<PAGE> 1
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED AUGUST 18, 1997)
IMC HOME EQUITY LOAN OWNER TRUST 1997-8
$307,785,257 ADJUSTABLE RATE HOME EQUITY LOAN
ASSET BACKED NOTES, SERIES 1997-8
DUE DECEMBER 20, 2028
IMC MORTGAGE COMPANY
[IMC LOGO] SELLER AND SERVICER
IMC SECURITIES, INC.
DEPOSITOR
The IMC Home Equity Loan Owner Trust 1997-8 (the "Issuer") will be formed
pursuant to an owner trust agreement to be dated as of December 1, 1997 (the
"Trust Agreement") between IMC Securities, Inc. (the "Depositor") and
Wilmington Trust Company, as owner trustee (the "Owner Trustee"). The Issuer
is hereby offering $307,785,257 aggregate principal amount of its Adjustable
Rate Home Equity Loan Asset Backed Notes, Series 1997-8 (the "Notes"). The
Notes will be issued pursuant to an indenture, dated as of December 1, 1997
(the "Indenture"), between the Issuer and The Chase Manhattan Bank, as
indenture 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 (the "Home Equity Loans"), (ii) the Issuer's rights
under the Sale and Servicing Agreement (as defined herein), (iii) the Note
Insurance Policy, as described herein and (iv) certain other assets described
in the Indenture. The Issuer also will issue instruments evidencing the
residual interest in the Trust Estate (the "Residual Interest"). The Residual
Interest and the Notes are collectively referred to as the "Securities." Only
the Notes are offered hereby.
Simultaneously with the issuance of the Notes, the Seller will obtain from
MBIA Insurance Corporation (the "Note Insurer") a financial guaranty note
insurance policy relating to the Notes (the "Note Insurance Policy") in favor
of the Indenture Trustee. The Note Insurance Policy will require the Note
Insurer to make certain Insured Payments (as defined herein) on the Notes.
[MBIA LOGO]
(continued on following page)
FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING INVESTMENT IN THE NOTES,
SEE "RISK FACTORS" BEGINNING ON PAGE S-9 HEREIN, "PREPAYMENT AND YIELD
CONSIDERATIONS" BEGINNING ON PAGE S-24 HEREIN AND "RISK FACTORS" BEGINNING ON
PAGE 7 IN THE PROSPECTUS.
THE NOTES REPRESENT NON-RECOURSE OBLIGATIONS OF THE ISSUER ONLY AND DO NOT
REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR, THE SELLER, THE
SERVICER, THE INDENTURE TRUSTEE, THE OWNER TRUSTEE, THE NOTE INSURER
OR ANY OF THEIR AFFILIATES, EXCEPT AS DESCRIBED HEREIN. 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.
<TABLE>
<CAPTION>
==========================================================================================================================
INITIAL NOTE PRICE TO UNDERWRITING PROCEEDS TO
PRINCIPAL BALANCE NOTE RATE PUBLIC DISCOUNT DEPOSITOR(1)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Note . . . . . . . . . . . . $307,785,257 Variable(2) 100% 0.25% 99.75%
- --------------------------------------------------------------------------------------------------------------------------
Total . . . . . . . . . . . . . . $307,785,257 $307,785,257 $769,463 $307,015,794
==========================================================================================================================
</TABLE>
(1) Before deducting expenses, estimated to be $400,000.
(2) The Note Rate on the Notes is adjustable based on One-Month LIBOR as
described herein.
The Notes are offered subject to prior sale, when, as, and if accepted by
the Underwriters and subject to the Underwriters' rights 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, S.A. and the Euroclear System on or about
December 30, 1997. The Notes will be offered in Europe and the United States
of America.
---------------
PAINEWEBBER INCORPORATED BEAR, STEARNS & CO. INC.
---------------
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS DECEMBER 23, 1997
<PAGE> 2
(cover continued from previous page)
The Original Aggregate Loan Balance of the Home Equity Loans as of the
Cut-Off Date was $307,785,257, all of which are first liens. The Home Equity
Loans were originated or purchased by IMC Mortgage Company (the "Seller" and
"Servicer").
Payments 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 January 20, 1998 (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 that certain agreement to be
entered into among the Depositor, the Servicer, the Seller, the Indenture
Trustee and the Issuer (the "Sale and Servicing Agreement"), 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 timely
payment of interest due to Owners and as to ultimate payment of the Note
Principal Balance, in each case pursuant to the terms of the Note Insurance
Policy issued by the Note Insurer. See "The Note Insurer" herein.
The stated maturity for the Notes is the Payment Date occurring on December
20, 2028 (the "Final 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" in the
Prospectus and "Prepayment and Yield Considerations" herein.
The Notes are subject to optional redemption in full by the holder(s) of at
least 50% of the Residual Interest at any time after the aggregate Loan Balance
of the Home Equity Loans has declined to less than 10% of the Original
Aggregate Loan Balance. In addition, the Note Insurer will have rights, under
the limited circumstances described in the Sale and Servicing Agreement, to
acquire all of the Home Equity Loans from the Issuer and thereby effect a
redemption of the Notes. See "Administration--Redemption of the Notes" herein.
It is a condition to the issuance of the Notes that they be rated "Aaa" by
Moody's Investors Service, Inc. and "AAA" by Standard & Poor's, a division of
The McGraw-Hill Companies.
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 have 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 A SEPARATE SERIES
OF ASSET BACKED NOTES BEING OFFERED BY THE DEPOSITOR PURSUANT TO ITS PROSPECTUS
DATED AUGUST 18, 1997, OF WHICH THIS PROSPECTUS SUPPLEMENT IS A PART AND WHICH
ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS IMPORTANT
INFORMATION REGARDING THIS OFFERING WHICH IS NOT CONTAINED HEREIN, AND
PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL.
AS PROVIDED HEREIN UNDER "THE NOTE INSURER -- INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE," THE DEPOSITOR WILL PROVIDE WITHOUT CHARGE TO ANY
PERSON TO WHOM THIS PROSPECTUS SUPPLEMENT IS DELIVERED, UPON ORAL OR WRITTEN
REQUEST OF SUCH PERSON, A COPY OF ANY OR ALL FINANCIAL STATEMENTS INCORPORATED
HEREIN BY REFERENCE. REQUESTS FOR SUCH COPIES SHOULD BE DIRECTED AS PROVIDED
UNDER "THE NOTE INSURER -- INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE"
HEREIN.
----------------
To the extent statements contained herein do not relate to historical or
current information, this Prospectus Supplement may be deemed to consist of
forward looking statements that involve risks and uncertainties that may
adversely affect the distributions to be made on, or the yield of, the Notes,
which risks and uncertainties are discussed under "Risk Factors" and
"Prepayment and Yield Considerations" herein. As a consequence, no assurance
can be given as to the actual distributions on, or the yield of, the Notes.
----------------
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> 3
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY OF TERMS . . . . . . . . . . . . . . . . . . . . . . . . S-1
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . S-9
THE SELLER AND SERVICER . . . . . . . . . . . . . . . . . . . . . S-11
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-11
Credit and Underwriting Guidelines . . . . . . . . . . . . . . S-12
Delinquency, Loan Loss and Foreclosure Information . . . . . . S-13
THE ISSUER . . . . . . . . . . . . . . . . . . . . . . . . . . . S-15
THE DEPOSITOR . . . . . . . . . . . . . . . . . . . . . . . . . . S-15
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . S-15
THE HOME EQUITY LOAN POOL . . . . . . . . . . . . . . . . . . . . S-15
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-15
Interest Payments on the Home Equity Loans . . . . . . . . . . S-24
PREPAYMENT AND YIELD CONSIDERATIONS . . . . . . . . . . . . . . . S-24
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-24
Prepayment and Yield Scenarios for the Notes . . . . . . . . . S-25
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . S-28
DESCRIPTION OF THE NOTES . . . . . . . . . . . . . . . . . . . . S-28
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-28
Payment Dates . . . . . . . . . . . . . . . . . . . . . . . . . S-28
Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . S-28
Calculation of One-Month LIBOR . . . . . . . . . . . . . . . . S-30
Book Entry Registration of the Notes . . . . . . . . . . . . . S-30
Assignment of Rights . . . . . . . . . . . . . . . . . . . . . S-33
THE NOTE INSURER . . . . . . . . . . . . . . . . . . . . . . . . S-33
CREDIT ENHANCEMENT . . . . . . . . . . . . . . . . . . . . . . . S-37
Note Insurance Policy . . . . . . . . . . . . . . . . . . . . . S-37
Overcollateralization Provisions . . . . . . . . . . . . . . . S-37
ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . S-38
Covenant of the Seller to Take Certain Actions with Respect
to the Home Equity Loans in Certain Situations . . . . . . . S-38
Assignment of Home Equity Loans . . . . . . . . . . . . . . . . S-39
Servicing and Sub-Servicing . . . . . . . . . . . . . . . . . . S-40
Removal and Resignation of Servicer . . . . . . . . . . . . . . S-43
Redemption of the Notes . . . . . . . . . . . . . . . . . . . . S-43
The Indenture Trustee . . . . . . . . . . . . . . . . . . . . . S-43
Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-44
Reporting Requirements . . . . . . . . . . . . . . . . . . . . S-44
Removal of Indenture Trustee for Cause . . . . . . . . . . . . S-45
Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . S-45
FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . . S-45
STATE TAX CONSEQUENCES . . . . . . . . . . . . . . . . . . . . . S-46
ERISA CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . S-46
RATINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-47
LEGAL INVESTMENT CONSIDERATIONS . . . . . . . . . . . . . . . . . S-48
UNDERWRITING . . . . . . . . . . . . . . . . . . . . . . . . . . S-48
REPORT OF EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . S-48
CERTAIN LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . S-48
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES . I - 1
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS . . . . . . . . . A - 1
</TABLE>
PROSPECTUS
<TABLE>
<CAPTION>
Page
----
<S> <C>
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 . . . . . . . . . . . . . . . . . . 17
Other Mortgage Securities . . . . . . . . . . . . . . . . . . . 18
CREDIT ENHANCEMENT . . . . . . . . . . . . . . . . . . . . . . . 18
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 . . . . . . . . . . . . . . . 32
Servicer Events of Default . . . . . . . . . . . . . . . . . . 33
Rights Upon Servicer Event of Default . . . . . . . . . . . . . 33
Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Termination . . . . . . . . . . . . . . . . . . . . . . . . . . 34
THE INDENTURE . . . . . . . . . . . . . . . . . . . . . . . . . . 34
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Modification of Indenture . . . . . . . . . . . . . . . . . . . 34
Note Events of Default . . . . . . . . . . . . . . . . . . . . 35
Rights Upon Note Events of Default . . . . . . . . . . . . . . 35
List of Note Owners . . . . . . . . . . . . . . . . . . . . . . 36
Annual Compliance Statement . . . . . . . . . . . . . . . . . . 36
Indenture Trustee's Annual Report . . . . . . . . . . . . . . . 36
Satisfaction and Discharge of Indenture . . . . . . . . . . . . 37
Redemption of Notes . . . . . . . . . . . . . . . . . . . . . . 37
Reports by Indenture Trustees to Note Owners . . . . . . . . . 37
Limitations on Suits . . . . . . . . . . . . . . . . . . . . . 37
The Sale and Servicing Agreement . . . . . . . . . . . . . . . 37
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . 38
THE DEPOSITOR . . . . . . . . . . . . . . . . . . . . . . . . . . 38
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS . . . . . . . . . . 38
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Foreclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Enforceability of Certain Provisions . . . . . . . . . . . . . 43
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 . . . . . . . . . 68
Taxation of Certain Foreign Investors . . . . . . . . . . . . . 69
Debt Certificates . . . . . . . . . . . . . . . . . . . . . . . 69
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Taxation of Securities 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
</TABLE>
<PAGE> 4
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: $307,785,257 Adjustable Rate Home Equity Loan
Asset Backed Notes, Series 1997-8 (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 1997-8 (the
"Issuer" or the "Trust"), a Delaware business
trust established by the Depositor pursuant to
an owner trust agreement, dated as of December
1, 1997 (the "Trust Agreement"), between the
Depositor and the Owner Trustee. 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: IMC Mortgage Company (the "Seller" and the
"Servicer"), a Florida corporation. The
Seller's and Servicer's principal executive
offices are located at 5901 East Fowler
Avenue, Tampa, Florida 33617-2362.
INDENTURE TRUSTEE: The Chase Manhattan Bank, a New York banking
corporation, as Indenture Trustee (the
"Indenture Trustee"). The Indenture Trustee
shall receive a fee (the "Indenture Trustee
Fee") equal to 0.005% per annum, payable
monthly at one-twelfth the annual rate of the
aggregate outstanding Loan Balance of the Home
Equity Loans.
OWNER TRUSTEE: Wilmington Trust Company, a Delaware banking
corporation, as owner trustee under the Trust
Agreement (the "Owner Trustee"). The Owner
Trustee shall receive a fee (the "Owner
Trustee Fee") as provided under the Trust
Agreement.
CUT-OFF DATE: As of the close of business on December 1,
1997 (the "Cut-Off Date").
CLOSING DATE: On or about December 30, 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 December 1,
1997 (the "Indenture"), entered into between
the Issuer and the Indenture Trustee. The
assets included in the trust estate created by
the Indenture (the "Trust Estate") will be the
sole source of payments on the Notes. The
Notes will be issued in a single class.
The assets of the Trust Estate will consist of
(i) a pool (the "Pool") of adjustable rate
home equity loans (the "Home Equity Loans")
secured by first lien mortgages or deeds of
trust on one-to-four family residential
properties, including units in condominiums,
planned unit developments, townhouses and
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 and
interest on the Home Equity Loans (other than
any principal or interest payments due thereon
on or prior to the Cut-Off Date whether or not
received); (iii) security interests in
S-1
<PAGE> 5
the Properties; (iv) the Issuer's rights under
the Sale and Servicing Agreement; (v) the Note
Insurance Policy and (vi) certain other
property.
OTHER SECURITIES: In addition to the Notes, the Trust will issue
a class of security (the "Residual Interest")
which will represent the residual interest in
the Trust. The Notes and the Residual
Interest 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 $25,000 and multiples of $1,000 in excess
thereof.
THE HOME EQUITY LOANS: The Home Equity Loans to be included in the
Trust Estate on the Closing Date consist of
adjustable rate conventional home equity loans
and the Mortgage Notes relating thereto.
The Home Equity Loans are secured by first
lien mortgages or deeds of trust primarily on
one-to-four family residential properties
located in 49 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
Home Equity Loan exceeded 90.00% as of the
Cut-Off Date except for 79 loans with an
aggregate Loan Balance of $7,919,902 (or 2.57%
of the Original Aggregate Loan Balance),
which had a Loan-to-Value Ratio not greater
than 100%. None of the Home Equity Loans are
insured by pool mortgage insurance policies
and no significant portion of the Home Equity
Loans are insured by primary mortgage
insurance policies; however, certain
distributions due to the owners of the Notes
(the "Owners") are insured by the Note Insurer
pursuant to the Note Insurance Policy. The
Home Equity Loans are not guaranteed by the
Issuer, the Depositor, the Seller, the
Servicer, the Note Insurer, the Owner Trustee,
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 Fannie Mae for Fannie Mae
mortgage-backed securities and in accordance
with the terms of that Sale and Servicing
Agreement dated as of December 1, 1997 (the
"Sale and Servicing Agreement") to be entered
into among the Issuer, the Depositor, the
Seller, the Servicer and the Indenture
Trustee.
As of the Cut-Off Date, the average Loan
Balance of the Home Equity Loans was $101,646.
The minimum and maximum Loan Balances of the
Home Equity Loans as of the Cut-Off Date were
$11,331 and $586,977, respectively. The
weighted average interest rate (the "Coupon
Rate") of the Home Equity Loans was 10.04%;
the weighted average maximum Coupon Rate of
the Home Equity Loans was 16.59%; the maximum
Coupon Rates of the Home Equity Loans ranged
from 9.00% to 32.50%; the weighted average
minimum Coupon Rate of the Home Equity Loans
was 9.86%; the minimum Coupon Rates of the
Home Equity Loans ranged from 5.50% to 16.75%;
the weighted average Loan-to-Value Ratio of
the Home Equity Loans was 77.50%; the weighted
average remaining term to maturity of the Home
Equity Loans was 356 months; and the remaining
terms to maturity of the Home Equity Loans
ranged from 118 months to 360 months. The
weighted average gross margin of the Home
Equity Loans was 6.92%; the minimum gross
margin of the Home Equity Loans was 2.50% and
the maximum gross margin of the Home Equity
Loans was 14.29%. All of the Home Equity
Loans were secured by first mortgages. Home
Equity Loans containing "balloon" payments
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represented not more than 0.32% of the Home
Equity Loans. No Home Equity Loan will mature
later than December 2, 2027. No Home Equity
Loan provides for negative amortization. See
"The Home Equity Loan Pool" herein.
FINAL PAYMENT DATE: The Final Payment Date for the Notes is
December 20, 2028 although it is anticipated
that the actual final Payment Date for the
Notes will occur significantly earlier than
the Final Payment Date. See "Prepayment and
Yield Considerations" herein.
PAYMENTS--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 January
20, 1998 (each such day being a "Payment
Date"), the Indenture Trustee will be
required, subject to the availability of
amounts therefor, pursuant to the cash flow
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, the city in which the corporate trust
office of the Indenture Trustee is located or
the city in which the Note Insurer 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.
"Current Interest" means, with respect to any
Payment Date the sum of (i) the aggregate
amount of interest accrued from and including
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 (the "Accrual Period") at
the Note Rate on the outstanding principal
balance of the Notes (the "Note Principal
Balance"), (ii) any Interest Carry Forward
Amount and (iii) 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 Sale and
Servicing Agreement). All calculations of
interest on the Notes will be made on the
basis of the actual number of days elapsed in
the related Accrual Period and a year of 360
days.
The "Interest Carry Forward Amount" for any
Payment Date is the sum of (x) the amount, if
any, by which (i) the Current Interest as of
the immediately preceding Payment Date
exceeded (ii) the amount of the actual
payments of 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 0.22% per annum and for any Payment
Date thereafter, One-Month LIBOR plus 0.44%
per annum, and (y) the weighted average of the
Coupon Rates on the Home Equity Loans, less
0.645% per annum (the rate described in this
clause (y), the "Available Funds Cap").
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If, on any Payment Date, the Available Funds
Cap limits the Note Rate (i.e., the rate set
by the Available Funds Cap is less than the
Formula Note Rate), the amount of any such
shortfall will be carried forward and be due
and payable on future Payment Dates and shall
accrue interest at the Formula Note Rate,
until paid (such shortfall, together with such
accrued interest, the "Available Funds Cap
Carry Forward Amount"). The Note Insurance
Policy does not cover the Available Funds Cap
Carry Forward Amount; the payment of such
amount may be funded only from (i) any excess
interest resulting from the Available Funds
Cap being in excess of the Formula Note Rate
on future Payment Dates, as distributed in the
priorities specified herein and (ii) any Net
Monthly Excess Cashflow which would otherwise
be paid to the Servicer or the Indenture
Trustee on account of certain reimbursable
amounts described in the Sale and Servicing
Agreement, or to the Owners of the Residual
Interests.
The "Formula Note Rate" for any Payment Date
is the rate determined by clause (x) of the
definition of "Note Rate" on such Payment
Date.
The "Redemption Date" is the first Monthly
Remittance Date on which the aggregate Loan
Balance of the Home Equity Loans has declined
to less than 10% of the aggregate Loan Balance
of the Home Equity Loans as of the Cut-Off
Date (the "Original Aggregate Loan Balance").
PRINCIPAL: On each Payment Date, payments in reduction of
the Note Principal Balance will be made in the
amounts described herein. The "Principal
Distribution Amount" for each Payment Date
shall be the lesser of:
(a) the Total Available Funds (as defined
herein) plus any Insured Payment minus the
Current Interest and the Trust Fees and
Expenses for such Payment Date; and
(b) the excess, if any, of
(i) the sum of:
(A) the Preference Amount with
respect to principal owed to each Owner
of a Note that remains unpaid as of
such Payment Date;
(B) the principal portion of all
scheduled monthly payments on the Home
Equity Loans due on or prior to the
related Due Date thereof, to the extent
actually received by the Servicer
during the related Remittance Period
and any Prepayments made by the
Mortgagors and actually received by
the Servicer during the related
Remittance Period;
(C) the balance of each Home Equity
Loan (the "Loan Balance") 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 Servicer
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
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<PAGE> 8
unpaid interest) delivered by the
Seller on the related Monthly
Remittance Date in connection with a
substitution of a Home Equity Loan (to
the extent such Substitution Amounts
relate to principal), to the extent
such Substitution Amounts are actually
received by the Servicer on the
related Remittance Date;
(E) all Net Liquidation Proceeds
actually collected by the Servicer with
respect to the Home Equity Loans during
the related Remittance Period (to the
extent such Net Liquidation Proceeds
relate to principal);
(F) the amount of any
Overcollateralization Deficit for such
Payment Date;
(G) the principal portion of the
proceeds received by the Indenture
Trustee upon termination of the Trust
Estate (to the extent such proceeds
relate to principal); and
(H) the amount of any
Overcollateralization Increase Amount
for such Payment Date to the extent of
any Net Monthly Excess Cashflow
available for such purpose;
over
(ii) the amount of any Overcollateralization
Reduction Amount for such Payment Date.
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 January 1998.
The "Preference Amount" is any amount (other
than amounts in respect of the Available Funds
Cap Carry Forward Amount) previously
distributed to an Owner on a Note 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), as
amended from time to time, in accordance with
a final nonappealable order of a court having
competent jurisdiction.
The "Premium Amount" is the amount payable to
the Note Insurer as premium for the Note
Insurance Policy.
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 excess interest created by the internal
cash flows of the Pool and (y) the Note
Insurance Policy.
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Overcollateralization. The required
application of the cash flow from the Pool
results 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 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 overcollateralization 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 Sale and Servicing Agreement provides
that, subject to certain floors, caps and
triggers, the required level of
overcollateralization may increase or decrease
over time. An increase would result in 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 to 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 Note Insurance Policy. MBIA
Insurance Corporation, a New York stock
insurance company (the "Note Insurer"), will
issue a financial guaranty Note Insurance
Policy (the "Note Insurance Policy") with
respect to the Notes.
Pursuant to the provisions of the Note
Insurance Policy, the Note Insurer will
irrevocably and unconditionally guarantee
certain payments 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 Indenture Trustee for
the benefit of the Owners of the Notes under
the Note 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 Overcollateralization Deficit and (c)
the Preference Amount (without duplication)
over (ii) the Total Available Funds (after any
deduction for the Trust Fees and 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 Insured Payment to be made with
respect to such Payment Date). The Note
Insurance Policy does not insure the payment
of Available Funds Cap Carry Forward Amounts.
Insured Payments do not cover Realized Losses
except to the extent that an
Overcollateralization Deficit exists. Insured
Payments do not cover the Servicer's failure
to make Delinquency Advances pursuant to the
Sale and Servicing Agreement, except to the
extent that an Overcollateralization Deficit
would otherwise result therefrom.
Nevertheless, the effect of the Note Insurance
Policy is to guaranty the timely payment of
interest on, and the ultimate payment of the
principal amount of, the Notes.
The Note 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
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<PAGE> 10
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 Note 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 Indenture Trustee, as
attorney-in-fact for the Owner thereof, will
be 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 Sale and
Servicing Agreement as the existence and
continuance of (x) the failure by the Note
Insurer to make a required payment under the
Note Insurance Policy or (y) the bankruptcy or
insolvency of the Note Insurer.
The "Trust Fees and Expenses" are the Premium
Amount, the Owner Trustee Fee, the Indenture
Trustee Fee and any Trustee Reimbursable
Expenses (as defined herein).
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") will hold their interests through The
Depository Trust Company ("DTC"), in the
United States, or Cedel Bank, S.A. ("Cedel")
or the Euroclear System ("Euroclear"), in
Europe. Transfers within DTC, Cedel or
Euroclear, as the case may be, will be in
accordance with the usual rules and operating
procedures of the relevant system. 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"), as the nominee of DTC or one of
the European Depositaries. Cross-market
transfers between persons holding directly or
indirectly through DTC, on the one hand, and
counterparties holding directly or indirectly
through Cedel or Euroclear, on the other, will
be effected in DTC through Citibank, N.A.
("Citibank") or The Chase Manhattan Bank
("Chase" and together with Citibank, the
"European Depositaries"), the relevant
depositaries of Cedel and Euroclear,
respectively, and each a participating member
of DTC or one of the European Depositaries.
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 note
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 Securities --
Book-Entry Registration" in the Prospectus.
OPTIONAL REDEMPTION --
CLEAN-UP CALL: The holders of Residual Interests exceeding in
the aggregate a 50% percentage interest (the
"Majority Residualholders") may, at their
option, effect an early redemption of the
Notes and terminate the Trust on any Payment
Date after the Redemption Date by purchasing
all of the Home Equity Loans at a price equal
to or greater than the Redemption Price (as
defined in the Sale and Servicing Agreement).
In addition, the Note Insurer will have
rights, under the limited circumstances
described in the Sale and Servicing Agreement,
to acquire all of the
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<PAGE> 11
Home Equity Loans from the Issuer and thereby
effect a redemption of the Notes. See
"Administration--Redemption of the 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
Standard & Poor's Rating Services, a division
of the McGraw-Hill Companies ("Standard &
Poor's"). Moody's and Standard & Poor's are
referred to herein collectively as the "Rating
Agencies". The ratings issued by the Rating
Agencies on the payment of principal and
interest on the Notes do not cover the payment
of any Available Funds Cap Carry Forward
Amounts. 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: 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 and the Issuer will not be
characterized as an association (or a publicly
traded partnership or taxable mortgage pool)
taxable as a corporation. An Owner of Notes,
by its acceptance of a Note, will agree to
treat the Notes as indebtedness. An Owner
will not be required to report income with
respect to the Notes under an accrual method
unless the Owner otherwise uses the accrual
method or purchases a Note which has original
issue discount.
The Notes will not represent interests 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 or "[l]oans . . .
principally secured by an interest in real
property" within the meaning of Section
7701(a)(19)(C)(v) of the Code.
Investors are advised to consult their tax
advisors and to review "Federal Income Tax
Consequences" herein and in the Prospectus.
ERISA CONSIDERATIONS: Subject to the considerations discussed under
"ERISA Considerations" herein and in the
Prospectus, the Notes may be purchased by
employee benefit plans that are subject to
ERISA. See "ERISA Considerations" herein and
in the Prospectus.
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
qualifying first lien home equity loans may
not be legally authorized to invest in the
Notes.
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<PAGE> 12
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 Home Equity Loans may be prepaid by the
related Mortgagors in whole or in part, at any time. However, approximately
55.80% of the Home Equity Loans (by Loan Balance) require the payment of a fee
in connection with certain prepayments. 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 Mortgage Assets -- Enforceability of Certain Provisions" in the Prospectus.
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.
All of the Home Equity Loans are adjustable rate home equity loans. As is
the case with fixed rate home equity loans, adjustable rate home equity loans
may be subject to a greater rate of principal prepayments in a low interest
rate environment. For example, if prevailing interest rates were to fall,
Mortgagors with adjustable rate home equity loans may be inclined to refinance
such home equity loans with a fixed rate loan to "lock in" a lower interest
rate. The existence of the applicable periodic rate cap, maximum Coupon Rate
and minimum Coupon Rate also may affect the likelihood of prepayments resulting
from refinancings. In addition, the delinquency and loss experience on
adjustable rate home equity loans may differ from that on fixed rate home
equity loans because the amount of the monthly payments on adjustable rate home
equity loans are subject to adjustment on each payment change date.
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 (the "Prepayments")) on the Home Equity Loans. In
general, the yield on the Notes 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.
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 (One-Month
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. 98.57% of the Home Equity Loans by aggregate Loan Balance
as of the Cut-Off Date adjust based upon the London interbank offered rate for
six-month United States dollar deposits ("Six-Month LIBOR"). A substantial
majority of the Six-Month LIBOR Loans first adjust two or three years from the
date of origination, with the remainder of the Six-Month LIBOR Loans having
their first adjustment six months after origination. 1.43% of the Home Equity
Loans by aggregate Loan Balance as of the Cut-Off Date are CMT Loans that
adjust based on the CMT Index (the "CMT Loans"). Although a substantial
majority of CMT Loans first adjust one year after origination, a number of the
CMT Loans do not first adjust until two or 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 Servicing Fee and the Trust
Fees and Expenses) during any Remittance Period may not equal the amount of
interest that would accrue at One-Month LIBOR plus the margin on the Notes
during the related Accrual Period. In particular, the Note Rate adjusts
monthly, while the interest rates of the Home Equity Loans adjust less
frequently with the result that the Available Funds Cap may limit increases in
the Note 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
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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 may be
temporarily or permanently reduced.
Although Owners of the Notes will be entitled to receive any Available Funds
Cap Carry Forward Amount from and to the extent of funds available therefor as
described herein, there is no assurance that such funds will be available. The
failure to pay any Available Funds Cap Carry Forward Amount due to a lack of
funds therefor will not constitute an Event of Default under the Indenture. In
addition, the Note Insurance Policy does not cover, and the ratings of the
Notes do not address the likelihood of the payment of any Available Funds Cap
Carry Forward Amount.
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 Servicer 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 The Mortgage Assets" 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 Servicer 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 Mortgage Assets" 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 Sale and Servicing Agreement that each Home Equity
Loan was originated in compliance with all applicable laws including the
Truth-in-Lending Act, as amended.
S-10
<PAGE> 14
RISK ASSOCIATED WITH THE NOTE INSURER. If the protection afforded by
overcollateralization is insufficient and if, upon the occurrence of an
Overcollateralization Deficit, the Note Insurer is unable to meet its
obligations under the Note Insurance Policy, then the Owners of the Notes could
experience a loss of their investment.
THE SELLER AND SERVICER
GENERAL
The Seller and Servicer, IMC Mortgage Company, is a Florida corporation.
IMC Mortgage Company completed an initial public offering of certain shares of
its common stock on June 25, 1996 and a secondary offering of certain shares of
its common stock in April 1997. 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 and certain other subsidiaries of the Seller are engaged in
originating, purchasing and servicing home equity loans secured by first and
second mortgages and deeds of trust on Properties located in 50 states and the
District of Columbia.
In September 1997, IMC Mortgage Company began servicing loans previously
serviced by Industry Mortgage Company, L.P., a Delaware limited partnership,
which is a subsidiary of IMC Mortgage Company and an affiliate of the
Depositor. Consequently, information on loans serviced prior to September 1997
was generated by Industry Mortgage Company, L.P. and not by IMC Mortgage
Company. The transfer of servicing to IMC Mortgage Company is part of an
ongoing effort to consolidate mortgage banking functions of the Seller and
Servicer. Since both IMC Mortgage Company and Industry Mortgage Company, L.P.
have the same management and staff, such transfer will not result in any
changes to the management and staff previously servicing the loans for Industry
Mortgage Company, L.P. In addition, there will not be any changes made to any
of the servicing procedures previously utilized by Industry Mortgage Company,
L.P.
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, without
recourse, but subject to the terms of the Sale and Servicing Agreement, in
consideration of the net proceeds from the sale of the Notes, which are being
offered hereby. The Seller, in its capacity as Servicer, will also service
each Home Equity Loan pursuant to the Sale and Servicing Agreement.
The Servicer may not assign its obligations under the Sale and Servicing
Agreement, in whole or in part, unless it shall have first obtained consent
from the Note Insurer and 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 Sale and Servicing Agreement.
The Servicer may, with the prior written consent of the Note Insurer, 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
"Administration--Servicing and Sub-Servicing" herein.
The Note Insurer or the Indenture Trustee (with the prior written consent of
the Note Insurer) (or, in certain circumstances the Owners, with the consent of
the Note Insurer), may remove the Servicer, and the Servicer may resign, only
in accordance with the terms of the Sale and Servicing Agreement. 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 or the successor servicer.
Upon removal or resignation of the Servicer, the Indenture Trustee (x) may
solicit bids for a successor servicer as described in the Sale and Servicing
Agreement and (y) until such time as a successor servicer is appointed pursuant
to the terms of the Sale and Servicing Agreement, 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 Note
Insurer and Majority
S-11
<PAGE> 15
Residualholders. 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 Fannie Mae 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 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 the Federal National Mortgage Association ("Fannie
Mae") 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 or adjustable 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 90%. 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.
S-12
<PAGE> 16
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 Fannie Mae/FHLMC forms and conform to current Fannie
Mae/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
In September 1997, the Servicer began servicing loans previously serviced by
its subsidiary, Industry Mortgage Company, L.P. IMC Mortgage Company and
Industry Mortgage Company, L.P. have the same management and staff and
therefore the transfer of servicing will not result in any changes to the
management and staff previously servicing the loans for Industry Mortgage
Company, L.P. 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 and reflect information generated by IMC Mortgage
Company. However, because the total amount of loans originated or purchased by
IMC Mortgage Company and its subsidiaries has increased substantially 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 Industry Mortgage Company, L.P.'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. As a result, 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-13
<PAGE> 17
DELINQUENCY AND DEFAULT EXPERIENCE OF THE SERVICER'S SERVICING
PORTFOLIO OF HOME EQUITY LOANS
<TABLE>
<CAPTION>
NINE MONTHS
ENDING SEPTEMBER 30, YEAR ENDING DECEMBER 31,
---------------------- -----------------------------------------------------------------------------
1997 1996 1995 1994
---- ---- ---- ----
NUMBER DOLLAR NUMBER DOLLAR NUMBER DOLLAR NUMBER OF DOLLAR
OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT LOANS AMOUNT
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio At 82,765 $5,643,274,430 35,390 $2,148,068,446 9,376 $535,797,748 1,635 $92,003,157
Delinquency
Percentage (1)
- --------------
30 - 59 days 3.086% 2.729% 3.390% 3.093% 2.613% 2.570% 1.040% 0.831%
60 - 89 days 1.178% 1.095% 1.077% 1.068% 0.672% 0.642% 0.183% 0.152%
90 + days 3.012% 3.049% 2.427% 2.616% 1.237% 1.223% 0.000% 0.000%
------ ------ ------ ------ ------ ------ ------ ------
Total 7.276% 6.873% 6.894% 6.777% 4.522% 4.435% 1.223% 0.983%
====== ====== ====== ====== ====== ====== ====== ======
Delinquency
Default
Percentage (2)
- --------------
Foreclosure 1.294% 1.466% 0.863% 1.003% 0.779% 0.749% 0.000% 0.000%
Bankruptcy(3) 1.206% 1.117% 1.064% 1.069% 0.576% 0.630% 0.122% 0.115%
Real Estate 0.365% 0.351% 0.276% 0.313% 0.117% 0.160% 0.000% 0.000%
------ ------ ------ ------ ------ ------ ------ ------
Owned
Total Default 2.865% 2.934% 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>
NINE MONTHS
ENDING
SEPTEMBER 30, YEAR ENDING DECEMBER 31,
--------------- ----------------------------------------
1997 1996 1995 1994
---- ---- ---- ----
<S> <C> <C>
Average Amount Outstanding(1) $3,585,251,629 $1,207,171,960 $294,251,859 $52,709,250
Gross Losses(2) $4,293,707 $1,581,695 $278,632 $0
Recoveries(3) $0 $1,727 $0 $0
Net Losses(4) $4,293,707 $1,579,968 $278,632 $0
Net Losses as a Percentage of
Average Amount 0.160% 0.131% 0.095% 0.000%
Outstanding(5)
</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."
(5) For the nine months ending September 30, 1997, "Net Losses as a
Percentage of Average Amount Outstanding" was annualized by multiplying
"Net Losses" by 1.33 before calculating the percentage of "Average
Amount Outstanding."
S-14
<PAGE> 18
THE ISSUER
The Issuer is a Delaware business trust established by the Depositor
pursuant to the Trust Agreement under the laws of the State of Delaware.
After its formation, the Issuer will not engage in any activity other than (i)
acquiring, holding and managing the Home Equity Loans and the other assets of
the Trust Estate and the proceeds therefrom, (ii) issuing the Notes and the
Residual Interest, (iii) making payments on the Notes and the Residual Interest
and (iv) engaging in other activities that are necessary, suitable or
convenient to accomplish the foregoing or are incidental thereto or in
connection therewith. The Residual Interest represents the residual interest
in the assets of the Trust Estate. The Notes and the Residual Interests will
be delivered by the Issuer to the Depositor as consideration for the Home
Equity Loans pursuant to the Sale and Servicing Agreement. 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 is a subsidiary of the Seller and the Servicer. 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
The Seller will sell the Home Equity Loans to the Depositor and the
Depositor will sell the Home Equity Loans to the Issuer concurrently with
delivery of the Notes. Net proceeds from the sale of the Notes will be applied
by the Issuer to purchase the Home Equity Loans from the Depositor which will
use the proceeds (i) to the purchase of the Home Equity Loans from the Seller
and (ii) to pay off extensions of credit provided by, among others, certain of
the Underwriters with respect to certain 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 Home Equity
Loans as of the Cut-Off Date.
This subsection describes generally certain characteristics of the Home
Equity Loans. Unless otherwise noted, all statistical percentages in this
Prospectus Supplement are measured by the aggregate principal balance of the
Home Equity Loans as of the Cut-Off Date. The columns entitled "% of Aggregate
Loan Balance" in the following tables may not sum to 100% due to rounding.
The Home Equity Loans to be included in the Trust Estate on the Closing
Date will consist of 3,028 adjustable rate conventional home equity loans
evidenced by Mortgage Notes secured by first lien deeds of trust, security
deeds or mortgages, which are located in 49 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 include
second and vacation homes). All of the Home Equity Loans have a first payment
date on or after October 1, 1996. All of the Home Equity Loans are secured by
first 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 Fannie Mae 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-15
<PAGE> 19
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, 98.57% of the Home Equity Loans are Six-Month LIBOR
Loans and 1.43% of the Home Equity Loans are CMT Loans. The Coupon Rates with
respect to all of the Home Equity Loans are subject to periodic and lifetime
rate adjustment caps.
As of the Cut-Off Date, the average Loan Balance of the Home Equity Loans
was $101,646. The minimum and maximum Loan Balances of the Home Equity Loans
as of the Cut-Off Date were $11,331 and $586,977, respectively. The weighted
average Coupon Rate of the Home Equity Loans was 10.04%; the Coupon Rate of the
Home Equity Loans ranged from 7.10% to 16.55%; the weighted average maximum
Coupon Rate of the Home Equity Loans was 16.59%; the maximum Coupon Rates of
the Home Equity Loans ranged from 9.00% to 32.50%; the weighted average minimum
Coupon Rate of the Home Equity Loans was 9.86%; the minimum Coupon Rates of the
Home Equity Loans ranged from 5.50% to 16.75%; the weighted average
Loan-to-Value Ratio of the Home Equity Loans was 77.50%; the weighted average
remaining term to maturity of the Home Equity Loans was 356 months; and the
remaining terms to maturity of the Home Equity Loans ranged from 118 months to
360 months. The weighted average gross margin of the Home Equity Loans was
6.92%; the minimum gross margin of the Home Equity Loans was 2.50% and the
maximum gross margin of the Home Equity Loans was 14.29%. Home Equity Loans
containing "balloon" payments represented not more than 0.32% of the aggregate
Loan Balance of the Home Equity Loans. No Home Equity Loan will mature later
than December 2, 2027.
Six-Month LIBOR Loans. The Six-Month LIBOR Loans consist of 2,995
loans aggregating $303,379,734, all of which have semi-annual interest rate and
semi-annual payment adjustment frequencies. A substantial portion of the
Six-Month LIBOR Loans first adjust two or three years from the date of
origination, with the remainder of the Six-Month LIBOR Loans having their first
adjustment six months after origination. The Six-Month LIBOR Loans have a
weighted average margin of 6.93%. The margin for the Six-Month LIBOR Loans
ranges from 2.50% to 14.29%. The Six-Month LIBOR Loans have a weighted average
initial periodic semi-annual rate adjustment cap of 2.78%. The weighted
average initial Coupon Rate is 10.04%, with initial Coupon Rates that range
from 7.10% to 16.55%. The Six-Month LIBOR Loans have a weighted average
maximum Coupon Rate of 16.60% with maximum Coupon Rates that range from 9.00%
to 32.50%. The weighted average number of months to the next rate adjustment
date on the Six-Month LIBOR Loans is 18 months.
CMT Loans. The CMT Loans consist of 33 loans aggregating $4,405,522, all
of 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. While a number of the CMT Loans first
adjust one year after origination, a substantial portion of the CMT Loans first
adjust two or three years from the date of origination. The CMT Loans have a
weighted average margin of 6.50%. The margin for the CMT Loans ranges from
5.25% to 8.00%. The CMT Loans have a weighted average initial periodic annual
rate adjustment of 2.09%. The weighted average initial Coupon Rate is 9.73%,
with initial Coupon Rates that range from 7.88% to 11.63%. The CMT Loans have
a weighted average maximum Coupon Rate of 15.69%, with maximum Coupon Rates
that range from 13.88% to 17.63%. The weighted average number of months to the
next rate adjustment date on the CMT Loans is 6 months.
S-16
<PAGE> 20
GEOGRAPHIC DISTRIBUTION OF PROPERTIES
The geographic distribution of the Home Equity Loans 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>
Alabama 1 $ 76,692 0.02%
Alaska 1 215,445 0.07
Arizona 73 9,120,651 2.96
Arkansas 3 116,978 0.04
California 281 43,463,219 14.12
Colorado 63 6,877,394 2.23
Connecticut 41 4,238,354 1.38
Delaware 11 1,060,413 0.34
District of Columbia 5 490,222 0.16
Florida 150 12,748,005 4.14
Georgia 86 9,415,315 3.06
Hawaii 24 4,007,096 1.30
Idaho 20 1,552,926 0.50
Illinois 224 23,357,364 7.59
Indiana 100 6,323,065 2.05
Iowa 6 387,798 0.13
Kansas 3 443,692 0.14
Kentucky 21 2,078,220 0.68
Louisiana 8 699,973 0.23
Maine 2 95,534 0.03
Maryland 102 12,108,440 3.93
Massachusetts 91 9,321,363 3.03
Michigan 228 16,356,059 5.31
Minnesota 36 3,403,304 1.11
Mississippi 8 452,076 0.15
Missouri 64 4,438,459 1.44
Montana 7 567,045 0.18
Nebraska 4 224,740 0.07
Nevada 22 2,309,590 0.75
New Hampshire 10 1,049,346 0.34
New Jersey 121 15,979,240 5.19
New Mexico 64 6,125,651 1.99
New York 185 21,266,467 6.91
North Carolina 89 7,732,327 2.51
Ohio 246 16,479,568 5.35
Oklahoma 14 1,366,194 0.44
Oregon 99 10,801,402 3.51
Pennsylvania 97 7,357,424 2.39
Rhode Island 25 2,852,256 0.93
South Carolina 24 1,647,664 0.54
South Dakota 2 185,490 0.06
Tennessee 7 894,015 0.29
Texas 101 10,385,034 3.37
Utah 68 8,101,304 2.63
Vermont 3 528,842 0.17
Virginia 34 4,138,596 1.34
Washington 83 10,392,175 3.38
West Virginia 5 259,556 0.08
Wisconsin 63 4,059,473 1.32
Wyoming 3 233,802 0.08
----- ------------ ------
Total 3,028 $307,785,257 100.00%
===== ============ ======
</TABLE>
S-17
<PAGE> 21
LOAN-TO-VALUE RATIOS
The original loan-to-value ratios as of the origination dates of the Home
Equity Loans (based upon either appraisals made at the time of origination or
the sales price 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 LTV'S HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
-------------- ----------------- ------------ ------------
<S> <C> <C> <C>
15.01 to 20.00% 2 $ 148,451 0.05%
20.01 to 25.00 3 207,831 0.07
25.01 to 30.00 6 296,643 0.10
30.01 to 35.00 13 589,468 0.19
35.01 to 40.00 18 1,068,844 0.35
40.01 to 45.00 21 1,551,516 0.50
45.01 to 50.00 30 2,586,307 0.84
50.01 to 55.00 44 3,312,103 1.08
55.01 to 60.00 92 8,104,557 2.63
60.01 to 65.00 216 17,255,130 5.61
65.01 to 70.00 387 34,932,718 11.35
70.01 to 75.00 488 52,600,803 17.09
75.01 to 80.00 870 91,592,021 29.76
80.01 to 85.00 444 48,794,968 15.85
85.01 to 90.00 315 36,823,993 11.96
90.01 to 95.00 9 1,086,601 0.35
95.01 to 100.00 70 6,833,301 2.22
----- ------------ ------
Total 3,028 $307,785,257 100.00%
===== ============ ======
</TABLE>
CUT-OFF DATE COUPON RATES
The Coupon Rates borne by the Notes relating to the Home Equity Loans as of
the Cut-Off Date were distributed as follows:
<TABLE>
<CAPTION>
RANGE OF NUMBER OF AGGREGATE % OF AGGREGATE
COUPON RATES HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
------------ ----------------- ------------ ------------
<S> <C> <C> <C>
7.001 to 8.000% 124 $ 17,676,547 5.74%
8.001 to 9.000 447 56,654,666 18.41
9.001 to 10.000 906 95,473,833 31.02
10.001 to 11.000 841 79,063,954 25.69
11.001 to 12.000 427 36,972,360 12.01
12.001 to 13.000 201 16,947,843 5.51
13.001 to 14.000 57 3,850,321 1.25
14.001 to 15.000 22 1,044,964 0.34
15.001 to 16.000 1 31,196 0.01
16.001 to 17.000 2 69,573 0.02
------ ------------ ------
Total 3,028 $307,785,257 100.00%
===== ============ ======
</TABLE>
S-18
<PAGE> 22
CUT-OFF DATE LOAN BALANCES
The distribution of the outstanding principal amounts of the Home Equity
Loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
CUT-OFF DATE NUMBER OF AGGREGATE % OF AGGREGATE
LOAN BALANCES HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
------------- ----------------- ------------ ------------
<S> <C> <C> <C>
Up to $ 25,000.00 75 $ 1,555,637 0.51%
25,000.01 to 50,000.00 504 19,581,127 6.36
50,000.01 to 75,000.00 768 48,033,585 15.61
75,000.01 to 100,000.00 533 46,464,395 15.10
100,000.01 to 125,000.00 388 43,633,006 14.18
125,000.01 to 150,000.00 252 34,404,460 11.18
150,000.01 to 175,000.00 158 25,428,377 8.26
175,000.01 to 200,000.00 106 19,875,080 6.46
200,000.01 to 250,000.00 119 26,427,239 8.59
250,000.01 to 300,000.00 47 12,851,463 4.18
300,000.01 to 350,000.00 39 12,743,194 4.14
350,000.01 to 400,000.00 19 7,071,905 2.30
400,000.01 to 450,000.00 3 1,287,722 0.42
450,000.01 to 500,000.00 14 6,731,630 2.19
500,000.01 to 550,000.00 1 549,356 0.18
Over $ 550,000.00 2 1,147,080 0.37
----- ------------ ------
Total 3,028 $307,785,257 100.00%
===== ============ ======
</TABLE>
TYPES OF MORTGAGED PROPERTIES
The Properties securing the Home Equity Loans 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 2,813 $289,224,098 93.97%
Two- to Four-Family 95 8,418,283 2.74
Condominium 67 4,992,469 1.62
Multi-Family 23 2,562,543 0.83
Townhouse 18 1,565,274 0.51
Manufactured Housing 7 462,495 0.15
Planned Unit Development 5 560,094 0.18
----- ------------ ------
Total 3,028 $307,785,257 100.00%
===== ============ ======
</TABLE>
S-19
<PAGE> 23
DISTRIBUTION OF MONTHS SINCE ORIGINATION
The distribution of the number of months since the date of origination of
the Home Equity Loans 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>
0 to 1 876 $ 82,693,526 26.87%
2 to 12 2,148 224,873,125 73.06
13 to 24 4 218,605 0.07
----- ------------ ------
Total 3,028 $307,785,257 100.00%
===== ============ ======
</TABLE>
DISTRIBUTION OF REMAINING TERM TO MATURITY
The distribution of the number of months remaining to maturity of the Home
Equity Loans 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>
Up to 120 1 $ 108,361 0.04%
121 to 180 30 2,087,914 0.68
181 to 240 4 296,931 0.10
301 to 360 2,993 305,292,050 99.19
----- ------------- -------
Total 3,028 $307,785,257 100.00%
===== ============ ======
</TABLE>
OCCUPANCY STATUS
The occupancy status of the Properties securing the Home Equity Loans at
origination (based on representations by the borrowers) 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 2,763 $ 287,690,825 93.47%
Investor Owned 238 17,151,430 5.57
Vacation/Second Home 27 2,943,001 0.96
------ --------------- -------
Total 3,028 $307,785,257 100.00%
===== ============ ======
</TABLE>
S-20
<PAGE> 24
DISTRIBUTION OF MAXIMUM COUPON RATES
The maximum Coupon Rates borne by the Mortgage Notes relating to the Home
Equity Loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
RANGE OF MAXIMUM NUMBER OF AGGREGATE % OF AGGREGATE
COUPON RATES HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
------------ ----------------- ------------ ------------
<S> <C> <C> <C>
8.001 to 9.000% 1 $ 47,165 0.02%
9.001 to 10.000 1 100,728 0.03
10.001 to 11.000 3 250,758 0.08
11.001 to 12.000 3 288,284 0.09
12.001 to 13.000 9 855,885 0.28
13.001 to 14.000 28 4,070,013 1.32
14.001 to 15.000 256 34,979,976 11.37
15.001 to 16.000 696 78,530,700 25.51
16.001 to 17.000 909 91,172,120 29.62
17.001 to 18.000 618 57,695,354 18.75
18.001 to 19.000 304 25,300,714 8.22
19.001 to 20.000 138 10,693,999 3.47
20.001 to 21.000 36 2,367,584 0.77
21.001 to 22.000 11 431,071 0.14
22.001 to 23.000 1 86,847 0.03
23.001 to 24.000 2 69,573 0.02
27.001 to 28.000 3 200,601 0.07
28.001 to 29.000 1 63,788 0.02
29.001 to 30.000 2 235,690 0.08
30.001 to 35.000 6 344,407 0.11
----- ------------ ------
Total 3,028 $307,785,257 100.00%
===== ============ ======
</TABLE>
DISTRIBUTION OF MINIMUM COUPON RATES
The minimum Coupon Rates borne by the Mortgage Notes relating to the Home
Equity Loans as of the Cut-Off Date was as follows
<TABLE>
<CAPTION>
Range of Minimum NUMBER OF AGGREGATE % OF AGGREGATE
Coupon Rates HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
------------ ----------------- ------------ ------------
<S> <C> <C> <C>
5.001 to 6.000% 9 $ 1,113,485 0.36%
6.001 to 7.000 121 14,946,489 4.86
7.001 to 8.000 177 21,983,599 7.14
8.001 to 9.000 421 52,310,800 17.00
9.001 to 10.000 774 80,397,309 26.12
10.001 to 11.000 810 77,203,448 25.08
11.001 to 12.000 419 36,909,844 11.99
12.001 to 13.000 209 17,218,680 5.59
13.001 to 14.000 59 4,213,534 1.37
14.001 to 15.000 25 1,275,088 0.41
15.001 to 16.000 1 31,196 0.01
16.001 to 17.000 3 181,784 0.06
----- ------------ ------
Total 3,028 $307,785,257 100.00%
===== ============ ======
</TABLE>
S-21
<PAGE> 25
DISTRIBUTION OF MARGINS
Six-Month LIBOR Loans. The margins borne by the Mortgage Notes relating to
the Six-Month LIBOR Loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
RANGE OF MARGINS HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
---------------- ----------------- ------------ ------------
<S> <C> <C> <C>
2.001 to 3.000% 1 $ 108,752 0.04%
3.001 to 4.000 10 850,848 0.28
4.001 to 5.000 87 9,700,355 3.15
5.001 to 6.000 646 70,660,827 22.96
6.001 to 7.000 1,192 127,668,894 41.48
7.001 to 8.000 589 51,430,537 16.71
8.001 to 9.000 220 18,353,499 5.96
9.001 to 10.000 85 7,291,248 2.37
10.001 to 11.000 76 8,645,831 2.81
11.001 to 12.000 54 5,670,083 1.84
12.001 to 13.000 27 2,326,641 0.76
13.001 to 14.000 7 613,733 0.20
14.001 to 15.000 1 58,487 0.02
----- ------------ -----
Subtotal 2,995 $303,379,734 98.57%
===== ============ =====
</TABLE>
CMT Loans. The margins borne by the Mortgage Notes relating to the CMT
Loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
RANGE OF MARGINS HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
---------------- ----------------- ------------ ------------
<S> <C> <C> <C>
5.001 to 6.000% 11 $ 1,760,167 0.57%
6.001 to 7.000 10 1,063,494 0.35
7.001 to 8.000 12 1,581,861 0.51
----- --------------- -----
Subtotal 33 $4,405,522 1.43%
== ========== ====
Total 3,028 $307,785,257 100.00%
===== ============ ======
</TABLE>
S-22
<PAGE> 26
DISTRIBUTION OF NEXT COUPON RATE CHANGE
Six-Month LIBOR Loans. The month of the next Coupon Rate change for each
of the Mortgage Notes relating to the Six-Month LIBOR Loans as of the Cut-Off
Date was as follows:
<TABLE>
<CAPTION>
MONTH OF NEXT NUMBER OF AGGREGATE % OF AGGREGATE
COUPON RATE CHANGE HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
------------------ ----------------- ------------ ------------
<S> <C> <C> <C>
December 1997 2 $ 325,309 0.11%
January 1998 96 10,680,014 3.47
February 1998 121 13,993,329 4.55
March 1998 67 6,432,179 2.09
April 1998 173 16,322,965 5.30
May 1998 165 13,149,325 4.27
June 1998 60 8,165,919 2.65
July 1998 7 848,437 0.28
August 1998 3 581,064 0.19
September 1998 2 82,485 0.03
October 1998 4 208,163 0.07
November 1998 1 199,593 0.06
December 1998 1 71,076 0.02
January 1999 3 203,884 0.07
February 1999 2 202,927 0.07
March 1999 2 433,544 0.14
April 1999 14 1,925,056 0.63
May 1999 21 2,535,810 0.82
June 1999 102 11,268,379 3.66
July 1999 185 18,514,579 6.02
August 1999 520 51,322,522 16.67
September 1999 242 24,379,805 7.92
October 1999 511 51,766,811 16.82
November 1999 456 44,988,464 14.62
December 1999 46 4,294,758 1.40
January 2000 5 395,350 0.13
April 2000 1 192,492 0.06
May 2000 4 638,922 0.21
June 2000 6 570,878 0.19
July 2000 13 1,522,957 0.49
August 2000 51 6,001,021 1.95
September 2000 60 6,445,232 2.09
October 2000 43 4,158,029 1.35
November 2000 6 558,457 0.18
-------- --------------- ------
Subtotal 2,995 $303,379,734 98.57%
===== ============ =====
</TABLE>
S-23
<PAGE> 27
CMT Loans. The month of the next Coupon Rate change for each of the
Mortgage Notes relating to the CMT Loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
MONTH OF NEXT NUMBER OF AGGREGATE % OF AGGREGATE
COUPON RATE CHANGE HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
------------------ ----------------- ------------ ------------
<S> <C> <C> <C>
March 1998 1 $ 79,905 0.03%
April 1998 3 558,641 0.18
May 1998 6 754,261 0.25
June 1998 9 1,438,855 0.47
July 1998 12 1,370,027 0.45
August 1998 1 115,730 0.04
October 1998 1 88,103 0.03
--- ---------- -----
Subtotal 33 $4,405,522 1.43%
== ========== ====
Total 3,028 $307,785,257 100.00%
===== ============ ======
</TABLE>
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, 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. The Home Equity Loans may be prepaid by the
related Mortgagors, in whole or in part, at any time. However, approximately
55.80% of the Home Equity Loans (by Loan Balance) require the payment of a fee
in connection with certain prepayments. 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 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. In
addition, the fact that a substantial majority of the Six-Month LIBOR Loans and
the CMT Loans do 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 Note Principal Balance relative to the amortization
of the Home 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.
S-24
<PAGE> 28
PREPAYMENT AND YIELD SCENARIOS FOR THE 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 Payment Date for the Notes is December 20, 2028. This date is
the Payment Date in the twelfth month after 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 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 actual final Payment Date with respect to the
Notes could occur significantly earlier than the Final Payment Date because (i)
Prepayments are likely to occur and (ii) the Majority Residualholders may cause
a redemption of the Notes on or after the Redemption 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 constant prepayment
rate ("CPR") 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. CPR 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 Home
Equity Loans have characteristics which differ from those assumed in preparing
the tables set forth below, the payments 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 having the approximate characteristics
as set forth in the "Representative Loan Pools" table below, (ii) the Closing
Date for the Notes occurs on December 30, 1997, (iii) payments 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 January 1998 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 Trust Fees and Expenses, (v) the Home Equity Loans'
prepayment rates occur at the CPR rates set forth in the table, (vi)
prepayments include 30 days' interest thereon, (vii) all of the Home Equity
Loans are sold to the Issuer for inclusion in the Trust Estate as of the
Closing Date; (viii) 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), (ix) the level of Six-Month LIBOR remains
constant at 5.90625%, (x) the level of One-Month LIBOR remains constant at
5.96875%, (xi) the level of 1 year CMT remains constant at 5.51%, (xii) the
Coupon Rate for each Home Equity Loan is adjusted on its next rate change date
(and on subsequent rate change dates, if necessary) to equal the sum of (a) the
applicable index and (b) the respective gross margin (subject to applicable
interest rate caps and floors), (xiii) the overcollateralization levels are set
as specified in the Sale and Servicing Agreement and (xiv) the optional
redemption is exercised.
S-25
<PAGE> 29
REPRESENTATIVE LOAN POOLS
SIX-MONTH LIBOR LOANS
<TABLE>
<CAPTION>
Months
Gross Net to Rate Initial
Pool Loan Coupon Coupon Rate Reset Periodic Periodic
Number Balance Rate Rate Change Frequency Margin Rate Cap Cap
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $18,295,588.07 10.376% 9.876% 33 6 8.973% 3.017% 1.060%
2 37,002,424.32 10.193 9.693 17 6 6.508 2.968 1.107
3 43,071,579.49 9.661 9.161 20 6 6.463 5.580 1.042
4 70,114,419.19 10.145 9.645 22 6 7.273 2.491 1.167
5 63,614,249.77 9.995 9.495 23 6 6.947 2.713 1.167
6 27,941,594.85 9.792 9.292 2 6 6.469 1.172 1.026
7 43,339,878.66 10.229 9.729 7 6 6.598 1.316 1.160
</TABLE>
<TABLE>
<CAPTION>
Original Weighted
Maximum Minimum Term of Average
Coupon Coupon Amortization Maturity
Rate Rate (in months) (in months)
-----------------------------------------------------------
<S> <C> <C> <C>
17.046% 10.203% 360 357
16.729 8.880 354 349
16.127 9.550 359 355
16.806 10.065 359 357
16.658 9.892 360 359
16.470 9.751 358 354
16.431 9.918 358 355
</TABLE>
CMT LOANS (ANNUAL RESET)
<TABLE>
<CAPTION>
Months to Rate Initial Maximum
Pool Loan Gross Net Rate Reset Periodic Periodic Coupon
Number Balance Coupon Rate Coupon Rate Change Frequency Margin Rate Cap Cap Rate
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
8 $4,405,522.24 9.728% 9.228% 6 12 6.500% 2.091% 1.962% 15.687%
</TABLE>
<TABLE>
<CAPTION>
Original Weighted
Minimum Term of Average
Coupon Amortization Maturity
Rate (in months) (in months)
- ---------------------------------------
<S> <C> <C>
9.593% 360 354
</TABLE>
S-26
<PAGE> 30
The following table sets forth the percentages of the initial principal
amount of the Notes that would be outstanding after each of the dates shown,
based on a rate equal to 0%, 15%, 20%, 25%, 30% and 40% of the CPR (as defined
above).
PERCENTAGE OF INITIAL NOTE PRINCIPAL BALANCE(1)
<TABLE>
<CAPTION>
Payment Date 0% 15% 20% 25% 30% 40%
-- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100 100
12/20/1998 96 81 76 71 67 57
12/20/1999 95 68 60 52 45 32
12/20/2000 95 57 47 38 31 20
12/20/2001 94 47 37 29 22 12
12/20/2002 94 40 30 21 15 0
12/20/2003 93 34 23 16 11 0
12/20/2004 92 29 19 12 0 0
12/20/2005 92 24 15 0 0 0
12/20/2006 91 20 12 0 0 0
12/20/2007 90 17 9 0 0 0
12/20/2008 89 14 0 0 0 0
12/20/2009 87 12 0 0 0 0
12/20/2010 86 10 0 0 0 0
12/20/2011 84 0 0 0 0 0
12/20/2012 82 0 0 0 0 0
12/20/2013 80 0 0 0 0 0
12/20/2014 78 0 0 0 0 0
12/20/2015 75 0 0 0 0 0
12/20/2016 72 0 0 0 0 0
12/20/2017 68 0 0 0 0 0
12/20/2018 64 0 0 0 0 0
12/20/2019 60 0 0 0 0 0
12/20/2020 54 0 0 0 0 0
12/20/2021 48 0 0 0 0 0
12/20/2022 42 0 0 0 0 0
12/20/2023 35 0 0 0 0 0
12/20/2024 27 0 0 0 0 0
12/20/2025 18 0 0 0 0 0
12/20/2026 0 0 0 0 0 0
Weighted
Average 21.35 5.02 3.72 2.92 2.37 1.66
Life
(Years)(2)
</TABLE>
- --------------------
(1) The percentages in the above table have been rounded to the nearest whole
number.
(2) The weighted average life of the Notes is determined by (i) multiplying the
amount of each principal payment by the number of years from the date of
issuance to the related Payment Date, (ii) adding the results, and (iii)
dividing by the initial Note Principal Balance and rounding to two decimal
places.
S-27
<PAGE> 31
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Home Equity Loans and
the Properties is based upon the Home Equity Loans as constituted at the close
of business on the Cut-Off Date. Prior to the issuance of the Notes, 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 Sale and Servicing Agreement, if the Depositor deems such removal
necessary or appropriate. A limited number of other Home Equity Loans may be
included in the pool prior to 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, the Trust Agreement and the Sale and Servicing
Agreement, with the Securities and Exchange Commission within fifteen days
after the initial issuance of the Notes. In the event Home Equity Loans are
removed from or 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 Issuer will issue the Notes pursuant to the Indenture. The Issuer will
also issue the Residual Interest pursuant to the Trust Agreement, which
represents the residual interest in the Trust Estate. The summaries of certain
provisions of the Indenture, the Sale and Servicing Agreement and the Trust
Agreement (collectively, the "Agreements") set forth below, under the caption
"Administration" herein and under the caption "The Indenture" in the
Prospectus, while complete in material respects, do not purport to be
exhaustive. For more details regarding the terms of the Agreements,
prospective investors in the Notes are advised to review the Agreements, a copy
of each of which the Depositor will provide (without exhibits) without charge
upon written request addressed to the Depositor.
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 Note Insurer, the Owner Trustee, the Indenture Trustee, the
Underwriters, any of their respective affiliates or any other entity.
PAYMENT DATES
On each Payment Date, the Owners of the Notes will be entitled to receive,
from amounts then on deposit in a trust account established and maintained by
the Indenture Trustee in accordance with the Sale and Servicing Agreement (the
"Note Account") and until the Note Principal Balance is reduced to zero, the
aggregate payment amount as of such Payment Date as described below. Payments
will be made in immediately available funds to Owners of Notes 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
Indenture 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 Indenture 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" and "Description of the Securities--Book Entry Registration" in
the Prospectus and "Description of the Notes--Book Entry Registration of the
Notes" herein.
The Indenture will provide that an Owner, upon receiving the final payment
on such Owner's Notes, will be required to send such Note to the Indenture
Trustee. The Indenture additionally will provide that, in any event, any Note
as to which the final payment thereon has been made shall be deemed canceled
for all purposes of the Indenture and the Note Insurance Policy.
Each Owner of record of the Notes will be entitled to receive such Owner's
Percentage Interest in the amounts due on such Payment Date. The "Percentage
Interest" as of any date of determination will be equal to the percentage
obtained by dividing the principal balance of such Note as of the Cut-Off Date
by the Note Principal Balance as of the Cut-Off Date.
PAYMENTS
Upon receipt, the Indenture Trustee will be required to deposit into the
Note Account, (i) any Insured Payments, (ii) the proceeds of any liquidation of
the assets of the Trust Estate and (iii) all remittances made to the Indenture
Trustee by the Servicer.
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On each Payment Date, the Indenture Trustee is required to make the
following payments and transfers from monies then on deposit in the Note
Account as specified below in the following order of priority of each such
transfer and payment:
(i) first, on each Payment Date from amounts then on deposit in the Note
Account the Indenture Trustee shall distribute (A) to itself, the
Indenture Trustee Fee and the Indenture Trustee Reimbursable
Expenses, (B) to the Owner Trustee, the Owner Trustee Fee and (C)
provided that no Note Insurer Default has occurred and is continuing,
the Premium Amount for such Payment Date to the Note Insurer;
(ii) second, on each Payment Date, the Indenture Trustee shall allocate an
amount equal to the sum of (x) the Total Monthly Excess Spread as
defined herein with respect to such Payment Date plus (y) any
Overcollateralization Reduction Amount with respect to such Payment
Date (such sum being the "Total Monthly Excess Cashflow" with respect
to such Payment Date) in the following order of priority:
(A) first, such Total Monthly Excess Cashflow shall be allocated to
the payment of the Principal Distribution Amount (excluding any
Overcollateralization Increase Amount) pursuant to clause (iv)(C)
below in an amount equal to the amount, if any, by which (x) the
Principal Distribution Amount (excluding any
Overcollateralization Increase Amount) exceeds (y) the Available
Funds for such Payment Date (net of the related Current Interest
and the Trust Fees and Expenses) (the amount of such difference
being an "Available Funds Shortfall"); and
(B) second, any portion of the Total Monthly Excess Cashflow
remaining after the allocation described in clause (A) above
shall be paid to the Note Insurer in respect of amounts owed on
account of any Reimbursement Amount (as defined in the Sale and
Servicing Agreement) owed to the Note Insurer;
(iii) third, the amount, if any, of the Total Monthly Excess Cashflow 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 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 an Overcollateralization
Increase Amount to the Owners of the Notes pursuant to clause
(iv)(C) below, any Overcollateralization Deficiency Amount (as
defined in the Sale and Servicing Agreement) as of such Payment
Date;
(B) second, any portion of the Net Monthly Excess Cashflow remaining
after the application described in clause (A) above shall be
used to pay any Available Funds Cap Carry Forward Amount to the
Owners of the Notes; 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 and unreimbursed Servicing Advances;
(iv) fourth, following the making by the Indenture Trustee of all
allocations, transfers and disbursements described above from
amounts (including any related Insured Payment) then on deposit in
the Note Account, the Indenture Trustee shall distribute:
(A) (x) to the Note Insurer, the amounts described in clause (ii)(B)
above and (y) to the Servicer the amounts described in clause
(iii)(C) above;
(B) to the Owners of the Notes, the Current Interest (including the
proceeds of any Insured Payments made by the Note Insurer) on a
pro rata basis without any priority among the Notes;
(C) to the Owners of the Notes, the Principal Distribution Amount
until the Note Principal Balance is reduced to zero;
(D) to the Indenture Trustee, as reimbursement of expenses of the
Indenture Trustee not reimbursed pursuant to (i) above and
incurred in connection with duties and obligations under the
Indenture; and
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(v) fifth, following the making by the Indenture Trustee of all
allocations, transfers and disbursements described above, from
amounts then on deposit in the Note Account, the Indenture Trustee
shall distribute to the holders of the Residual Interest, the
remaining distributable amounts as specified in the Sale and
Servicing Agreement, for such Payment Date.
"Available Funds" as to each Payment Date is the amount on deposit in the
Note Account on such Payment Date (net of Total Monthly Excess Cashflow and
disregarding the amounts of any Insured Payments to be made on such Payment
Date and inclusive of any investment earnings on eligible investments therein).
"Total Available Funds" as to each Payment Date is the sum of (x) the
amount on deposit in the Note Account on such Payment Date (net of Total
Monthly Excess Cashflow) on such Payment Date and (y) any amounts of Total
Monthly Excess Cashflow to be applied on such Payment Date (disregarding the
amount of any Insured Payment to be made on such Payment Date).
The Indenture Trustee or Paying Agent (as defined in the Indenture) shall
(i) receive as attorney-in-fact of each Owner of Notes any Insured Payment from
the Note Insurer and deposit such amounts into the Note Account and (ii)
disburse the same to each Owner of Notes. The Sale and Servicing Agreement
will provide that to the extent the Note Insurer makes Insured Payments, either
directly or indirectly (as by paying through the Indenture Trustee), to the
Owners of such Notes, the Note Insurer will be subrogated to the rights of such
Owners of Notes with respect to such Insured Payments and shall receive
reimbursement for such Insured Payment as provided in the Sale and Servicing
Agreement, but only from the sources and in the manner provided in the Sale and
Servicing Agreement, such subrogation and reimbursement to have no effect on
the Note Insurer's obligations under the Note Insurance Policy.
Each Owner of a Note will be required promptly to notify the Indenture
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 Indenture Trustee.
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 to one month. The Indenture 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 to 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).
"Reference Banks" means leading banks selected by the Indenture Trustee and
engaged in transactions in Eurodollar deposits in the international
Eurocurrency market.
BOOK ENTRY REGISTRATION OF THE NOTES
The Notes will originally be issued as 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 in the United States, or Cedel or Euroclear (in Europe) if they are
participants of such system ("Participants"), or indirectly through
organizations which are Participants. The Book-Entry Notes will be issued in
one or more 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. Cedel and Euroclear will hold omnibus positions on behalf of their
Participants through customers' securities accounts in Cedel's and Euroclear's
names on the books of their respective
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depositaries which in turn will hold such positions in customers' securities
accounts in the depositaries' names on the books of DTC. Citibank will act as
depositary for Cedel and Chase will act as depositary for Euroclear (in such
capacities, individually the "Relevant Depositary" and collectively the
"European Depositaries"). 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 Agreements. Beneficial Owners are only
permitted to exercise their rights indirectly through Participants and DTC.
The Beneficial Owner's ownership of a Book-Entry Note 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 and on the records of
Cedel and Euroclear, as appropriate).
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. 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
notes, 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.
Because of time zone differences, credits of securities received in Cedel
or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Cedel Participants on such business day. Cash received in Cedel
or Euroclear as a result of sales of securities by or through a Cedel
Participant (as defined below) or Euroclear Participant (as defined below) to a
DTC Participant will be received with value on the DTC settlement date but will
be available in the relevant Cedel or Euroclear cash account only as of the
business day following settlements in DTC. For information with respect to tax
documentation procedures relating to the Notes, see "Certain Federal Income Tax
Consequences -- Taxation of Certain Foreign Investors" and "-- Backup
Withholding" in the Prospectus and "Global Clearance, Settlement and Tax
Documentation Procedures--Certain U.S. Federal Income Tax Documentation
Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in DTC
in accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Cedel Participants and Euroclear Participants may not deliver
instructions directly to the European Depositaries.
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,
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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.
Cedel Bank, S.A. was incorporated in 1970 as a limited company under
Luxembourg law. Cedel is owned by banks, securities dealers and financial
institutions, and currently has about 100 shareholders, including United States
financial institutions or their subsidiaries. No single entity may own more
than five percent of Cedel's stock.
Cedel is registered as a bank in Luxembourg, and as such is subject to
regulation by the Institut Monetaire Luxembourgeois, "IML," the Luxembourg
Monetary Authority, which supervises Luxembourg banks.
Cedel holds securities for its participant organizations ("Cedel
Participants") and facilitates the clearance and settlement of securities
transactions between Cedel Participants through electronic book-entry changes
in accounts of Cedel Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in Cedel in any of 28
currencies, including United States dollars. Cedel provides to its Cedel
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Cedel interfaces with domestic markets in several
countries. As a professional depository, Cedel is subject to regulation by the
Luxembourg Monetary Institute. Cedel Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to Cedel is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Cedel Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including
United States dollars. Euroclear includes various other services, including
securities lending and borrowing and interfaces with domestic markets in
several countries generally similar to the arrangements for cross-market
transfers with DTC described above. Euroclear is operated by the Brussels,
Belgium office of Morgan Guaranty Trust Company of New York (the "Euroclear
Operator"), under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation (the "Cooperative"). All operations are conducted by
the Euroclear Operator, and all Euroclear Securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative establishes policy for Euroclear on behalf of
Euroclear Participants. Euroclear Participants include banks (including
central banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities
and cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Payments 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. Distributions with respect to
Book-Entry Notes held through Cedel or Euroclear will be credited to the cash
accounts of Cedel Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by the Relevant
Depositary. Such distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. Because 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
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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 Issuer 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. Cedel or the
Euroclear Operator, as the case may be, will take any action permitted to be
taken by an Owner under the Indenture on behalf of a Cedel Participant or
Euroclear Participant only in accordance with its relevant rules and procedures
and subject to the ability of the Relevant Depositary to effect such actions on
its behalf through DTC. DTC may take actions, at the direction of the related
Participants, with respect to some 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.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of Notes among Participants of DTC, Cedel and Euroclear, they are
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 such Notes 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 Issuer, 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 premium and
subject to the terms of the Note 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 Note 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 Note 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.
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Notwithstanding the foregoing paragraph, the Note Insurance Policy does not
cover shortfalls, if any, attributable to the liability of the Issuer or the
Indenture Trustee for withholding taxes, if any (including interest and
penalties in respect of any such liability).
The Note Insurer will pay any Insured Payment that is a Preference Amount
no later than 12:00 noon, New York City time, on the later of the Payment Date
on which the related Preference Amount is due or the third Business Day
following receipt on a Business Day by the Fiscal Agent (as described below) of
(i) a certified copy of the order requiring the return of such preference
payment, (ii) an opinion of counsel satisfactory to the Note Insurer that such
order is final and not subject to appeal, (iii) an assignment in such form as
is reasonably required by the Note Insurer, irrevocably assigning to the Note
Insurer all rights and claims of the Owner relating to or arising under the
Notes against the debtor which made such preference payment or otherwise with
respect to such preference payment and (iv) appropriate instruments to effect
the appointment of the Note Insurer as agent for such Owner in any legal
proceeding related to such preference payment, such instruments being in a form
satisfactory to the Note Insurer; provided, that if such documents are received
after 12:00 noon, New York City time on such Business Day, they will be deemed
to be received on the following Business Day. Such payments shall be disbursed
to the receiver or trustee in bankruptcy named in the final order of the court
exercising jurisdiction on behalf of the Owner and not to any Owner directly
unless such Owner has returned principal or interest paid on the Notes to such
receiver or trustee in bankruptcy, in which case such payment shall be
disbursed to such Owner.
The Note Insurer will pay any other amount payable under the Note 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, on a Business Day by State Street Bank and Trust
Company, N.A., as Fiscal Agent for the Note Insurer or any successor fiscal
agent appointed by the Note Insurer (the "Fiscal Agent") 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 received by the Fiscal Agent is not
in proper form or is otherwise insufficient for the purpose of making a claim
under the Note Insurance Policy, it shall be deemed not to have been received
by the Fiscal Agent for purposes of this paragraph, and the Note Insurer or the
Fiscal Agent, as the case may be, shall promptly so advise the Indenture
Trustee and the Indenture Trustee may submit an amended Notice.
Insured Payments due under the Note Insurance Policy, unless otherwise
stated therein, will be disbursed by the Fiscal Agent to the Indenture 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 Indenture Trustee for the payment of
such Insured Payment and legally available therefor.
The Fiscal Agent is the agent of the Note Insurer only and the Fiscal Agent
shall in no event be liable to Owners for any acts of the Fiscal Agent or any
failure of the Note Insurer to deposit or cause to be deposited, sufficient
funds to make payments due under the Note Insurance Policy.
As used in the Note Insurance Policy, the following terms shall have the
following meanings:
"Agreement" means the Sale and Servicing Agreement dated as of
December 1, 1997 among IMC Securities, Inc., as Depositor, IMC Mortgage
Company, as Seller and Servicer, IMC Home Equity Loan Owner Trust 1997-8,
as Issuer, and The Chase Manhattan Bank, as Indenture Trustee, without
regard to any amendment or supplement thereto, unless the Note Insurer
shall have consented in writing thereto.
"Business Day" means any day other than a Saturday, a Sunday or a
day on which banking institutions in New York City, Tampa, Florida, the
city in which the corporate trust office of the Indenture Trustee under the
Indenture is located or the city in which the principal office of the Note
Insurer is located are authorized or obligated by law or executive order to
close.
"Insured Payment" means for any Payment Date, the excess, if any, of
(i) the sum of (a) the Current Interest, (b) the Overcollateralization
Deficit and (c) the Preference Amount (without duplication) over (ii) the
Total Available Funds (after any deduction for the Trust Fees and Expenses
and after taking into account the portion of the Principal Distribution
Amount to be actually paid on such Payment Date without regard to any
related Insured Payment to be made with respect to such Payment Date).
Insured Payments do not include the payment of any Available Funds Cap
Carry Forward Amounts.
"Notice" means the telephonic or telegraphic notice, promptly
confirmed in writing by telecopy substantially in the form of Exhibit A
attached to the Note Insurance Policy, the original of which is
subsequently delivered by registered or certified mail, from the Indenture
Trustee specifying the Insured Payment which shall be due and owing on the
applicable Payment Date.
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"Owner" means each Owner (as defined in the Indenture) who, on the
applicable Payment Date, is entitled under the terms of the applicable Note
to payment thereunder.
"Preference Amount" means any amount previously distributed to an
Owner on a Note that is recoverable and sought to be recovered as a
voidable preference by a trustee in bankruptcy pursuant to the United
States Bankruptcy Code (11 U.S.C.) as amended from time to time, in
accordance with a final nonappealable order of a court having competent
jurisdiction.
Capitalized terms used in the Note Insurance Policy and not otherwise
defined therein will have the respective meanings set forth in the Agreement as
of the date of execution of the Note Insurance Policy, without giving effect to
any subsequent amendment to or modification of the Agreement unless such
amendment or modification has been approved in writing by the Note Insurer.
Any notice under the Note Insurance Policy or service of process on the
Fiscal Agent of the Note Insurer may be made at the address listed below for
the Fiscal Agent of the Note Insurer or such other address as the Note Insurer
shall specify in writing to the Indenture Trustee.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway, New
York, New York, 10006, Attention: Municipal Registrar and Paying Agency, or
such other address as the Fiscal Agent shall specify to the Indenture Trustee
in writing.
The Note Insurance Policy is being issued under and pursuant to, and shall
be construed under, the laws of the State of New York, without giving effect to
the conflict of laws principles thereof.
THE INSURANCE PROVIDED BY THE NOTE INSURANCE POLICY IS NOT COVERED BY THE
PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW
YORK INSURANCE LAW.
The Note Insurance Policy is not cancelable for any reason. The premium on
the Note Insurance Policy is not refundable for any reason including payment,
or provision being made for payment, prior to the maturity of the Notes.
The Note Insurer is the principal operating subsidiary of MBIA Inc., a New
York Stock Exchange listed company. MBIA Inc. is not obligated to pay the
debts of or claims against the Note Insurer. The Note Insurer is domiciled in
the State of New York and licensed to do business in and is subject to
regulation under the laws of all 50 states, the District of Columbia, the
Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands,
the Virgin Islands of the United States and the Territory of Guam. The Note
Insurer has two European branches, one in the Republic of France and the other
in the Kingdom of Spain. New York has laws prescribing minimum capital
requirements, limiting classes and concentration of investments and requiring
the approval of policy rates and forms. State laws also regulate the amount of
both the aggregate and individual risks that may be insured, the payment of
dividends by the Note Insurer, changes in control and transactions among
affiliates. Additionally, the Note Insurer is required to maintain contingency
reserves on its liabilities in certain amounts and for certain periods of time.
On November 14, 1997, MBIA Inc. announced the signing of a definitive
agreement to merge with CapMAC Holdings Inc. ("CHI"), the parent company of
Capital Markets Assurance Corporation ("CapMAC"), in a stock-for-stock
transaction valued at $607 million. The announcement also stated that all
outstanding policies issued by CapMAC will be backed by the full financial
resources of MBIA Inc., and that the agreement is subject to regulatory
approvals and approval by CHI shareholders.
The consolidated financial statements of the Note Insurer, a wholly-owned
subsidiary of MBIA Inc., and its subsidiaries as of December 31, 1996 and
December 31, 1995 and for each of the three years in the period ended December
31, 1996, prepared in accordance with generally accepted accounting principles,
included in the 1996 Annual Report on Form 10-K of MBIA Inc. and the
consolidated financial statements of the Note Insurer and its subsidiaries as
of September 30, 1997 and for the nine month periods ended September 30, 1997
and September 30, 1996, included in the Quarterly Report on Form 10-Q of MBIA
Inc. for the period ending September 30, 1997, are hereby incorporated by
reference into this Prospectus Supplement and shall be deemed to be a part
hereof. Any statement contained in a document incorporated by reference herein
shall be modified or superseded for purposes of this Prospectus Supplement to
the extent that a statement contained herein or in any other subsequently filed
document which also is 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
Supplement.
All financial statements of the Note Insurer and its subsidiaries included
in documents filed by MBIA Inc. pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Securities Exchange Act of 1934, as amended, subsequent to the date of
this Prospectus Supplement and prior to the termination of the offering of the
Notes shall be deemed to be
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<PAGE> 39
incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing such documents.
The tables below present selected financial information of the Note Insurer
determined in accordance with statutory accounting practices prescribed or
permitted by insurance regulatory authorities ("SAP") and generally accepted
accounting principles ("GAAP"):
<TABLE>
<CAPTION>
SAP
------------------------ -----------------------
DECEMBER 31, SEPTEMBER 30,
1996 1997
---- ----
(Audited) (Unaudited)
(In millions)
<S> <C> <C>
Admitted Assets $4,476 $5,165
Liabilities 3,009 3,457
Capital and Surplus 1,467 1,708
</TABLE>
<TABLE>
<CAPTION>
GAAP
------------------------ -------------------------
DECEMBER 31, SEPTEMBER 30
1996 1997
---- ----
(Audited) (Unaudited)
(In millions)
<S> <C> <C>
Assets $5,066 $5,819
Liabilities 2,262 2,594
Shareholder's Equity 2,804 3,225
</TABLE>
____________________
Copies of the financial statements of the Note Insurer incorporated by
reference herein and copies of the Note Insurer's 1996 year-end audited
financial statements prepared in accordance with statutory accounting practices
are available, without charge, from the Note Insurer. The address of the Note
Insurer is 113 King Street, Armonk, New York 10504. The telephone number of
the Note Insurer is (914) 273-4545.
The Note Insurer does not accept any responsibility for the accuracy or
completeness of this Prospectus Supplement or any information or disclosure
contained herein, or omitted heretofrom, other than with respect to the
accuracy of the information regarding the Note Insurance Policy and Note
Insurer set forth under the heading "The Note Insurer" herein. Additionally,
the Note Insurer makes no representations regarding the Notes or the
advisability of investing in the Notes.
Moody's rates the claims paying ability of the Note Insurer "Aaa".
Standard & Poor's rates the claims paying ability of the Note Insurer
"AAA".
Fitch IBCA, Inc. (formerly known as Fitch Investors Service, L.P.) rates
the claims paying ability of the Note Insurer "AAA".
Each rating of the Note Insurer should be evaluated independently. The
ratings reflect the respective rating agency's current assessment of the
creditworthiness of the Note Insurer and its ability to pay claims on its
policies of insurance. Any further explanation as to the significance of the
above ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the Notes
and such ratings may be subject to revision or withdrawal at any time by the
rating agencies. Any downward revision or withdrawal of any of the above
ratings may have an adverse effect on the market price of the Notes. The Note
Insurer does not guaranty the market price of the Notes nor does it guaranty
that the ratings on the Notes will not be revised or withdrawn.
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<PAGE> 40
CREDIT ENHANCEMENT
NOTE INSURANCE POLICY
See "The Note Insurer" herein for a description of the Note Insurance
Policy.
OVERCOLLATERALIZATION PROVISIONS
Overcollateralization Resulting from Cash Flow Structure. The Sale and
Servicing Agreement 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 Current
Interest and the Trust Fees and 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.
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, the Sale and Servicing Agreement provides that it will be used to
reimburse the Owners of the Notes with respect to any Available Funds Cap Carry
Forward Amount and then to reimburse the Servicer with respect to any amounts
owing to it, and, thereafter, paid to the Owners of the Residual Interest.
Pursuant to the Sale and Servicing Agreement, Net Monthly Excess Cashflow
will be applied as an accelerated payment of principal on the Notes until the
Overcollateralization Amount has increased to the level required.
"Overcollateralization Amount" means, the excess, if any, of (x) the aggregate
Loan Balances of the Home Equity Loans as of the close of business on the last
day of the preceding Remittance Period 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 Overcollateralization Reduction
Amount or Overcollateralization Increase Amount) on such Payment Date). Any
amount of Net Monthly Excess Cashflow actually applied as an accelerated
payment of principal is an "Overcollateralization Increase Amount." The
required level of the Overcollateralization Amount with respect to a Payment
Date is the "Specified Overcollateralization Amount." The Sale and Servicing
Agreement generally provides that the Specified Overcollateralization Amount
may, over time, decrease, or increase, subject to certain floors, caps and
triggers including triggers that allow the related Specified
Overcollateralization Amount to decrease or "step down" based on the
performance on the Home Equity Loans with respect to certain tests specified
in the Sale 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 Notes during the period that the Home
Equity Loans are unable to meet certain tests specified in the Sale and
Servicing Agreement based on delinquency rates and cumulative losses.
In the event that the Specified Overcollateralization Amount is permitted
to decrease or "step down" on a Payment Date in the future, the Sale and
Servicing Agreement 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 Residual Interest over the period specified
in the Sale and Servicing Agreement. This has the effect of decelerating the
amortization of the Notes relative to the amortization of the Home Equity Loans
and of reducing the Overcollateralization Amount. With respect to any Payment
Date, the excess, if any, of (x) the Overcollateralization Amount on such
Payment Date after taking into account all distributions to be made on such
Payment Date (except for any distributions of the Overcollateralization
Reduction Amount as described in this sentence) over (y) the Specified
Overcollateralization Amount is the "Excess Overcollateralization Amount" for
such Payment Date. If, on any Payment Date, the Excess Overcollateralization
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 Overcollateralization
Amount is or would be greater than the Specified Overcollateralization 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 Residual Interest (to the extent available therefor) in an
amount equal to the lesser of (x) the Excess Overcollateralization 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 "Overcollateralization
Reduction Amount" with respect to the related Payment Date.
The Sale 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 an Overcollateralization 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 Sale and Servicing Agreement provides that the principal
balance of any Home Equity Loan which becomes a Liquidated Loan shall
thenceforth equal zero. The Sale and
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<PAGE> 41
Servicing Agreement does not contain any requirement that the amount of any
Realized Loss be distributed to the Owners of the Notes on the Payment Date
which immediately follows the event of loss; i.e., the Sale and Servicing
Agreement does not require the current recovery of losses. However, the
occurrence of a Realized Loss will reduce the Overcollateralization Amount,
which to the extent that such reduction causes the Overcollateralization Amount
to be less than the related Specified Overcollateralization Amount applicable
to the related Payment Date, will require the payment of an
Overcollateralization Increase Amount on such Payment Date (or, if insufficient
funds are available on such Payment Date, on subsequent Payment Dates, until
the Overcollateralization Amount equals the Specified Overcollateralization
Amount).
Overcollateralization and the Note Insurance Policy. The Sale and
Servicing Agreement defines a "Overcollateralization 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 Overcollateralization Deficit),
exceeds (y) the aggregate Loan Balances of the Home Equity Loans as of the
close of business on the last day of the prior Remittance Period. The Sale and
Servicing Agreement requires the Indenture Trustee to make a claim for an
Insured Payment under the Note Insurance Policy not later than the second
Business Day prior to any Payment Date as to which the Indenture Trustee has
determined that an Overcollateralization 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 Note Insurance Policy is thus
similar to the overcollateralization provisions described above insofar as the
Note 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, 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 Note 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.
ADMINISTRATION
In addition to the provisions of the Agreements summarized elsewhere in the
Prospectus and this Prospectus Supplement there is set forth below a summary of
certain other provisions of the Agreements.
COVENANT OF THE SELLER TO TAKE CERTAIN ACTIONS WITH RESPECT TO THE HOME EQUITY
LOANS IN CERTAIN SITUATIONS
Pursuant to the Sale and Servicing Agreement, upon the discovery by the
Depositor, the Seller, the Note Insurer, any Sub-Servicer, any Owner, the
Custodian or the Indenture Trustee that the representations and warranties set
forth therein or in the Loan Sale Agreement dated as of December 1, 1997
between the Seller and the Depositor are untrue in any material respect as of
the Closing Date with the result that the interests of the Owners or of the
Note 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 Note Insurer, 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 Sale and Servicing
Agreement) 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 Issuer as part of the
Monthly Remittance remitted by the Servicer on such Monthly Remittance Date or
(ii) purchase such Home Equity Loan from the Issuer 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 and the Note 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. 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
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<PAGE> 42
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
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
all its respective right, title and interest in and to each Home Equity Loan
and all its respective right, title and interest in and to principal and
interest due on each such 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 received on or before the
Cut-Off Date) and interest due on each Home Equity Loan on or prior to the
Cut-Off Date (whether or not received on or prior to the Cut-Off Date). The
Issuer will pledge each Home Equity Loan to the Indenture Trustee for the
benefit of the Owners of the Notes and the Note Insurer pursuant to the
Indenture.
In connection with the transfer and assignment of the Home Equity Loans on
the Closing Date, the Seller will be required to:
(i) deliver without recourse to BankBoston, N.A. (the "Custodian")
on behalf of the Indenture Trustee on the Closing Date with respect to each
Home Equity Loan identified in the Schedule of Home Equity Loans (A) the
original Mortgage Notes, endorsed in blank or to the order of the "The
Chase Manhattan Bank, as Indenture Trustee for the IMC Adjustable Rate Home
Equity Loan Asset Backed Notes, Series 1997-8", (B) (1) 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
(2) 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 the Seller from the applicable
recording office) or a copy (if such original Mortgage has not been
returned to the 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, assignments
of the Mortgages to "The Chase Manhattan Bank, as Indenture Trustee for
the IMC Adjustable Rate Home Equity Loan Asset Backed Notes, Series 1997-8"
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 Sale and Servicing Agreement) if the
Seller furnishes to the Indenture Trustee, the Note Insurer and the Rating
Agencies, on or before the Closing Date 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 Home
Equity Loans (in form satisfactory to the Indenture Trustee, the Note
Insurer and the Rating Agencies); and
(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).
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 the
date of receipt of any documents delivered to the Indenture Trustee after the
Closing 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, the Owners and the Note Insurer. The Seller will agree
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,
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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 Owners of the Notes as part of
the Monthly Remittance Amount 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 Indenture Trustee along with the Monthly Remittance Amount
remitted by the Servicer on such Monthly Remittance Date.
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 Sale and Servicing Agreement, the terms of the respective Home Equity
Loans, and the servicing standards set forth in Fannie Mae's Servicing Guide
(the "Fannie Mae Guide"); provided, however, that to the extent such standards,
such obligations or the Fannie Mae Guide is amended by Fannie Mae after the
date of the Sale 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 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 and 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.
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 Sale 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 Fannie Mae 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
received after the Cut-Off Date, 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 (a) the Loan Balance of the related Home
Equity Loan immediately prior to liquidation, (b) accrued and unpaid interest
on such Home Equity Loan (net of the Servicing Fee) to the date of such
liquidation and (c) 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 Mortgage 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:
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(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
(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 Note 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 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 Sale and Servicing Agreement that any proposed Delinquency Advance if made
would not be recoverable, the Servicer shall not be required to make such
Delinquency Advances with respect to such Home Equity Loan. To the extent that
the Servicer previously has made Delinquency Advances with respect to a Home
Equity Loan that the Servicer subsequently determines to be nonrecoverable, the
Servicer shall be entitled to reimbursement for such aggregate unreimbursed
Delinquency Advances as provided above. The Servicer shall give written notice
of such determination as to why such amount is or would be nonrecoverable to
the Indenture Trustee and the Note 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 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 Sale and Servicing 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 related 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
related 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 such
Monthly Remittance Date. The Servicer shall not be entitled to reimbursement
for amounts paid as Compensating Interest.
In accordance with the terms of the Sale and Servicing Agreement, 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.
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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 Sale and Servicing Agreement
(upon receiving the consent of the Note Insurer) to accept applications of
Mortgagors for consent to (i) partial releases of Mortgages, (ii) alterations
thereof and (iii) removal, demolition or division of Properties. No
application for approval may be considered by the Servicer unless: (a) the
provisions of the related Mortgage 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% unless approved by
the Note Insurer; 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 Payment Date.
Notwithstanding anything set forth in the Sale 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 Indenture Trustee and the
Note Insurer, 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 with the consent
of the Note Insurer, the Servicer will be permitted under the Sale 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).
No Sub-Servicing arrangements will discharge the Servicer from its
servicing obligations. Notwithstanding any Sub-Servicing Agreement, the
Servicer will not be relieved of its obligations under the Sale 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;
provided, however, that nothing contained in such Sub-Servicing Agreement shall
be deemed to limit or modify the Sale and Servicing Agreement.
The Servicer (except the Indenture Trustee if it is required to succeed the
Servicer under the Sale and Servicing Agreement) has agreed to indemnify and
hold the Indenture Trustee, the Note 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
Indenture Trustee, the Depositor, the Note 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 Sale and
Servicing Agreement. The Servicer shall immediately notify the Indenture
Trustee, the Depositor, the Note Insurer and each Owner if a claim is made by a
third party with respect to the Sale 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
Indenture Trustee, the Note Insurer and/or Owner in respect of such claim. The
Indenture Trustee shall reimburse the Servicer from amounts otherwise
distributable on the Residual Interest 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 Sale and Servicing Agreement. The
indemnification provisions shall survive the termination of the Sale and
Servicing Agreement and the payment of the outstanding Notes.
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The Servicer will be required to deliver to the Indenture Trustee, the Note
Insurer and the Rating Agencies on or before April 30 of each year, commencing
in 1999: (i) an officers' certificate stating, as to each signer thereof, that
(a) a review of the activities of the Servicer during such preceding calendar
year and of performance under the Sale and Servicing Agreement has been made
under such officers' supervision, and (b) to the best of such officers'
knowledge, based on such review, the Servicer has fulfilled all its obligations
under the Sale 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 (ii) a letter or letters
of a firm of independent, nationally recognized certified public accountants
reasonably acceptable to the Note Insurer 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 Note Insurer or the Indenture Trustee (with the prior written consent
of the Note Insurer) (or except as specified in the Sale and Servicing
Agreement, the Owners, with the consent of the Note Insurer) will have the
right, pursuant to the Sale and Servicing Agreement, 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 Sale 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 Sale 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 Sale 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 Sale
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 Indenture
Trustee and the Note Insurer.
Upon removal or resignation of the Servicer, the Indenture Trustee may (A)
solicit bids for a successor servicer as described in the Sale and Servicing
Agreement and (B) until such time as a successor servicer is appointed pursuant
to the terms of the Sale and Servicing Agreement, 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 Fannie Mae,
having equity of not less than $5,000,000, and acceptable to the Note Insurer
and a majority of the Owners of the Notes (provided that if the Note Insurer
and such Owners cannot agree as to the acceptability of such successor
servicer, the decision of the Note Insurer will 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 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 Majority Residualholders, on or after the Redemption Date. Under
certain circumstances, the Note Insurer may also exercise such purchase rights
if the Majority Residualholders do not do so. The Notes will be redeemed at
the Redemption Price and the payment of the Redemption Price shall be in lieu
of the payment otherwise required to be made on such Payment Date in respect of
the Notes. The "Redemption Price" is equal to 100% of the aggregate Loan
Balances of the Home Equity Loans plus the appraised value of any REO Property
as of the Redemption Date minus amounts remitted from the Principal and
Interest Account to the Note Account representing collections of principal on
the Home Equity Loans during the current Remittance Period, plus one month's
interest on such amount plus any Available Funds Cap Carry Forward Amounts plus
all accrued and unpaid Servicing Fees plus the aggregate amount of any
unreimbursed Delinquency Advances and Servicing Advances and Delinquency
Advances which the Servicer has theretofore failed to remit plus all amounts
owed to the Note Insurer under the Insurance Agreement.
THE INDENTURE TRUSTEE
The Chase Manhattan Bank 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.
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The Indenture also will provide that the Indenture Trustee may resign at
any time, upon notice to the Issuer, the Note Insurer, the Servicer and each
Rating Agency, in which event the Issuer (with the consent of the Note Insurer)
will be obligated to appoint a successor Indenture Trustee. The Issuer or the
Note Insurer 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 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.
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, the Note Insurer , the Rating Agencies and the Note
Insurer:
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 (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) the amount of any Insured Payment included in the amounts
distributed to the Owners on such Payment Date;
vii) 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; and
viii) the weighted average Coupon Rate of the Home Equity Loans;
ix) such other information as the Note Insurer may reasonably
request with respect to delinquent Home Equity Loans;
x) the amount of the Available Funds Cap Carry Forward Amount, if
any, for such Payment Date;
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xi) the total of any Substitution Amounts or Loan Purchase Price
amounts included in such distribution.
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, the Note Insurer 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);
(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 Sale and Servicing Agreement) and
any other loss percentages as required by the Sale and Servicing Agreement.
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: (i)
failure to make distributions of available amounts; (ii) certain breaches of
covenants and representations by the Indenture Trustee; (iii) certain acts of
bankruptcy or insolvency on the part of the Indenture Trustee; and (iv) 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 Note Insurer or (ii) with the prior written consent of the Note Insurer
(which is required not to be unreasonably withheld), the Issuer and the Owners
of a majority of the Percentage Interests represented by the Notes may remove
the Indenture Trustee.
GOVERNING LAW
The Agreements 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.
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No election will be made to treat the Trust or the Trust Estate or any
portion thereof as a REMIC for federal income tax purposes.
In the opinion of Arter & Hadden, special tax counsel, for federal income
tax purposes, the Notes will be treated as newly originated debt instruments
and the Issuer will not be characterized as an association (or a publicly
traded partnership or taxable mortgage pool) taxable as a corporation. Each
Owner of a Note, by its acceptance of a Note, will agree to treat the Notes as
indebtedness. 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 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 25%. No representation is made as to the
actual rate at which the Home Equity Loans will prepay. See "Federal Income
Tax Consequences -- Notes" in the Prospectus.
STATE TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Federal
Income Tax Consequences" herein, potential investors should consider the state
income tax consequences of the acquisition, ownership, and disposition of the
Notes. State income tax law may differ substantially from the corresponding
federal tax law, and this discussion does not purport to describe any aspect of
the income tax laws of any state. Therefore, potential investors should
consult their own tax advisors with respect to the various tax consequences of
investments in the Notes.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and the Code impose certain restrictions on (a) employee benefit plans (as
defined in Section 3(3) of ERISA) and plans described in Code section
4975(e)(1), including individual retirement accounts (the "Plans") and (b)
persons who have certain specified relationships to such Plans or who
constitute "disqualified persons" under Code section 4975(e)(2) with respect to
such Plans ("parties in interest"). 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. Any Plan fiduciary which proposes to cause a Plan to acquire any of
the Notes should consult with its counsel with respect to the potential
consequences under ERISA, and the Code, of the Plan's acquisition and ownership
of the Notes. See "ERISA Considerations" in the Prospectus. Investments by
Plans are also 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.
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) concerning the definition of what constitutes
the assets of a Plan for purposes of ERISA and the prohibited transaction
provisions of the Code (the "Plan Asset Regulation"). The Plan Asset
Regulation describes the circumstances under which the assets of an entity in
which a Plan invests will be considered to be "plan assets" such that any
person who exercises control over such assets would be subject to ERISA's
fiduciary standards. Under the Plan Asset Regulation, generally when a Plan
invests in another entity, the Plan's assets do not include, solely by reason
of such investment, any of the underlying assets of the entity. However, the
Plan Asset Regulation provides that, if a Plan acquires an "equity interest" in
any entity that is neither a "publicly-offered security" (as defined therein)
nor a security issued by an investment company registered under the Investment
Company Act of 1940, the assets of the entity will be treated as assets of the
Plan investor unless certain exceptions apply. If the Notes were deemed to be
equity interests and no statutory, regulatory or administrative exemption
applies, the Issuer could be considered to hold plan assets by reason of a
Plan's investment in the Notes. Such plan assets would include an undivided
interest in any assets held by the Issuer. In such an event, the Servicer and
other persons, in providing services with respect to the Issuer's assets, may
be parties in interest with respect to such Plans, subject to fiduciary
responsibility provisions of Title I of ERISA, including the general fiduciary
duties of Section 404 of ERISA, the prohibited transaction provisions of
Section 406
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<PAGE> 50
of ERISA, and to Section 4975 of the Code with respect to transactions
involving the Trust's assets. Under the Plan Asset Regulation, the term
"equity interest" is defined as any interest in an entity other than an
instrument that is treated as indebtedness under "applicable local law" and
which has no "substantial equity features." Although the Plan Asset Regulation
is silent with respect to the question of which law constitutes "applicable
local law" for this purpose, the DOL has stated that these determinations
should be made under the state law governing interpretation of the instrument
in question. In the preamble to the Plan Asset Regulation, the DOL declined to
provide a precise definition of what features are equity features or the
circumstances under which such features would be considered "substantial,"
noting that the question of whether a plan's interest has substantial equity
features is an inherently factual one, but that in making a determination it
would be appropriate to take into account whether the equity features are such
that a Plan's investment would be a practical vehicle for the indirect
provision of investment management services.
Without regard to whether the Notes are treated as an equity interest under
the Plan Asset Regulation, the acquisition or holding of the Notes by or on
behalf of a Plan could be considered to give rise to a prohibited transaction
if such acquisition or holding is deemed to be a prohibited loan to a party in
interest with respect to such Plan. Certain exemptions from the prohibited
transaction rules could be applicable to the purchase and holding of the Notes
by a Plan depending on the type and circumstances of the plan fiduciary making
the decision to acquire the Notes. Included among these exemptions are:
Prohibited Transaction Class Exemption ("PTCE") 90-1, regarding certain
transactions entered into by insurance company pooled separate accounts; PTCE
95-60, regarding certain transactions entered into by insurance company general
accounts; PTCE 96-23, regarding certain transactions effected by "in-house
asset managers"; PTCE 91-38, regarding certain transactions entered into by
bank collective investment funds; and PTCE 84-14, regarding certain
transactions effected by "qualified professional asset managers."
Any Plan fiduciary considering whether to purchase any Notes on behalf of a
Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to such investment. Among other things, before purchasing any Notes, a
fiduciary of a Plan should make its own determination as to whether the Trust,
as obligor on the Notes, is a party in interest with respect to the Plan, the
availability of the exemptive relief provided in the Plan Asset Regulations and
the availability of any other prohibited transaction exemptions. Investors
should analyze whether the decision may have an impact with respect to
purchases of the Notes.
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 Standard & Poor's. Explanations of
the significance of such ratings may be obtained from Moody's, 99 Church
Street, New York, New York 10007 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 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 issued by Moody's and Standard & Poor's on the payment of
principal and interest on the Notes do not cover the payment of the Available
Funds Cap Carry Forward Amount. The ratings of Moody's and Standard & Poor's
do not address the possibility that, as a result of principal prepayments,
Owners of the Notes may receive a lower than anticipated yield.
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 Standard & Poor's 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 Standard & Poor's.
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 Standard & Poor's.
S-47
<PAGE> 51
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 qualifying 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:
<TABLE>
<CAPTION>
Underwriters Principal Amount
------------ ----------------
<S> <C>
PaineWebber Incorporated $153,892,629
Bear, Stearns & Co. Inc. 153,892,628
------------
Total $307,785,257
============
</TABLE>
The Depositor and the Seller have 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 offering price set forth on the cover page hereof and to certain dealers at
such price less a concession not in excess of 0.18% (expressed as a percentage
of the Note Principal Balance). The Underwriters may allow and such dealers
may reallow a discount not in excess of 0.04%.
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.
REPORT OF EXPERTS
The consolidated balance sheets of the Note Insurer, MBIA Insurance
Corporation and Subsidiaries, as of December 31, 1996 and 1995, and the
consolidated statements of income, shareholders' equity and cash flows, for
each of the three years in the period ended December 31, 1996, incorporated by
reference into this Prospectus Supplement, have been incorporated by reference
herein in reliance on the report of Coopers & Lybrand, L.L.P., independent
accountants, given on the authority of such firm as experts in accounting and
auditing.
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 LLP, 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 LLP.
Certain legal matters relating to the validity of the issuance of the Notes
will be passed upon for the Underwriters by Stroock & Stroock & Lavan LLP, New
York, New York. Certain legal matters relating to the Note Insurer and the
Note Insurance Policy will be passed upon for the Note Insurer by Kutak Rock,
Omaha, Nebraska.
S-48
<PAGE> 52
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered $307,785,257
Adjustable Rate Home Equity Loan Asset Backed Notes, Series 1997-8, (the
"Global Securities") will be available only in book-entry form. Investors in
the Global Securities may hold such Global Securities through any of DTC, Cedel
or Euroclear. The Global Securities will be tradeable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same-day funds.
Secondary market trading between investors through Cedel and Euroclear will
be conducted in the ordinary way in accordance with the normal rules and
operating procedures of Cedel and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be conducted
according to DTC's rules and procedures applicable to U.S. corporate debt
obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Notes will be effected on a delivery-against-payment basis
through the respective Depositaries of Cedel and Euroclear (in such capacity)
and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities
will be represented through financial institutions acting on their behalf as
direct and indirect Participants in DTC. As a result, Cedel and Euroclear will
hold positions on behalf of their participants through their Relevant
Depositary which in turn will hold such positions in their accounts as DTC
Participants.
Investors electing to hold their Global Securities through DTC will follow
DTC settlement practices. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the
settlement date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to
the securities custody accounts on the settlement date against payment in
same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior home
equity loan asset-backed securities issues in same-day funds.
Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC, Seller and Cedel or Euroclear Participants. When
Global Securities are to be transferred from the account of a DTC Participant
to the account of a Cedel Participant or a Euroclear Participant, the purchaser
will send instructions to Cedel or Euroclear through a Cedel Participant or
Euroclear Participant at least one business day prior to settlement. Cedel or
Euroclear will instruct the Relevant Depositary, as the case may be, to receive
the Global Securities against payment. Payment will include interest accrued
on the Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in
such accrual period and a year assumed to consist of 360 days. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. Payment will
then be made by the Relevant Depositary to the DTC Participant's account
against delivery of the Global Securities. After settlement has been
completed, the Global Securities will be credited to the respective clearing
system and by the clearing system, in accordance with its usual procedures, to
the Cedel Participant's or Euroclear Participant's account. The securities
I-1
<PAGE> 53
credit will appear the next day (European time) and the cash debt will be
back-valued to, and the interest on the Global Securities will accrue from, the
value date (which would be the preceding day when settlement occurred in New
York). If settlement is not completed on the intended value date (i.e., the
trade fails), the Cedel or Euroclear cash debt will be valued instead as of the
actual settlement date.
Cedel Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day
funds settlement. The most direct means of doing so is to preposition funds
for settlement, either from cash on hand or existing lines of credit, as they
would for any settlement occurring within Cedel or Euroclear. Under this
approach, they may take on credit exposure to Cedel or Euroclear until the
Global Securities are credited to their account one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit to
them, Cedel Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon to finance settlement. Under
this procedure, Cedel Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although the result will depend on each Cedel Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for crediting Global Securities
to the respective European Depositary for the benefit of Cedel Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller
on the settlement date. Thus, to the DTC Participants a cross-market
transaction will settle no differently than a trade between two DTC
Participants.
Trading between Cedel or Euroclear Seller and DTC Purchaser. Due to time
zone differences in their favor, Cedel Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a DTC Participant. The seller will send instructions
to Cedel or Euroclear through a Cedel Participant or Euroclear Participant at
least one business day prior to settlement. In these cases Cedel or Euroclear
will instruct the respective Depositary, as appropriate, to credit the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of the actual
number of days in such accrual period and a year assumed to consist to 360
days. For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of Cedel Participant or Euroclear
Participant the following day, and receipt of the cash proceeds in the Cedel
Participant's or Euroclear Participant's account would be back-valued to the
value date (which would be the preceding day, when settlement occurred in New
York). Should the Cedel Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the Cedel Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from DTC Participants for delivery to Cedel Participants or
Euroclear Participants should note that these trades would automatically fail
on the sale side unless affirmative action is taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the purchase
side of the trade is reflected in their Cedel or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedel or Euroclear account
in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at least
one day prior to the value date for the sale to the Cedel Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel or
Euroclear (or through DTC if the holder has an address outside the U.S.) will
be subject to the 30% U.S. withholding tax that generally applies to payments
of interest (including original issue discount) on registered debt issued by
U.S. Persons (as defined below),
I-2
<PAGE> 54
unless (i) each clearing system, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or business in the
chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements
and (ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
Exemption for Non-U.S. Persons (Form W-8). Beneficial Owners of Global
Securities that are Non-U.S. Persons (as defined below) can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate of
Foreign Status). If the information shown on Form W-8 changes, a new Form W-8
must be filed within 30 days of such change.
Exemption for Non-U.S. Persons with effectively connected income (Form
4224). A Non-U.S. Person (as defined below), including a non-U.S. corporation
or bank with a U.S. branch, for which the interest income is effectively
connected with its conduct of a trade or business in the United States, can
obtain an exemption from the withholding tax by filing Form 4224 (Exemption
from Withholding of Tax on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
Exemption or reduced rate for Non-U.S. Persons resident in treaty countries
(Form 1001). Non-U.S. Persons residing in a country that has a tax treaty with
the United States can obtain an exemption or reduced tax rate (depending on the
treaty terms) by filing Form 1001 (Ownership, Exemption or Reduced Rate
Certificate). If the treaty provides only for a reduced rate, withholding tax
will be imposed at that rate unless the filer alternatively files Form W-8.
Form 1001 may be filed by Note Owners or their agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Owner of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds the
security (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity organized in or under
the laws of the United States or any political subdivision thereof or (iii) an
estate the income of which is includible in gross income for United States tax
purposes, regardless of its source or a trust if a court within the United
States is able to exercise primary supervision of the administration of the
trust and one or more United States fiduciaries have the authority to control
all substantial decisions of the trust. The term "Non-U.S. Person" means any
person who is not a U.S. Person. This summary does not deal with all aspects
of U.S. Federal income tax withholding that may be relevant to foreign holders
of the Global Securities. Investors are advised to consult their own tax
advisors for specific tax advice concerning their holding and disposing of the
Global Securities.
I-3
<PAGE> 55
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 56
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Accrual Period . . . . . . . . . . . . . . . . . . S-3
Agreements . . . . . . . . . . . . . . . . . . . . S-28
Appraised Values . . . . . . . . . . . . . . . . . S-15
Available Funds . . . . . . . . . . . . . . . . . . S-30
Available Funds Cap Carry-Forward Amount . . . . . S-4
Available Funds Shortfall . . . . . . . . . . . . . S-29
Backup Servicer . . . . . . . . . . . . . . . . . . S-11
Beneficial Owners . . . . . . . . . . . . . . . . . S-7
Book-Entry Notes . . . . . . . . . . . . . . . . . S-30
Cede . . . . . . . . . . . . . . . . . . . . . . . S-7
Cedel . . . . . . . . . . . . . . . . . . . . . . . S-7
Cedel Participants . . . . . . . . . . . . . . . . S-32
Certificate Insurer Default . . . . . . . . . . . . S-6
Closing Date . . . . . . . . . . . . . . . . . . . S-1
CMT Loans . . . . . . . . . . . . . . . . . . . . . S-9
Code . . . . . . . . . . . . . . . . . . . . . . . S-8
Compensating Interest . . . . . . . . . . . . . . . S-41
Cooperative . . . . . . . . . . . . . . . . . . . . S-32
Coupon Rate . . . . . . . . . . . . . . . . . . . . S-2
CPR . . . . . . . . . . . . . . . . . . . . . . . . S-25
Current Interest . . . . . . . . . . . . . . . . . S-3
Custodian . . . . . . . . . . . . . . . . . . . . . S-39
Cut-Off Date . . . . . . . . . . . . . . . . . . . S-1
Daily Collections . . . . . . . . . . . . . . . . . S-40
Definitive Note . . . . . . . . . . . . . . . . . . S-31
Delinquency Advances . . . . . . . . . . . . . . . S-41
Delinquent . . . . . . . . . . . . . . . . . . . . S-41
Depositor . . . . . . . . . . . . . . . . . . . . . S-1
DOL . . . . . . . . . . . . . . . . . . . . . . . . S-46
DTC . . . . . . . . . . . . . . . . . . . . . . . . S-7
DTC Participants . . . . . . . . . . . . . . . . . S-31
ERISA . . . . . . . . . . . . . . . . . . . . . . . S-46
Euroclear . . . . . . . . . . . . . . . . . . . . . S-7
Euroclear Operator . . . . . . . . . . . . . . . . S-32
Euroclear Participants . . . . . . . . . . . . . . S-32
Excess Overcollateralization Amount . . . . . . . . S-37
Exchange Act . . . . . . . . . . . . . . . . . . . S-48
Fannie Mae . . . . . . . . . . . . . . . . . . . . S-12
FHLMC . . . . . . . . . . . . . . . . . . . . . . . S-12
Final Certification . . . . . . . . . . . . . . . . S-40
Financial Intermediary . . . . . . . . . . . . . . S-31
Fiscal Agent . . . . . . . . . . . . . . . . . . . S-34
FNMA Guide . . . . . . . . . . . . . . . . . . . . S-40
Formula Note Rate . . . . . . . . . . . . . . . . . S-4
GAAP . . . . . . . . . . . . . . . . . . . . . . . S-36
Home Equity Loans . . . . . . . . . . . . . . . . . S-1
Indenture . . . . . . . . . . . . . . . . . . . . . S-1
Indenture Trustee Fee . . . . . . . . . . . . . . . S-1
Indenture Trustee . . . . . . . . . . . . . . . . . S-1
Insurance Policy . . . . . . . . . . . . . . . . . S-6
Insured Payment . . . . . . . . . . . . . . . . . . S-6
Interest Carry Forward Amount . . . . . . . . . . . S-3
Issuer . . . . . . . . . . . . . . . . . . . . . . S-1
LIBOR Determination Date . . . . . . . . . . . . . S-30
Loan Balance . . . . . . . . . . . . . . . . . . . S-4
Loan Purchase Price . . . . . . . . . . . . . . . . S-38
Loan-to-Value Ratios . . . . . . . . . . . . . . . S-18
Majority Residualholders . . . . . . . . . . . . . S-7
Monthly Remittance Date . . . . . . . . . . . . . . S-5
Moody's . . . . . . . . . . . . . . . . . . . . . . S-8
Mortgage Note . . . . . . . . . . . . . . . . . . . S-1
Mortgagor . . . . . . . . . . . . . . . . . . . . . S-24
Net Liquidation Proceeds . . . . . . . . . . . . . S-40
Net Monthly Excess Cashflow . . . . . . . . . . . . S-29
Note Account . . . . . . . . . . . . . . . . . . . S-28
Note Insurer . . . . . . . . . . . . . . . . . . . S-6
Note Insurer Default . . . . . . . . . . . . . . . S-7
Note Principal Balance . . . . . . . . . . . . . . S-3
Note Rate . . . . . . . . . . . . . . . . . . . . . S-3
Notes . . . . . . . . . . . . . . . . . . . . . . . S-1
One-Month LIBOR . . . . . . . . . . . . . . . . . . S-30
Original Aggregate Loan Balance . . . . . . . . . . S-4
Overcollateralization Amount . . . . . . . . . . . S-37
Overcollateralization Deficit . . . . . . . . . . . S-38
Overcollateralization Increase Amount . . . . . . . S-37
Overcollateralization Reduction Amount . . . . . . S-37
Owner Trust . . . . . . . . . . . . . . . . . . . . S-1
Owner Trustee Fee . . . . . . . . . . . . . . . . . S-1
Owners . . . . . . . . . . . . . . . . . . . . . . S-2
Participants . . . . . . . . . . . . . . . . . . . S-30
Payment Date . . . . . . . . . . . . . . . . . . . S-3
Percentage Interest . . . . . . . . . . . . . . . . S-28
Plan Asset Regulation . . . . . . . . . . . . . . . S-46
Plans . . . . . . . . . . . . . . . . . . . . . . . S-46
Pool . . . . . . . . . . . . . . . . . . . . . . . S-1
Preference Amount . . . . . . . . . . . . . . . . . S-5
Premium Amount . . . . . . . . . . . . . . . . . . S-5
Prepayments . . . . . . . . . . . . . . . . . . . . S-9
Preservation Expenses . . . . . . . . . . . . . . . S-41
Principal and Interest Account . . . . . . . . . . S-40
Principal Distribution Amount . . . . . . . . . . . S-4
Properties . . . . . . . . . . . . . . . . . . . . S-1
Qualified Replacement Mortgage . . . . . . . . . . S-38
Rating Agencies . . . . . . . . . . . . . . . . . . S-8
Realized Loss . . . . . . . . . . . . . . . . . . . S-37
Record Date . . . . . . . . . . . . . . . . . . . . S-3
Redemption Date . . . . . . . . . . . . . . . . . . S-4
Redemption Price . . . . . . . . . . . . . . . . . S-43
Reference Banks . . . . . . . . . . . . . . . . . . S-30
Register . . . . . . . . . . . . . . . . . . . . . S-28
Registrar . . . . . . . . . . . . . . . . . . . . . S-28
Remittance Period . . . . . . . . . . . . . . . . . S-5
REMIC . . . . . . . . . . . . . . . . . . . . . . . S-8
Residual Interest . . . . . . . . . . . . . . . . . S-2
Riegle Act . . . . . . . . . . . . . . . . . . . . S-10
Rules . . . . . . . . . . . . . . . . . . . . . . . S-31
Sale and Servicing Agreement . . . . . . . . . . . S-2
SAP . . . . . . . . . . . . . . . . . . . . . . . . S-36
Securities . . . . . . . . . . . . . . . . . . . . S-2
Seller . . . . . . . . . . . . . . . . . . . . . . S-1
Servicer . . . . . . . . . . . . . . . . . . . . . S-1
Servicer Termination Events . . . . . . . . . . . . S-43
Servicing Advance . . . . . . . . . . . . . . . . . S-41
Servicing Fee . . . . . . . . . . . . . . . . . . . S-5
Six-Month LIBOR . . . . . . . . . . . . . . . . . . S-9
SMMEA . . . . . . . . . . . . . . . . . . . . . . . S-8
Specified Overcollateralization Amount . . . . . . S-37
Standard & Poor's . . . . . . . . . . . . . . . . . S-8
Substitution Amount . . . . . . . . . . . . . . . . S-38
Sub-Servicers . . . . . . . . . . . . . . . . . . . S-11
Sub-Servicing Agreements . . . . . . . . . . . . . S-11
Telerate Page 3750 . . . . . . . . . . . . . . . . S-30
</TABLE>
A - 1
<PAGE> 57
<TABLE>
<CAPTION>
Page
----
<S> <C>
Terms and Conditions . . . . . . . S-32
Total Available Funds . . . . . . . S-30
Total Monthly Excess Cashflow . . . S-29
Trust . . . . . . . . . . . . . . . . S-1
Trust Agreement . . . . . . . . . . . S-1
Trust Estate . . . . . . . . . . . . S-1
Trust Fees and Expense . . . . . . . S-7
Underwriters . . . . . . . . . . . S-48
Underwriting Agreement . . . . . . S-48
Weighted average life . . . . . . . S-25
</TABLE>
A - 2
<PAGE> 58
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,
ANY INDENTURE TRUSTEE, ANY OWNER 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, ANY INDENTURE TRUSTEE, ANY
OWNER 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 August 18, 1997.
<PAGE> 59
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", "The
Indenture Trustee's Annual Report" and " Reports by Trustee to Note Owners"
herein. 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 East Fowler Avenue, Tampa, Florida
33617-2362 (telephone number (813) 984-8801).
<PAGE> 60
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 or Indenture 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> 61
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
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 . . . . . . . . . . . . . . . . . . . . . . . . 17
Other Mortgage Securities . . . . . . . . . . . . . . . . . . . . . . . . 18
CREDIT ENHANCEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
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 . . . . . . . . . . . . . . . . . . . . . 32
Servicer Events of Default . . . . . . . . . . . . . . . . . . . . . . . . 33
Rights Upon Servicer Event of Default . . . . . . . . . . . . . . . . . . 33
Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
THE INDENTURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Modification of Indenture . . . . . . . . . . . . . . . . . . . . . . . . 34
Note Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Rights Upon Note Events of Default . . . . . . . . . . . . . . . . . . . . 35
List of Note Owners . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Annual Compliance Statement . . . . . . . . . . . . . . . . . . . . . . . 36
Indenture Trustee's Annual Report . . . . . . . . . . . . . . . . . . . . 36
Satisfaction and Discharge of Indenture . . . . . . . . . . . . . . . . . 37
Redemption of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Reports by Indenture Trustee to Note Owners . . . . . . . . . . . . . . . 37
Limitation on Suits . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
The Sale and Servicing Agreement . . . . . . . . . . . . . . . . . . . . . 37
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
THE DEPOSITOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
CERTAIN LEGAL ASPECTS OF THE MORTGAGE
ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Foreclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Enforceability of Certain Provisions . . . . . . . . . . . . . . . . . . . 43
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 . . . . . . . . . . . . . . 68
Taxation of Certain Foreign Investors . . . . . . . . . . . . . . . . . . 69
Debt Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
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
</TABLE>
<PAGE> 62
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<PAGE> 63
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 Pooling and Servicing Agreement or the Indenture and the Trust 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 Certificates 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> 64
evidenced by certificated or
noncertificated interests (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 FannieMae ("FannieMae") 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
2
<PAGE> 65
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 related 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" and "The Indenture --
Redemption of Notes" 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
"Pooling and Servicing Agreement --
Termination" and "The Indenture --
Rights Upon Note Events of Default"
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
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Agency in the name of brokers, dealers,
banks and other organizations eligible
to maintain accounts with the Clearing
Agency ("Clearing Agency Participants")
or their nominees. Transfers and
pledges by purchasers and other
beneficial owners of Book Entry
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 or the
Indenture 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 or the Indenture 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" and "The Indenture --
Redemption of Notes" 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 be available for payment of
the deficiency. Because payments of principal will
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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 or the Indenture Trustee, as applicable, 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 the assets
in the related Trust may be delayed, or such proceeds may not be sufficient to
repay all amounts owed
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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 or the Issuer to withdraw or replace Mortgage
Loans if such violation breaches a representation or warranty contained in the
related Pooling and Servicing Agreement, Sale 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 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.
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(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 or Indenture Trustee, the Owner Trustee, if any, 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 Pooling and Servicing
Agreement or the Indenture and the Trust Agreement, as applicable, for the
related Series. Requests should be addressed to IMC Securities, Inc., 5901
East Fowler Avenue, Tampa, Florida 33617-2362. The Pooling and Servicing
Agreement or the Indenture and the Trust Agreement, as applicable, 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 or the Indenture
Trustee, the Owner Trustee, if any, 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 or the Indenture Trustee, as applicable. The Trustee or the Indenture
Trustee, as applicable, will be appointed initially as the "Security Registrar"
and no service charge will be made for any registration of transfer or exchange
of Securities, but payment of a sum sufficient to cover any tax or other
governmental charge may be required.
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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 or the
Indenture 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 or the Indenture Trustee, the
Servicer or the Depositor to any obligation or liability in addition to those
undertaken in the Pooling and Servicing Agreement or the Indenture, as
applicable.
As to each Series of Certificates, one or more elections may be made
to treat the related Trust or designated portions thereof as a REMIC for
federal income tax purposes. The related Prospectus Supplement will specify
whether a REMIC election is to be made. Alternatively, the Agreement for a
Series may provide that a REMIC election may be made at the discretion of the
Depositor or the Servicer and may only be made if certain conditions are
satisfied. See "Federal Income Tax Considerations" herein. As to any such
Series, the terms and provisions applicable to the making of a REMIC election,
as well as any material federal income tax consequences to Owners of
Certificates not otherwise described herein, will be set forth in the related
Prospectus Supplement. If such an election is made with respect to a Series,
one of the classes will be designated as evidencing the "residual interests" in
the related REMIC, as defined in the Code. All other classes of 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 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,
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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.
Distributions of Interest. Unless otherwise specified in the
Prospectus Supplement relating to a given Series of Securities, each Class of
Certificates may bear interests at a different Security Interest Rate, which
may be fixed or adjustable. All of the Notes of a given Series will bear
interest at the same rate, which may be fixed or
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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 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 or the Indenture Trustee prior to the date of such
distribution.
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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 or the Indenture 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 or the Indenture Trustee. With
respect to Book Entry Securities, the only named Owner on the Security Register
will be the Clearing Agency.
The Pooling and Servicing Agreement or the Indenture, as applicable,
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 Security Interest 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 or the Indenture Trustee, the Depositor
and the Servicer under any insurance policies, hazard insurance or surety bonds
required to be maintained in respect of the related Mortgage Assets; and (vi)
if so specified in the Prospectus Supplement, one or more forms of Credit
Enhancement.
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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 Pooling and Servicing Agreement or
the Indenture, as applicable, 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 or the Indenture 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 or the Indenture
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 with the amount of any difference contributed from funds supplied
by the seller of the Mortgaged Property or another source.
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(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.
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
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certificates or other mortgage-backed securities or (ii) certificates insured
or guaranteed by FHLMC or FannieMae 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.
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
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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 or the Indenture Trustee,
as applicable (an "Insurance Paying Agent"), on behalf of Owners, for
distribution by the Trustee or the Indenture Trustee, as applicable, 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 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
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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.
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 or the Indenture
Trustee under the related Pooling and Servicing Agreement or Indenture, as
applicable, 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
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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 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.
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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.
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 or the Indenture Trustee, as applicable. 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
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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 or the Indenture Trustee, as applicable, such letter of credit will be
irrevocable. Any instrument deposited therein will name the Trustee or the
Indenture Trustee, as applicable, 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 or the Indenture Truste, as
applicable, 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 related Pooling and
Servicing Agreement or any Sale and Servicing Agreement (a "Sale and Servicing
Agreement") entered into among the Servicer, the Depositor, the Issuer and the
Indenture Trustee. 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
related Pooling and Servicing Agreement or Sale and Servicing Agreement) as
well as satisfaction of certain other criteria. The Servicer is required to be
a FannieMae-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 or the
Indenture Trustee, as applicable, 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 "-- 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 related
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Pooling and Servicing Agreement or Sale and Servicing Agreement, as applicable.
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 the Sale and Servicing
Agreement, as applicable, for the entire term of such Mortgage Loan unless such
Pooling and Servicing Agreement or Sale and Servicing 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 or the
Indenture Trustee, as applicable, 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 or the
Indenture Trustee, as applicable, 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
related Pooling and Servicing Agreement or Sale and Servicing 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 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
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by a Servicer to make a required Monthly Advance will be grounds for
termination under the related Pooling and Servicing Agreement or Sale and
Servicing Agreement, as applicable.
COLLECTION AND OTHER SERVICING PROCEDURES
Each Servicer will service the Mortgage Loans pursuant to guidelines
established in the related Pooling and Servicing Agreement or Sale and
Servicing Agreement, as applicable.
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, 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
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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 Pooling and Servicing Agreement or Sale and Servicing
Agreement, as applicable, 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 FannieMae in connection with
its mortgage loan purchase program. The Depositor may also purchase special
hazard insurance against certain of the uninsured risks described above. See
"Credit Enhancement -- Special Hazard Insurance".
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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 Pooling and Servicing Agreements and the Sale and Servicing
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 or the Indenture Trustee, as applicable.
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 Pooling and Servicing Agreement
or the Sale and Servicing Agreement, as applicable. 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 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.
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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 SubServicers 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 Pooling and Servicing Agreement or the Sale and Servicing Agreement,
as applicable, 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 backup 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 Pooling and Servicing
Agreement or the Sale and Servicing Agreement, as applicable, 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 Pooling and Servicing Agreement or Sale and
Servicing Agreement, as applicable. The Master Servicer will be compensated
for the performance of its services and duties under each Pooling and Servicing
Agreement or Sale and Servicing 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 CutOff 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 schedule appearing as an exhibit to the Pooling
and Servicing Agreement. Such schedule may include information as to the
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Principal Balance of each Mortgage Loan as of the CutOff Date, as well as
information respecting the Mortgage Rate, the scheduled monthly payment of
principal and interest as of the CutOff 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 CutOff Date, annual pass-through rate or interest rate and maturity date
and certain other pertinent information for each such security. The Depositor
will represent and warrant to the Trustee, among other things, the
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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 CutOff 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
FannieMae 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 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
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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 CutOff Date (including scheduled payments of
principal and interest due on and after the CutOff Date but received before the
CutOff Date):
(i) all Mortgagor payments on account of principal,
including Principal Prepayments and, if specified in the related
Prospectus Supplement, prepayment penalties:
(ii) all Mortgagor payments on account of interest,
adjusted to the Remittance Rate;
(iii) all Liquidation Proceeds net of certain amounts
reimbursed to the Servicer or other person entitled thereto, as
described above;
(iv) all Insurance Proceeds, other than proceeds to be
applied to the restoration or repair of the related property or
released to the Mortgagor and net of certain amounts reimbursed to the
Servicer or other person entitled thereto, as described above;
(v) all condemnation awards or settlements which are not
released to the Mortgagor in accordance with normal servicing
procedures;
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(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).
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
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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 PreFunding Account. The
maximum amount deposited in the PreFunding 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
PreFunding 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.
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
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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. 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.
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 Indenture 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
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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 Indenture 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 Indenture Trustee or to the related
Issuer and the Indenture 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 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 Indenture 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 Indenture Trustee may, and
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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 Indenture 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 Indenture
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 Indenture Trustee may, in its
discretion (provided that, unless the Note Event of Default relates to a
default in payment of principal or interest, the Indenture 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 Indenture Trustee, in case a Note Event of Default shall occur and be
continuing, the Indenture 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 Note Owners unless such Note Owners have offered to the Indenture
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 Indenture Trustee or exercising any trust or power conferred
on the Indenture 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 Indenture Trustee, obtain access to the list of all Note
Owners of such Series maintained by the Indenture Trustee for the purpose of
communicating with other such Note Owners with respect to their rights under
the Indenture. The Indenture 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.
ANNUAL COMPLIANCE STATEMENT
The related Issuer will be required to file annually with the
Indenture Trustee a written statement as to the fulfillment of its obligations
under the Indenture.
INDENTURE TRUSTEE'S ANNUAL REPORT
The Indenture 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 Indenture 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
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to it in the Indenture Trustee's individual capacity, the property and funds
physically held by the Indenture 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 Indenture Trustee for
cancellation of all of the Notes of such Series or, with certain limitations,
upon deposit with the Indenture 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 INDENTURE TRUSTEE TO NOTE OWNERS
On each Payment Date, the Indenture Trustee will send a report to each
Note Owner 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 Indenture 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 Indenture Trustee to institute proceedings in respect
to such Note Event of Default in its own name as Indenture Trustee; (3) such
holders have offered to the Indenture 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 Indenture Trustee has failed to institute
any proceedings; and (5) no direction inconsistent with such written request
has been given to the Indenture Trustee during such period by the holders of
not less than 51% in principal amount of the Notes of such Series then
outstanding.
THE SALE AND SERVICING AGREEMENT
General. The conveyance and servicing of the Mortgage Loans related
to the issuance of a Series of Notes will be pursuant to a Sale and Servicing
Agreement to be entered into between the Issuer, a seller, the Servicer, the
Depositor and the Indenture Trustee. Where provisions or terms used in a
particular Sale and Servicing Agreement differ from those provided herein, a
description of such provisions or terms will be included in the related
Prospectus Supplement.
Assignment of Mortgage Assets. The Mortgage Loans to be included in
the related Trust will be assigned to the Indenture Trustee on behalf of the
holders of the Notes pursuant to provisions included in the related Sale and
Servicing Agreement that are substantially the same as and the Indenture
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 Assets" herein.
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Evidence as to Compliance. The Indenture Trustee will receive an
opinion from a firm of independent public accountants regarding the servicing
of the Mortgage Loans which is substantially the same as described under "The
Pooling and Servicing Agreement -- Evidence as to Compliance" herein.
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
PreFunding Account the costs of carrying such Mortgage Assets until sale of the
Securities and to pay other expenses.
THE DEPOSITOR
The Depositor will have no ongoing servicing obligations or
responsibilities with respect to any Mortgage Pool. The Depositor does not
have, nor is it expected in the future to have, any significant net worth.
The Depositor anticipates that it will acquire Mortgage Assets in the
open market or in privately negotiated transactions, which may be through or
from an affiliate. The Depositor will not receive any fees or other
commissions in connection with its acquisition of Mortgage Assets or its sale
of such Mortgage Assets to the Trust.
Neither the Depositor nor any of its affiliates will insure or
guarantee the 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
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by the cooperative in connection with the construction or purchase of the
cooperative's apartment building. The interest of the occupant under
proprietary leases or occupancy agreements to which that cooperative is a party
are generally subordinate to the interest of the holder of the blanket mortgage
in that building. If the cooperative is unable to meet the payment obligations
arising under its blanket mortgage, the mortgagee holding the blanket mortgage
could foreclose on that mortgage and terminate all subordinate proprietary
leases and occupancy agreements. In addition, the blanket mortgage on a
cooperative may provide financing in the form of a mortgage that does not fully
amortize with a significant portion of principal being due in one lump sum at
final maturity. The inability of the cooperative to refinance this mortgage
and its consequent inability to make such final payment could lead to
foreclosure by the mortgagee providing the financing. A foreclosure in either
event by the holder of the blanket mortgage could eliminate or significantly
diminish the value of any collateral held by the lender who financed the
purchase by an individual tenant-stockholder of cooperative shares or in the
case of a Trust including Cooperative Loans, the collateral securing the
Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through ownership
of stock shares or membership certificates in the corporation, receive
proprietary leases or occupancy agreements which confer exclusive rights to
occupy specific units. Generally, a tenant-stockholder of a cooperative must
make a monthly payment to the cooperative representing such
tenant-stockholder's pro rata share of the cooperative's payments for its
blanket mortgage, real property taxes, maintenance expenses and other capital
or ordinary expenses. An ownership interest in a cooperative and accompanying
occupancy rights is financed through a cooperative share loan evidenced by a
promissory note and secured by a security interest in the occupancy agreement
or proprietary lease and in the related cooperative shares. The lender takes
possession of the share certificate and a counterpart of the proprietary lease
or occupancy agreement and a financing statement covering the proprietary lease
or occupancy agreement and the cooperative shares is filed in the appropriate
state and local offices to perfect the lenders interest in its collateral.
Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in
the security agreement covering the assignment of the proprietary lease or
occupancy agreement and the pledge of cooperative shares.
FORECLOSURE
Mortgages. Foreclosure of a deed of trust is generally accomplished
by a non-judicial trustee's sale under a specific provision in the deed of
trust that authorizes the trustee to sell the property to a third party upon
any default by the borrower under the terms of the note or deed of trust. In
some states, the trustee must record a 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
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during foreclosure proceedings, it is uncommon for a third party to purchase
the property at the foreclosure sale. Rather it is common for the lender to
purchase the property from the trustee or referee for an amount equal to the
principal amount of the mortgage or deed of trust, accrued and unpaid interest
and expenses of foreclosure. Thereafter, the lender will assume the burdens of
ownership, including paying real estate taxes, obtaining casualty insurance and
making such repairs at its own expense as are necessary to render the property
suitable for sale. The lender will commonly obtain the services of a real
estate broker and pay the broker's commission in connection with the sale of
the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property.
Any loss may be reduced by the receipt of any mortgage insurance proceeds.
When the junior mortgagee or beneficiary under a junior deed of trust
cures the default and state law allows it to reinstate or redeem by paying the
full amount of the senior mortgage or deed of trust, then in those states the
amount paid so to cure or redeem generally becomes a part of the indebtedness
secured by the junior mortgage or deed of trust. See "Junior Liens; Rights of
Senior Mortgagors or Beneficiaries" below.
A sale conducted in accordance with the terms of the power of sale
contained in a mortgage or deed of trust is generally presumed to be conducted
regularly and fairly, and a conveyance of the real property by the trustee
confers, in most states, legal title to the real property to the purchaser,
free of all junior mortgages or deeds of trust and free of all other liens and
claims subordinate to the mortgage or deed of trust under which the sale is
made (with the exception of certain governmental liens). The purchaser's title
is, however, subject to all senior liens, encumbrances and mortgages and may be
subject to mechanic's and materialman's liens in some states. Thus, if the
mortgage or deed of trust being foreclosed is a junior mortgage or deed of
trust, the sheriff or trustee will convey title to the purchaser of the real
property, subject to any existing first mortgage or deed of trust and any other
prior liens and claims. The foreclosure of a junior mortgage or deed of trust,
generally, will have an effect on the first mortgage or deed of trust, if the
senior mortgage or deed of trust grants to the senior mortgagee or beneficiary
the right to accelerate its indebtedness under a "due-on-sale" clause or "due
on further encumbrance" clause contained in the senior mortgage or deed of
trust. See "Anti-Deficiency Legislation and Other Limitations on Lenders"
below.
The proceeds received by the sheriff or trustee from the sale are
applied pursuant to the terms of the deed of trust, which may require
application first to the costs, fees and expenses of sale and then in
satisfaction of the indebtedness secured by the mortgage or deed of trust under
which the sale was conducted. In some states, any surplus money remaining may
be available to satisfy claims of the holders of junior mortgages or deeds of
trust and other junior liens and claims in order of their priority, whether or
not the mortgagor or trustee is in default, while 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.
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The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from a sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the cooperative loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure
on a cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender
is not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the cooperative shares is accomplished
by a sale in accordance with the provisions of Article 9 of the Uniform
Commercial Code (the "UCC") and the security agreement relating to those
shares. Article 9 of the UCC requires that a sale be conducted in a
"commercially reasonable" manner. Whether a foreclosure sale has been
conducted in a "commercially reasonable" manner will depend on the facts in
each case. In determining commercial reasonableness, a court will look to the
notice given the debtor and the method, manner, time, place and terms of the
foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative corporation to receive sums due
under the proprietary lease or occupancy agreement. If there are proceeds
remaining, the lender must account to the tenant-stockholder for the surplus.
Conversely, if a portion of the indebtedness remains unpaid, the
tenant-stockholder is generally responsible for the deficiency. See
"AntiDeficiency 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
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property and, when due, all encumbrances, charges and liens on the property
which appear prior to the mortgage or deed of trust, to provide and maintain
fire insurance on the property, to maintain and repair the property and not to
commit or permit any waste thereof, and to appear in and defend any action or
proceeding purporting to affect the property or the rights of the mortgagee or
beneficiary under the mortgage or deed of trust. Upon a failure of the
mortgagor or trustor to perform any of these obligations, the mortgagee or
beneficiary typically is given the right under the mortgage or deed of trust to
perform the obligation itself at its election, with the mortgagor or trustor
agreeing to reimburse the mortgagee or beneficiary for any sums expended by the
mortgagee or beneficiary on behalf of the trustor. All sums so expended by the
mortgagee or beneficiary generally become part of the indebtedness secured by
the mortgage or deed of trust
Right of Redemption. In some states, after sale pursuant to a deed of
trust or foreclosure of a mortgage, the borrower and foreclosed junior lienors
are given a statutory period in which to redeem the property following
foreclosure. In some states, redemption may occur only upon payment of the
entire principal balance of the loan, accrued interest and expenses of
foreclosure. In other states, redemption may be authorized if the former
borrower pays only a portion of the sums due. The effect of a statutory right
of redemption is to diminish the ability of the lender to sell the foreclosed
property. The rights of redemption would defeat the title of any purchaser
from the lender subsequent to foreclosure or sale under a deed of trust.
Consequently, the practical effect of the redemption right is to force the
lender to retain the property and pay the expenses of ownership until the
redemption period has run.
Anti-Deficiency Legislation and Other Limitations on Lenders. Certain
states have imposed statutory prohibitions that limit the remedies of a
beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment would be a personal judgment against the
former borrower equal in most cases to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. Other statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against the
borrower. Finally, other statutory provisions limit any deficiency judgment
against the former borrower following a judicial sale to the excess of the
outstanding debt over the fair market value of the property at the time of the
public sale. The purpose of these statutes is generally to prevent a
beneficiary or a mortgagee from obtaining a large deficiency judgment against
the former borrower as a result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including the federal bankruptcy laws and
state laws affording relief to debtors, may interfere with or affect the
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.
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The Code provides priority to certain tax liens over the lien of the
mortgage. In addition, substantive requirements are imposed upon mortgage
lenders in connection with the origination and the servicing of mortgage loans
by numerous federal and some state consumer protection laws. These laws
include the federal Truth-in-Lending Act, Real Estate Settlement Procedures
Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit
Reporting Act and related statutes. These federal laws impose specific
statutory liabilities upon lenders who originate mortgage loans and who fail to
comply with the provisions of the law. In some cases, this liability may
affect assignees of the mortgage loans.
Generally, Article 9 of the UCC governs foreclosure on cooperative
shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted section 9-504 of the UCC to prohibit a deficiency award unless
the creditor establishes that the sale of the collateral (which, in the case of
a Cooperative Loan, would be the shares of the cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
ENFORCEABILITY OF CERTAIN PROVISIONS
Certain of the Mortgage Loans will contain due-on-sale clauses. These
clauses permit the lender to accelerate the maturity of a loan if the borrower
sells, transfers, or conveys the property. The enforceability of these clauses
was the subject of legislation or litigation in many states, and in some cases
the enforceability of these clauses was limited or denied. However, the
Garn-St. Germain Depository Institutions Act of 1982 (the "Garn-St. Germain
Act") preempts state constitutional, statutory and case law prohibiting the
enforcement of due-on-sale clauses and permits lenders to enforce these clauses
in accordance with their terms, subject to certain limited exceptions. The
Garn-St. Germain Act does "encourage" lenders to permit assumption of loans at
the original rate of interest or at some other rate less than the average of
the original rate and the market rate.
The Garn-St. Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the Garn-St. Germain Act (including federal
savings and loan associations and federal savings banks) may not exercise a
due-on-sale clause, notwithstanding the fact that a transfer of the property
may have occurred. These include intra-family transfers, certain transfers by
operation of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St. Germain Act by the
Federal Home Loan Bank Board as succeeded by the Office of Thrift Supervision
(the "OTS"), also prohibit the imposition of a prepayment penalty upon the
acceleration of a loan pursuant to a due-on-sale clause. Any inability of the
Depositor to enforce due-on-sale clauses may affect the average life of the
Mortgage Loans and the number of Mortgage Loans that may be outstanding until
maturity.
Upon foreclosure, courts have imposed general equitable principles.
These equitable principles are generally designed to relieve the borrower from
the legal effect of his defaults under the loan documents. Examples 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 any
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Pooling and Servicing Agreement or Sale and Servicing 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 or the Indenture Trustee, as
applicable, will not be deemed to be a "holder in due course," within the
meaning of the UCC and may take such a mortgage note subject to certain
restrictions on its ability to foreclose and to certain contractual defenses
available to a mortgagor.
Environmental Legislation. Certain states impose a statutory lien for
associated costs on property that is the subject of a cleanup action by the
state on account of hazardous wastes or hazardous substances released or
disposed of on the property. Such a lien will generally have priority over all
subsequent liens on the property and, in certain of these states, will have
priority over prior recorded liens including the lien of a mortgage. In
addition, under federal environmental legislation and under state law in a
number of states, a secured party which takes a deed in lieu of foreclosure or
acquires a mortgaged property at a foreclosure sale or assumes active control
over the operation or management of a property so as to be deemed an "owner" or
"operator" of the property may be liable for the costs of cleaning up a
contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a secured lender (such as a Trust) to
homeowners. In the event that title to a Mortgaged Property securing a
Mortgage Loan in a Trust was acquired by the Trust and cleanup costs were
incurred in respect of the Mortgaged Property, the Trust might realize a loss
if such costs were required to be paid by the Trust.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Relief Act, a borrower who enters
military service after the origination of a Mortgage Loan by such borrower
(including a borrower who is a member of the National Guard or is in reserve
status at the time of the origination of the Mortgage Loan and is later called
to active duty) may not be charged interest above an annual rate of 6% during
the period of such borrower's active duty status, unless a court orders
otherwise upon application of the lender. It is possible that such interest
rate limitation or similar limitations under state law could have an effect,
for an indeterminate period of time, on the ability of the Servicer to collect
full amounts of interest on certain of the Mortgage Loans. In addition, the
Relief Act imposes limitations which would impair the ability of the Servicer
to foreclose on an affected Mortgage Loan during the borrower's period of
active duty status. Thus, in the event that such a Mortgage Loan goes into
default there may be delays and losses occasioned by the inability to realize
upon the Mortgaged Property in a timely fashion.
Any shortfalls in interest collections resulting from application of
the Relief Act could adversely affect 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 statechartered 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,
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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 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 bookentry
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
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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 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 or the Indenture Truste, as applicable, 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
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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") and final regulations under
Sections 1271 through 1273 and 1275 of the Code concerning debt instruments
(the "OID Regulations"). The Depositor intends to rely on the OID Regulations
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
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above respecting asset ownership of more or less than 95%. Notwithstanding the
foregoing, however, REMIC income received by a REIT owning a residual interest
in a REMIC Pool could be treated in part as non-qualifying REIT income if the
REMIC Pool holds Mortgage Assets with respect to which income is contingent on
mortgagor profits or property appreciation. In addition, if the assets of the
REMIC include buy-down Mortgage Assets, it is possible that the percentage of
such assets constituting "qualifying real property loans" or "loans secured by
an interest in real property" for purposes of Code Sections 593(d)(1) and
7701(a)(19)(C)(v), respectively, may be required to be reduced by the amount of
the related buy-down funds. REMIC 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
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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.
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 reasonable legal remedies exist to
compel timely payment or the debt instrument otherwise provides terms and
conditions that make the likelihood of late payment (other than a late payment
that occurs within a reasonable grace period) or nonpayment a remote
contingency. 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 or the likelihood of late
payment or nonpayment is a remote contingency, 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
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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.
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
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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 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
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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, 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.
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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 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. 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).
Net capital gains of individuals are subject to varying tax rates depending
upon the holding period of the Regular Security.
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
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business bad debts and (iii) the limitation on the deductibility of interest
and expenses related to taxexempt income will apply. REMIC taxable income
generally means the REMIC Pool's gross income, including interest, original
issue discount income and market discount income, if any, on the Mortgage
Assets, plus income on reinvestment of cashflows and reserve assets, minus
deductions, including interest and original issue discount expense on the
Regular 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 aftertax 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
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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.
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 longterm 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 are allocable to the interest in the
Pass-Through Entity during the period such interest is held by such
Disqualified
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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
PassThrough 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) "PassThrough
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 PassThrough
Entity as a nominee for another will, with respect to such interest, be treated
as a PassThrough 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, 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
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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 nonU.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 cleanup 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
dueonsale 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 MortgageBacked Securities will not be treated as a modification of
the MortgageBacked 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 administrative rules of the Code applicable to partnerships,
including the determination by the Internal Revenue
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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 passthrough 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 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
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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 noncharitable 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, 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
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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 passthrough 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 passthrough entity, may have aggregate taxable income in
excess of the aggregate amount of cash received on such Securities with respect
to interest at the passthrough 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
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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 buydown 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 buydown 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.
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."
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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 an 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 an 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 loanbyloan 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 an
Owner, except that the income reported by a cash method holder may be slightly
accelerated. See "Stripped Securities" below for a further description of the
federal income tax treatment of stripped bonds and stripped coupons.
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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, 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 variablerate Mortgage Assets, the Depositor has been
advised by counsel that (i) the Trust will be treated as a grantor trust under
subpart
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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 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.
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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.
REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Trustee or the Indenture Trustee, as applicable, 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 or the Indenture Trustee, as applicable,
deems to be necessary or desirable to enable such Owners to prepare their
federal income tax returns. Such information will include the
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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 or the Indenture Trustee, as applicable, may not be
equal to the proper amount of original issue discount required to be reported
as taxable income by an Owner, other than an original Owner. The Trustee or
the Indenture Trustee, as applicable, will also file such original issue
discount information with the Internal Revenue Service. If an 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)
nonrecourse 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 related Indenture, (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 determine the nontax 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 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.
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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 longterm or
shortterm depending on whether the Debt Certificate has been held for more than
one year. For corporate taxpayers, there is no preferential rate afforded to
longterm capital gains. For individual taxpayers, net capital gains are
subject to varying tax rates depending upon the holding period of the Debt
Certificates.
Backup Withholding. Holders of Debt Certificates will be subject to
backup withholding rules identical to those applicable to REMIC Regular
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
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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 or taxable mortgage
pool 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 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
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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 8K (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 nonresource 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.
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
<TABLE>
<CAPTION>
PAGE
<S> <C>
1986 Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
1996 Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
AMTI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Applicable Accounting Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Balloon Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Beneficial Owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
BIF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Book Entry Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
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
DCR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Debt Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Defective Mortgage Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Delivery Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Deposit Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Depositor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Disqualified Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
DOL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Eligible Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Equity Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Indenture Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Insurance Paying Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Insurance Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Insured Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Interest Accrual Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Issuer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Liquidation Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Loan-to-Value Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Mark to Market Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Original Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
OTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Owner Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Partnership Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Pass-Through Entity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Pass-Through Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Payment Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Policy Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Pool Insurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Pooling and Servicing Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Pre-Funding Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Prepayment Assumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Principal Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Principal Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Priority Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Proposed Premium Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
PTE 83-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Rating Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Regular Owner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Regular Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
REIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Relief Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
REMIC Pool . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
REMIC Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
REMIC Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Remittance Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Remittance Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Reserve Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Residual Owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Residual Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Retail Class Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Riegle Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
SAIF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Sale and Servicing Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Scheduled Amortization Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Securities Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Security Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Security Principal Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Security Register . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Security Registrar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
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 Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Stripped Owner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Stripped Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Subordinated Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Subsequent Transfer Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Thrift Institution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
TMP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
</TABLE>
A-1
<PAGE> 136
<TABLE>
<S> <C>
Trust Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
U.S. Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
UCC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Underwriters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
</TABLE>
A-2
<PAGE> 137
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 138
- ------------------------------------------------------------
- ------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
DEPOSITOR OR BY THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
DO NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY ANY OF
THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE DEPOSITOR SINCE SUCH DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Summary of Terms.............................. S-1
Risk Factors.................................. S-9
The Seller and Servicer....................... S-11
The Issuer.................................... S-15
The Depositor................................. S-15
Use of Proceeds............................... S-15
The Home Equity Loan Pool..................... S-15
Prepayment and Yield Considerations........... S-24
Additional Information........................ S-29
Description of the Notes...................... S-29
The Note Insurer.............................. S-34
Credit Enhancement............................ S-37
Administration................................ S-39
Federal Income Tax Consequences............... S-46
State Tax Consequences........................ S-46
ERISA Considerations.......................... S-47
Ratings....................................... S-48
Legal Investment Considerations............... S-48
Underwriting.................................. S-48
Report of Experts............................. S-49
Certain Legal Matters......................... S-49
Global Clearance, Settlement and Tax
Documentation Procedures.................... I-1
Index to Location of Principal Defined
Terms....................................... A-1
PROSPECTUS
Summary of Prospectus......................... 1
Risk Factors.................................. 7
Description of the Securities................. 11
The Trusts.................................... 15
Credit Enhancement............................ 18
Servicing of Mortgage Loans................... 23
The Pooling and Servicing Agreement........... 28
The Indenture................................. 34
Use of Proceeds............................... 38
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
Ratings....................................... 72
Legal Matters................................. 72
Financial Information......................... 72
Index to Location of Principal Defined
Terms....................................... A-1
</TABLE>
- ------------------------------------------------------------
- ------------------------------------------------------------
IMC HOME EQUITY LOAN
OWNER TRUST 1997-4
$575,000,000 ADJUSTABLE RATE
HOME EQUITY LOAN
ASSET BACKED NOTES, SERIES 1997-4,
DUE OCTOBER 20, 2027
[INDUSTRY MORTGAGE CO. LOGO]
INDUSTRY MORTGAGE
COMPANY, L.P.
SELLER AND SERVICER
IMC SECURITIES, INC.
DEPOSITOR
------------------------
PROSPECTUS SUPPLEMENT
------------------------
PAINEWEBBER INCORPORATED
BEAR, STEARNS & CO. INC.
NOMURA SECURITIES
INTERNATIONAL, INC.
------------------------
AUGUST 18, 1997
- ------------------------------------------------------------
- ------------------------------------------------------------
<PAGE> 139
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
DEPOSITOR OR BY THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
DO NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY ANY OF
THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE DEPOSITOR SINCE SUCH DATE.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Summary of Terms . . . . . . . . . . . . . . . . S-1
Risk Factors . . . . . . . . . . . . . . . . . . S-9
The Seller and Servicer . . . . . . . . . . . . . S-11
The Issuer . . . . . . . . . . . . . . . . . . . S-15
The Depositor . . . . . . . . . . . . . . . . . . S-15
Use of Proceeds . . . . . . . . . . . . . . . . . S-15
The Home Equity Loan Pool . . . . . . . . . . . . S-15
Prepayment and Yield Considerations . . . . . . . S-24
Additional Information . . . . . . . . . . . . . S-28
Description of the Notes . . . . . . . . . . . . S-28
The Note Insurer . . . . . . . . . . . . . . . . S-33
Credit Enhancement . . . . . . . . . . . . . . . S-37
Administration . . . . . . . . . . . . . . . . . S-38
Federal Income Tax Consequences . . . . . . . . . S-45
State Tax Consequences . . . . . . . . . . . . . S-46
ERISA Considerations . . . . . . . . . . . . . . S-46
Ratings . . . . . . . . . . . . . . . . . . . . . S-47
Legal Investment Considerations . . . . . . . . . S-48
Underwriting . . . . . . . . . . . . . . . . . . S-48
Report of Experts . . . . . . . . . . . . . . . . S-48
Certain Legal Matters . . . . . . . . . . . . . . S-48
Global Clearance, Settlement and Tax
Documentation Procedures . . . . . . . . . . . I-1
Index to Location of Principal Defined Terms . . A-1
PROSPECTUS
Summary of Prospectus . . . . . . . . . . . . . . 1
Risk Factors . . . . . . . . . . . . . . . . . . 7
Description of the Securities . . . . . . . . . . 11
The Trusts . . . . . . . . . . . . . . . . . . . 15
Credit Enhancement . . . . . . . . . . . . . . . 18
Servicing of Mortgage Loans . . . . . . . . . . . 23
The Pooling and Servicing Agreement . . . . . . . 28
The Indenture . . . . . . . . . . . . . . . . . . 34
Use of Proceeds . . . . . . . . . . . . . . . . . 38
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
Ratings . . . . . . . . . . . . . . . . . . . . . 72
Legal Matters . . . . . . . . . . . . . . . . . . 72
Financial Information . . . . . . . . . . . . . . 72
Index to Location of Principal Defined Terms . . A-1
</TABLE>
IMC HOME EQUITY LOAN
OWNER TRUST 1997-8
$307,785,257 ADJUSTABLE RATE
HOME EQUITY LOAN
ASSET BACKED NOTES, SERIES 1997-8,
DUE DECEMBER 20, 2028
[IMC LOGO]
IMC MORTGAGE COMPANY
SELLER AND SERVICER
IMC SECURITIES, INC.
DEPOSITOR
----------------------
PROSPECTUS SUPPLEMENT
----------------------
PaineWebber Incorporated
Bear, Stearns & Co. Inc.
----------------------
December 23, 1997
================================================================================
