquidation Proceeds related to principal).
The "Remittance Period" with respect to any
Monthly Remittance Date is the period from 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 Note
Account, which is the 18th day of each month, or
if such day is not a Business Day, the next
preceding Business Day, commencing in __________
___, 199__.
MONTHLY SERVICING FEE: The Servicer will retain a fee (the "Servicing
Fee") equal to 0.50% 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 Notes consists of (x) the
overcollateralization mechanics which utilize the
internal cash flows of the transaction and (y)
the Insurance Policy.
Overcollateralization. The credit enhancement
provisions of the transaction result in a limited
acceleration of the Notes relative to the
amortization of the Home Equity Loans in the
early months of the transaction. The accelerated
amortization
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is achieved by the application of certain excess
interest to the payment in reduction of the Note
Principal Balance. This acceleration feature
creates, overcollateralization (i.e., the excess
of the aggregate outstanding Loan Balance of the
Home Equity Loans over the Note Principal
Balance). Once the required level of
overcollaterlization is reached, and subject to
the provisions described in the next paragraph,
the acceleration feature will cease unless
necessary to maintain the required level of
overcollateralization.
The Indenture provides that, subject to certain
floors, caps and triggers, the required level of
ovecollateralization may increase or decrease
over time. An increase would result a temporary
period of accelerated amortization of the Notes
to increase the actual level of
overcollateralization to its required level; a
decrease would result in a temporary period of
decelerated amortization ro reduce the actual
level of overcollateralization to its required
level.
See "Prepayment and Yield Considerations",
"Credit Enhancement -- Overcollateralization
Provisions" herein and "Credit Enhancement" in
the Prospectus.
Financial Guaranty Insurance Policy.
__________________ a New York stock insurance
company (the "Note Insurer") will issue a
financial guaranty insurance policy (the
"Insurance Policy") with respect to the Notes.
Pursuant to the Insurance Policy, the Note
Insurer will irrevocably and unconditionally
guarantee certain payments on each Payment Date
to the Indenture Trustee for the benefit of the
Owners of the Notes. The amount of the actual
payment, if any, made by the Note Insurer to the
Owners of the Notes under the Insurance Policy on
each Payment Date (the "Insured Payment") is the
excess, if any, of (i) the sum of (a) the Current
Interest, (b) the Subordination Deficit and (c)
the Preference Amount (without duplication) over
(ii) the Total Available Funds (after any
deduction for the related Premium Amount, the
related Trustee Fee and any related Trustee
Reimbursable Expenses and after taking into
account the portion of the Principal Distribution
Amount to be actually distributed on such Payment
Date without regard to any related Insured
Payment to be made with respect to such Payment
Date).
Insured Payments do not cover Realized Losses
except to the extent that a Subordination Deficit
exists. Insured Payments do not cover the
Servicer's failure to make Delinquency Advances,
except to the extent that a Subordination Deficit
would otherwise result therefrom. Nevertheless,
the effect of the Insurance Policy is to guaranty
the timely payment of interest on, and the
ultimate payment of the principal amount of,
Notes.
The Insurance Policy is noncancellable for any
reason.
[Unless a Note Insurer Default exists, the Note
Insurer shall have the right to exercise certain
rights of the Owners of the Notes, as specified
in the Indenture, without any consent of such
Owners; and such Owners may exercise such rights
only with the prior written consent of the Note
Insurer, except as provided in the Indenture. In
addition, to the extent of unreimbursed payments
under the Insurance Policy, the Note Insurer will
be subrogated to the rights of the Owners of the
Notes on which such Insured Payments were made.]
In connection with each Insured Payment on a
Note, the Trustee, as attorney-in-fact for the
Owner thereof, will be
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required to assign to the Note Insurer the rights
of such Owner with respect to the Note to the
extent of such Insured Payment. "Note Insurer
Default" is defined under the Indenture as the
existence and continuance of (x) the failure by
the Note Insurer to make a required payment under
the Insurance Policy or (y) the bankruptcy or
insolvency of the Note Insurer.
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 Indenture Trustee on behalf of the Owners
of the Notes. During the period (the "Funding
Period") from the Closing Date until __________
___, 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 Indenture. Subsequent Home
Equity Loans purchased on any date (each, a
"Subsequent Transfer Date") must satisfy the
criteria set forth in the Indenture. See "The
Home Equity Loan Pool-- Conveyance of Subsequent
Home Equity Loans" herein. Any Pre-Funded Amount
remaining at the end of the Funding Period will
be distributed to the Owners of the Notes on the
Payment Date in ________ ___, 199__, thus
resulting in a partial principal prepayment of
the Note as specified herein under "Description
of the Notes-- Distributions." All interest and
other investment earnings on amounts on deposit
in the Pre-Funding Account will be deposited in
the Capitalized Interest Account.
CAPITALIZED INTEREST
ACCOUNT: On the Closing Date, cash will be deposited in a
trust account (the "Capitalized Interest
Account") in the name of, and maintained by, the
Indenture Trustee on behalf of the Owners of the
Notes. During the Funding Period, the amount on
deposit in the Capitalized Interest Account,
including reinvestment income thereon, will be
used by the Indenture Trustee to fund the excess,
if any, of (i) the amount of interest accruing at
the Note Rate on the amount by which the Note
Principal Balance exceeds the aggregate Loan
Balance of the Home Equity Loans 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 Indenture
Trustee on the initial Payment Date to fund any
such excess. Any amounts remaining in the
Capitalized Interest Account not needed for such
purpose will be paid to the depositor of such
funds at the end of the Funding Period.
MANDATORY PREPAYMENT OF
NOTES: It is intended that the principal amount of
Subsequent Home Equity Loans included in the
Trust Estate 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 Notes from the Pre-Funding Account.
In the event that the Depositor is unable to
deliver Subsequent Home Equity Loans during the
Funding Period in an amount equal to $__________,
principal prepayments to Owners of the Notes 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
NOTES: The Notes will initially be issued in book-entry
form. Persons acquiring beneficial ownership
interests in the Notes ("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 Notes are Book-Entry Notes (as defined
herein), such Notes will be evidenced by one or
more Notes registered in the name of Cede & Co.
("Cede"),
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as the nominee of DTC. The Notes will initially
be registered in the name of Cede. The interests
of the Owners of such Notes 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 Notes (as
defined herein) are issued under the limited
circumstances described herein. All references in
this Prospectus Supplement to any Notes reflect
the rights of Beneficial Owners only as such
rights may be exercised through DTC and its
participating organizations for so long as such
Notes are held by DTC. See "Description of the
Notes -- Book-Entry Registration of the Notes"
herein, and "Description of the Notes
--Book-Entry Registration" in the Prospectus.
OPTIONAL REDEMPTION: The Note, may be redeemed in full at the option
of Issuer after the Note Principal Balance is
less than ___% of the original Note Principal
Balance. In addition, the Servicer and the Note
Insurer will have rights, under the limited
circumstances described herein, to acquire all of
the Home Equity Loans from the Indenture trustee
and thereby effect a redemption of the Notes. See
"Description of the Notes -- Redemption of Notes"
herein.
RATINGS: It is a condition of issuance of the Notes that
they be rated "Aaa" by [Moody's Investors
Services, Inc. ("Moody's") and "AAA" by Fitch
Investors Service, L.P. ("Fitch").] Moody's and
Fitch 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. No Rating
Agency is obligated to maintain any rating on the
Notes and, accordingly, there can be no assurance
that the rating assigned to Notes upon initial
issuance thereof will not be lowered or withdrawn
at any time thereafter. See "Ratings" herein.
FEDERAL TAX ASPECTS: Investors are advised to consult their tax
advisors and to review "Federal Income Tax
Consequences" herein and in the Prospectus.
No election will be made to treat the Trust
Estate or any portion thereof as a "real estate
mortgage investment conduit" (a "REMIC") for
federal income tax purposes.
For federal income tax purposes, the Notes will
be treated as debt obligations of the Issuer. An
Owner will be required to report income with
respect to the Notes under an accrual method
unless the Owner otherwise uses the accrual
method.
The Notes will not represent interest in
"qualifying real property loans" within the
meaning of Section 593(d) of the Internal Revenue
Code of 1986, as amended (the "Code"), "real
estate assets" for purposes of Section
856(c)(5)(A) of the Code and "[l]oans . . .
principally secured by an interest in real
property" within the meaning of Section
7701(a)(19)(C)(v) of the Code.
ERISA CONSIDERATIONS: Subject to the considerations discussed under
"ERISA Considerations" herein, the Notes 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: The Notes will [not] constitute "mortgage related
securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984
("SMMEA"). [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
Notes.]
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<PAGE>
RISK FACTORS
Prospective investors in the Notes 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 Notes.
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 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 such 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 the Notes, and, if purchased at other than par, the
yields realized by Owners of the Notes will be sensitive to levels of payment
(including prepayments of the Home Equity Loans (the "Prepayments")) on the Home
Equity Loans. In general, the yield on if purchased at a premium from the
outstanding principal amount thereof will be adversely affected by a higher than
anticipated level of Prepayments and enhanced by a lower than anticipated level.
Conversely, the yield on Notes if 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 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 Indenture. See "The
Indenture--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.]
THE SUBSEQUENT HOME EQUITY LOANS AND THE PRE-FUNDING ACCOUNT. Any
conveyance of Subsequent Home Equity Loans is subject to the following
conditions, among others (i) each such Subsequent Home Equity Loan 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 Indenture; (ii) the Seller will not
select such Subsequent Home Equity Loans in a manner adverse to the interest of
the Owners of the Notes; (iii) the Seller will deliver certain opinions of
counsel with respect to the validity of the conveyance of such Subsequent Home
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Equity Loans; (iv) each Subsequent Home Equity Loan will be an adjustable rate
Home Equity Loan; and (v) 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 Indenture, as described
herein under "The Home Equity Loan Pool--Conveyance of Subsequent Home Equity
Loans."
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 for inclusion
in the Trust Estate by the end of the Funding Period, the Owners of the Notes
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__. The Depositor intends that the principal amount of Subsequent Home Equity
Loans added to the Trust Estate 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 of the Notes.
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. Following the transfer of Subsequent Home
Equity Loans to the Trust, it is anticipated that the aggregate characteristics
of the Home Equity Loans then held in the Trust will not vary significantly from
those of the Initial Home Equity Loans. See "The Home Equity Loan
Pool--Conveyance of Subsequent Home Equity Loans" herein.
RISK OF HOME EQUITY LOAN COUPON RATES REDUCING THE NOTE RATE. The
calculation of the Note Rate is based upon (i) the value of an index (LIBOR)
which is different from the value of the indices applicable to the Home Equity
Loans as described under "The Home Equity Loan Pool" either as a result of the
use of a different index, rate determination date or rate adjustment date) and
(ii) the weighted average of the Coupon Rates of the Home Equity Loans, which
are subject to periodic adjustment caps, maximum rate caps and minimum rate
floors. _____% of the Initial Home Equity Loans in by aggregate Loan Balance as
of the Cut-Off Date adjust semi-annually based upon the London interbank offered
rate for six-month United States dollar deposits ("Six-Month LIBOR"). Although a
substantial majority of the Initial Six-Month LIBOR Loans first adjust six
months after origination, a number of the Initial Six-Month LIBOR Loans first
adjust two or three years from the date of origination. [_____% of the Initial
Home Equity Loans in by aggregate Loan Balance as of the Cut-Off Date are CMT
Loans that adjust annually based on the CMT Index (the "CMT Loans"). Although a
substantial majority of Initial CMT Loans first adjust one year after
origination, a number of the Initial CMT Loans do not first adjust until three
years from the date of origination.] The Note Rate adjusts monthly based upon
One-Month LIBOR as described under "Description of the Notes -- Calculation of
One-Month LIBOR" herein, subject to the Available Funds Cap. Consequently, the
interest which becomes due on the Home Equity Loans (net of the related
Servicing Fee, the related Premium Amount, the related Trustee Fee, any Trustee
Reimbursable Expenses and certain reductions required by the Note Insurer)
during any Remittance Period may not equal the amount of interest that would
accrue at One-Month LIBOR plus the margin on the Note during the related Accrual
Period. In particular, the Note Rate adjusts monthly, while the interest rates
of the Home Equity Loans in adjust less frequently with the result that the
Available Funds Cap may limit increases in the Rate for extended periods in a
rising interest rate environment. In addition, One-Month LIBOR, Six-Month LIBOR
and the CMT Index may respond to different economic and market factors, and
there is not necessarily a correlation among them. Thus, it is possible, for
example, that One-Month LIBOR may rise during periods in which Six-Month LIBOR
or the CMT Index are stable or are falling or that, even if each of One-Month
LIBOR, Six-Month LIBOR and the CMT Index rise during the same period, One-Month
LIBOR may rise more rapidly than Six-Month LIBOR and the CMT Index. Furthermore,
if the Available Funds Cap determines the Note Rate for a Payment Date, the
value of the Notes will be temporarily or permanently reduced. There is no
mechanism to compensate Owners of the Notes if the Note Rate is limited by the
Available Funds Cap.
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
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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.
It is possible that some of the Home Equity Loans will be subject to the
Riegle Community Development and Regulatory Improvement Act of 1994 (the "Riegle
Act"), which incorporates the Home Ownership and Equity Protection Act of 1994.
The Riegle Act adds certain additional provisions to Regulation Z, which is the
implementing regulation of the Truth-in-Lending Act. These provisions impose
additional disclosure and other requirements on creditors with respect to
non-purchase money home equity loans with high interest rates or high upfront
fees and charges. In general, home equity loans within the purview of the Riegle
Act have annual percentage rates over 10% greater than the yield on Treasury
Securities of comparable maturity and/or fees and points which exceed the
greater of 8% of the total loan amount or $400. The provisions of the Riegle Act
apply on a mandatory basis to all home equity loans originated on or after
October 1, 1995. These provisions can impose specific statutory liabilities upon
creditors who fail to comply with their provisions and may affect the
enforceability of the related loans. In addition, any assignee of the creditor
would generally be subject to all claims and defenses that the consumer could
assert against the creditor, including, without limitation, the right to rescind
the home equity loan. The Seller will represent and warrant in the Indenture
that each Home Equity Loan was originated in compliance with all applicable laws
including the Truth-in- Lending Act, as amended.
[RISK OF HIGHER DEFAULT RATES FOR HOME EQUITY LOANS WITH BALLOON PAYMENTS.
_____% of the aggregate Loan Balance of the Initial Home Equity Loans 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"). The 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 up to 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 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.]
DISSOLUTION OF ISSUER FROM INSOLVENCY OF DEPOSITOR
On the Closing Date, the [Depositor] will hold a [1%] equity interest in
the Issuer. The Trust Agreement will provide that if any certain events (each,
an "Insolvency Event") of voluntary corporate dissolution or insolvency,
readjustment of debt, marshaling of assets and liability, commencement of
bankruptcy proceedings under the United
S-11
<PAGE>
States Bankruptcy Code or similar applicable state laws ("Insolvency Laws") or
similar proceedings with respect to the Depositor including a default of the
Note Insurer in the payment of any Insured Payment), the Issuer will dissolve.
The Depositor has taken certain steps in structuring the transactions
contemplated hereby that are intended to help ensure that an Insolvency Event
with respect tot he Depositor will not occur. These steps include the formation
of the Depositor as a separate limited-purpose entity pursuant to formation
document that contain certain limitations (including restrictions on the nature
of the Depositor business and restrictions of the Depositor ability to commence
a voluntary case of proceeding under the Insolvency Laws). However, there can be
no assurance that the activities of the Depositor would not result in an
Insolvency Event.
If the Issuer is dissolved, the Indenture Trustee will promptly sell,
dispose of or otherwise liquidate the Home Equity Loans in a commercially
reasonable manner of commercially reasonable terms, except under certain limited
circumstances. The proceeds from any such sale, disposition or liquidation of
the Loans will be treated as collections on the Home Equity Loans, deposited in
the Note Account and paid to the Owners of the Note in accordance with the terms
described herein.
RISK ASSOCIATED WITH THE NOTE INSURER. If the protection afforded by
overcollateralization and crosscollateralization is insufficient and if, upon
the occurrence of a Subordination Deficit, the Note Insurer is unable to meet
its obligations under the Insurance Policy, then the Owners of the Note could
experience a loss of their investment.
THE SELLER AND SERVICER
GENERAL
The Seller and Servicer, Industry Mortgage Company, L.P., is a Delaware
limited partnership. The general partner of the Seller is Industry Mortgage
Corporation, a Delaware corporation, which is a subsidiary of IMC Mortgage
Company and an affiliate of the Depositor. IMC Mortgage Company completed a
public offering of certain shares of its common stock on June 25, 1996. The
principal executive offices of the Seller are located at 5901 East Fowler
Avenue, Tampa, Florida 33617-2362 and its telephone number is (813) 984-8801.
The Seller has been in the mortgage lending business since its formation in
1993 and the Seller, IMC Mortgage Company and certain other subsidiaries of IMC
Mortgage Company 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 48 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 Issuer which
will in turn pledge the Home Equity Loans to the Indenture Trustee for the
benefit of the Owners of the Notes, in consideration of the net proceeds from
the sale of the Notes, which are being offered hereby. The Seller will also
service each Home Equity Loan.
The Servicer may not assign its obligations under the Indenture, in whole
or in part, unless it shall have first obtained confirmation in writing from the
Rating Agencies that such assignment shall not result in a downgrade or
withdrawal of the ratings assigned to the Notes by each respective Rating
Agency; provided, however, that any assignee must meet the eligibility
requirements for a successor servicer set forth in the Indenture.
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. Each Sub-Servicing
Agreement shall be terminated at such time as the Servicer resigns or is
removed. See "The Indenture--Servicing and Sub-Servicing" herein.
The Indenture Trustee, at the direction of a majority of the Owners, may
remove the Servicer, and the Servicer may resign, only in accordance with the
terms of the Indenture. No removal or resignation shall become effective until
the Indenture 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 Indenture Trustee and remitted directly to the Indenture Trustee.
S-12
<PAGE>
Upon removal or resignation of the Servicer, the Indenture Trustee (x) may
solicit bids for a successor servicer as described in the Indenture and (y)
until such time as a successor servicer is appointed pursuant to the terms of
the Indenture, shall serve in the capacity of Backup Servicer (the "Backup
Servicer") subject to the right of the Indenture Trustee to assign such duties
to a party acceptable to the Owners of a majority of the Notes. If the Indenture
Trustee is unable to obtain a qualifying bid and is prevented by law from acting
as servicer, the Indenture 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 FannieMae 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 shall assume
all or any part of the responsibilities, duties or liabilities of the Servicer.
The Notes will not represent an interest in or obligation of, nor are the
Home Equity Loans guaranteed by, the Issuer, the Depositor, the Seller, the
Servicer, except as described herein, 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 FannieMae ("FannieMae") 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 full-service branch offices in Cincinnati, Ohio,
Ft. Washington, Pennsylvania, Lincoln, Rhode Island and Cherry Hill, New Jersey.
In addition, the Seller maintains retail branch offices throughout the United
States and 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 generally 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 $400,000. Under current policy the Seller generally
does not acquire or originate home equity loans where the combined Loan-to-Value
Ratio exceeds 85%. 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
S-13
<PAGE>
circumstances. The Seller does not purchase loans where any senior mortgage
contains open-end advance, negative amortization or shared appreciation
provisions.
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 FannieMae/FHLMC forms and conform to
current FannieMae/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 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. In
addition, the information in the tables below has not been adjusted to eliminate
the effect of the significant growth in the size of the Seller's home equity
loan portfolio during the periods shown. Accordingly, loss and delinquency as
percentages of aggregate principal balance of home equity loans serviced for
each period would be higher than those shown if a group of home equity loans
were artificially isolated at a point in time and the information showed the
activity only in that isolated group. 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-14
<PAGE>
DELINQUENCY AND DEFAULT EXPERIENCE OF THE SERVICER'S SERVICING
PORTFOLIO OF HOME EQUITY LOANS
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
-----------------------
1996 1995 1994
---- ---- ----
NUMBER DOLLAR NUMBER DOLLAR NUMBER DOLLAR
OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT
<S> <C> <C> <C> <C> <C> <C>
Portfolio At 35,390 $2,148,068,446 9,376 $535,797,748 1,635 $92,003,157
Delinquency
Percentage (1)
30 - 59 days 3.390% 3.093% 2.613% 2.570% 1.040% 0.831%
60 - 89 days 1.077% 1.068% 0.672% 0.642% 0.183% 0.152%
90 + days 2.427% 2.616% 1.237% 1.223% 0.000% 0.000%
------ ------ ------ ------ ------ ------
Total Delinquency 6.894% 6.777% 4.522% 4.435% 1.223% 0.983%
====== ====== ====== ====== ====== ======
Default
Percentage (2)
Foreclosure 0.863% 1.003% 0.779% 0.749% 0.000% 0.000%
Bankruptcy (3) 1.064% 1.069% 0.576% 0.630% 0.122% 0.115%
Real Estate Owned 0.276% 0.313% 0.117% 0.160% 0.000% 0.000%
------ ------ ------ ------ ------ ------
Total Default 2.204% 2.385% 1.472% 1.539% 0.122% 0.115%
====== ====== ====== ====== ====== ======
</TABLE>
- ----------
(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 account
balances on home equity loans in foreclosure, bankruptcy or real estate
owned.
(3) The bankruptcy percentage represents all home equity loans that are in
bankruptcy regardless of delinquency status.
LOAN LOSS EXPERIENCE ON THE SERVICER'S SERVICING
PORTFOLIO OF HOME EQUITY LOANS
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Average Amount Outstanding(1) $1,207,171,960 $294,251,859 $52,709,250
Gross Losses(2) $1,581,695 $278,632 $0
Recoveries(3) $1,727 $0 $0
Net Losses(4) $1,579,968 $278,632 $0
Net Losses as a Percentage Of Average 0.131% 0.095% 0.000%
Amount Outstanding
</TABLE>
- ----------
(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."
S-15
<PAGE>
THE ISSUER
The Issuer is a Delaware business trust established by the Depositor
pursuant to the Trust Agreement. After the Closing Date, substantially all of
the beneficial ownership interest in the Issuer will be held [__________]. The
[Depositor] will retain only a negligible interest in the Issuer after the
Closing Date, but will have primary responsibility for managing the affairs and
operations of the Issuer. The principal office of the Issuer is located in
Tampa, Florida. The Issuer does not have, nor is it expected in the future to
have, any significant assets, other than the assets included in the Trust
Estate.
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware in November 1994.
The Depositor maintains its principal offices at 5901 East Fowler Drive, Tampa,
Florida 33617-2362. None of the Issuer, the Depositor, the Seller or the
Servicer or any of their affiliates will insure or guarantee distributions on
the Notes.
USE OF PROCEEDS
Net proceeds from the sale of the Notes will be applied by the Issuer (i)
to the purchase of the Initial Home Equity Loans from the Depositor, (ii) to pay
off extensions of credit provided by, among others, certain of the Underwriters
with respect to certain Home Equity Loans, (iii) to the deposit of the
Pre-Funded Amount in the Pre- Funding Account and (iv) to the deposit of certain
amounts in the Capitalized Interest Account.
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 added to the Trust Estate 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.
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.
The Initial Home Equity Loans to be transferred by the Depositor to the
Trust on the Closing Date will consist of __________ adjustable rate
conventional home equity loans evidenced by promissory notes (the "Mortgage
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 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 have a first payment date on or
after __________ ___,. 199__. Initial Home Equity Loans aggregating _____% of
the aggregate Loan Balances of the 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 _____% of 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 FannieMae 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.
S-16
<PAGE>
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.
As of the Cut-Off Date, the average Loan Balance of the Initial Home Equity
Loans was $_________. The minimum and maximum Loan Balances of the Initial Home
Equity Loans as of the Cut-Off Date were $______ and $__________, respectively.
The weighted average Coupon Rate of the Initial Home Equity Loans was _____%;
the Coupon Rate of the Initial Home Equity Loans ranged from ____% to _____%;
the weighted average combined Loan- to-Value Ratio of the Initial Home Equity
Loans was _____%; the weighted average remaining term to maturity of the Initial
Home Equity Loans was ___ months; and the remaining terms to maturity of the
Initial Home Equity Loans ranged from ___ months to ___ months. Initial Home
Equity Loans containing "balloon" payments represented not more than _____% of
the aggregate Loan Balance of the Initial Home Equity Loans. No Initial Home
Equity Loan will mature later than ___________ ___, 202__..
S-17
<PAGE>
GEOGRAPHIC DISTRIBUTION OF PROPERTIES
The geographic distribution of the Initial Home Equity Loans by state, as
of the Cut-Off Date, was as follows:
<TABLE>
<CAPTION>
NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
STATE HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
<S> <C> <C> <C>
Alabama
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
District of Columbia
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
Total
</TABLE>
S-18
<PAGE>
COMBINED LOAN-TO-VALUE RATIOS
The original combined loan-to-value ratios as of the origination dates of
the Initial Home Equity Loans (based upon appraisals made at the time of
origination thereof) (the "Combined Loan-to-Value Ratios") as of the Cut-Off
Date were distributed as follows:
<TABLE>
<CAPTION>
RANGE OF NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
ORIGINAL CLTV'S HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
<S> <C> <C> <C>
Up to 10.00%
10.01 to 15.00
15.01 to 20.00
20.01 to 25.00
25.01 to 30.00
30.01 to 35.00
35.01 to 40.00
40.01 to 45.00
45.01 to 50.00
50.01 to 55.00
55.01 to 60.00
60.01 to 65.00
65.01 to 70.00
70.01 to 75.00
75.01 to 80.00
80.01 to 85.00
85.01 to 90.00
90.01 to 95.00
95.01 to 100.00
Total
</TABLE>
CUT-OFF DATE COUPON RATES
The Coupon Rates borne by the Notes relating to the Initial Home Equity
Loans as of the Cut-Off Date were distributed as follows:
<TABLE>
<CAPTION>
RANGE OF NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
COUPON RATES HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
<S> <C> <C> <C>
7.001 to 8.000%
8.001 to 9.000
9.001 to 10.000
10.001 to 11.000
11.001 to 12.000
12.001 to 13.000
13.001 to 14.000
14.001 to 15.000
15.001 to 16.000
16.001 to 17.000
17.001 to 18.000
18.001 to 19.000
22.001 to 23.000
Total
</TABLE>
S-19
<PAGE>
CUT-OFF DATE LOAN BALANCES
The distribution of the outstanding principal amounts of the Initial Home
Equity Loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
CUT-OFF DATE NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
LOAN BALANCES HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
<S> <C> <C> <C>
Up to $ 25,000.00
25,000.01 to 50,000.00
50,000.01 to 75,000.00
75,000.01 to 100,000.00
100,000.01 to 125,000.00
125,000.01 to 150,000.00
150,000.01 to 175,000.00
175,000.01 to 200,000.00
200,000.01 to 250,000.00
250,000.01 to 300,000.00
300,000.01 to 350,000.00
350,000.01 to 400,000.00
400,000.01 to 450,000.00
450,000.01 to 500,000.00
500,000.01 to 550,000.00
Total
</TABLE>
TYPES OF MORTGAGED PROPERTIES
The Properties securing the Initial Home Equity Loans as of the Cut-Off
Date were of the property types as follows:
<TABLE>
<CAPTION>
NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
PROPERTY TYPES HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
<S> <C> <C> <C>
Single Family Detached
Two- to Four-Family
Condominium
Single Family Attached
Townhouse
Manufactured Housing
Multi-Family
Planned Unit Development
Mixed Use
Total
</TABLE>
DISTRIBUTION OF MONTHS SINCE ORIGINATION
The distribution of the number of months since the date of origination of
the Initial Home Equity Loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
NUMBER OF MONTHS NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
SINCE ORIGINATION HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
<S> <C> <C> <C>
0 to 1
2 to 12
13 to 24
25 or more
</TABLE>
S-20
<PAGE>
DISTRIBUTION OF REMAINING TERM TO MATURITY
The distribution of the number of months remaining to maturity of the
Initial Home Equity Loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
MONTHS REMAINING NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
TO MATURITY HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
<S> <C> <C> <C>
Up to 120
121 to 180
181 to 240
241 to 300
301 to 360
Total
</TABLE>
OCCUPANCY STATUS
The occupancy status of the Properties securing the Initial Home Equity
Loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
OCCUPANCY STATUS HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
<S> <C> <C> <C>
Owner Occupied
Investor Owned
Vacation/Second Home
Total
</TABLE>
DISTRIBUTION BY LIEN POSITION
The lien position of the Initial Home Equity Loans as of the Cut-Off Date
was as follows:
<TABLE>
<CAPTION>
NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
LIEN POSITION HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
<S> <C> <C> <C>
First Lien
SECOND LIEN
TOTAL
</TABLE>
CONVEYANCE OF SUBSEQUENT HOME EQUITY LOANS
The Indenture permits the addition to the Trust Estate of $_____________ in
aggregate principal balance of Subsequent Home Equity Loans. Accordingly, the
statistical characteristics of the Home Equity Loans will vary as of Subsequent
Cut-Off Date upon the acquisition of Subsequent Home Equity Loans, but the
Depositor does not expect such variance to be material.
The obligation of the Issuer to purchase a Subsequent Home Equity Loan for
addition to the Trust Estate on a Subsequent Transfer Date for assignment to the
Home Equity Loan Pool is subject, among other factors, to the following
requirements: (i) the ratings on the Notes shall not have been downgraded by any
Rating Agency; (ii) such Subsequent Home Equity Loan may not be 30 or more days
contractually delinquent as of the related Subsequent CutOff 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 Cut-Off
S-21
<PAGE>
Date); (iii) such Subsequent Home Equity Loan will be an adjustable rate Home
Equity Loan; (iv) the original term to maturity of such Subsequent Home Equity
Loan may not exceed 30 years; (v) such Subsequent Home Equity Loan will have a
Coupon Rate of not less than ____%; (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, (d) will have no Home Equity Loan with a
principal balance in excess of $_______.
INTEREST PAYMENTS ON THE HOME EQUITY LOANS
Approximately _____% 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.
There are a number of Home Equity Loans on which interest is charged to the
Mortgagor at the Coupon Rate on the outstanding principal balance calculated
based on the number of days elapsed between receipt of the Mortgagor's last
payment through receipt of the Mortgagor's most current payment (such Home
Equity Loans, "Date-of-Payment Loans"). Such interest is deducted from the
Mortgagor's payment amount and the remainder, if any, of the payment is applied
as a reduction to the outstanding principal balance of such Mortgage Note.
Although the Mortgagor is required to remit equal monthly payments on a
specified monthly payment date that would reduce the outstanding principal
balance of such Mortgage Note to zero at such Mortgage Note's maturity date,
payments that are made by the Mortgagor after the due date therefor would cause
the outstanding principal balance of such Mortgage Note not to be reduced to
zero on its maturity date. In such a case, the Mortgagor would be required to
make an additional principal payment at the maturity date for such Mortgage
Note. If it were assumed that all the Mortgagors on the Date-of-Payment Loans
were to pay on the latest date possible without the Date-of-Payment Loans being
in default, the amount of such additional principal payment would be a de
minimis amount of the aggregate Loan Balance of the Home Equity Loans. On the
other hand, if a Mortgagor makes a payment (other than a Prepayment) before the
due date therefor, the reduction in the outstanding principal balance of such
Mortgage Note would occur over a shorter period of time than would have occurred
had it been based on the schedule of amortization in effect on the Cut-Off Date.
Accordingly, the timing of principal payments to the Owners of the Notes may be
affected by the fact that actual Mortgagor payments may not be made on the due
date therefor.
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
The weighted average life of, and, if purchased at other than par, the
yield to maturity on, the Notes will relate to the rate of payment of principal
of the Home Equity Loans, 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.
Adjustable rate home equity loans may be subject to a greater rate of
principal prepayments in a declining interest rate environment. For example, if
prevailing interest rates fail 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. In
addition, the fact that a number of the Six-Month LIBOR Loans and the CMT Loans
doe not adjust for substantial period of time may affect the prepayment
experience on such loans. 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 Notes, the overcollateralization provisions of the transaction result in an
additional reduction of the Notes relative to the amortization of the Home
S-22
<PAGE>
Equity Loans in early months of the transaction. This creates
overcollateralization which results from the excess of the aggregate Loan
Balance of the Home Equity Loans over the Note Principal Balance.
MANDATORY PREPAYMENT
In the event that prior to the end of the Funding Period the Issuer is
unable to acquire Subsequent Home Equity Loans for addition to the Trust Estate
in an amount equal to $_____________, the Owners of the Notes will receive a
partial prepayment on the Payment Date in __________ 199__ in an amount equal to
the Pre-Funded Amount remaining at the end of the Funding Period.
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 on the Payment Date in
__________, 199__.
PREPAYMENT AND YIELD SCENARIOS FOR NOTES
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), the yield to maturity on a Note 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 Notes 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 Notes at a premium, the actual yield to
such investor will be lower than such investor's anticipated yield.
The Final Scheduled Payment Date for the Notes is __________, 202__. This
date is the date on which the initial Note Principal Balance as of the Closing
Date 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 the overcollateralization
mechanics of the transaction are not used to make accelerated payments of
principal to the Owners of the Notes. The weighted average, life of the Notes
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 Notes could occur significantly earlier than the Final
Scheduled Payment Date because (i) Prepayments are likely to occur and (ii) the
Issuer may cause a redemption of the Notes when the when the Note Principal
Balance is less than _____% of the Note Principal Balance as of the Closing
Date.
"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
Notes will be influenced by the rate at which principal of the Home Equity Loans
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.
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. [A 100% Prepayment
Assumption assumes constant prepayment rates ("CPR") of 4% per annum of the then
outstanding principal balance of the Home Equity Loans in the first month of the
life of such Home Equity Loans and an additional _____% (precisely _____ths) per
annum in each month thereafter until the twelfth month. Beginning in the
thirteenth month and in each month thereafter during the life of such Home
Equity Loans, 100% Prepayment Assumption assumes a constant prepayment rate of
24% per annum each month. As used in the table below, 0% Prepayment Assumption
assumes prepayment rates equal to 0% of the Prepayment Assumption; i.e., no
prepayments. Correspondingly, 100% Prepayment Assumption assumes prepayment
rates equal to 100% 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
the Notes 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 Note Principal Balance outstanding and weighted average
life of the Notes set forth in the tables. In addition, since the actual
S-23
<PAGE>
Home Equity Loans have characteristics which differ from those assumed in
preparing the tables set forth below, the distributions of principal on the
Notes 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 consist of pools of loans with level-pay and balloon amortization
methodologies, Cut-Off Date Loan Balances, gross coupon rates, net coupon rates,
original and remaining terms of amortization, and remaining terms to maturity as
applicable, as set forth in the "Representative Loan Pools" table below, (ii)
the Closing Date for the Notes occurs on __________, 199__ (iii) distributions
on the Notes are made on the 20th 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 Indenture Trustee Fee, (v) the Home
Equity Loans' prepayment rates are a multiple of the Prepayment Assumption, (vi)
prepayments include 30 day's interest thereon, (vii) no redemption is exercised,
(viii) all of the Home Equity Loans are sold to the Issuer for inclusion in the
Trust Estate as of the Closing Date; and (x) 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).
REPRESENTATIVE LOAN POOLS
<TABLE>
<CAPTION>
Original Remaining Remaining
Term of Term of Term to
Pool Loan Gross Net Coupon Amortization Amortization Maturity Amortization
Number Balance Coupon Rate (in months) (in months) (in months) Method
Rate
- ---------- ---------------- ----------- ------------- -------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1
2
3
4
5
6
</TABLE>
S-24
<PAGE>
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Initial Home Equity
Loans and the Properties is based upon the Initial Home Equity Loans as
constituted at the close of business on the Cut-Off Date. Prior to the issuance
of the Notes, 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 Indenture, 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 Notes and the
Subsequent Home Equity Loans will be added to the pool after the issuance of the
Notes.
A current report on Form 8-K will be available to purchasers of the Notes
and will be filed, and incorporated by reference to the Registration Statement
together with the Indenture, with the Securities and Exchange Commission within
fifteen days after the initial issuance of the Notes and within 15 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 NOTES
GENERAL
The Notes will be issued pursuant to the Indenture. The summaries of
certain provisions of the Indenture set forth below, under the caption "The
Indenture" herein and under the caption "The Indenture" in the Prospectus, while
complete in material respects, do not purpose to be exhaustive. For more details
regarding the terms of the Indenture, prospective investors in the Notes are
advised to review the Indenture, a copy of which the Issuer will provide
(without exhibits) without charge upon written request addressed to the Issuer.
The Notes will be secured by the Trust Estate created by the Indenture. The
Notes represent non-recourse obligations of the Issuer and proceeds of the
assets in the Trust Estate will be the sole source of payments of the Notes. The
Notes will not represent an interest in or obligation of the Depositor, the
Servicer, the Indenture Trustee, the underwriters, any of their respective
affiliates or any other entity, and will not represent an interest in or
recourse obligation of the Issuer.
Initially, the assets of the Trust Estate will consist of (i) the Home
Equity Loan Pool, which is comprised of the Initial Home Equity Loans secured by
[first] lien mortgages of deeds of trust on the Properties; (ii) all payments in
respect to principal of the Initial Home Equity Loans received on or after the
applicable Cut-Off Dates; (iii) all payments in respect of interest accrued on
the Initial Home Equity Loans received on or after the applicable Cut-Off Dates,
irrespective of when received; (iv) security interests in the Properties; (v)
amounts to be deposited in the Pre-Funding Account that will be available for
the acquisition of the Subsequent Home Equity Loans during the Funding Period;
(vi) amounts to be deposited in the Capitalized Interest Account; (vii) the
Insurance Policy issued by the Note Insurer and (viii) certain other property.
All payments on the Notes will be made by or on behalf of the Indenture
Trustee to each Owner of record on the related Record Date for the related
Payment Date. Payments on Notes issued in book-entry form will be made by or on
behalf of the Indenture Trustee to DTC. Payments on Definitive Notes generally
will be made either (i) by check mailed to the address of each Owner as it
appears in the register maintained by the Indenture Trustee or (ii) by wire
transfer of immediately available funds to the account of an Owner, if such
Owner (a) is a registered holder of Definitive Notes having an initial principal
amount of at least $1,000,000 and (b) has provided the Indenture Trustee with
wiring instructions in writing five days prior to the related Record Date or has
provided the Indenture Trustee with such instructions for any previous Payment
date. A fee may be charged by the Indenture Trustee to an Owner of Definitive
Notes for any payment made by wire transfer. Notwithstanding the above, the
final payment in redemption of any Definitive Note will be made only upon
presentation and surrender of such Definitive Note at the office of agency
designated by the Indenture Trustee for that purpose.
The Notes will be issued in denominations of not less than $1,000 principal
amount and in integral; dollar multiples of $1 in excess thereof.
The Home Equity Loans were originated by the Seller. On or prior to the
date the Notes are issued, the Seller will convey each Home Equity Loan to the
Depositor who in turn will convey each such Home Equity Loan to the Issuer.
At the time of issuance of the Notes, the Issuer will pledge all of its
right, title and interest in and to the Initial Home Equity Loans, including all
principal received on or after the applicable Cut-Off Date and all interest
accrued from and including the applicable Cut-Off Date, together with its
rights, title and interest in and to the proceeds of any
S-25
<PAGE>
related insurance policies received on and after the applicable Cut-Off Date,
without recourse, to the Indenture Trustee pursuant to the Indenture as
collateral for the Notes.
The Indenture Trustee, concurrently with such assignment, will authenticate
and deliver the Notes at the direction of the Issuer in exchange for, among
other things, the Initial Home Equity Loans, the Initial Pre-Funding Account
deposit and the amount deposited in the Capitalized Interest Account. Each
Initial Home Equity Loan will provide information about each Home Equity Loan,
including, among other things, its identifying number and the name of the
related Mortgagor, the street address of the related Property, its date of
origination, the original number of months to stated maturity, the original
stated maturity, its original Loan Balance, the Cut-Off Date, its interest rate
as of the CutOff Date, the manner in which the interest rate is to be determined
and its monthly payment as of the Cut-Off Date.
PAYMENTS ON THE NOTES
Payments on the Notes will be made by the Indenture Trustee (in such
capacity, the "Paying Agent") on each Payment Date to Owners as of the Record
Date in an amount equal to the product of such Owners' Percentage Interest and
the amount paid in respect of the Notes. The "Percentage Interest" represented
by any Note will be equal to the percentage obtained by dividing the aggregage
principal balance of such Note by the Note Principal Balance.
On each Payment Date, the Paying Agent will be required to pay the
following amounts in the following order of priority, out of Total Available
Funds:
(a) to the Note Insurer, an amount equal to the Premium Amount for
such Payment Date and the aggregate amount necessary to reimburse the Note
Amount Insurer for any unreimbursed payments of Insured Payments (together
with interest thereon) in respect of the Notes on prior Payment Dates and
the amount of any unpaid Premium Amount for prior Payment Dates (together
with interest thereon); provided, however, that the Note Insurer shall be
paid such amounts only after Owners have received Current Interest and any
Subordination Deficit with respect to such Payment Date;
(b) to the Owners, Current Interest;
(c) to the Owners, the Principal Distrubtion Amount, in reduction of
the Note Principal Balance until such Note Principal Balance is reduced to
zero; and
(d) to the Owners, the amount, if any, of the overcollateraization
payment [as defined] .
Any Available Funds remaining after application in the manner specified above
will be released to the Owner of Issuer's Certificate.
In the event that, with respect to a particular Payment Date, Available
Funds on such date are not sufficient to pay any portion of Current Interest,
the Indenture Trustee will make a claim on the Insurance Policy in an amount
equal to such deficiency and apply the Insured Payment received in respect of
such claim to the payment of the deficiency in such Current Interest. In
addition, the Indenture Trustee will make a claim on the Insurance Policy in an
amount equal to any Subordination Deficit on a Payment Date (after taking into
account payments in respect of the Principal Distribution Amount on such Paymnt
Date) and apply the portion of the Insured Payment related Subordination Deficit
to reduce the Note Principal Balance on such Payment Date by the amount of such
Subordination Deficit. Any Insured Payment paid in respect of the Notes to make
up any Subordination Deficit shall be paid to the Owners, in reduction of the
Note Principal Balance, until such Note Principal Balance is reduced to zero.
In no event will the aggregate payments of principal to Owners exceed the
Original Note Principal Balance as of the Closing Date.
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
Indenture Trustee and shall be part of the Trust Estate. 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 in accordance with the
Indenture. Any Pre-Funded Amount remaining at the end of the Funding Period will
be distributed to the Owners of the Notes on the Payment Date in __________
199__ in reduction of the Note Principal Balance of such Owner's Notes, thus
resulting in a partial principal prepayment of such Notes.
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.
S-26
<PAGE>
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 Indenture
Trustee and shall be part of the Trust Estate. The amount on deposit in the
Capitalized Interest Account, including reinvestment income thereon, will be
used by the Indenture Trustee to fund the excess, if any, of (i) the amount of
interest accruing at Note Rate on the amount by which the Note Principal Balance
exceeds the aggregate Loan Balance of the Home Equity Loans 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 Indenture Trustee on the first
Payment Date 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 Notes.
CALCULATION OF ONE-MONTH LIBOR
On each LIBOR Determination Date (as defined below), the Indenture Trustee
will determine LIBOR for the next Accrual Period for the Notes.
"One-Month LIBOR" means, as of any LIBOR Determination Date, the London
interbank offered rate for one-month United States dollar deposits 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 one
month. 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 (rounded upwards if necessary to the nearest whole multiple of
1/16%). 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 one month.
"LIBOR Determination Date" means, with respect to any Accrual Period, the
second London business day preceding the commencement of such Accrual Period.
For purposes of determining One-Month LIBOR, a "London business day" is any day
on which dealings in deposits of United States dollars are transacted in the
London interbank market.
"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 NOTES
The Notes will be book-entry Notes (the "Book-Entry Notes"). Persons
acquiring beneficial ownership interests in such Book-Entry Notes ("Beneficial
Owners") may elect to hold their Book-Entry Notes directly through DTC
participants of such system ("Participants"), or indirectly through
organizations which are Participants. The Book- Entry Notes will be issued in
one or more certificates per class of Notes which in the aggregate equal the
principal balance of such Notes 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 Notes in minimum denominations representing principal amounts of
$1,000 and multiples of $1 in excess thereof. Except as described below, no
Beneficial Owner will be entitled to receive a physical certificate representing
such Note (a "Definitive Note"). Unless and until Definitive Notes are issued,
it is anticipated that the only "Owner" of such Book-Entry Notes will be Cede &
Co., as nominee of DTC. Beneficial Owners will not be Owners as that term is
used in the Indenture. Beneficial Owners are only permitted to exercise their
rights indirectly through Participants and DTC.
The Beneficial Owner's ownership of a Book-Entry Notes 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 Note 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 Notes from the Indenture Trustee through DTC and DTC
Participants. While such Notes 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 Notes and is required to receive and transmit distributions of principal
of, and interest on, such Notes.
S-27
<PAGE>
Participants and indirect participants with whom Beneficial Owners have accounts
with respect to Book-Entry Notes 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 Notes, except under the limited
circumstances described below. Unless and until Definitive Notes are issued,
Beneficial Owners who are not Participants may transfer ownership of Notes only
through Participants and indirect participants by instructing such Participants
and indirect participants to transfer such Notes, by book-entry transfer,
through DTC for the account of the purchasers of such Notes, which account is
maintained with their respective Participants. Under the Rules and in accordance
with DTC's normal procedures, transfers of ownership of such Notes 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
Notes, whether held for its own account or as a nominee for another person. In
general, beneficial ownership of Book-Entry Notes 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 Notes will be made on each Payment Date by
the Indenture 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 Notes 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 Notes that it
represents.
Under a book-entry format, Beneficial Owners of the Book-Entry Notes may
experience some delay in their receipt of payments, since such payments will be
forwarded by the Indenture Trustee to Cede. Because DTC can only act on behalf
of Financial Intermediaries, the ability of a Beneficial Owner to pledge
Book-Entry Notes to persons or entities that do not participate in the
Depository system, or otherwise take actions in respect of such Book-Entry
Notes, may be limited due to the lack of physical certificates for such
Book-Entry Notes. In addition, issuance of the Book- Entry Notes in book-entry
form may reduce the liquidity of such Notes in the secondary market since
certain potential investors may be unwilling to purchase Notes 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 and affecting the
Depository, and to the Financial Intermediaries to whose DTC accounts the
Book-Entry Notes of such Beneficial Owners are credited.
DTC has advised the Indenture Trustee that, unless and until Definitive
Notes are issued, DTC will take any action permitted to be taken by the holders
of the Book-Entry Notes under the Indenture only at the direction of one or more
Financial Intermediaries to whose DTC accounts the Book-Entry Notes are
credited, to the extent that such actions are taken on behalf of Financial
Intermediaries whose holdings include such Book-Entry Notes. DTC may take
actions, at the direction of the related Participants, with respect to some
Offered Notes which conflict with actions taken with respect to other Notes.
Definitive Notes will be issued to Beneficial Owners of the Book-Entry
Notes, or their nominees, rather than to DTC, only if (a) DTC or the Depositor
advises the Indenture 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 Notes and the Depositor or the
Indenture 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 Notes, advises the Indenture 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 Indenture Trustee will be required to notify all
Beneficial Owners of the occurrence of such event and the availability through
DTC of Definitive Notes. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Notes and instructions for
re-registration, the Indenture Trustee will issue Definitive Notes, and
thereafter the Indenture Trustee will recognize the holders of such Definitive
Notes as Owners under the Indenture.
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Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of Notes 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 Notes, 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 Indenture described above.
THE NOTE INSURER
The information set forth in this section has been provided by the Note
Insurer. No representation is made by the Underwriters, the Issuers, 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 Note Insurer
incorporated by reference herein.
The Note Insurer, in consideration of the payment of the premiums and
subject to the terms of the Insurance Policy, will unconditionally and
irrevocably guarantee to any Owner that an amount equal to each full and
complete Insured Payment will be received by the Indenture Trustee or its
successor, as trustee for the Owners, on behalf of the Owners from the Note
Insurer, for distribution by the Indenture Trustee to each Owner of each Owner's
proportionate share of the Insured Payment. The Note Insurer's obligations under
the Insurance Policy with respect to a particular Insured Payment shall be
discharged to the extent funds equal to the applicable Insured Payment are
received by the Indenture Trustee, whether or not such funds are properly
applied by the Indenture Trustee. Insured Payments shall be made only at the
time set forth in the Insurance Policy and no accelerated Insured Payments shall
be made regardless of any acceleration of the Notes, unless such acceleration is
at the sole option of the Note Insurer.
Notwithstanding the foregoing paragraph, the Insurance Policies do not
cover shortfalls, if any, attributable to the liability of the Trust, or the
Trustee for withholding taxes, if any (including interest and penalties in
respect of any such liability).
The Note Insurer will pay any other amount payable under the Insurance
Policy no later than 12:00 noon New York City time, on the later of the Payment
Date on which the Insured Payment is due or the second Business Day following
receipt in New York, New York, of a Notice (as described below); provided that
if such Notice is received after 12:00 noon New York City time on such Business
Day, it will be deemed to be received on the following Business Day. If any such
Notice is not in proper form or is otherwise insufficient for the purpose of
making a claim under an Insurance Policy, it shall be deemed not to have been
received for purposes of this paragraph, and the Note Insurer shall promptly so
advise the Indenture Trustee and the Indenture Trustee may submit an amended
Notice.
Insured Payments due under an Insurance Policy, unless otherwise stated
therein, will be disbursed to the Trustee on behalf of Owners by wire transfer
of immediately available funds in the amount of the Insured Payment less, in
respect of Insured Payments related to Preference Amounts, any amount held by
the Trustee for the payment of such Insured Payment and legally available
therefor.
[Financial Information to be provided].
CREDIT ENHANCEMENT
INSURANCE POLICY
See "The Note Insurer" herein for a description of the Insurance Policy.
OVERCOLLATERALIZATION PROVISIONS
Overcollateralization Resulting from Cash Flow Structure. The Indenture
requires that, on each Payment Date, Net Monthly Excess Cashflow be applied on
such Payment Date as an accelerated payment of principal on the Notes, 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 during a Remittance Period (net of the Servicing Fee and
of certain miscellaneous administrative amounts) plus any Delinquency Advances
and Compensating Interest over (y) the sum of the related Current Interest,
Trustee Fee, Premium Amount and Trustee Reimbursable Expenses (the difference
between (x) and (y) is the "Total Monthly Excess Spread"), over (ii) the portion
of the Total Monthly Excess Cashflow that is used to cover shortfalls in
Available Funds on such Payment Date or used to reimburse the Note Insurer.
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The application of Net Monthly Excess Cashflow has the effect of
accelerating the amortization of the Notes relative to the amortization of the
Home Equity Loans. To the extent that any Net Monthly Excess Cashflow is not so
used (and is not required to pay Reimbursement Amounts (as defined in the
Indenture) to the Note Insurer), the Indenture 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 Issuer's Certificate.
Pursuant to the Indenture, Net Monthly Excess Cashflow will be applied as
an accelerated payment of principal on the Note until the Subordinated Amount
has increased to the level required. "Subordinated Amount" means, the excess, if
any, of (x) 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 preceding Remittance Period
and (ii) any amount on deposit in the Pre-Funding Account at such time exclusive
of any Pre-Funding Account Earnings (as defined in the Indenture) over (y) the
aggregate Note Principal Balance as of such Payment Date (after taking into
account the payment of the Principal Distribution Amount(except for any
Subordination Reduction Amount or Subordination Increase Amount) on such Payment
Date). 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 with respect to a Payment Date is the
"Specified Subordinated Amount." The Indenture 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 related
Specified Subordinated Amount to decrease or "step down" based on the
performance on the Home Equity Loans with respect to certain tests specified in
the Indenture 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 Notes during the period that the Home Equity Loans are unable to meet
certain tests specified in the Notes based on delinquency rates and cumulative
losses.
In the event that the Specified Subordinated Amount is permitted to
decrease or "step down" on a Payment Date in the future, the Indenture provides
that a portion of the principal which would otherwise be distributed to the
Owners of the Notes on such Payment Date shall be distributed to the Owners of
the Issuer's Certificate over the period specified in the Indenture. This has
the effect of decelerating the amortization of Notes relative to the
amortization of the Home Equity Loans and of reducing the related Subordinated
Amount. With respect to any 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
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 Specified Subordinated Amount), then any amounts relating to
principal which would otherwise be distributed to the Owners of the Notes on
such Payment Date shall instead be distributed to the Owners of the Issuer's
Certificate (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 Notes on such Payment
Date; such amount being the "Subordination Reduction Amount" with respect to the
related Payment Date. As a result of the cash flow structure of the transaction,
Subordination Reduction Amounts may result even prior to the occurrence of any
decrease or "step down" in the Specified Subordinated Amount. This is because
the Owners of the Notes will generally be entitled to receive 100% of collected
principal even though the aggregate Note Principal Balance will, following the
accelerated amortization resulting from the application of the Net Monthly
Excess Cashflow, represent less than 100% of the 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 Indenture 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) during the prior Remittance Period
will be distributed to the Owners of the Notes 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 Indenture provides
that the principal balance of any Home Equity Loan which becomes a Liquidated
Loan shall thenceforth equal zero. The Indenture does not contain any
requirement that the amount of any Realized Loss be distributed to the Owners of
the related Notes on the Payment Date which immediately follows the event of
loss; i.e., the Indenture does not require the current recovery of losses.
However, the occurrence of a Realized Loss will reduce the Subordinated Amount,
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 Date,
on subsequent Payment Dates, until the Subordinated Amount equals the Specified
Subordinated Amount).
Overcollateralization and the Insurance Policy. The Indenture defines a
"Subordination Deficit" with respect to a Payment Date to be the amount, if any,
by which (x) the Note Principal Balance with respect to such Payment Date, after
taking into account all distributions to be made on such Payment Date (without
regard to any Insured Payment to be made on such Payment Date and except for any
Subordination Deficit), exceeds (y) the sum of (a) the aggregate Loan Balances
of the Home Equity Loans as of the close of business on the last day of the
prior Remittance Period and (b) the
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amount, if any, on deposit in the Pre-Funding Account on such Payment Date
exclusive of any Pre-Funding Account Earnings. The Indenture requires the
Trustee to make a claim for an Insured Payment under the Insurance Policy not
later than the second Business Day 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 Notes 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 Notes. Investors in the Notes should
realize that, under extreme loss or delinquency scenarios Notes, 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
Notes depends in part on the ability of the Note Insurer to satisfy its
obligations under the Insurance Policy. In that respect and to the extent that
the Note Insurer satisfies such obligations, the Owners of the Notes are
insulated from shortfalls in Available Funds that may arise.
THE INDENTURE
In addition to the provisions of the Indenture summarized elsewhere in the
Prospectus and this Prospectus Supplement there is set forth below a summary of
certain other provisions of the Indenture.
COVENANT OF THE SELLER TO TAKE CERTAIN ACTIONS WITH RESPECT TO THE HOME EQUITY
LOANS IN CERTAIN SITUATIONS
Pursuant to the Indenture, upon the discovery by the Depositor, the Seller,
any Sub-Servicer, any Owner, the Custodian or the Indenture 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
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, the Seller will be required promptly to cure such
breach in all material respects or the Seller shall on or prior to 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 Indenture) and deliver an amount equal to
the excess, if any, of the Loan Balance of the Home Equity Loan being replaced
over the outstanding principal balance of the replacement Home Equity Loan plus
interest (the "Substitution Amount") to the Indenture 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. The
Seller shall also deliver an Officer's Certificate to the Indenture Trustee
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.
The obligation of the Seller to so substitute or repurchase any Home Equity Loan
as to which a representation of warranty is untrue in any material respect and
has not been remedied constitutes the sole remedy available to the Owners and
the Indenture Trustee.
"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 Indenture, the Seller on the Closing Date will sell,
transfer, assign, set over and otherwise convey without recourse to the
Depositor and the Depositor will sell, transfer, assign, set over and otherwise
convey without recourse to the Issuer and the Issuer will pledge all of its
right, title and interest, without recourse to the Indenture 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).
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:
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(i) deliver without recourse to _______________ (the "Custodian") on
behalf of the Indenture 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 Mortgage Notes, endorsed in blank or to
the order of the Indenture 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 Indenture
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 Indenture Trustee of IMC Home Equity Loan Owner
Trust 199__-__ under the Indenture 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 until such
information is received; provided, further, that the Seller shall not be
required to record an assignment of a Mortgage (except upon the occurrence
of certain triggers specified in the Indenture) if the Seller furnishes to
the Indenture Trustee 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 each Subsequent Home Equity Loans, at the
Seller's expense, an opinion of counsel with respect to the relevant
jurisdiction that such recording is not required to perfect the Indenture
Trustee's interests in the related Mortgages Loans (in form satisfactory to
the Indenture Trustee 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 Indenture 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 Indenture Trustee 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 Indenture Trustee and the Rating
Agencies.
The Indenture 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 Indenture 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 Indenture 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 Indenture Trustee will be required to promptly notify the
Depositor, the Seller and the Owners. The Seller will agree in the Indenture 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
Indenture 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, 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 Indenture 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 Monthly
Remittance Date.
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In addition to the foregoing, the Custodian on behalf of the Indenture
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 Indenture Trustee and the
Servicer shall monitor no less frequently than monthly 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 Indenture, the terms of the respective Home Equity Loans, and the
servicing standards set forth in FannieMae's Servicing Guide (the "FannieMae
Guide"); provided, however, that to the extent such standards, such obligations
or the FannieMae Guide is amended by FannieMae after the date of the Indenture
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 Indenture.
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
Indenture, and similar items.
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 Indenture 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
FannieMae 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 Indenture 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 Indenture). 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, (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 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 for
any excess interest collected from a Mortgagor; and
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(v) to clear and terminate the Principal and Interest Account
following the termination of the Trust.
The Servicer will remit to the Indenture Trustee for deposit in the Note
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 Indenture 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 Monthly Remittance Date and was not theretofore advanced by the
Servicer. Such amounts of the Servicer's own funds so deposited are "Delinquency
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 (such amount to
be replaced on future dates to the extent necessary) or from the Note Account
out of the Monthly Excess Cashflow Amount.
Notwithstanding the foregoing, in the event that the Servicer determines in
its reasonable business judgment in accordance with the servicing standards of
the Indenture 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 Indenture Trustee.
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 the Servicer in its reasonable business
judgment determines that any such proposed amount 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 Note Account
as provided in the Indenture. 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 Indenture Trustee on the next succeeding Monthly Remittance
Date.
The Servicer 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. 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 23
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.]
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 Indenture 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
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approval may be considered by the Servicer unless: (a) the provisions of the
related Note and Mortgage have been complied with; (b) the loan-to-value ratio
and debt-to-income ratio after any release do not exceed the loan-to-value ratio
and debt-to-income ratio, respectively, of such Mortgage Note on the Cut-Off
Date provided that the loan-to-value ratio shall be permitted to be increased by
an amount not to exceed 5%; and (c) 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 the Remittance Period related to the Final Scheduled Payment Date.
Notwithstanding anything set forth in the Indenture 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 Indenture Trustee prior to
the execution of any modification, waiver or amendment of any provision of any
Home Equity Loan and shall deliver to the Custodian, on behalf of the Indenture
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
will be permitted under the Indenture 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).
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 Indenture 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 Indenture.
The Servicer (except the Indenture Trustee if it is required to succeed the
Servicer under the Indenture) has agreed to indemnify and hold the Indenture
Trustee 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 Indenture Trustee 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 Indenture. The
Servicer shall immediately notify the Indenture Trustee and each Owner if a
claim is made by a third party with respect to the Indenture, 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
Indenture Trustee and/or Owner in respect of such claim. The Indenture Trustee
shall reimburse the Servicer from amounts otherwise distributable on the
Issuer's Certificate 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 Indenture. The indemnification provisions shall survive the
termination of the Indenture and the payment of the outstanding Notes.
The Servicer will be required to deliver to the Indenture Trustee and the
Rating Agencies on or before April 30 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 Indenture 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 Indenture 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 Indenture Trustee
stating that such firm has examined the Servicer's overall servicing operations
in accordance with the requirements of the Uniform Single Attestation Program
for Mortgage Bankers, and stating such firm's conclusions relating thereto.
REMOVAL AND RESIGNATION OF SERVICER
The Indenture Trustee, at the direction of a majority of the Owners, will
have the right, pursuant to the Indenture, to 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 Indenture (including certain performance
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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 Indenture; 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 Indenture 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 Indenture. 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 Indenture Trustee.
Upon removal or resignation of the Servicer, the Indenture Trustee may (A)
solicit bids for a successor servicer as described in the Indenture and (B)
until such time as a successor servicer is appointed pursuant to the terms of
the Indenture, shall serve in the capacity of Backup Servicer. The Indenture
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 FannieMae, having equity of not less than $5,000,000, and acceptable
to a majority of the Owners of the Notes 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 or a successor servicer shall have assumed the Servicer's
responsibilities and obligations in accordance with the Indenture.
REDEMPTION OF THE NOTES
The Notes will be subject to redemption in whole but not in part, at the
option of the Issuer, on or after the Payment Date on which the Note Principal
Balance is less ___% of the Note Principal Balance as of the Cut-Off Date. The
Servicer may also cause the redemption of the Notes by exercising its right to
purchase all Home Equity Loans from the Indenture Trustee on or after the
Payment Date on which the aggregate Loan Balance of the Home Equity Loans in the
Home Equity Loan Pool has declined to less than ___% of the sum of the Loan
Balance of the Initial Home Equity Loans plus the amount deposited in the
Pre-Funding Account (the "Pool Redemption Date").
In addition, the Note Insurer may effect a redemption of the Notes by
exercising its right to purchase all Home Equity Loans from the Indenture
Trustee on any Payment Date on which Home Equity Loans having Loan Balances as
of the Cut-Off Date aggregating an amount equal to or in excess of ___% of the
sum of the Loan Balance of the Initial Home Equity Loans plus the amount
deposited in the Pre-Funding Account have become Liquidated Loans.
The Notes will be redeemed at a redemption price of 100% of the then
outstanding Note Principal Balance thereof plus accrued but unpaid interest
thereon through the end of the Remittance Period immediately preceding the
related Payment Date. There will be no prepayment premium in connection with
such a redemption. Notice of an optional redemption of the Notes must be mailed
by the Indenture Trustee to the Owners at least ten days prior to the Payment
Date set for such redemption.
The payment on the final Payment Date in connection with the redemption of
the notes shall be in lieu of the payment otherwise required to be made on such
Payment Date in respect of the Notes.
THE INDENTURE TRUSTEE
________________________ will be the Indenture Trustee under the Indenture.
The Indenture will provide that the Indenture Trustee is entitled to certain
fees and reimbursement of expenses.
The Indenture also will provide that the Indenture Trustee may resign at
any time, upon notice to the Issuer, the Servicer and any Rating Agency, in
which event the Issuer will be obligated to appoint a successor Indenture
Trustee. The Issuer may remove the Indenture Trustee if the Indenture Trustee
ceases to be eligible to continue as such under the Indenture Trustee and
appointment of a successor Indenture Trustee will not become effective until
acceptance of the appointment by the successor Indenture Trustee. The Indenture
will provide that the Indenture Trustee is under no obligation to exercise any
of the rights or powers vested in it by the Indenture at the request or
direction of any of the Owners, unless such Owners shall have offered to the
Indenture Trustee reasonable security or indemnity against the costs, expenses
and liabilities which might be incurred by it in compliance with such request or
direction. The Indenture Trustee may execute any of the rights of powers granted
by the Indenture or perform any duties thereunder either directly or by or
through agents or attorneys, and the Indenture Trustee is responsible for any
misconduct or negligence on the part of any agent or attorney appointed and
supervised with due care by it thereunder. Pursuant to the Indenture, the
Indenture Trustee is not liable for any action it takes or omits to take in good
faith which it reasonably believes to be authorized by an authorized officer of
any person or within its rights or powers under the Indenture. The Indenture
Trustee and any director, officer, employee or agent of the Indenture Trustee
may rely and will be protected
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in acting or refraining from acting in good faith in reliance on any
certificate, notice or other document of any kind prima facie properly executed
and submitted by the authorized officer of any person respecting any matters
arising under the Indenture.
VOTING
Unless otherwise specified in the Indenture, with respect to any provisions
of the Indenture providing for the action, consent or approval of the Owners
evidencing specified "Voting Interests", each Owner will have a Voting Interest
equal to the Percentage Interest represented by such Owner's Note. Any Note
registered in the name of the Issuer or any affiliate thereof will be deemed not
to be outstanding and the Percentage Interest evidenced thereby shall not be
taken into account in determining whether the requisite amount of Voting
Interests necessary to take any such action, or effect any such consent, has
been obtained.
NOTE EVENTS OF DEFAULT
A default on the Notes may also occur if on any Payment Date, after taking
into account all payments made in respect of principal on the Notes and the
payment of any Insured Payments on such Payment Date, a Subordination Deficit
exists with respect to the Notes. In the absence of a failure by the Note
Insurer to pay Insured Payments no acceleration of the maturity of the Notes
shall be permitted without the consent of the Note Insurer.
REPORTING REQUIREMENTS
On each Payment Date the Indenture Trustee will be required to report in
writing (based on information provided to the Indenture Trustee by the Servicer)
to each Owner and the Rating Agencies:
i) the amount of the distribution with respect the Notes (based on a
Note 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 any Pre-Funded Amounts distributed as a prepayment
(based on a Note in the original principal amount of $1,000);
iii) the amount of such distribution allocable to interest on the Home
Equity Loans (based on a Note in the original principal amount of $1,000);
iv) the principal amount of the Notes (based on a Note in the original
principal amount of $1,000) which will be Outstanding after giving effect
to any payment of principal on such Payment Date;
v) the aggregate Loan Balance of all Home Equity Loans after giving
effect to any payment of principal on such Payment Date;
vi) 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;
vii) the total of any Substitution Amounts or Loan Purchase Price
amounts included in such distribution; and
viii) for the initial Payment Date the total remaining Pre-Funded
Amount in the Pre-Funding Account.
Certain obligations of the Indenture 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 Indenture
Trustee will be required to distribute to each Owner and the Rating Agencies,
together with the information described above, the following information
prepared by the Servicer and furnished to the Indenture Trustee for such
purpose:
(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
calendar month 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 amounts represented by clauses (i),
(ii) and (iii) represent as a percentage of the respective amounts in
clause (iv);
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(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 calendar month 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 calendar month 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 Indenture Trustee, as of the
close of business of the last day of the calendar month 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 calendar month immediately preceding the Payment Date; and
(f) the amount of cumulative Realized Losses, the current period
Realized Losses (each as defined in the Indenture) and any other loss
percentages as required by the Indenture.
REMOVAL OF INDENTURE TRUSTEE FOR CAUSE
The Indenture 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 Indenture Trustee: (1)
failure to make distributions of available amounts; (2) certain breaches of
covenants and representations by the Indenture Trustee; (3) certain acts of
bankruptcy or insolvency on the part of the Indenture Trustee; and (4) failure
to meet the standards of Indenture Trustee eligibility as set forth in the
Indenture.
If any such event occurs and is continuing, then and in every such case (i)
the Seller or (ii) the Owners of a majority of the Percentage Interests
represented by the Notes.
GOVERNING LAW
The Indenture and each Note 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.
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 Notes.
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
Notes.
No election will be made to treat the Trust Estate or any portion thereof
as a REMIC for federal income tax purposes.
The Notes will be treated as newly originated debt instruments for federal
income tax purposes. It is anticipated that the Notes will be issued without
original issue discount for federal income tax purposes. However, it is possible
that the Internal Revenue Service could treat a portion of the additional
interest which would become payable on the notes after the Pool Redemption Date
as original issue discount. Owners are urged to consult their tax advisor with
respect to the tax consequences of holding the Notes.
The Prepayment Assumption that is to be used in determining whether the
Notes are issued with original issue discount and the rate of accrual of
original issue discount is a CPR of ___%. No representation is made as to the
actual rate of which the Home Equity Loans will prepay. See "Federal Income Tax
Consequences -- Taxation of Notes" in the Prospectus.
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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 Notes 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 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 Note; 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.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, and the potential consequences in
their specific circumstances, prior to making an investment in the Notes.
Moreover, each Plan fiduciary should determine whether under the general
fiduciary standards of investment procedure and diversification an investment in
the Notes is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio.
In addition to the matters described above, purchasers of an Notes that are
insurance companies should consult with their counsel with respect to the United
States Supreme Court case interpreting the fiduciary responsibility rules of
ERISA, John Hancock Mutual Life Insurance Co. v. Harris Trust and Savings Bank
114 S.Ct. 517 (1993). In John Hancock, the Supreme Court ruled that assets held
in an insurance company's general account may be deemed to be "plan assets" for
ERISA purposes under certain circumstances. Prospective purchasers using
insurance company general account assets should determine whether the decision
affects their ability to make purchases of the Notes.
RATINGS
It is a condition of the issuance of the Notes that the Notes receive
ratings of "Aaa" by Moody's and "AAA" by Fitch. Explanations of the significance
of such ratings may be obtained from Moody's, 99 Church Street, New York, New
York 10007 and Fitch, One State Street Plaza, 33rd Floor, New York, New York
10004. Such ratings will be the views only of such rating agencies. There is no
assurance that 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 Notes. A
security rating is not a recommendation to buy, sell or hold securities.
The ratings of Moody's and Fitch do not address the possibility that, as a
result of principal prepayments, certificateholders may receive a lower than
anticipated yield.
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The ratings of the Notes should be evaluated independently from similar
ratings on other types of securities. 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.
The Depositor has not requested a rating of the Notes offered hereby by any
rating agency other than Moody's and Fitch and the Depositor has not provided
information relating to the Notes offered hereby or the Home Equity Loans to any
rating agency other than Moody's and Fitch. However, there can be no assurance
as to whether any other rating agency will rate the Notes offered hereby or, if
another rating agency rates such Notes, what rating would be assigned to such
Notes by such rating agency. Any such unsolicited rating assigned by another
rating agency to the Notes offered hereby may be lower than the rating assigned
to such Notes by either or both of Moody's and Fitch.
LEGAL INVESTMENT CONSIDERATIONS
The Notes will [not] constitute "mortgage related securities" for purposes
of SMMEA. 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 Notes.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
relating to the Notes (the "Underwriting Agreement"), the Underwriters named
below (the "Underwriters"), has severally agreed to purchase, the principal
amount of the Notes set forth opposite its name below:
Underwriters Principal Amount
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 Notes offered
hereby, if any are purchased. The Depositor has been advised by the Underwriters
that they propose initially to offer the Notes 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 Note Principal Balance).
The Underwriters may allow and such dealers may reallow a discount not in excess
of the ____%.
After the initial public offering, such prices and discounts may be
changed.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934 (the "Exchange Act"). Over- allotment
involves syndicate sales in excess of the offering size, which creates a
syndicate short position. Stabilizing transactions permit bids to purchase the
underlying security so long as the stabilizing bids do not exceed a specific
maximum. Syndicate covering transactions involve purchases of the Notes in the
open market after the distribution has been completed in order to cover
syndicate short positions. Penalty bids permit the Underwriters to reclaim a
selling concession from a syndicate member when the Notes originally sold by
such syndicate member are purchased in a syndicate covering transaction to cover
syndicate short positions. Such stabilizing transactions, syndicate covering
transactions and penalty bids may cause the price of the Notes to be higher than
it would otherwise be in the absence of such transactions. These transactions,
if commenced, may be discontinued at any time.
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.
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CERTAIN LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the Notes
will be passed upon for the Seller, the Depositor and the Issuer by Arter &
Hadden, Washington, D.C. Certain legal matters relating to insolvency issues and
certain federal income tax matters concerning the Notes will be passed upon for
the Seller, Depositor, and the Issuer by Arter & Hadden.
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APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
Page
Accrual Period...............................................................S-3
Appraised Values............................................................S-16
Backup Servicer.............................................................S-13
Balloon Loans...............................................................S-11
Beneficial Owners............................................................S-6
Book-Entry Notes............................................................S-27
Capitalized Interest Account.................................................S-6
Cede.........................................................................S-6
Certificate Insurer Default..................................................S-5
Closing Date.................................................................S-1
CMT Loans...................................................................S-10
Combined Loan-to-Value Ratios...............................................S-19
Compensating Interest.......................................................S-34
Coupon Rate..................................................................S-3
CPR.........................................................................S-23
Current Interest.............................................................S-3
Custodian...................................................................S-32
Cut-Off Date.................................................................S-1
Daily Collections...........................................................S-33
Date-of-Payment Loans.......................................................S-22
Definitive Note.............................................................S-27
Delinquency Advances........................................................S-34
Depositor....................................................................S-1
DOL.........................................................................S-39
DTC..........................................................................S-6
DTC Participants............................................................S-28
ERISA.......................................................................S-39
Excess Subordinated Amount..................................................S-30
Exchange Act................................................................S-40
FannieMae...................................................................S-13
FHLMC.......................................................................S-13
Financial Intermediary......................................................S-27
Fitch........................................................................S-7
FNMA Guide..................................................................S-33
Funding Period...............................................................S-6
Indenture....................................................................S-1
Initial Home Equity Loans....................................................S-2
Insolvency Event............................................................S-11
Insolvency Laws.............................................................S-12
Insurance Policy.............................................................S-5
Insured Payment..............................................................S-5
Interest Carry Forward Amount................................................S-4
Interest Remittance Amount...................................................S-3
Issuer's Certificate.........................................................S-2
LIBOR Determination Date....................................................S-27
Loan Purchase Price.........................................................S-31
Monthly Remittance Date......................................................S-4
Moody's......................................................................S-7
Mortgage Note................................................................S-1
Mortgage Notes..............................................................S-16
Mortgagor...................................................................S-22
Net Liquidation Proceeds....................................................S-33
Net Monthly Excess Cashflow.................................................S-29
Note.........................................................................S-2
Note Insurer.................................................................S-5
Note Insurer Default.........................................................S-6
Note Rate....................................................................S-4
Notes........................................................................S-1
One-Month LIBOR.............................................................S-27
Original Aggregate Loan Balance.............................................S-16
Participants................................................................S-27
Paying Agent................................................................S-26
Payment Date.................................................................S-3
Percentage Interest.........................................................S-26
Plans.......................................................................S-39
Pool.........................................................................S-1
Prepayment Assumption.......................................................S-23
Prepayments..................................................................S-9
Preservation Expenses.......................................................S-34
Pre-Funded Amount............................................................S-6
Pre-Funding Account..........................................................S-2
Principal and Interest Account..............................................S-33
Principal Remittance Amount..................................................S-4
Properties...................................................................S-1
Qualified Replacement Mortgage..............................................S-31
Rating Agencies..............................................................S-7
REMIC........................................................................S-7
Realized Loss...............................................................S-30
Record Date..................................................................S-3
Reference Banks.............................................................S-27
Remittance Period............................................................S-4
Riegle Act..................................................................S-11
Rules.......................................................................S-27
Securities...................................................................S-2
Seller.......................................................................S-1
Servicer.....................................................................S-1
Servicer Termination Events.................................................S-35
Servicing Advance...........................................................S-34
Servicing Fee................................................................S-4
Six-Month LIBOR.............................................................S-10
SMMEA........................................................................S-8
Specified Subordinated Amount...............................................S-30
Subordinated Amount.........................................................S-30
Subordination Deficit.......................................................S-30
Subordination Increase Amount...............................................S-30
Subordination Reduction Amount..............................................S-30
Subsequent Cut-Off Date.....................................................S-10
Subsequent Home Equity Loans.................................................S-2
Subsequent Transfer Agreement................................................S-9
Subsequent Transfer Date.....................................................S-6
Substitution Amount.........................................................S-31
Sub-Servicers...............................................................S-12
Sub-Servicing Agreements....................................................S-12
Telerate Page 3750..........................................................S-27
Total Monthly Excess Spread.................................................S-29
Trust Estate.................................................................S-1
Trustee......................................................................S-1
Trustee Fee..................................................................S-1
Underwriters................................................................S-40
Weighted average life.......................................................S-23
A - 1
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
====================================== ========================================
NO DEALER, SALESPERSON OR OTHER PERSON IMC HOME EQUITY
HAS BEEN AUTHORIZED TO GIVE ANY LOAN OWNER TRUST 199_-_
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 [LOGO]
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 $___________ ADJUSTABLE RATE
THERE HAS BEEN NO CHANGE IN THE ASSET BACKED NOTES,
AFFAIRS OF THE DEPOSITOR SINCE SUCH SERIES 199__-__ DUE ____________, 200_
DATE.
----------
TABLE OF CONTENTS
PAGE
PROSPECTUS SUPPLEMENT
Summary.............................S-
Risk Factors .......................S-
The Seller and Servicer.............S- INDUSTRY MORTGAGE COMPANY, L.P.
The Depositor.......................S- SELLER AND SERVICER
Use of Proceeds.....................S-
The Home Equity Loan Pool...........S- IMC SECURITIES, INC.
Prepayment and Yield DEPOSITOR
Considerations....................S-
Additional Information..............S-
Description of the Notes............S-
The Note Insurer....................S-
Credit Enhancement..................S-
The Indenture.......................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 SUPPLEMENT
PROSPECTUS -----------
Summary of Prospectus................
Risk Factors.........................
Description of the Securities........
The Trusts...........................
Credit Enhancement...................
Servicing of Mortgage Loans..........
The Pooling and Servicing
Agreement ........................
The Indenture........................
Use of Proceeds......................
The Depositor........................
Certain Legal Aspects of the
Mortgage Assets....................
Legal Investment Matters.............
ERISA Considerations.................
Federal Income Tax Consequences...... [Underwriters]
Plan of Distribution.................
Ratings..............................
Legal Matters........................
Financial Information................
Index to Location of Principal
Defined Terms......................
======================================= =======================================
<PAGE>
SUBJECT TO COMPLETION DATED __________, 199_
PROSPECTUS
HOME EQUITY LOAN ASSET BACKED CERTIFICATES
HOME EQUITY LOAN ASSET BACKED NOTES
(Issuable in Series)
IMC SECURITIES, INC.
(DEPOSITOR)
This Prospectus relates to Home Equity Loan Asset Backed Certificates (the
"Certificates") and Home Equity Loan Asset Backed Notes (the "Notes" and
together with the Certificates, the "Securities") to be issued from time to time
in one or more series (each, a "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 Securities 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 (including financial guaranty insurance policies and surety
bonds), guaranties, letters of credit or similar types of credit support or
enhancement as more particularly described in the related Prospectus Supplement.
One or more classes of Securities 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 Securities 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 Securities
of such Series, in each case as specified in the related Prospectus Supplement.
Interest on each class of Securities 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 Securities.
Distributions on the Securities 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 Securities. An
affiliate of the Depositor may make or obtain for the benefit of the Securities
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 Securities.
The yield on Securities will be affected by the rate of payment of
principal (including prepayments) of mortgage assets in the related Trust. Each
Series of Securities will be subject to early termination under the
circumstances described herein and in the related Prospectus Supplement.
If specified in a Prospectus Supplement for a Series of Certificates, one
or more elections 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 Securities that the Securities be
rated in not less than the fourth highest rating category by a nationally
recognized rating organization.
SEE "RISK FACTORS" BEGINNING ON PAGE 7 HEREIN AND IN THE RELATED PROSPECTUS
SUPPLEMENT FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING INVESTMENTS IN THE
SECURITIES.
SEE "ERISA CONSIDERATIONS" HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT
FOR A DISCUSSION OF RESTRICTIONS ON THE ACQUISITION OF SECURITIES 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 SECURITIES.
THE ASSETS OF A TRUST ARE THE SOLE SOURCE OF PAYMENTS ON THE RELATED
SECURITIES. THE SECURITIES 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 SECURITIES 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 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 OR ANY RELATED PROSPECTUS SUPPLEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
Offers of the Securities 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 Securities nor can there by any assurance
that one will develop or if it does develop, that it will provide the Owners of
the Securities with liquidity or will continue for the life of the Securities.
- --------------------------------------------------------------------------------
RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE. THIS PROSPECTUS MAY NOT BE
USED TO CONSUMMATE SALES OF SECURITIES UNLESS ACCOMPANIED BY A PROSPECTUS
SUPPLEMENT.
The date of this Prospectus is __________ __, 199_.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PRELIMINARY PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
SUCH STATE.
<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 Securities. 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 its Public
Reference Section 450 Fifth Street, N.W., Washington, D.C. 20549, and at its
Regional Offices located as follows: New York Regional Office, 7 World Trade
Center, 13th Floor, New York, New York 10048; and Chicago Regional Office,
Citicorp 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
and electronically through the Commission's Electronic Data Gathering, Analysis
and Retrieval system at the Commission's Web site (http://www.sec.gov).
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 accompanying
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 Securities
offered hereby and thereby nor an offer of the Securities 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 OWNERS
Periodic and annual reports concerning any Securities and the related Trust
will be provided to the persons in whose names the Securities are registered
(the "Owners"). See "The Pooling and Servicing Agreement-Reports" If specified
in the related Prospectus Supplement, a Series of Securities may be issuable in
book-entry form. In such event, the related Securities will be registered in the
name of a Clearing Agency (as defined herein) and, therefore, the Clearing
Agency will be the Owner for purposes hereof. 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 Securities. See
"Description of the Securities-Book-Entry Registration" herein. 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 Depositor'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., 5901 E. Fowler Avenue, Tampa, Florida
33617-2362 (telephone number (813) 984-8801).
<PAGE>
PROSPECTUS SUPPLEMENT OR CURRENT REPORT ON FORM 8-K
The Prospectus Supplement or Current Report on Form 8-K relating to the
Securities of each Series to be offered hereunder will, among other things, set
forth with respect to such Securities, as appropriate: (i) a description of the
class or classes of Securities and the interest rate or method of determining
the rate or the amount of interest, if any, to be paid to each such class; (ii)
the aggregate principal amount and Payment Dates relating to such Series and, if
applicable, the initial and final scheduled Payment Dates for each class; (iii)
information as to the assets comprising the Trust, including the general
characteristics of the Trust Assets included therein and, if applicable, the
insurance policies, surety bonds, guarantees, letters of credit, reserve funds,
cash accounts, reinvestment income or other instruments or agreements included
in the Trust or otherwise, and the amount and source of any reserve account or
cash account; (iv) the circumstances, if any, under which the Trust may be
subject to early termination; (v) the methods used to calculate the amount of
principal to be distributed with respect to each class of Securities; (vi) the
order of application of distributions to each of the classes within such Series,
whether sequential, pro rata, or otherwise; (vii) additional information with
respect to the method of distribution of such Securities; (viii) whether one or
more REMIC elections will be made and designation of the regular interests and
residual interests; (ix) the aggregate original percentage ownership interest in
the Trust to be evidenced by each class of Securities; (x) information as to the
Trustee; (xi) information as to the nature and extent of subordination with
respect to any class of Securities that is subordinate in right of payment to
any other class; and (xii) information as to the Master Servicer, if any.
UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE SECURITIES COVERED BY SUCH PROSPECTUS SUPPLEMENT,
WHETHER OR NOT PARTICIPATING IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO
DELIVER SUCH PROSPECTUS SUPPLEMENT AND THIS PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
WHEN ACTING AS UNDERWRITERS OF THE SECURITIES COVERED BY SUCH PROSPECTUS
SUPPLEMENT AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
TABLE OF CONTENTS
PAGE
SUMMARY OF PROSPECTUS........................................................ 1
RISK FACTORS................................................................. 7
DESCRIPTION OF THE SECURITIES................................................ 11
General................................................................. 11
Classes of Securities................................................... 12
Distributions of Principal and Interest................................. 13
Book Entry Registration................................................. 15
List of Owners of Securities............................................ 15
THE TRUSTS................................................................... 15
Mortgage Loans.......................................................... 16
Mortgage-Backed Securities.............................................. 18
Other Mortgage Securities............................................... 18
CREDIT ENHANCEMENT........................................................... 19
SERVICING OF MORTGAGE LOANS.................................................. 23
Payments on Mortgage Loans.............................................. 24
Advances................................................................ 24
Collection and Other Servicing Procedures............................... 25
Primary Mortgage Insurance.............................................. 26
Standard Hazard Insurance............................................... 26
Title Insurance Policies................................................ 27
Claims Under Primary Mortgage Insurance Policies
and Standard Hazard Insurance Policies; Other
Realization Upon Defaulted Loan..................................... 27
Servicing Compensation and Payment of Expenses.......................... 28
Master Servicer......................................................... 28
THE POOLING AND SERVICING AGREEMENT.......................................... 28
Assignment of Mortgage Assets........................................... 28
Evidence as to Compliance............................................... 30
The Trustee............................................................. 30
Administration of the Security Account.................................. 31
Reports................................................................. 32
Forward Commitments; Pre-Funding........................................ 33
Servicer Events of Default.............................................. 33
Rights Upon Servicer Event of Default................................... 33
Amendment............................................................... 34
Termination............................................................. 34
THE INDENTURE................................................................ 34
General................................................................. 34
Modification of Indenture............................................... 35
Note Events of Default.................................................. 35
Rights Upon Note Events of Default...................................... 36
List of Note Owners..................................................... 36
Annual Compliance Statements............................................ 37
Trustee's Annual Report................................................. 37
Satisfaction and Discharge of Indenture................................. 37
Redemption of Notes..................................................... 37
Reports by Trustee to Note Owners....................................... 37
Limitation on Suits..................................................... 37
USE OF PROCEEDS.............................................................. 37
THE DEPOSITOR................................................................ 38
CERTAIN LEGAL ASPECTS OF THE MORTGAGE
ASSETS.................................................................. 38
General................................................................. 38
Foreclosure............................................................. 39
Soldiers' and Sailors' Civil Relief Act................................. 44
LEGAL INVESTMENT MATTERS..................................................... 44
ERISA CONSIDERATIONS......................................................... 45
FEDERAL INCOME TAX CONSEQUENCES.............................................. 46
Federal Income Tax Consequences For REMIC
Securities.......................................................... 47
Taxation of Regular Securities.......................................... 48
Taxation of Residual Securities......................................... 53
Treatment of Certain Items of REMIC Income and
Expense............................................................. 55
Tax-Related Restrictions on Transfer of Residual
Securities.......................................................... 57
Sale or Exchange of a Residual Security................................. 59
Taxes That May Be Imposed on the REMIC Pool............................. 60
Liquidation of the REMIC Pool........................................... 60
Administrative Matters.................................................. 60
Limitations on Deduction of Certain Expenses............................ 61
Taxation of Certain Foreign Investors................................... 61
Backup Withholding...................................................... 62
Reporting Requirements.................................................. 62
Federal Income Tax Consequences for Securities as to
Which No REMIC Election Is Made..................................... 63
Standard Securities..................................................... 63
Premium and Discount.................................................... 64
Stripped Securities..................................................... 66
Reporting Requirements and Backup Withholding........................... 69
Taxation of Certain Foreign Investors................................... 69
Debt Certificates....................................................... 69
Notes................................................................... 71
Taxation of Certificates Classified as Partnership
Interests........................................................... 71
PLAN OF DISTRIBUTION......................................................... 71
RATINGS...................................................................... 72
LEGAL MATTERS................................................................ 72
FINANCIAL INFORMATION........................................................ 72
INDEX TO LOCATION OF PRINCIPAL DEFINED
TERMS...................................................................A-1
<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 Securities and to
the related Agreement which will be prepared in connection with each Series of
Securities. 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. An index indicating where certain
capitalized terms used herein are defined appears on Appendix A hereto.
SECURITIES.................... Home Equity Loan Asset Backed Certificates (the
"Certificates") and Home Equity Loan Asset
Backed Notes (the "Notes" and together with the
Certificates, the "Securities"), issuable from
time to time in Series, in fully registered
form or book entry only form, in authorized
denominations, as described in the Prospectus
Supplement. Each Security will represent a
beneficial ownership interest in a trust (a
"Trust") created from time to time pursuant to
a pooling and servicing agreement (a "Pooling
and Servicing Agreement") or trust agreement (a
"Trust Agreement" and together with a Pooling
and Servicing Agreement an "Agreement").
Securities evidencing a debt obligation of a
Trust will be issued pursuant to a trust
indenture (each, an "Indenture").
THE DEPOSITOR................. IMC Securities, Inc. (the "Depositor") is a
Delaware corporation. The Depositor's principal
executive offices are located at 5901 East
Fowler Avenue, Tampa, Florida 33617-2362;
telephone number (813) 984-8801. 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
Securities.
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 Securities.
TRUSTEES...................... The trustee (the "Trustee") for each Series of
Securities will be specified in the related
Prospectus Supplement. The owner trustee (the
"Owner Trustee") and the indenture trustee (the
"Indenture Trustee") for each Series of Notes
will be specified in the related Prospectus
Supplement.
ISSUER OF NOTES............... With respect to each Series of Notes, the
issuer (the "Issuer") will be the Depositor or
an owner trust established by it for the
purpose of issuing such Series of Notes. Each
such owner trust will be created pursuant to a
Trust Agreement between the Depositor, acting
as depositor, and the Owner Trustee. Each
Series of Notes will represent indebtedness of
the Issuer and will be issued pursuant to an
Indenture between the Issuer and the Trustee
whereby the Issuer will pledge the related
Trust to secure the Notes under the lien of the
Indenture. As to each Series of Notes where the
Issuer is an owner trust, the ownership of the
related Trust will be
1
<PAGE>
evidenced by certificates (the "Equity
Certificates") issued under the Trust
Agreement, which, unless otherwise specified in
the Prospectus Supplement, are not offered
hereby. The Notes will represent nonrecourse
obligations solely of the Issuer, and the
proceeds of the related Trust will be the sole
source of payments on the Notes, except as
described herein under "Credit Enhancement" and
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 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 (including financial guaranty
insurance policies and surety bonds),
guaranties, letters of credit or similar types
of credit support or enhancement as described
in the related Prospectus Supplement.
The related Prospectus Supplement for a Series
of Securities will describe the Mortgage Assets
to be included in the Trust for such Series.
THE SECURITIES................ The Securities of any Series may be issued in
one or more classes, as specified in the
Prospectus Supplement. One or more classes of
Securities 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
Securities 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 Securities of such Series throughout
the lives of the Securities 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
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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
Securities 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 Securities, and no payments being made
thereon until certain other classes of the
Series have been paid in full; and (viii) as to
Securities 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 SECURITIES.............. The related Prospectus Supplement will specify
(i) whether distributions on the Securities
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 holders of the
Securities (the "Owners"); (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 Securities of the class entitled thereto.
The aggregate original principal balance of the
Securities will equal the aggregate
distributions allocable to principal that such
Securities will be entitled to receive; the
Securities will have an aggregate original
principal 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 Securities 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
"Subsequent Transfer 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 Securities are
issued. Any Subsequent Transfer Agreement will
require that any Mortgage Loans so transferred
conform to the requirements specified in such
Subsequent Transfer Agreement. If a Subsequent
Transfer 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 Securities 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 25% of the aggregate principal amount of
the Securities offered pursuant to the related
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Prospectus Supplement. Each Subsequent Transfer
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 Securities 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 Securities or
a credit enhancer may at their respective
options effect early retirement of a Series of
Securities through the purchase of the Mortgage
Assets in the related Trust. See "The Pooling
and Servicing Agreement -- 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 Securities by
soliciting competitive bids for the purchase of
the assets of the related Trust or otherwise.
See "The Pooling and Servicing Agreement --
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 Securities of the
related Series, to amounts deemed to be
recoverable from late payments or liquidation
proceeds, to specified periods or to any
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" herein.
CREDIT ENHANCEMENT............ If specified in the related Prospectus
Supplement, a Series of Securities, 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 overcollateralization, 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. Credit
Enhancement also may be provided in the form of
subordination of one or more classes of
Securities in a Series under which losses are
first allocated to any Subordinated Securities
up to a specified limit. The protection against
losses afforded by any such Credit Enhancement
will be limited as described in the related
Prospectus Supplement. See "Credit Enhancement"
herein.
BOOK ENTRY REGISTRATION....... Securities of one or more classes of a Series
may be issued in book entry form ("Book Entry
Securities") 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
Securities may be made only through entries on
the books of the Clearing Agency in the name of
brokers, dealers, banks and other organizations
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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 Securities ("Beneficial Owners") other
than Clearing Agency Participants may be
effected only through Clearing Agency
Participants. All references to the Owners of
Securities 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
Securities - 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 Securities are considered to be
debt obligations, Standard Securities, Stripped
Securities or Partnership Interests. The
related Prospectus Supplement for each Series
of Securities 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 Securities could give rise to a transaction
prohibited or otherwise impermissible under
ERISA or the Code. Certain classes of
Securities 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 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 Securities - General"
herein and "ERISA Considerations" herein and in
the related Prospectus Supplement.
LEGAL INVESTMENT MATTERS...... Securities that constitute "mortgage related
securities" under the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") will be so
described in the related Prospectus Supplement.
Securities 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 Securities 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
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sale of the Securities and to pay other
expenses. See "Use of Proceeds" herein.
RATING........................ It is a condition to the issuance of each class
of Securities that each class of the Securities
of such Series be rated by one or more of
Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's Ratings Services ("Standard &
Poor's"), Duff & Phelps Credit Rating Co.
("DCR") and Fitch Investors Service, Inc.
("Fitch" and each of Fitch, Moody's, DCR and
Standard & Poor's, a "Rating Agency") in one of
their four highest rating categories; provided,
however, that one or more classes of
Subordinated Securities and Residual Securities
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 Security, and,
accordingly, there can be no assurance that the
ratings assigned to any class of Securities
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
Securities of a Series is revised or withdrawn,
the liquidity of such class of Securities 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 Securities 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 Securities:
Limited Liquidity. There will be no market for the Securities 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 Securities of such Series. The
market value of the Securities will fluctuate with changes in prevailing rates
of interest. Consequently, the sale of Securities in any market that may develop
may be at a discount from the Securities' par value or purchase price. Owners of
Securities generally have no right to request redemption of Securities, and the
Securities are subject to redemption only under the limited circumstances
described in the related Prospectus Supplement. In addition, the Securities will
not be listed on any securities exchange.
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 Securities will not represent an interest in or
obligation of the Depositor. The Securities 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 Securities 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 Securities should be aware that the Servicer, the
Seller, or, if specified in the related Prospectus Supplement, the Owners of a
Class of Securities or a credit enhancer may at their respective options effect
early retirement of a Series of Securities through the purchase of Mortgage
Assets from the related Trust. See "The Pooling and Servicing Agreement
- -- 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 Assets. Owners of Securities 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 Securities), for the
payment of principal of, and interest on, that Series of Securities. If the
assets comprising the Trust are insufficient to make payments on such
Securities, no other assets of the Depositor will
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be available for payment of the deficiency. Because payments of principal will
be applied to classes of outstanding Securities of a Series in the priority
specified in the related Prospectus Supplement, a deficiency may have a
disproportionately greater effect on the Securities 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.
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.
See "Credit Enhancement" herein. 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 Securities, if the
applicable rating agencies indicate that the then-current rating thereof will
not be adversely affected.
Original Issue Discount. All the Compound Interest Securities and Stripped
Securities that are entitled only to interest distributions will be, and certain
of the other Securities may be, issued with original issue discount for federal
income tax purposes. An Owner of a Security 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 Securities
generally will be treated as original issue discount for this purpose. Moreover,
the calculation of original issue discount on REMIC Securities (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 Securities,"
"- Taxation of Regular Securities - Variable Rate Regular Securities," "Federal
Income Tax Consequences - Federal Income Tax Consequences for Securities as to
Which No REMIC Election Is Made - Standard Securities," and "Federal Income Tax
Consequences - Premium and Discount" and "- Stripped Securities" herein.
Book Entry Registration. Because transfers and pledges of Book Entry
Securities may be effected only through book entries at a Clearing Agency
through Clearing Agency Participants, the liquidity of the secondary market for
Book Entry Securities may be reduced to the extent that some investors are
unwilling to hold Securities in book entry form in the name of Clearing Agency
Participants and the ability to pledge Book Entry Securities may be limited due
to lack of a physical certificate. Beneficial Owners of Book Entry Securities
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 Securities 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 Securities may be impaired.
The Status of the Mortgage Assets in the Event of Bankruptcy of the Seller.
The Seller and the Depositor intend that the transfers of the Mortgage Assets
from the Seller to the Depositor, and in turn to the applicable Trust,
constitute sales rather than pledges to secure indebtedness for insolvency
purposes. If, however, the Seller were to become a debtor under the federal
bankruptcy code, it is possible that a creditor, trustee-in-bankruptcy or
receiver of the Seller may argue that the sale thereof by the 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 Securities.
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
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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.
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.
State and Federal Regulations. Applicable state laws generally regulate
interest rates and other charges, require certain disclosures and require
licensing of the Seller and the Servicer. In addition, most states have other
laws, public policies and general principles of equity relating to the
protection of consumers, unfair and deceptive practices and practices which may
apply to the origination, servicing and collection of the Mortgage Loans. See
"Certain Legal Aspects of the Mortgage Assets herein.
The Mortgage Loans may also be subject to federal laws, including: (i) the
Truth in Lending Act and Regulation Z promulgated thereunder, which require
certain disclosures to the borrowers regarding the terms of the Mortgage 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;
(iii) the Real Estate Settlement Procedures Act and Regulation X promulgated
thereunder, which require certain disclosures to borrowers regarding the
settlement and servicing of the Mortgage Loans; (iv) the Fair Credit Reporting
Act, which regulates the use and reporting of information related to the
borrower's credit experience; and (v) the Federal Trade Commission Preservation
of Consumer's Claims and Defense Rule, 16 C.F.R. Part 433, regarding the
preservation of a consumer's rights.
It is possible that some of the Mortgage Loans will be subject to the
Riegle Community Development and Regulatory Improvement Act of 1994 (the "Riegle
Act") which incorporates the Home Ownership and Equity Protection Act of 1994.
The Riegle Act amended the Truth in Lending Act, which in turn led to certain
additional provisions being added to Regulation Z, the implementing regulation
of the Truth in Lending Act. These provisions impose additional disclosure and
other requirements on creditors with respect to non-purchase money mortgage
loans with high interest rates on high up-front fees and changes. In general,
mortgage loans within the purview of the Riegle Act have annual percentage rates
over 10% greater than the yield on Treasury Securities of comparable maturity
and/or fees and points which exceed the greater of 8% of the total loan amount
or $400. The provisions of the Riegle Act apply on a mandatory basis to all
mortgage loans originated on or after October 1, 1995. The provisions can impose
specific statutory liabilities upon creditors who fail to comply with their
provisions and may affect the enforceability of the related loans. In addition,
any assignee of the creditor would generally be subject to all claims and
defenses that the consumer could assert against the creditor, including, without
limitation, the right to rescind the mortgage loan.
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 Servicer to collect all or part of the principal of
or interest on the Mortgage Loans, may entitle the borrower to a refund of
amounts previously paid and, in addition, could subject the Servicer to damages
and administrative sanctions. If the Servicer is unable to collect all or part
of the principal or interest on any Mortgage Loans because of a violation of the
aforementioned laws, public policies or general principles of equity,
distributions or payments to Owners of realized proceeds of
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the assets in the related Trust may be delayed, or such proceeds may not be
sufficient to repay all amounts owed to Owners. Furthermore, depending upon
whether damages and sanctions are assessed against the Servicer, such violations
may have a material impact upon the financial ability of the Servicer to
continue to act in such capacity or the ability of the Depositor to withdraw or
replace Mortgage Loans if such violation breaches a representation or warranty
contained in the related Pooling and Servicing Agreement or Indenture, as
applicable.
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.
Limited Nature of Ratings. It is a condition to the issuance of the
Securities that each class of offered Securities be rated in one of the four
highest rating categories by one or more of Moody's, Standard & Poor's DCR 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
Security, and, accordingly, there can be no assurance that the ratings assigned
to any class of Securities on the date on which such Securities 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 Securities may be adversely affected. Issuance of any of the
Securities in book-entry form may reduce the liquidity of such Securities in the
secondary trading market because investors may be unwilling to purchase
Securities for which they cannot obtain physical certificates. The rating of
Securities 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 Securities would likely result in a reduction in
the rating of the Securities. See "Ratings" in the Prospectus Supplement.
Funds Available for Redemptions at the Request of Note Owners. With respect
to any Series of Notes for which the related Prospectus Supplement provides for
redemptions of such Notes at the request of Note Owners, there can be no
assurance that amounts available for such redemptions for such Notes will be
sufficient to permit such Notes to be redeemed within a reasonable time after
redemption is requested, for reasons including the following:
(i) Scheduled principal payments on the related Mortgage Loans
generally will be minimal in the early years and will increase in the later
years of such Mortgage Loans. As a result, funds available to be applied to
redemptions at the request of Note Owners, may be expected to be limited in
the early years and to increase during the later years of each Series.
Accordingly, the availability of funds for redemptions of Notes of any
Series at the request of Note Owners will depend largely upon the rates of
prepayment of the related Mortgage Loans.
(ii) Prepayments of principal on Mortgage Loans are less likely to
occur during periods of higher interest rates when it is more likely that
requests for redemption by Note Owners will be made. During periods in
which prevailing interest rates are higher than the interest rate paid on
Notes that may be redeemed at the request of Note Owners, greater numbers
of such Notes are expected to be tendered for redemption in order to take
advantage of the higher interest rates payable on other investments then
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available. During such periods, there will likely also be a reduction in
the rate of prepayments on the related Mortgage Loans, thus limiting the
funds available to satisfy requested redemption by Note Owners.
(iii) As specified in the related Prospectus Supplement, certain Note
Owners, such as personal representatives of deceased Note Owners, may have
certain priorities as to redemption at the request of Note Owners.
DESCRIPTION OF THE SECURITIES
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
Securities to be issued thereunder and the nature of the related Trust.
Securities which represent beneficial interests in the Trust will be issued
pursuant to the Pooling and Servicing Agreement similar to the form filed as an
Exhibit to the Registration Statement of which this Prospectus is a part.
Securities which represent debt obligations of the trust will be issued pursuant
to an Indenture between the Trust and the Indenture Trustee. The following
summaries and the summaries set forth under "The Pooling and Servicing
Agreement" and "The Indenture" describe certain provisions relating to each
Series of Securities. THE PROSPECTUS SUPPLEMENT FOR A SERIES OF SECURITIES WILL
DESCRIBE THE SPECIFIC PROVISIONS RELATING TO SUCH SERIES. The Depositor will
provide Owners of Securities, without charge, on written request a copy of the
Agreement for the related Series. Requests should be addressed to IMC
Securities, Inc., 5901 East Fowler Avenue, Tampa, Florida 33617-2362. The
Agreement relating to a Series of Securities will be filed with the Securities
and Exchange Commission within 15 days after the date of issuance of such Series
of Securities (the "Delivery Date").
The Securities 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 Securities and
will not be entitled to payments in respect of the assets included in any other
trust fund established by the Depositor. The Securities 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.
The Mortgage Assets relating to a Series of Securities 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 Securities of such Series.
GENERAL
The Securities of each Series will be issued either in book entry form or
in fully registered form. The Securities of a given Series will evidence
undivided beneficial interests in the assets of the related Trust specified in
the related Prospectus Supplement. The Notes of a given Series will represent
non-recourse obligations of the related Issuer, secured by the assets in the
related Trust, and the proceeds of such assets will be in the sole source of
payments on such Notes. The minimum original denomination of each class of
Securities will be specified in the related Prospectus Supplement. The original
"Security Principal Balance" of each Security will equal the aggregate
distributions or payments allocable to principal to which such Security is
entitled and distributions allocable to interest on each Security that is not
entitled to distributions allocable to principal will be calculated based on the
"Notional Principal Balance" of such Security. The Notional Principal Balance of
a Security 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 Securities, the Securities of each Series will be transferable and
exchangeable on a "Security 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 "Security Registrar" and
no service charge will be made for any registration of transfer
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or exchange of Securities, 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 Securities
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 Securities 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 Securities 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 of Securities 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 Securities 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 Securities 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 Securities 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 SECURITIES
Each Series of Securities 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 Securities and (ii) interest on such
Securities. If specified in the Prospectus Supplement, one or more classes of a
Series of Securities may evidence beneficial ownership interests in separate
groups of assets included in the related Trust.
The Securities will have an aggregate original Security 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 Security
Principal Balance (or Notional Principal Balance) of the Securities of a Series
and the interest rate on the classes of such Securities will be determined in
the manner specified in the Prospectus Supplement.
Each class of Securities 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 "Security Interest Rate"). One or more classes
of Securities may provide for interest that accrues but is not currently payable
("Compound Interest Securities"). With respect to any class of Compound Interest
Securities, any interest that has accrued but is not paid on a given Payment
Date will be added to the aggregate Security Principal Balance of such class of
Securities on that Payment Date.
A Series of Securities 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
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payments of principal and Principal Prepayments) and interest. A Series of
Securities 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 Securities may include one or more Classes of Scheduled
Amortization Securities and Companion Securities. "Scheduled Amortization
Securities" are Securities 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 Securities" are Securities 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 Securities on such Payment Date. Because of the manner of
application of payments of principal to Companion Securities, the weighted
average lives of Companion Securities 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 Securities of such Series.
One or more Series of Securities may constitute Series of "Special
Allocation Securities", which may include Senior Securities, Subordinated
Securities, Priority Securities and Non-Priority Securities. As specified in the
related Prospectus Supplement for a Series of Special Allocation Securities, the
timing and/or priority of payments of principal and/or interest may favor one or
more classes of Securities over one or more other classes of Securities. 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 Securities in a Series may be comprised of one or more
classes of Senior Securities having a priority in right to distributions of
principal and interest over one or more classes of Subordinated Securities, as a
form of Credit Enhancement. See "Credit Enhancement - Subordination" herein.
Typically, the Subordinated Securities will carry a rating by the rating
agencies lower than that of the Senior Securities. In addition, one or more
classes of Securities ("Priority Securities") may be entitled to a priority of
distributions of principal or interest from assets in the Trust over another
class of Securities ("Non-Priority Securities"), but only after the exhaustion
of other Credit Enhancement applicable to such Series. The Priority Securities
and Non-Priority Securities nonetheless may be within the same rating category.
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 Securities are
registered (the "Owners") at the close of business on the dates specified in the
Prospectus Supplement (each, a "Record Date"). With respect to Securities other
than Book Entry Securities, distributions will be made by check or money order
mailed to the person entitled thereto at the address appearing in the Security
Register or, if specified in the Prospectus Supplement, in the case of
Securities that are of a certain minimum denomination as specified in the
Prospectus Supplement, upon written request by the Owner of a Security, 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
Securities (other than Book Entry Securities) will be made only upon
presentation and surrender of the Securities at the office or agency of the
Trustee specified in the notice of such final distribution. With respect to Book
Entry Securities, 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 Securities of
the related Series (the "Security 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 Security Account and may be available to make payments on the
Securities of the applicable Series on the next succeeding Payment Date or pay
after amounts owed by the Trust.
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Distributions of Interest. Unless otherwise specified in the Prospectus
Supplement relating to a given Series of Securities, each Class of Securities
may bear interests at a Security Interest Rate, which may be fixed or
adjustable. All of the Note of a given Series will bear interest at the same
rate, which may be fixed or adjustable (the "Note Rate"). Interest will accrue
on the aggregate Security Principal Balance (or, in the case of Securities
entitled only to distributions allocable to interest, the aggregate Notional
Principal Balance (as defined below)) of each class of Securities entitled to
interest from the date, at the applicable Security Interest Rate and for the
periods (each, an "Interest Accrual Period") specified in the Prospectus
Supplement. The aggregate Security Principal Balance of any class of Securities
entitled to distributions of principal will be the aggregate original Security
Principal Balance of such class of Securities, reduced by all distributions
allocable to principal, and, in the case of Compound Interest Securities,
increased by all interest accrued but not then distributable on such Compound
Interest Securities. With respect to a class of Securities 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 Securities.
To the extent funds are available therefor, interest accrued during each
Interest Accrual Period on each class of Securities entitled to interest (other
than a class of Compound Interest Securities) will be distributable on the
Payment Dates specified in the Prospectus Supplement until the aggregate
Security Principal Balance of the Securities of such class has been distributed
in full or, in the case of Securities entitled only to distributions allocable
to interest, until the aggregate Notional Principal Balance of such Securities
is reduced to zero or for the period of time designated in the Prospectus
Supplement. Distributions of interest on each class of Compound Interest
Securities will commence only after the occurrence of the events specified in
the Prospectus Supplement and, prior to such time, the aggregate Security
Principal Balance (or Notional Principal Balance) of such class of Compound
Interest Securities, will increase on each Payment Date by the amount of
interest that accrued on such class of Compound Interest Securities 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 Securities
will thereafter accrue interest on its outstanding Security 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 Securities on
each Payment Date will be calculated and the manner in which such amount will be
allocated among the classes of Securities entitled to distributions of
principal.
One or more classes of Securities 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 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 Securities relative to the interests
evidenced by the other Securities.
Unscheduled Distributions. The Securities 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
Securities 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 Security
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 Securities 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 Securities on the next Payment Date and will
include interest at the applicable Security 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 Securities would have been made on the next Payment Date except
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as otherwise stated in the related Prospectus Supplement, and, with respect to
Securities 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
Securities may be issued as Book Entry Securities 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 Securities 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 Securities.
Purchasers and other Beneficial Owners may not hold Book Entry Securities
directly but may hold, transfer or pledge their ownership interest in the
Securities only through Clearing Agency Participants. Furthermore, Beneficial
Owners will receive all payments of principal and interest with respect to the
Securities and, if applicable, may request redemption of Securities, only
through the Clearing Agency and the Clearing Agency Participants. Beneficial
Owners will not be registered Owners of Securities or be entitled to receive
definitive certificates representing their ownership interest in the Securities
except under the limited circumstances, if any, described in the related
Prospectus Supplement. See "Risk Factors - Book Entry Registration" herein.
If Securities of a Series are issued as Book Entry Securities, 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 Securities of such Series, and to receive and transmit requests
for redemption with respect to such Securities. Clearing Agency Participants
with whom Beneficial Owners have accounts with respect to such Book Entry
Securities 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 Securities and will not possess physical certificates, a
method will be provided whereby Beneficial Owners may receive payments, transfer
their interests, submit redemption requests and receive the reports provided
herein.
LIST OF OWNERS OF SECURITIES
Upon written request of a specified number or percentage interests of
Owners of Securities of record of a Series of Securities for purposes of
communicating with other Owners of Securities with respect to their rights as
Owners of Securities, the Trustee will afford such Owners access during business
hours to the most recent list of Owners of Securities of that Series held by the
Trustee. With respect to Book Entry Securities, the only named Owner on the
Security Register will be the Clearing Agency.
The Agreement will not provide for the holding of any annual or other
meetings of Owners of Securities.
THE TRUSTS
The Trust for a Series of Securities will consist of: (i) the Mortgage
Assets (subject, if specified in the related Prospectus Supplement, to certain
exclusions, such as a portion of the mortgage interest rate being retained by
the Seller and not sold to the Trust) received on and after the related Cut-Off
Date; (ii) all payments (subject, if specified in the related Prospectus
Supplement, to certain exclusions, such as the retention by the Seller of
payments due and accrued before the related Cut-Off Date but collected after
such Cut-Off Date) 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
<PAGE>
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 Securities 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 Securities
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
Securities. A copy of the Agreement with respect to each Series of Securities
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
Securities, will be attached to the related Pooling and Servicing Agreement or
Indenture, as applicable delivered to the Trustee upon delivery of such
Securities.
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 classifications 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 Securities
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 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
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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.
(e) Another type of mortgage loan described in the Prospectus
Supplement.
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 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.
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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 Securities 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 Securities 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 Securities 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 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 Securities will
describe any Other Mortgage Securities to be included in the Trust for such
Series.
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CREDIT ENHANCEMENT
General. Various forms of Credit Enhancement may be provided with respect
to one or more classes of a Series of Securities or with respect to the assets
in the related Trust. Credit Enhancement may be in the form of (i) the
subordination of one or more classes of the Securities of such Series, (ii) the
establishment of one or more Reserve Funds, (iii) 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 (iv) 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 Securities 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
Securities 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 Securities. 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 Owners 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 Owners, for distribution by the Trustee to each Owner. 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 Owners 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 Securities on any specified date.
Subject to the terms of the related Pooling and Servicing Agreement or
Indenture, as applicable, the Financial Guaranty Insurer may be subrogated to
the rights of Owners to receive payments under the Securities 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 Securities
of such Series (the "Subordinated Securities") may be paid to one or more other
classes of such Series (the "Senior Securities") under the circumstances and to
the extent provided in the Prospectus Supplement. If specified in the Prospectus
Supplement, delays in receipt of scheduled payments on the Mortgage Assets and
losses on defaulted Mortgage Assets will be borne first by the various classes
of Subordinated Securities and thereafter by the various classes of Senior
Securities, 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 Securities
or at any time, the aggregate losses in respect of defaulted Mortgage Assets
which must be borne by the Subordinated Securities by virtue of subordination
and the amount of the distributions otherwise distributable to the Subordinated
Securities that
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will be distributable to Owners of Senior Securities 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 Securities or, if
applicable, were to exceed the specified maximum amount, Owners of Senior
Securities could experience losses on the Securities.
In addition to or in lieu of the foregoing, all or any portion of
distributions otherwise payable to Subordinated Securities 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 Securities 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 Securities at the times and under the
circumstances specified in the Prospectus Supplement.
If specified in the Prospectus Supplement, various classes of Subordinate
Securities and Subordinated Securities may themselves be subordinate in their
right to receive certain distributions to other classes of Senior and
Subordinated Securities, respectively, through a cross-support mechanism or
otherwise.
As between classes of Senior Securities and as between classes of
Subordinated Securities, 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 Securities, payments with respect to Senior
Securities 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 Securities 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 Securities. 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 Securities. Such acceleration may continue for
the life of the related Securities, 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 Securities. In
such case, Credit Enhancement may be provided by a cross-support feature which
may require that distributions be made with respect to Securities evidencing
beneficial ownership of one or more asset groups prior to distributions to
Subordinated Securities 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 Securities. If 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.
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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 Securities 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 Securities 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 Securities 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 Securities, 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.
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
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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.
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.
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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 Securities, 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 Securities. 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 Securities 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 Securities, or for such other purpose as is
specified in such Prospectus Supplement. Such arrangements may include
agreements under which Owners of Securities 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 Securities, 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 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
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" - 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 Pooling and Servicing Agreement or Indenture, as applicable 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
Securities.
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 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
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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 Security
Account when realized and will be distributed to Owners of Securities 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.
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,
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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 as would
be required by FNMA in connection with its mortgage loan purchase program. The
Depositor may also
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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 Security Account after such
foreclosure or liquidation and attributable to such Mortgage Loan will be
distributed to Owners of the Securities.
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 Securities 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 Securities. 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.
THE POOLING AND SERVICING AGREEMENT
The following summary describes certain provisions which will be common to
each Pooling and Servicing Agreement. The summary does not purport to be
complete and is subject to the provisions of a particular Pooling and Servicing
Agreement. Material terms of a specific Pooling and Servicing 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
Securities, 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
Securities to the Depositor in exchange for the Mortgage Loans. Each Mortgage
Loan will be identified in a
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schedule appearing as an exhibit to the Pooling and Servicing 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 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 Pooling and Servicing 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 Securities, 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 Securities, 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 Securities, 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 Securities, 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 Securities 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
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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.
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 Security
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 Securities 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.
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 Pooling and Servicing 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
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Securities. In the event of such appointment, all rights, powers, duties and
obligations conferred or imposed upon the Trustee by the Pooling and Servicing
Agreement shall be conferred or imposed upon the Trustee and such separate
trustee or co-trustee 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 Pooling and Servicing Agreement, the Securities 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 Securities or
the related assets, or amounts deposited in the Security 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 Pooling and Servicing 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 Pooling and Servicing 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
Pooling and Servicing 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 SECURITY ACCOUNT
The Pooling and Servicing Agreement will require that the Security 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
Securities, 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 Security Account is limited to United States government
securities and other investments acceptable to the rating agencies rating such
Series of Securities, and may include one or more Securities of a Series
("Eligible Investments"). If so specified in the related Prospectus Supplement,
a Security 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 Security Account as additional compensation. The
Servicer will deposit in the Security 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;
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(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 Pooling and
Servicing Agreement to be deposited in the Security Account;
(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 Security
Account from any Credit Enhancement for the related Series; and
(ix) all other amounts required to be deposited in the Security
Account pursuant to the related Pooling and Servicing Agreement.
REPORTS
Concurrently with each distribution on the Securities, 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 Security Principal Balance of each class of the
Securities after giving effect to distributions on such Payment Date;
(iv) the aggregate Security Principal Balance of any class of Compound
Interest Securities 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
Securities that was distributed to other classes of Securities;
(vi) if any class of Securities 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 (in the case of Book Entry Securities, the
above described statement and such annual information will be sent to the
Clearing Agency, which will provide such reports to the Clearing Agency
Participants in accordance with its procedures).
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FORWARD COMMITMENTS; PRE-FUNDING
The Trustee of a Trust may enter into a Subsequent Transfer Agreement for
the transfer of additional Mortgage Loans to such Trust following the date on
which such Trust is established and the related Securities are issued. The
Trustee of a Trust may enter into Subsequent Transfer 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 Subsequent Transfer Agreement will require that
any Mortgage Loans so transferred to a Trust conform to the requirements
specified in such Subsequent Transfer Agreement. If a Subsequent Transfer
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 Securities 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 25% of the aggregate principal amount of the
Securities offered pursuant to the related Prospectus Supplement. Each
Subsequent Transfer 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 Subsequent Transfer 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 Securities as specified in the related Prospectus Supplement.
SERVICER EVENTS OF DEFAULT
"Events of Default" under the Pooling and Servicing 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 Securities
evidencing interests aggregating not less than 25% of the affected class of
Securities; 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 Pooling and Servicing Agreement
remains unremedied by the Servicer, the Trustee, or Owners of Securities may
terminate all the rights and obligations of the Servicer under the Pooling and
Servicing Agreement, whereupon the Trustee or Master Servicer, if any, or a new
Servicer appointed pursuant to the Pooling and Servicing Agreement, will succeed
to all the responsibilities, duties and liabilities of the Servicer under the
Pooling and Servicing 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 Pooling and Servicing Agreement to act as successor to the
Servicer under the Pooling and Servicing 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 Securities will not have any right under the Pooling and
Servicing Agreement to institute any proceeding with respect to the Pooling and
Servicing Agreement, unless they previously have given to the Trustee written
notice of default and unless the Owners of the percentage of the Securities
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.
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AMENDMENT
A Pooling and Servicing Agreement generally may be amended by the
Depositor, the Servicer and the Trustee, without the consent of the Owners of
the Securities, 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 such amendment
will not adversely affect in any material respect the interests of any Owners of
Securities of that Series. Any such amendment shall be deemed not to adversely
affect in any material respect any Owner if there is delivered to the Trustee
written notification from each Rating Agency that such amendment will not cause
such Rating Agency to reduce its then current rating assigned to any Class of
the Securities of such Series. 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 Security without the consent of the Owner of such
Security, (ii) adversely affect in any material respect the interests of the
Owners of any class of Securities in any manner other than as described in (i),
without the consent of the Owners of Securities of such class evidencing not
less than a majority of the interests of such class or (iii) reduce the
aforesaid percentage of Securities of any class required to consent to any such
amendment, without the consent of the Owners of all Securities 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 Pooling and Servicing Agreement will terminate upon the payment as required
by the Pooling and Servicing Agreement of all amounts held by the Servicer or in
the Security Account and required to be paid to them pursuant to the Pooling and
Servicing 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 Securities or all remaining
assets in the Trust. The Pooling and Servicing Agreement will establish the
repurchase price for the assets in the Trust and the allocation of such purchase
price among the classes of Securities. The exercise of such right will effect
early retirement of the Securities 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 Pooling and Servicing Agreement
continue beyond the expiration of 21 years from the death of the survivor of
certain persons named in the Pooling and Servicing Agreement. The Trustee will
give written notice of termination of Pooling and Servicing the Agreement to
each Owner, and the final distribution will be made only upon surrender and
cancellation of the Securities at an office or agency of the Trustee specified
in such notice of termination.
THE INDENTURE
GENERAL
Each Series of Notes will be issued pursuant to an Indenture to be entered
into between the related Issuer and the related Trustee. The Mortgage Loans to
be included in the related Trust will be assigned to the Trustee pursuant to
provisions included in the related Indenture that are substantially the same as
and the Trustee with respect to the Mortgage Loans so conveyed will be
substantially similar to, those described under "The Pooling and Servicing
Agreement -- Assignment of Mortgage" herein. Where provisions or terms used in a
particular Indenture differ from those provided herein, a description of such
provisions or terms will be included in the related Prospectus Supplement.
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The following summaries describe certain provisions of the indenture not
described elsewhere in this Prospectus. Where particular provisions or terms
used in the Indenture are referred to, the actual provisions (including
definitions of terms) are incorporated by reference as part of such summaries.
The description set forth below is subject to modification in the Prospectus
Supplement for a Series of Notes to describe the terms and provisions of the
particular Indenture relating to such Series of Notes.
MODIFICATION OF INDENTURE
With the consent of the holders of not less than 51% of the aggregate
principal amount of the outstanding Notes of any Series issued under an
indenture, the related Trustee and the related Issuer may execute a supplemental
indenture to add provisions to, or change in any manner or eliminate any
provisions of, the Indenture with respect to such Series or modify (except as
provided below) in any manner the rights of the holders of such Notes.
Without the consent of the holder of each outstanding Note of such Series
affected thereby, however, no supplemental indenture shall (a) change the final
Payment Date of the principal of, or any installment of interest on, any Note of
such series or reduce the principal amount thereof the Note Rate specified
thereon (except as provided in the related Indenture with respect to Notes that
have an adjustable Note Rate), the redemption price with respect thereto or the
earliest date on which any Notes of such Series may be redeemed at the option of
the related Issuer, or change any place of payment where, or the coin or
currency in which, any Note of such Series or any interest thereon is payable,
or impair the right to institute suit for the enforcement of certain provisions
of the Indenture regarding payment, (b) reduce the percentage of the aggregate
principal amount of the outstanding Notes of such Series, the consent of the
holders of which is required for any such a supplemental indenture, or the
consent of the holders of which is required for any waiver of compliance with
certain provisions of the indenture or of certain defaults thereunder and their
consequences as provided for in the Indenture, (c) modify the provisions of the
Indenture specifying the circumstances under which such a supplemental indenture
may not change the provisions of the Indenture without the consent of the
holders of each outstanding Note of such Series affected thereby, or the
provisions of the Indenture with respect to certain remedies available in a Note
Event of Default (as described below), except to increase any percentage
specified therein or to provide that certain other provisions of the Indenture
cannot be modified or waived without the consent of the holder of each
outstanding Note affected thereby, (d) modify or alter the provisions for the
Indenture regarding the voting of Notes held by the related Issuer or an
affiliate of the related Issuer, (e) permit the creation of any lien ranking
prior to or on the parity with the lien of the Indenture with respect to any
part of the property subject to a lien under the Indenture or terminate the lien
of the Indenture on any property at any time subject thereto or deprive the
holder of any Note of such Series of the security afforded by the lien of the
Indenture, or (f) modify any of the provisions of the Indenture in such manner
as to affect the rights of the holders of Notes of such Series to the benefits
of any provisions for the redemption at the request of holders of Notes of such
Series contained therein.
The related Issuer and the respective Trustee may also enter into
supplemental indentures, without obtaining the consent of the Owners of the
Notes of such Series, to cure ambiguities or make minor corrections, to provide
for the issuance of Notes in bearer or registered form or for the conversion of
any outstanding Notes to or from bearer form and to do such other things as
would not adversely affect the interests of the Owners of the Notes of such
Series.
NOTE EVENTS OF DEFAULT
Unless otherwise specified in the Prospectus Supplement relating to a given
Series of Notes, a "Note Event of Default" with respect to any Series of Notes
will be defined in the respective Indenture under which such Notes are issued
as: (a) unless otherwise specified in the Prospectus Supplement for such Series,
a default in the payment of interest on any Note of such Series when and as due
and such failure continues for a period of two days; (b) a failure to pay the
Notes of such Series in full on or before the date specified as the final
scheduled Payment Date in the related Prospectus Supplement; (c) a default in
the observance of certain negative covenants in the Indenture or in the
observance of certain covenants relating to redemptions of Notes of such Series;
(d) a default in the observance of any other covenants of the Indenture, and the
continuation of any such default for a specified period after notice to the
related Issuer by the Trustee or to the related Issuer and the Trustee by the
holders of at least 25% in principal amount of the Notes of such Series then
outstanding; (e) any representation or warranty made by
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the related Issuer in the Indenture or in any security delivered pursuant
thereto having been incorrect in a material respect as of the time made, and the
circumstance in respect of which such representation or warranty is incorrect
not having been cured within a specified period after notice thereof is given to
the related Issuer by the Trustee or by the holders of at least 25% in principal
amount of the Notes of such Series then outstanding; or (f) certain events of
bankruptcy, insolvency, receivership or reorganization of the related Issuer.
RIGHTS UPON NOTE EVENTS OF DEFAULT
Unless otherwise specified in the Prospectus Supplement relating to a given
Series of Notes, in case a Note Event of Default should occur and be continuing
with respect to a Series of Notes, the Trustee may, and on request of holders of
not less than 51% in principal amount of the Notes of such Series then
outstanding shall, declare the principal of such Series of Notes to be due and
payable. Such declaration may under certain circumstances be rescinded by the
holders of a majority in principal amount of the Notes of such Series then
outstanding.
If, following a Note Event of Default, a Series of Notes has been declared
to be due and payable, the Trustee may, in its discretion (provided that the
holders of the Notes of such Series have not directed the Trustee to sell the
assets included in the related Trust) refrain from selling such assets and
continue to apply all amounts received on such assets to payments due on the
Notes of such Series in accordance with their terms, notwithstanding the
acceleration of the maturity of such Notes. The Trustee, however, must sell the
assets included in the related Trust for such Series if collections in respect
of such assets are determined to be insufficient to make all scheduled payments
on Notes of such Series, in which case payments will be made on the Notes in the
same manner as described in the next sentence with regard to instances in which
such assets are sold. In addition, upon a Note Event of Default the Trustee may,
in its discretion (provided that, unless the Note Event of Default relates to a
default in payment of principal or interest, the Trustee must receive the
consent of the holders of all outstanding Notes of such Series, and certain
other conditions must be met), sell the assets included in the related Trust
Estate for such Series, in which event the Notes of such Series will be payable
pro rata out of the collections on, or the proceeds from the sale of, such
assets and any overdue installments of interest on the Notes will, to the extent
permitted by applicable law, bear interest at the highest stated interest rate
borne by any Note of such Series.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case a Note Event of Default shall occur and be continuing, the
Trustee shall be under no obligation to exercise any of the rights and powers
under the Indenture at the request or direction of any of the Noteholders,
unless such Noteholders have offered to the Trustee reasonable security or
indemnity satisfactory to it against the costs, expenses and liabilities which
might be incurred by it in compliance with such request or direction. Subject to
such provisions for indemnification and certain limitations contained in the
Indenture, the holders of a majority in principal amount of the outstanding
Notes of a Series shall have the right to direct the time, method, and place of
conducting any proceeding or any remedy available to the Trustee or exercising
any trust or power conferred on the Trustee with respect to the Notes of such
Series; and the holders of a majority in principal amount of the Notes of a
Series then outstanding may, in certain cases, waive any default with respect
thereto, except a default in the payment of principal or interest or a default
in respect of a covenant or provision of the Indenture that cannot be modified
without the waiver or consent of the holder of each outstanding Note affected
thereby.
LIST OF NOTE OWNERS
Unless otherwise specified in the prospectus Supplement relating to a given
Series of Notes, three or more holders of the Notes of any Series (each of whom
has owned a Note of such Series for at lease six months) may, by written request
to the Trustee, obtain access to the list of all Note Owners of such Series
maintained by the Trustee for the purpose of communicating with other such Note
Owners with respect to their rights under the Indenture. The Trustee may elect
not to afford the requesting Note Owners access to the list of Note Owners if it
agrees to mail the desired communication or proxy, on behalf of the requesting
Note Owners, to all Note Owners.
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ANNUAL COMPLIANCE STATEMENT
The related Issuer will be required to file annually with the Trustee a
written statement as to the fulfillment of its obligations under the Indenture.
TRUSTEE'S ANNUAL REPORT
The Trustee will be required to mail each year to all Owners of Notes a
brief report relating to its eligibility and qualifications to continue as the
Trustee under the Indenture, any amounts advanced by it under the Indenture, the
amount, interest rate and maturity date of certain indebtedness owing by the
related Issuer to it in the Trustee's individual capacity, the property and
funds physically held by the Trustee as such, any release, or release and
substitution, of property subject to the lien of the Indenture that has not been
previously reported, any additional Series of Notes not previously reported and
any action taken by it which materially affects the Notes and which has not been
previously reported.
SATISFACTION AND DISCHARGE OF INDENTURE
The Indenture will be discharged with respect to the assets securing the
Notes of a Series upon the delivery to the Trustee for cancellation of all of
the Notes of such Series or, with certain limitations, upon deposit with the
Trustee of funds sufficient for the payment in full of all of the Notes of such
Series.
REDEMPTION OF NOTES
To the extent provided in the related Prospectus Supplement, the Notes of
any Series may be (i) redeemed at the request of holders of such Notes; (ii)
redeemed at the option of the related Issuer or another party specified in the
related Prospectus Supplement; or (iii) subject to special redemption under
certain circumstances. The circumstances and terms under which the Notes of a
Series may be redeemed will be described in the related Prospectus Supplement.
REPORTS BY TRUSTEE TO NOTE OWNERS
On each Payment Date, the Trustee will send a report to each Note Owners
setting forth, among other things, the amount of such payment representing
interest, the amount thereof, if any, representing principal and the outstanding
principal amount of an individual Note after giving effect to the payments made
on such Payment Date.
LIMITATION ON SUITS
Unless otherwise specified in the Prospectus Supplement relating to a given
Series of Notes, no Note Owners of any Series will have any right to institute
any proceedings with respect to the Indenture unless (1) such holder has
previously given written notice to the Trustee of a continuing Note Event of
Default with respect to such Series; (2) the holders of at least 25% in
principal amount of the Notes of such Series then outstanding have made written
requests to the Trustee to institute proceedings in respect to such Note Event
of Default in its own name as Trustee; (3) such holders have offered to the
Trustee reasonable indemnity satisfactory to it against the costs, expenses and
liabilities to be incurred in compliance with such request; (4) for a specified
period after its receipt of such notice, request and offer of indemnity the
Trustee has failed to institute any proceedings; and (5) no direction
inconsistent with such written request has been given to the Trustee during such
period by the holders of not less than 51% in principal amount of the Notes of
such Series then outstanding.
USE OF PROCEEDS
Substantially all the net proceeds to be received from the sale of each Series
of Securities 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 establishment of any Reserve Fund or Pre-Funding
Account the costs of carrying such Mortgage Assets until sale of the Securities
and to pay other expenses.
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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 Securities 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.
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
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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 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.
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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 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.
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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 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
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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 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
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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 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.
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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 Securities.
LEGAL INVESTMENT MATTERS
The Securities 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 Securities 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 Securities. Any
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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 Securities 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 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 Securities, 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 Securities, an
investment in the Securities 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
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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 Securities 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 Securities 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 Securities.
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 Securities,
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 Securities must make its
own determination as to whether the general and the specific 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 Securities 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 Securities 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 Securities. Opinions of counsel are
not binding on the IRS, however, and there is no assurance that the IRS could
not challenge successfully the opinions of counsel. 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, 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
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for all Securities 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 Securities. 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 Securities. The Prospectus Supplement for each Series of
Securities will discuss any special tax consideration applicable to any class of
Securities 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 Securities, 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 SECURITIES
General. With respect to a particular Series of Securities, 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,
Securities of a Series as to which one or more REMIC elections are made are
referred to as "REMIC Securities" and will consist of one or more classes of
"Regular Securities" and one class of "Residual Securities" in the case of each
REMIC Pool. Qualification as a REMIC requires ongoing compliance with certain
conditions. With respect to each Series of REMIC Securities, 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 Securities 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 Securities will be
considered to be "residual interests" in the REMIC Pool. The Prospectus
Supplement for each Series of Securities 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.
Status of REMIC Securities. REMIC Securities 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 Securities 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 Securities 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 Securities 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
Securities 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 Securities,
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
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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 Securities held by a regulated investment
company will not constitute "government securities" within the meaning of Code
Section 851(b)(4)(A)(i). REMIC Securities held by certain financial institutions
will constitute an "evidence of indebtedness" within the meaning of Code Section
582(c)(i). REMIC Securities 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
Securities) 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 Securities 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 Securities 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 Securities
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 Securities 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 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 SECURITIES
General. Payments received by holders of Regular Securities 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 Security will be treated as
ordinary income to a holder of the Regular Security (the "Regular Owner") as
they accrue, and principal payments on a Regular Security will be treated as a
return of capital to the extent of the Regular Owner's basis in the Regular
Security allocable thereto. Regular Owners must use the accrual method of
accounting with regard to Regular Securities, regardless of the method of
accounting otherwise used by such Regular Owners.
Original Issue Discount. Regular Securities may be issued with "original
issue discount" within the meaning of Code Section 1273(a). Holders of any class
of Regular Securities 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 Owner's income in any taxable year
will be computed as described below.
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Each Regular Security (except to the extent described below with respect to
a Regular Security 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 Owner or by random lot (a "Retail Class
Security")) will be treated as a single installment obligation for purposes of
determining the original issue discount includible in a Regular Owner's income.
The total amount of original issue discount on a Regular Security is the excess
of the "stated redemption price at maturity" of the Regular Security over its
"issue price." The issue price of a Regular Security is the first price at which
a substantial amount of Regular Securities 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 Owner for accrued interest that relates to a
period prior to the issue date of the Regular Security in the issue price of a
Regular Security 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 Security always includes the original principal amount of the Regular
Security, 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 Securities 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
Securities 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 Security 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
Security technically do not constitute qualified stated interest. In such case a
special 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 Security 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 Owners should consult their own tax
advisors to determine the issue price and stated redemption price at maturity of
a Regular Security.
Under a de minimis rule, original issue discount on a Regular Security 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 Security multiplied by
the weighted average maturity of the Regular Security. For this purpose, the
weighted maturity of the Regular Security 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 Security and the denominator of
which is the stated redemption price at maturity of the Regular Security.
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 Securities (the "Prepayment Assumption"). The Prepayment Assumption with
respect to a Series of Regular Securities 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.
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Of the total amount of original issue discount on a Regular Security, the
Regular Owner 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 Security accrued during an accrual period for each day on which he
holds the Regular Security, 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 Security, 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 Security. For a Regular
Security, 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 Security as of the end of that accrual period that are included in the
Regular Security's stated redemption price at maturity and (b) the distributions
made on the Regular Security during the accrual period that are included in the
Regular Security's stated redemption price at maturity over (ii) the adjusted
issue price of the Regular Security 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
Security 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 Security
at the beginning of any accrual period equals the issue price of the Regular
Security, increased by the aggregate amount of original issue discount with
respect to the Regular Security that accrued in all prior accrual periods and
reduced by the amount of distributions included in the Regular Security's stated
redemption price at maturity that were made on the Regular Security 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 Owner generally will
increase to take into account prepayments on the Regular Securities 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 Securities are
redetermined by treating the Regular Securities as reissued on the date of the
change for an amount equal to the adjusted issue price of the Regular
Securities. To the extent specified in the applicable Prospectus Supplement, an
increase in prepayments on the Mortgage Assets with respect to a Series of
Regular Securities can result in both a change in the priority of principal
payments with respect to certain classes of Regular Securities and either an
increase or decrease in the daily portions of original issue discount with
respect to such Regular Securities.
A purchaser of a Regular Security 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 Security. 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 Security 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 Security who purchased the Regular Security 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 Security
(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 Security is expected to be reduced to zero under the Prepayment
Assumption.
A Owner 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
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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 Securities. Regular Securities 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 Security). 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 Security to be significantly less or
more than the overall expected return on the Regular Security 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 Security and is based on objective financial
information or economic information; however, a objective rate does not include
a rate based on information that is in the control of the issuer or that is
unique to the circumstances of a related party. 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) 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.
The application of the OID Regulations to variable rate debt instruments is
limited and may not apply to some Regular Securities having variable rates. In
that event, the provisions of regulations issued on June 11, 1996,
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applicable to instruments having contingent payments, may apply to those Regular
Securities. The application of those provisions to instruments such as variable
rate Regular Securities is subject to varying interpretations. Prospective
purchasers of variable rate Regular Securities are advised to consult their tax
advisers concerning the tax treatment of such Regular Securities.
Market Discount. A purchaser of a Regular Security 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 Security (i) is exceeded by the stated
redemption price at maturity of the Regular Security or (ii) in the case of a
Regular Security having original issue discount, is exceed by the sum of the
issue price of such Regular Security plus any original issue discount that would
have previously accrued thereon if held by an original Regular Owner (who
purchased the Regular Security at its issue price), in either case less any
prior distributions included in the stated redemption price at maturity of such
Regular Security. 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 Security 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 Security
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 Security 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 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 Security 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 Security 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 Security is disposed of. As
an alternative to the inclusion of market discount in income on the foregoing
basis, the Regular Owner may elect to include market discount in income
currently as it accrues in all market discount instruments acquired by such
Regular Owner 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 Security 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
Security multiplied by the weighted average maturity of the Regular Security
(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 Security 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 Owner holds such Regular Security as a "capital asset"
within the meaning of Code Section 1221, the Regular Owner 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 Securities.
This election, once made, applies to all obligations held by the
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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 Securities. On June 27, 1996, the IRS published proposed
regulations (the "Proposed Premium Regulations") covering the amortization of
bond premiums. The Proposed Premium Regulations describe the constant yield
method for amortizing premium and provide the Regular Owner may offset the
premium against corresponding interest income only as that interest income is
taken into account under the Regular Owner's method of accounting. For
instruments that may be called or prepaid prior to maturity, a Regular Owner
will be deemed to exercise its option and an issuer will be deemed to exercise
its redemption right in a manner that maximizes the Regular Owner's yield. The
Proposed Premium Regulations are proposed to be effective for debt instruments
acquired on or after the date 60 days after final regulations are issued. A
Regular Owner may elect to amortize bond premium under the Proposed Premium
Regulations for the taxable year containing the effective date, with the
election applying to all the Regular Owner's debt instruments held on the first
day of that taxable year. The Proposed Premium Regulations are subject to
further administrative action before becoming effective, if at all, and may be
modified before their becoming effective. Purchasers who pay a premium for their
Regular Securities should consult their tax advisors regarding the election to
amortize premium and the method to be employed.
Sale or Exchange of Regular Securities. If a Regular Owner sells or
exchanges a Regular Security, the Regular Owner will recognize gain or loss
equal to the difference, if any, between the amount received and his adjusted
basis in the Regular Security. The adjusted basis of a Regular Security
generally will equal the cost of the Regular Security 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 Security and reduced by
amounts included in the stated redemption price at maturity of the Regular
Security 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 Security realized by an investor who holds the Regular Security as a
capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Security has been held for the long-term
capital gain holding period (currently more than one year). Gain from the
disposition of a Regular Security 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 Security 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 includible in the gross income of such
holder with respect to the Regular Security. In addition, gain or loss
recognized from the sale of a Regular Security by certain banks or thrift
institutions will be treated as ordinary income or loss pursuant to Code Section
582(c). The current maximum tax rate for individuals on the excess of net
long-term capital gain over net short-term capital loss is 28%; however,
Congress is considering tax legislation which would reduce that rate.
TAXATION OF RESIDUAL SECURITIES
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 Securities ("Residual Owners")
and will not be taxed separately to the REMIC Pool. The daily portions of REMIC
taxable income or net loss of a Residual Owner 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
Owners in proportion to their respective holdings of Residual Securities 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
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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 Securities, 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 Owners report their pro rata
share of taxable income or net loss of the REMIC Pool will continue until there
are no Securities of any class of the related Series outstanding.
The taxable income recognized by a Residual Owner 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 Securities, on the other hand. Because of the way REMIC taxable
income is calculated, a Residual Owner 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 Owners 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 Owner 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 Securities 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
Securities. When there is more than one class of Regular Securities that
distribute principal sequentially, this mismatching of income and deductions is
particularly likely to occur in the early years following issuance of the
Regular Securities when distributions in reduction of principal are being made
in respect of earlier maturing classes of Securities 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 Securities 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 Securities, may
increase over time as distributions in reduction of principal are made on the
lower yielding classes of Regular Securities, 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 Owners 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 of such
mismatching of income and deductions described in this paragraph, if present
with respect to a Series of Securities, may have a significant adverse effect
upon the Residual Owners after-tax rate of return. In addition, a Residual
Owner's taxable income during certain periods may exceed the income reflected by
such Owner 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 Securities.
Basis and Losses. The amount of any net loss of the REMIC Pool that may be
taken into account by the Residual Owner is limited to the adjusted basis of the
Residual Security as of the close of the quarter (or time of disposition of the
Residual Security if earlier), determined without taking into account the net
loss for the quarter. The initial adjusted basis of a purchaser of a Residual
Security is the amount paid for such Residual Security. Such adjusted basis will
be increased by the amount of taxable income of the REMIC Pool reportable by the
Residual Owner and decreased by the amount of loss of the REMIC Pool reportable
by the Residual Owner. 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
Owner as to whom such loss was disallowed and may be used by such Residual Owner
only to offset any income generated by the same REMIC Pool. Residual Owners
should consult their tax advisors about other limitations on the deductibility
of net losses that may apply to them.
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A Residual Owner will not be permitted to amortize directly the cost of its
Residual Security 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 Securities over their life. However, in view of
the possible acceleration of the income of Residual Owners 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
Securities.
If a Residual Security 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
Securities 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 Owner
(other than an original holder) in the Residual Security is greater than the
corresponding portion of the REMIC Pool's basis in the Mortgage Assets, the
Residual Owner 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 Securities" 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 Security should be aware that on
December 24, 1996, the Internal Revenue Service issued final regulations (the
"Mark to Market 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 Mark
to Market Regulations provide that for purposes of this mark-to-market
requirement, a Residual Security acquired after January 4, 1995, is not treated
as a security and thus may not be marked to market.
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 Securities as described above under "Taxation of
Regular Securities - Original Issue Discount" and "Variable Rate Regular
Securities," 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 Securities - 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
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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 Securities 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 Securities - 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.
Limitations on Offset or Exemption of REMIC Income; Excess Inclusions. A
portion of the income allocable to a Residual Security (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 Owner, (ii) will be treated as "unrelated business taxable income"
within the meaning of Code Section 512 if the Residual Owner 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 Owner that is a foreign investor, as
further discussed in "Taxation of Certain Foreign Investors - Residual
Securities" below. Except as discussed below with respect to excess inclusions
from Residual Securities without "significant value." Members of an affiliated
group are treated as one corporation for purposes of applying the limitation on
offset of excess inclusion income. The Small Business Protection Act of 1996
(the "1996 Act") eliminated a special rule that permitted thrift institutions to
use net operating losses and other allowable deductions to offset their excess
inclusion income from Residual Securities with significant value for taxable
years beginning after December 31, 1995 (subject to exceptions for certain
certificates held continuously since November 1, 1995). The 1996 Act also
provides new rules affecting the determination of alternative maximum taxable
income ("AMTI") of a Residual Owner. First, AMTI is calculated without regard to
the special rule that taxable income cannot be less than excess inclusion income
for the year. Second, AMTI cannot be less than excess inclusion income for the
year. Finally, any AMTI net operating loss deduction is computed without regard
to excess inclusion income. These new rules are effective for tax years
beginning after December 31, 1986, unless a Residual Owner elects to have the
rules apply only to tax years ending after August 20, 1996.
Except as discussed in the following paragraph, with respect to excess
inclusions from Residual Securities without "significant value," for any
Residual Owner, the excess inclusion for any calendar quarter is the excess, if
any, of (i) the income of such Residual Owner for that calendar quarter from its
Residual Security over (ii) the sum of the "daily accruals" (as defined below)
for all days during the calendar quarter on which the Residual Owner holds such
Residual Security. For this purpose, the daily accruals with respect to a
Residual Security 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 Security at the beginning of the calendar quarter
and 120 percent of the "Federal long-term rate" in effect at the time the
Residual Security is issued. For this purposes the "adjusted issue price" of a
Residual Security at the beginning of any calendar quarter equals the issue
price of the Residual Security (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 Security before
the beginning of such
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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 Security will be treated as an excess inclusion if the
Residual Securities 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 Securities do not have significant value. Under the REMIC
Regulations, the Residual Securities will have significant value if: (i) the
aggregate of the issue prices of the Residual Securities is at least two percent
of the aggregate issue prices of all Regular Securities and Residual Securities
in the REMIC and (ii) the anticipated weighted average life of the Residual
Securities 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 Security 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 Security based on the relevant
prepayment assumption and expected reinvestment income. The anticipated weighted
average life of a Residual Security 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 Security 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.
Under Treasury regulations to be promulgated, a portion of the dividends
paid by a REIT which owns a Residual Security are to be designated as excess
inclusions in an amount corresponding to the Residual Security'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 Security 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 SECURITIES
Disqualified Organizations. If legal title or beneficial interest in a
Residual Security 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 Security 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 Security and whose term
ended on the close of the last quarter in which excess inclusion was expected to
accrue with respect to the Residual Security. Such a tax generally would be
imposed on the transferor of the Residual Security, 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 Security 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 Security and the transferor pays income tax at the highest corporate
rate on the excess inclusion for the period the Residual Security 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 Security 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
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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 Security, 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 Securities will provide that
neither legal title nor beneficial interest in a Residual Security 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 purchasing such Residual Securities 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 Security with respect to a Series will have
a legend referring to such restrictions on transfer, and each Residual Owner
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 Securities are disregarded, in which case the transferor
continues to be treated as the owner of the Residual Securities 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 Owner (other than a Residual
Owner 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,
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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
Security 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 Security, and (iv) intends to pay any and all taxes
associated with holding the Residual Security 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 Security 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 Security 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 Security back to a U.S.
Person, the transfer will 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 Securities may provide
that a Residual Security 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 SECURITY
Upon the sale or exchange of a Residual Security, the Residual Owner 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 Securities -
Basis and Losses") of such Residual Owner in such Residual Security at the time
of the sale or exchange. In addition to reporting the taxable income of the
REMIC Pool, a Residual Owner 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 Security. It is possible that the termination of the REMIC Pool may
be treated as a sale or exchange of a Residual Owner's Residual Security, in
which case, if the Residual Owner has an adjusted basis in his Residual Security
remaining when his interest in the REMIC Pool terminates, and if he holds such
Residual Security 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 Securities. Consequently,
losses on dispositions of Residual Securities will be disallowed where the
seller of the Residual Security, during the period beginning six months before
the sale or disposition of the Residual Security 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 Security.
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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 Owners,
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 Securities 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 Securities 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.
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 Owner, (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
Securities and Residual Owners 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 Owner for an entire
taxable year, the REMIC Pool generally will be subject to the procedural and
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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 Owners
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 Owners, the Residual Owner chosen by the
Residual Owners 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 Security 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 Securities for the
entire calendar year. Otherwise, each holder of a Residual Security is required
to treat items on its return consistently with their treatment on the REMIC
Pool's return, unless the holder of a Residual Security 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 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 Securities 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 Securities 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 Securities, as well as holders of
Residual Securities, where such Regular Securities 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
Owner's income, determined on a daily basis, bears to the income of all holders
of Regular Securities and Residual Securities with respect to a REMIC Pool. As a
result, individuals, estates or trusts holding REMIC Securities (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 Securities 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 Securities.
TAXATION OF CERTAIN FOREIGN INVESTORS
Regular Securities. Interest, including original issue discount,
distributable to Regular Owners 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
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an appropriate statement, signed under penalties of perjury, identifying the
beneficial owner and stating, among other things, that the beneficial owner of
the Regular Security 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 Security 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
Security. The term "Non-U.S. Person" means any person who is not a U.S. Person.
Residual Securities. The Conference Committee Report to the 1986 Act
indicates that amounts paid to Residual Owners 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 Owners qualify as "portfolio interest," subject to the conditions
described in "Regular Securities" 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 Security 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
Owner 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 Securities -
Limitations on Offset or Exemption of REMIC Income; Excess Inclusions." If the
amounts paid to Residual Owners 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 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 Security 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 Securities - 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 Securities.
On April 22, 1996, the IRS issued proposed regulations which, if adopted in
final form, could have an effect on the United States' taxation of foreign
investors in Regular Securities or Residual Securities. The proposed regulations
would apply to payments after December 31, 1997. Investors who are Non-U.S.
Persons should consult their own tax advisors regarding the specific tax
consequences to them of owning Residual Securities.
BACKUP WITHHOLDING
Distributions made on the Regular Securities, and proceeds from the sale of
the Regular Securities 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 Owner 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 Security, or such Owner is otherwise an exempt
recipient under applicable provisions of the Code. Any amounts to be withheld
from distribution on the Regular Securities would be refunded by the Internal
Revenue Service or allowed as a credit against the Regular Owner'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 Securities or beneficial owners who own Regular Securities through a
broker or middleman as nominee. All brokers, nominees and all other non-exempt
holders of record of Regular Securities (including corporations, non-calendar
year taxpayers, securities or commodities dealers, real estate investment
trusts,
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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 Securities.
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 Securities 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 Owner 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 Owners,
furnished annually, if applicable, to holders of Regular Securities, 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 Owners, furnished annually to holders of Regular
Securities, 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 Securities,"
above."
FEDERAL INCOME TAX CONSEQUENCES FOR SECURITIES 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, and if
the Securities are not treated as debt for federal tax purposes, the tax
consequences to the Owners will be as described below.
STANDARD SECURITIES
General. If no election is made to treat a Trust (or a segregated pool of
assets therein) with respect to a Series of Securities 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 Securities of a Series, and where such Securities are not
designated as Debt Certificates, as described under "Debt Certificates," as
Stripped Securities, as described below under "Stripped Securities" or as
Partnership Interests described under "Taxation of Securities Classified as
Partnership Interests," the holder of each such "Standard Security" 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 Security 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 Owner of a Security 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 Owner's method of
accounting. A Owner 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 Securities, 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
Securities, directly or indirectly through a pass-through entity, may have
aggregate taxable income in excess of the aggregate
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amount of cash received on such Securities with respect to interest at the
pass-through rate on such Securities 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 Securities 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 Securities" 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 Security 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
Security is of the type described in such section.
2. A Standard Security 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 Security
is of the type described in such section.
3. A Standard Security 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 Security 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, Owners are urged to consult
their own tax advisors concerning the effects of such arrangements on the
characterization of such Owner's investment for federal income tax purposes.
PREMIUM AND DISCOUNT
Owners 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 Securities or thereafter.
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Premium. The treatment of premium incurred upon the purchase of a Security
will be determined generally as described above under " - Taxation of Regular
Securities - 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 Owner'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 Owner 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 the issue price and the original principal amount of such
Mortgage Assets (i.e., points) will be includible by such holder.
Market Discount. Owners 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 Securities - 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 Securities, 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 Owners 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 Owner, except that the
income reported by a cash method holder may
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be slightly accelerated. See "Stripped Securities" 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 Owners to purchase an
undivided interest in the Mortgage Assets. In such event, the present value of
such additional payments might be included in the Owner's basis in such
undivided interests for purposes of determining whether the Security was
acquired at a discount, at par, or at a premium. Under this alternative, Owners
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. Owners 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 Securities. Upon sale or exchange of a Security, a
Owner 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 Security. In general, the aggregate adjusted
basis will equal the Owner's cost for the Security, increased by the amount of
any income previously reported with respect to the Security and decreased by the
amount of any losses previously reported with respect to the Security 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 Security was held as a
capital asset.
STRIPPED SECURITIES
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, Securities that are subject to those rules will be referred to as
"Stripped Securities." The Securities 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 Securities - Recharacterization of the
Servicing Fees" above) and (iii) a class of Securities 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 Security (a "Stripped Owner") 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 Security'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 Securities - Recharacterization of Servicing Fees." For this purpose
the servicing fees will be allocated to the Stripped Securities in proportion to
the respective offering price of each class (or subclass) of Stripped
Securities. The holder of a Stripped Security generally will be entitled to a
deduction each year in respect of the servicing fees, as described above under "
- - Federal Income Tax Consequences for Securities as to Which No REMIC Election
is Made - Standard Securities - 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,
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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 Securities for
federal income tax purposes is not clear in certain respects at this time,
particularly where such Stripped Securities 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 Security 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 Securities 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 Security 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 Security 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 Security would be treated as stated
interest under the original issue discount rules. Further, the regulations
provide that the purchaser of such a Stripped Security 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 Security 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 Securities - Taxation of Regular Securities -
Market Discount," without regard to the de minimis rule therein.
Status of Stripped Securities. No specific legal authority exists as to
whether the character of the Stripped Securities, 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 Securities
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 Securities 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 Securities as to Which
No REMIC Election is Made" and " - Standard Securities - Tax Status" above.
Original Issue Discount. Except as described above under " - General," each
Stripped Security 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 Security 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 Owner in any taxable year likely will be computed generally as
described above under "Federal Income Tax Consequences for REMIC Securities -
Taxation of Regular Securities - Original Issue Discount" and " - Variable Rate
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Regular Securities." However, with the apparent exception of a Stripped Security
issued with de minimis original issue discount, as described above under " -
General," the issue price of a Stripped Security 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 Security to such
Stripped Owner, 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 Owner'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 Owner's Stripped Security. While the matter is not free from
doubt, the holder of a Stripped Security 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 Security 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 Securities 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 Security under such rules depends on whether the aggregate amount
of principal payments, if any, to be made on the Stripped Security 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 Security. 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 Security. Such payments of
interest would be includible in the Stripped Owner's gross income in the taxable
year in which the amounts become fixed. If the aggregate amount of principal
payments to be made on the Stripped Security 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 Security, while amounts received in excess of the
applicable Federal rate, as applied to the adjusted basis of the Stripped
Security, 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 Securities.
Sale or Exchange of Stripped Securities. Sale or exchange of a Stripped
Security prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Stripped Owner's
adjusted basis in such Stripped Security, as described above under "Federal
Income Tax Consequences for REMIC Securities - Taxation of Regular Securities -
Sale or Exchange of Regular Securities." To the extent that a subsequent
purchaser's purchase price is exceeded by the remaining payments on the Stripped
Securities, 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 Owner other
than by original Stripped Owner 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 Securities. Where an investor
purchases more than one class of Stripped Securities, it is currently unclear
whether for federal income tax purposes such classes of Stripped Securities
should be treated separately or aggregated for purposes of the rules described
above.
Because of these possible varying characterizations of Stripped Securities
and the resultant differing treatment of income recognition, Stripped Owners are
urged to consult their own tax advisors regarding the proper treatment of
Stripped Securities for federal income tax purposes.
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REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Trustee will furnish, within a reasonable time after the end of each
calendar year, to each Owner or Stripped Owner 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 Owners to prepare their federal income
tax returns. Such information will include the amount of original issue discount
accrued on Securities held by persons other than Owners 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 Owner, other than an original Owner. The Trustee
will also file such original issue discount information with the Internal
Revenue Service. If a Owner fails to supply an accurate taxpayer identification
number or if the Secretary of the Treasury determines that a Owner 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 Security 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 Owner on the sale
or exchange of such a Security also will be subject to federal income tax at the
same rate.
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 Securities."
Owners should be aware that the IRS issued proposed regulations on April
22, 1996 which, if adopted in final form, could affect the United States'
taxation of foreign investors in Securities. The proposed regulations would
apply to payments after December 31, 1997. Investors who are non-U.S. Persons
should consult their own tax advisors regarding the specific tax consequences to
them of owning Securities.
DEBT CERTIFICATES
General. Certain Certificates ("Debt Certificates") may be issued with the
intention to treat them, for federal income tax purposes, either as (i)
non-recourse debt of the Depositor secured by the related Mortgage Assets, in
which case the related Trust will constitute only a security device which
constitutes a collateral arrangement for the issuance of secured debt and not an
entity for federal income tax purposes or (ii) debt of a partnership, in which
case the related Trust will constitute a partnership for federal income tax
purposes. Arter & Hadden, special counsel to the Depositor, is of the opinion
that (unless otherwise limited in the related Prospectus Supplement), for
federal income tax purposes, assuming compliance with all the provisions of the
Agreement, (i) Debt Certificates will be characterized as debt issued by, and
not equity in, the related Trust and (ii) the related Trust will not be
characterized as an association (or publicly traded partnership within the
meaning of Code Section 7704) taxable as a corporation or as a taxable mortgage
pool within the meaning of Code Section 7701(i). Since different criteria are
used to detemine the non-tax accounting treatment of the issuance of Debt
Certificates, however, the Depositor expects to treat such transactions, for
financial accounting purposes, as a transfer of an ownership interest in the
related Mortgage Assets to the related Trust and not as the issuance of debt
obligations. In this regard, it should be noted that the IRS has issued a notice
stating that, upon examination, it will scrutinize instruments treated as debt
for federal income tax purposes but as equity for regulatory, rating agency or
financial accounting purposes to determine if their purported status as debt for
federal income tax purposes is appropriate. Assuming, as Arter & Hadden advises,
that Debt Certificates will be treated as indebtedness for federal income tax
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purposes, holders of Debt Certificates, using their method of tax accounting,
will follow the federal income tax treatment hereinafter described.
Original Issue Discount. It is likely that the Debt Certificates will be
treated as having been issued with "original issue discount" within the meaning
of Code Section 1273(a) because interest payments on the Debt Certificates may,
in the event of certain shortfalls, be deferred for periods exceeding one year.
As a result, interest payments may not be considered "qualified stated interest"
payments.
In general, a holder of a Debt Certificate having original issue discount
must include original issue discount in ordinary income as it accrues in advance
of receipt of the cash attributable to the discount, regardless of the method of
accounting otherwise used. The amount of original issue discount on a Debt
Certificate will be computed generally as described under "- Federal Income Tax
Consequences for REMIC Securities" and "Taxation of Regular Securities -
Original Issue Discount" and "- Variable Rate Regular Securities." The Depositor
intends to report any information required with respect to the Debt Certificates
based on the OID Regulations.
Market Discount. A purchaser of a Debt Certificate may be subject to the
market discount rules of Code Sections 1276 through 1278. In general, "market
discount" is the amount by which the stated redemption price at maturity (or, in
the case of a Debt Certificate issued with original issue discount, the adjusted
issue price) of the Debt Certificate exceeds the purchaser's basis in a Debt
Certificate. The holder of a Debt Certificate that has market discount generally
will be required to include accrued market discount in ordinary income to the
extent payments includible in the stated redemption price at maturity of such
Debt Certificate are received. The amount of market discount on a Debt
Certificate will be computed generally as described under "Federal Income Tax
Consequences for REMIC Securities" and " - Taxation of Regular Securities -
Market Discount."
Premium. A Debt Certificate purchased at a cost greater than its currently
outstanding stated redemption price at maturity is considered to be purchased at
a premium. A holder of a Debt Certificate who holds a Debt Certificate as a
"capital asset" within the meaning of Code Section 1221 may elect under Code
Section 171 to amortize the premium under the constant interest method. That
election will apply to all premium obligations that the holder of a Debt
Certificate acquires on or after the first day of the taxable year for which the
election is made, unless the IRS permits the revocation of the election. In
addition, it appears that the same rules that apply to the accrual of market
discount on installment obligations are intended to apply in amortizing premium
on installment obligations such as the Debt Certificates. The treatment of
premium incurred upon the purchase of a Debt Certificate will be determined
generally as described above under " -Taxation of Regular Securities - Premium."
Sale or Exchange of Debt Certificates. If a holder of a Debt Certificate
sells or exchanges a Debt Certificate, the holder of a Debt Certificate will
recognize gain or loss equal to the difference, if any, between the amount
received and the holder of a Debt Certificate's adjusted basis in the Debt
Certificate. The adjusted basis in the Debt Certificate generally will equal its
initial cost, increased by any original issue discount or market discount
previously included in the seller's gross income with respect to the Debt
Certificate and reduced by the payments previously received on the Debt
Certificate, other than payments of qualified stated interest, and by any
amortized premium.
In general, except as described above with respect to market discount, and
except for certain financial institutions subject to Code Section 582(c), any
gain or loss on the sale or exchange of a Debt Certificate recognized by an
investor who holds the Debt Certificate as a capital asset (within the meaning
of Code Section 1221), will be capital gain or loss and will be long-term or
short-term depending on whether the Debt Certificate has been held for more than
one year. For corporate taxpayers, there is no preferential rate afforded to
long-term capital gains. For individual taxpayers, all net long-term capital
gains are currently subject to a maximum nominal rate of tax of 28%. However,
Congress is currently considering proposed tax legislation which would reduce
the tax rate on net long-term capital gains.
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Backup Withholding. Holders of Debt Certificates will be subject to backup
withholding rules identical to those applicable to REMIC Regular Securities. See
" - Federal Income Tax Consequences For REMIC Securities - Backup Withholding."
Tax Treatment of Foreign Investors. Holders of Debt Certificates who are
foreign investors will be subject to taxation in the same manner as foreign
holders of REMIC Regular Securities. See " - Federal Income Tax Consequences For
REMIC Securities -- Taxation of Certain Foreign Investors -- Regular
Securities."
NOTES
With respect to those Securities issued as Notes, no regulations, published
rulings or judicial decisions exist that discuss the characterization for
federal income tax purposes of instruments with terms substantially the same as
the Notes. However, Arter & Hadden, special counsel to the Depositor, is of the
opinion that (unless otherwise limited in the related Prospectus Supplement),
for federal income tax purposes, assuming compliance with all the provisions of
the related Indenture, (i) Notes will be characterized as debt issued by, and
not equity in, the related Trust and (ii) the related Trust will not be
characterized as an association (or publicly traded partnership within the
meaning of Code Section 7704) taxable as a corporation or as a taxable mortgage
pool within the meaning of Code Section 7701(i). Assuming, as Arter & Hadden
advises, that Notes are treated as indebtedness for federal income tax purposes,
holders of Notes, using their method of tax accounting, will follow the same
federal income tax treatment as Debt Certificates, as described above under
"Federal Income Tax Consequences - Federal Income Tax Consequences for
Securities as to Which No REMIC Election Is Made - Debt Certificates."
For federal income tax purposes, (i) Notes held by a thrift institution
taxed as a "mutual savings bank" or "domestic building and loan association"
will not represent interests in "qualifying real property loans" within the
meaning of Code Section 593(d)(1); (ii) Notes held by a thrift institution taxed
as a domestic building and loan association will not constitute "loans ...
secured by an interest in real property" within the meaning of Code Section
7701(a)(19)(C)(v); (iii) interest on Notes held by a real estate investment
trust will not be treated as "interest on obligations secured by mortgages on
real property or on interests in real property " within the meaning of Code
Section 856(c)(3)(B); (iv) Notes held be a real estate investment trust will not
constitute "real estate assets" or "Government securities" within the meaning of
Code Section 856(c)(5)(A); and (v) Notes held by a regulated investment company
will not constitute "Government securities" within the meaning of Code Section
851(b)(4)(A)(i).
TAXATION OF CERTIFICATES CLASSIFIED AS PARTNERSHIP INTERESTS
Certain Trusts may be treated as partnerships for Federal income tax
purposes. In such event, the Trusts may issue Securities characterized as
"Partnership Interests" as discussed in the related Prospectus Supplement. With
respect to such Series of Partnership Interests, Arter & Hadden, 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.
The related Prospectus Supplement will also cover any material federal income
tax consequences applicable to the Owners.
PLAN OF DISTRIBUTION
Securities 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 Securities,
including the public offering or purchase price of each class of Securities 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 Securities 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 Securities 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 Securities will be set forth on the
cover of the Prospectus Supplement
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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 Securities, Underwriters may receive
compensation from the Depositor or from purchasers of the Securities in the form
of discounts, concessions or commissions. Underwriters and dealers participating
in the distribution of the Securities may be deemed to be underwriters in
connection with such Securities, and any discounts or commissions received by
them from the Depositor and any profit on the resale of Securities 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 Securities 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 Securities 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 Securities 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 Security, and,
accordingly, there can be no assurance that the ratings assigned to a Security
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
Securities of each Series including insolvency issues and certain federal income
tax matters concerning the Securities will be passed upon for the Depositor by
Arter & Hadden, Washington, D.C.
FINANCIAL INFORMATION
A Trust will be formed with respect to each Series of Securities. No Trust
will have any assets or obligations prior to the issuance of the related Series
of Securities. No Trust will engage in any activities other 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.
Although the Notes of any Series will represent obligations of the related
Issuer, such obligations will be non-resource and the proceeds of the assets
included in the related Trust will be the sole source of payments on the Notes
of such Series. The Issuer for any Series of Notes will not have, nor be
expected in the future to have, any significant assets available for payments on
such Series of Notes other than the assets included in the related Trust.
Accordingly, the investment characteristics of a Series of Notes will be
determined by the assets included in the related Trust and will not be affected
by the identity of the obligor with respect to such Series of Notes.
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Accordingly, no capitalization information or any historical or pro forma ratio
of earnings to fixed charges or any other financial information with respect to
any trust, partnership, limited liability company or corporation formed for the
purpose of issuing a Series of Notes has been or will be included herein or in
the related Prospectus Supplement.
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APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
PAGE
1986 Act......................................................................48
1996 Act......................................................................56
Agreement......................................................................1
AMTI..........................................................................56
Applicable Accounting Standards...............................................30
Balloon Loans..................................................................7
Beneficial Owners..............................................................5
BIF...........................................................................31
Book Entry Securities..........................................................4
Certificates...................................................................1
Clearing Agency................................................................4
Clearing Agency Participants...................................................5
Code...........................................................................5
Companion Securities..........................................................13
Compound Interest Securities..................................................12
Cooperative Loans.............................................................16
Cooperatives...................................................................2
Credit Enhancement.............................................................4
Credit Enhancer...............................................................10
Custodial Account.............................................................24
Cut-Off Date..................................................................12
Debt Certificates.............................................................69
Defective Mortgage Loan.......................................................30
Delivery Date.................................................................11
Deposit Date..................................................................30
Depositor......................................................................1
Disqualified Organization.....................................................58
Distribution Date.............................................................13
DOL...........................................................................45
Eligible Investments..........................................................31
ERISA..........................................................................5
Events of Default.............................................................33
FDIC..........................................................................24
FHLMC..........................................................................2
Financial Guaranty Insurance Policy...........................................19
Financial Guaranty Insurer....................................................19
Fitch..........................................................................6
FNMA...........................................................................2
Garn-St. Germain Act..........................................................43
GNMA...........................................................................2
Indenture Trustee..............................................................1
Insurance Paying Agent........................................................19
Insurance Proceeds............................................................24
Insured Payment...............................................................19
Interest Accrual Period.......................................................14
Issuer.........................................................................1
Liquidation Proceeds..........................................................24
Loan-to-Value Ratio...........................................................17
Master Servicer................................................................1
MBS............................................................................2
MBS Agreement.................................................................18
MBS Issuer....................................................................18
MBS Servicer..................................................................18
MBS Trustee...................................................................18
Monthly Advance...............................................................24
Moody's........................................................................6
Mortgage Assets................................................................2
Mortgage Loans.................................................................2
Mortgage Notes................................................................16
Mortgage Pool Insurance Policy................................................21
Mortgage Rates................................................................17
Mortgage-Backed Securities.....................................................2
Mortgaged Properties..........................................................16
Mortgages.....................................................................16
Mortgagors....................................................................23
NCUA..........................................................................24
Non-Priority Securities.......................................................13
Non-U.S. Person...............................................................62
Noneconomic Residual Interest.................................................58
Nonrecoverable Advance........................................................24
Note Event of Default.........................................................35
Note Rate.....................................................................14
Notes..........................................................................1
Notional Principal Balance....................................................14
OID Regulations...............................................................46
Original Value................................................................17
OTS...........................................................................43
Owner Trustee..................................................................1
Owners.........................................................................3
Partnership Interests.........................................................71
Pass-Through Entity...........................................................58
Pass-Through Rate..............................................................3
Plans.........................................................................45
Policy Statement..............................................................45
Pool Insurer..................................................................21
Pre-Funding Account............................................................3
Prepayment Assumption.........................................................49
Principal Balance.............................................................17
Principal Prepayments.........................................................14
Priority Securities...........................................................13
Proposed Premium Regulations..................................................53
PTE 83-1......................................................................45
Rating Agency..................................................................6
Record Date...................................................................13
Regular Owner.................................................................48
Regular Securities............................................................47
REIT..........................................................................47
Relief Act....................................................................10
REMIC..........................................................................5
REMIC Pool....................................................................47
REMIC Regulations.............................................................46
REMIC Securities..............................................................47
Remittance Date...............................................................24
Remittance Rate...............................................................24
Reserve Fund..................................................................23
Residual Owners...............................................................53
Residual Securities...........................................................47
Retail Class Security.........................................................34
Riegle Act.....................................................................9
SAIF..........................................................................31
Scheduled Amortization Securities.............................................13
Securities.....................................................................1
Security Account..............................................................13
Security Interest Rate........................................................12
Security Principal Balance.....................................................8
Security Register..............................................................8
Security Registrar.............................................................8
Seller.........................................................................1
Senior Securities.............................................................19
Servicer.......................................................................1
SMMEA..........................................................................5
Special Allocation Securities.................................................13
Special Hazard Insurance Policy...............................................21
Special Hazard Insurer........................................................22
Standard & Poor's..............................................................6
Standard Security.............................................................63
Stripped Owner................................................................66
Stripped Securities...........................................................66
Subordinated Securities.......................................................19
Subsequent Transfer Agreement..................................................3
Thrift Institution............................................................47
TMP...........................................................................48
Trust..........................................................................1
Trustee........................................................................1
U.S. Person...................................................................59
UCC...........................................................................41
Underwriters..................................................................71
A-1
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
14. ITEM 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........................ $ 909,090.90
Legal Fees and Expenses*..................................... 400,000.00
Accounting Fees and Expenses*................................ 144,000.00
Trustee's Fees and Expenses (including counsel fees)*........ 68,400.00
Printing and Engraving Fees*................................. 120,000.00
Rating Agency Fees*.......................................... 816,000.00
Miscellaneous*............................................... 840,000.00
Total.................................................. $3,297,490.90
- ----------
* Estimated in accordance with Item 511 of Regulation S-K.
II-i
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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 31st
day of July, 1997.
IMC SECURITIES INC.
By: /S/ George Nicholas
----------------------
George Nicholas
Chairman, Chief Executive Officer
and Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to 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 Chairman, Chief Executive Officer, July 31, 1997
Assistant Secretary and Director
/s/Thomas Middleton
- ----------------------
Thomas Middleton President, Chief Operating Officer July 31, 1997
(Chief Financial Officer), Assistant
Secretary and Director
/s/Timothy Griffin Director July 31, 1997
- ----------------------
Timothy Griffin
/s/Mitchell W. Legler Director July 31, 1997
- ----------------------
Mitchell W. Legler
